Document ID: SEC-2018-1519-0001
Agency: sec
Document Type: Proposed Rule
Title: Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities
Posted Date: 2018-10-02T04:00Z

[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Proposed Rules]
[Pages 49630-49689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19456]

[[Page 49629]]

Vol. 83

Tuesday,

No. 191

October 2, 2018

Part II

 Securities and Exchange Commission

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17 CFR Parts 210, 229, 239, et al.

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

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

[[Page 49630]]

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SECURITIES AND EXCHANGE COMMISSION

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

[Release No. 33-10526; 34-83701; File No. S7-19-18]
RIN 3235-AM12

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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to the financial disclosure 
requirements for guarantors and issuers of guaranteed securities 
registered or being registered, and issuers' affiliates whose 
securities collateralize securities registered or being registered in 
Regulation S-X to improve those requirements for both investors and 
registrants. The proposed changes are intended to provide investors 
with material information given the specific facts and circumstances, 
make the disclosures easier to understand, and reduce the costs and 
burdens to registrants. In addition, by reducing the costs and burdens 
of compliance, issuers may be encouraged to offer guaranteed or 
collateralized securities on a registered basis, thereby affording 
investors protection they may not be provided in offerings conducted on 
an unregistered basis. Finally, by making it less burdensome and less 
costly for issuers to include guarantees or pledges of affiliate 
securities as collateral when they structure debt offerings, the 
proposed revisions may increase the number of registered offerings that 
include these credit enhancements, which could result in a lower cost 
of capital and an increased level of investor protection.

DATES: Comments should be received on or before December 3, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use our internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-19-18 on the subject line.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-19-18. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method of submission. We will post all comments on our website (http://www.sec.gov/rules/other.shtml). Comments also are available for website 
viewing and printing in our Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make publicly 
available.
    We or the staff may add studies, memoranda, or other substantive 
items to the comment file during this rulemaking. A notification of the 
inclusion in the comment file of any such materials will be made 
available on our website. To ensure direct electronic receipt of such 
notifications, sign up through the ``Stay Connected'' option at 
www.sec.gov to receive notifications by email.

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

SUPPLEMENTARY INFORMATION: The Commission is proposing to amend
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    \1\ 17 CFR 210.1-01 through 210.13.02.
    \2\ 17 CFR 229.10 through 229.1208.
    \3\ 15 U.S.C. 77a et seq.
    \4\ 15 U.S.C. 78a et seq.

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          Commission reference                CFR citation  (17 CFR)
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Regulation S-X: \1\
  Rule 3-10............................  210.3-10
  Rule 3-16............................  210.3-16
  Rule 8-01............................  210.8-01
  Rule 8-03............................  210.8-03
  Rule 10-01...........................  210.10-01
  Rule 13-01...........................  210.13-01
  Rule13-02............................  210.13-02
Regulation S-K: \2\
  Item 504.............................  229.504
  Item 1100............................  229.1100
  Item 1112............................  229.1112
  Item 1114............................  229.1114
  Item 1115............................  229.1115
Securities Act of 1933 (Securities
 Act): \3\
  Form F-1.............................  239.31
  Form F-3.............................  239.33
  Form 1-A.............................  239.90
  Form 1-K.............................  239.91
  Form 1-SA............................  239.92
Securities Exchange Act of 1934
 (Exchange Act): \4\
  Rule 12h-5...........................  240.12h-5
  Form 20-F............................  249.220f
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Table of Contents

I. Introduction
    A. Background
    B. Scope of Proposals
II. Rule 3-10 of Regulation S-X
    A. Background
    B. Overview of the Existing Requirements
    C. Parent Company Financial Statements
    D. 100% Owned
    E. Full and Unconditional Guarantees
    F. Exceptions
    G. Consolidating Information
    H. Securities to Which Rule 3-10 Applies
    I. Recently-Acquired Subsidiary Issuers and Guarantors
    J. Exchange Act Reporting Requirements
III. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule 
13-01
    A. Overarching Principle
    B. Overview of the Proposed Amendments
    C. Conditions To Omit the Financial Statements of a Subsidiary 
Issuer or Guarantor
    1. Eligibility Conditions
    a. Parent Company Financial Statements Condition
    b. Consolidated Subsidiary Condition
    c. Debt or Debt-Like Securities Condition
    d. Eligible Issuer and Guarantor Structures Condition
    i. Role of Parent Company
    (A) Parent Company Obligation Is Not Limited or Conditional
    (B) Parent Company as Issuer or Co-Issuer
    (C) Parent Company as Full and Unconditional Guarantor
    ii. Role of Subsidiary Guarantors
    (A) Subsidiary Guarantee Release Provisions
    iii. Treatment of Currently Eligible Issuer and Guarantor 
Structures Under Proposed Rule 3-10
    (A) Finance Subsidiary Issuer of Securities Guaranteed by Its 
Parent Company
    (B) Obligated Parent Company and Single Obligated Subsidiary
    (C) Obligated Parent Company and Multiple Obligated Subsidiaries
    2. Disclosure Requirements
    a. Financial Disclosures
    i. Level of Detail
    ii. Presentation on a Combined Basis
    iii. Periods to Present
    b. Non-Financial Disclosures
    c. When Disclosure Is Required
    d. Location of Proposed Alternative Disclosures and Audit 
Requirement
    e. Recently-Acquired Subsidiary Issuers and Guarantors
    f. Continuous Reporting Obligation
    D. Application of Proposed Amendments to Certain Types of 
Issuers
    1. Foreign Private Issuers
    2. Smaller Reporting Companies

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    3. Offerings Pursuant to Regulation A
    4. Issuers of Asset-Backed Securities--Third Party Financial 
Statements
IV. Rule 3-16 of Regulation S-X
V. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
    A. Overarching Principle
    B. Overview of the Proposed Changes
    C. Financial Disclosures
    1. Level of Detail
    2. Presentation on a Combined Basis
    3. Periods to Present
    D. Non-Financial Disclosures
    E. When Disclosure Is Required
    F. Application of Proposed Amendments to Certain Types of 
Issuers
    1. Foreign Private Issuers
    2. Smaller Reporting Companies
    3. Offerings Pursuant to Regulation A
VI. General Request for Comment
VII. Economic Analysis
    A. Introduction
    B. Baseline and Affected Parties
    1. Market Participants
    2. Market Conditions
    C. Anticipated Economic Effects
    1. Proposed Amendments to Rule 3-10 and Partial Relocation to 
Rule 13-01
    a. Eligibility Conditions To Omit Financial Statements of 
Subsidiary Issuer or Guarantor
    b. Disclosure Requirements
    i. Financial and Non-Financial Disclosures
    ii. When Disclosure Is Required
    iii. Location of Proposed Alternative Disclosures and Audit 
Requirement
    iv. Recently Acquired Subsidiary Issuers and Guarantors
    v. Continuous Reporting Obligation
    2. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
    a. Financial Disclosures
    i. Level of Detail
    ii. Presentation on a Combined Basis
    iii. Periods to Present
    b. Non-Financial Disclosures
    c. When Disclosure Is Required
    D. Anticipated Effects on Efficiency, Competition, and Capital 
Formation
    E. Consideration of Reasonable Alternatives
    1. Alternative to Proposed Amendments to Existing Rule 3-10
    2. Alternatives Common to Proposed Amendments to Existing Rule 
3-10 and Existing Rule 3-16
    F. Request for Comment
VIII. Paperwork Reduction Act
    A. Background
    B. Summary of the Proposed Amendments Impact on Collection of 
Information
    1. Rule 3-10
    2. Rule 3-16
    C. Burden and Cost Estimates for the Proposed Amendments
    D. Request for Comment
IX. Small Business Regulatory Enforcement Fairness Act
X. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposing Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rules
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
XI. Statutory Authority
Text of Proposed Rule and Form Amendments

I. Introduction

A. Background

    We are proposing changes to the disclosure requirements in Rules 3-
10 and 3-16 of Regulation S-X to better align those requirements with 
the needs of investors and to simplify and streamline the disclosure 
obligations of registrants. Rule 3-10 requires financial statements to 
be filed for all issuers and guarantors of securities that are 
registered or being registered, but also provides several exceptions to 
that requirement. These exceptions are typically available for 
individual subsidiaries of a parent company \5\ when certain conditions 
are met and the consolidated financial statements of that parent 
company are filed. Rule 3-16 requires a registrant to provide separate 
financial statements for each affiliate whose securities constitute a 
substantial portion of the collateral for any class of registered 
securities as if the affiliate were a separate registrant. The changes 
we are proposing include amending both rules and relocating part of 
Rule 3-10 and all of Rule 3-16 to new Rules 13-01 and 13-02 in 
Regulation S-X, respectively.\6\ These changes are intended to provide 
investors with the information that is material given the specific 
facts and circumstances, make the disclosures easier to understand, and 
reduce the costs and burdens to registrants.
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    \5\ The identity of the parent company depends on the particular 
corporate structure. See additional discussion in Section II.C, 
``Parent Company Financial Statements Condition.''
    \6\ Proposed Rules 13-01 and 13-02 would contain financial and 
non-financial disclosure requirements for certain types of 
securities registered or being registered that, while material to 
investors, need not be included in the audited and unaudited 
financial statements.
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    This proposal results from an ongoing, comprehensive evaluation of 
our disclosure requirements.\7\ As part of that evaluation, in 
September 2015, the Commission issued a Request for Comment on the 
Effectiveness of Financial Disclosures About Entities Other Than the 
Registrant (``Request for Comment'').\8\ The Request for Comment sought 
feedback on, among other things, the financial disclosure requirements 
in Regulation S-X for certain entities other than the registrant, 
including the requirements in Rules 3-10 and 3-16. More specifically, 
the Commission solicited comment on how investors use the disclosures 
required by these rules to make investment decisions; the challenges 
that registrants face in providing the required disclosures; and 
potential changes to these requirements that could enhance the 
information provided to investors and promote efficiency, competition, 
and capital formation.
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    \7\ The staff, under its Disclosure Effectiveness Initiative, is 
reviewing the disclosure requirements in Regulations S-K and 
Regulation S-X and is considering ways to improve the disclosure 
regime for the benefit of both companies and investors. The goal is 
to comprehensively review the requirements and make recommendations 
on how to update them to facilitate timely, material disclosure by 
companies and shareholders' access to that information.
    \8\ Release No. 33-9929 (Sept. 25, 2015) [80 FR 59083 (Oct. 1, 
2015)].
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    In response, we received approximately 50 comment letters.\9\ About 
half of these comment letters addressed Rule 3-10,\10\ and nearly as 
many addressed Rule 3-16.\11\ Additionally, prior to issuing the 
Request for Comment, one comment letter was submitted, in response to 
the staff's Disclosure Effectiveness Initiative, that addressed Rules 
3-10 and 3-16.\12\ These comments were

[[Page 49632]]

considered carefully in developing these proposals.
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    \9\ Comments that we received in response to the Request for 
Comment are available at https://www.sec.gov/comments/s7-20-15/s72015.shtml. References to comment letters in this release refer to 
the comments on the Request for Comment unless otherwise specified.
    \10\ See, e.g., letters from Association of the Bar of the City 
of New York (Nov. 30, 2015) (``AB-NYC''); Anuradha RK (Nov. 23, 
2015) (``Anuradha''); BDO USA, LLP (Dec. 7, 2015) (``BDO''); Cahill 
Gordon & Reindel LLP (Nov. 30, 2015) (``Cahill''); California Public 
Employees' Retirement System (Nov. 30, 2015) (``CalPERS''); Center 
for Audit Quality (Nov. 25, 2015) (``CAQ''); CFA Institute (Mar. 2, 
2016) (``CFA''); Comcast Corporation (Dec. 11, 2015) (``Comcast''); 
Covenant Review, LLC (Nov. 30, 2015) (``Covenant''); Davis Polk & 
Wardwell LLP (Nov. 30, 2015) (``Davis Polk''); Deloitte & Touche LLP 
(Nov. 23, 2015) (``DT''); Ernst & Young LLP (Nov. 20, 2015) 
(``EY''); FedEx Corporation (``Nov. 30, 2015) (``FedEx''); General 
Motors Company (Nov. 30, 2015) (``GM''); Grant Thornton LLP (Dec. 1, 
2015) (``Grant''); Headwaters Incorporated (Nov. 30, 2015) 
(``Headwaters''); KPMG LLP (Nov. 30, 2015) (``KPMG''); Medtronic plc 
(Nov. 30, 2015) (``Medtronic''); Noble Corporation plc (Dec. 1, 
2015) (``Noble-UK''); PricewaterhouseCoopers LLP (Nov. 30, 2015) 
(``PwC''); RSM US LLP (Nov. 30, 2015) (``RSM''); Securities Industry 
and Financial Markets Association (Nov. 30, 2015) (``SIFMA''); 
Simpson Thacher & Bartlett LLP (Nov. 30, 2015) (``Simpson''); U.S. 
Chamber of Commerce, Center for Capital Markets Competitiveness 
(Nov. 30, 2015) (``Chamber''); and WhiteWave Foods Company (Nov. 30, 
2015) (``WhiteWave'').
    \11\ See, e.g., letters from Anuradha, BDO, Cahill, CalPERS, 
CAQ, CFA, Covenant, Davis Polk, DT, EY, KPMG, PwC, SIFMA, and 
Chamber.
    \12\ See letter from Disclosure Effectiveness Working Group of 
the Federal Regulation of Securities Committee and the Law and 
Accounting Committee of the Business Law Section of the American Bar 
Association (Nov. 14, 2014) (``ABA-Committees''), https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
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B. Scope of Proposals

    We are proposing changes to the disclosure requirements contained 
in Rules 3-10 and 3-16. These rules represent a discrete, but 
important, subset of the Regulation S-X disclosure requirements.\13\ 
Both rules affect disclosures made in connection with registered debt 
offerings \14\ and subsequent periodic reporting.\15\ We believe that 
revising these rules would reduce the cost of compliance for 
registrants and encourage potential issuers to conduct registered debt 
offerings or private offerings with registration rights. The proposed 
amendments would benefit investors by simplifying and streamlining the 
disclosure provided to them about registered transactions and improve 
transparency in the market to the extent more offerings are 
registered.\16\ In addition, if the proposed changes reduce the burden 
associated with providing guarantees or pledges of affiliate securities 
as collateral,\17\ investors may benefit from access to more registered 
offerings that are structured to include such enhancements and, 
accordingly, the additional protections that come with Section 11 
liability for disclosures made in those offerings.
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    \13\ Until 2000, the disclosure requirements for guarantors and 
issuers of guaranteed securities registered or being registered and 
those for affiliates whose securities collateralized securities 
registered or being registered were included in the same rule. The 
Commission separated those disclosure requirements in 2000 because 
of the significant change made to the structure and substance of the 
disclosure requirements for guarantors and issuers of guaranteed 
securities registered or being registered. See Financial Statements 
and Periodic Reports for Related Issuers and Guarantors, Release No. 
33-7878 (Aug. 4, 2000) [65 FR 51691 (Aug. 24, 2000)] (``2000 
Release''). The Commission kept these new disclosure requirements in 
Rule 3-10 and moved the disclosure requirements for affiliates whose 
securities collateralize securities registered or being registered 
to new Rule 3-16. The substance of the requirements moved to Rule 3-
16 were unchanged. See Separate Financial Statements Required by 
Regulation S-X, Release No. 33-6359 (Nov. 6, 1981) [46 FR 56171 
(Nov. 16, 1981)].
    \14\ In practice, pledges of affiliate securities as collateral 
are almost always for debt securities. However, the requirements of 
Rule 3-16 are applicable to any security registered or being 
registered, whether or not in the form of debt.
    \15\ The proposed amendments will not affect the presentation of 
registrants' consolidated financial statements prepared in 
accordance with U.S. GAAP or International Financial Reporting 
Standards (``IFRS'') as issued by the International Accounting 
Standards Board in registration statements and Exchange Act periodic 
reports, such as Form 10-K. The proposed amendments are focused on 
the supplemental information about subsidiary issuers and guarantors 
as well as affiliates whose securities are pledged as collateral.
    \16\ In a recent report to Congress, the Commission's Division 
of Economic Risk Analysis determined that capital raising activity 
in the registered debt market was approximately $1.3 trillion in 
2016. See U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis, 
Access to Capital and Market Liquidity 96 (Aug. 2017) [hereinafter 
Access to Capital and Market Liquidity Report], https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf. In 
2016, debt offerings under Securities Act Rule 144A raised 
approximately $562.8 billion, based on staff analysis of data from 
the SDC Platinum (Thomson Reuters) database.
    \17\ Currently, registrants often structure debt agreements to 
release affiliate securities pledged as collateral if the disclosure 
requirements of Rule 3-16 would be triggered, thereby depriving 
investors of that collateral protection. See additional discussion 
below. Registrants may cease structuring offerings to release such 
collateral if disclosure burdens are reduced by the proposed 
amendments, which would benefit investors.
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II. Rule 3-10 of Regulation S-X

A. Background

    A guarantee of a debt or debt-like security (``debt security'') 
\18\ is a separate security under the Securities Act \19\ and, as a 
result, offers and sales of these guarantees \20\ must be either 
registered or exempt from registration. If the offer and sale is 
registered, the issuer of the debt security and the guarantor \21\ must 
each file its own audited annual and unaudited interim \22\ financial 
statements required by Regulation S-X. Additionally, the offer and sale 
of the securities pursuant to a Securities Act registration statement 
causes the issuer and guarantor to become subject to reporting under 
Section 15(d) of the Exchange Act.\23\ Reporting under Section 15(d) 
requires filing periodic reports that include audited annual and 
unaudited interim financial statements for at least the fiscal year in 
which the related Securities Act registration statement became 
effective.\24\
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    \18\ Rule 3-10 exceptions are available to issuers and 
guarantors of guaranteed securities that are ``debt or debt-like.'' 
The 2000 Release stated, in part, ``[t]he characteristics that 
identify a guaranteed security as debt or debt-like for this purpose 
are: the issuer has a contractual obligation to pay a fixed sum at a 
fixed time; and where the obligation to make such payments is 
cumulative, a set amount of interest must be paid.'' See Section 
III.A.4 of the 2000 Release and additional discussion in Section 
II.H, ``Securities to which Rule 3-10 Applies.''
    \19\ See Section 2(a)(1) of the Securities Act.
    \20\ These securities, while separately identified in the 
Securities Act, are typically purchased by investors together with 
the related debt security and are held together while outstanding.
    \21\ The issuer and guarantor structures contemplated by Rule 3-
10 can comprise multiple issuers and multiple guarantors. For 
example, a parent can co-issue a security with one of its 
subsidiaries that several of its other subsidiaries guarantee.
    \22\ A foreign private issuer need only provide interim period 
disclosure in certain registration statements.
    \23\ See 15 U.S.C. 78o(d).
    \24\ The duty to file under Section 15(d) is automatically 
suspended as to any fiscal year, other than the fiscal year within 
which the registration statement became effective, if, at the 
beginning of such fiscal year, the securities of each class to which 
the registration statement relates are held of record by less than 
300 persons. See Section 15(d)(1) of the Exchange Act.
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    When the Commission amended Rule 3-10 in 2000, it recognized that 
``[t]here are circumstances, however, where full Securities Act and 
Exchange Act disclosure by both the issuer and the guarantors may not 
be useful to an investment decision and, therefore, may not be 
necessary.'' \25\ Common examples are when: (1) A parent company offers 
its own securities that its subsidiary guarantees; and (2) a subsidiary 
offers securities that its parent company fully and unconditionally 
guarantees. In these and similar situations, in which a parent company 
and one or more of its subsidiaries serve as issuers and/or guarantors 
of guaranteed securities, we believe the disclosure requirements 
generally have been guided by an overarching principle: The 
consolidated financial statements of the parent company are the 
principal source of information for investors when evaluating the debt 
security and its guarantee together.\26\ This principle is grounded in 
the idea that the investment is in the consolidated enterprise when: 
(1) The parent company is fully obligated as either issuer or full and 
unconditional guarantor of the security; \27\ (2) the parent company 
controls each subsidiary issuer and guarantor, including having the 
ability to direct all debt-paying activities; \28\ and (3) the 
financial information of each subsidiary issuer and guarantor is 
included as part of the consolidated financial statements of the parent 
company.\29\ In these

[[Page 49633]]

circumstances, we believe full Securities Act and Exchange Act 
disclosures for each subsidiary issuer and guarantor are generally not 
material for an investor to make an informed investment decision about 
a guaranteed security. Instead, we believe information included in the 
consolidated disclosures about the parent company, as supplemented with 
details about the issuers and guarantors, is sufficient. These 
disclosures help an investor understand how the consolidated entities 
within the enterprise support the obligation.
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    \25\ See Section I of the 2000 Release.
    \26\ Parent company consolidated financial statements must be 
filed in all instances where the omission of financial statements of 
subsidiary issuers and guarantors are permitted under existing Rule 
3-10. See paragraph (4) in each of Rules 3-10(b)-(f).
    \27\ Typically, all of a parent company's subsidiaries support 
the parent company's debt-paying ability. However, in the event of 
default, the holders of debt without the benefit of guarantees are 
comparatively disadvantaged. In the event of default, a holder of a 
debt security issued by a parent company can make claims for payment 
directly against the issuer and guarantors. The assets of non-issuer 
and non-guarantor subsidiaries typically would be accessible only by 
the holder indirectly through a bankruptcy proceeding. In such a 
proceeding, without a direct guarantee, the claims of the holder 
would be structurally subordinate to the claims of other creditors, 
including trade creditors of the non-issuer and non-guarantor 
subsidiaries.
    \28\ Debt-paying activities typically include, but are not 
limited to, the use of the subsidiary issuer's and guarantor's 
assets and the timing and amount of distributions.
    \29\ A parent company that prepares its financial statements in 
accordance with U.S. Generally Accepted Accounting Principles 
(``U.S. GAAP''), would apply Accounting Standards Codification 
(``ASC'') 810, Consolidation, in determining whether to consolidate 
a subsidiary issuer or guarantor. A parent company that qualifies as 
a foreign private issuer and prepares its financial statements in 
accordance with IFRS would apply IFRS 10, Consolidated Financial 
Statements.
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B. Overview of the Existing Requirements

    Rule 3-10(a) states the general rule that every issuer of a 
registered security that is guaranteed and every guarantor of a 
registered security must file the financial statements required for a 
registrant by Regulation S-X. The rule also sets forth five exceptions 
to this general rule.\30\ Each exception specifies conditions that must 
be met, including, in each case, that the parent company provide 
certain disclosures (``Alternative Disclosures''). If the conditions 
are met, separate financial statements of each qualifying subsidiary 
issuer and guarantor may be omitted. Only one of the five exceptions 
can apply to any particular offering and the subsequent Exchange Act 
reporting.
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    \30\ See Rules 3-10(b)-(f) of Regulation S-X. See Section II.F, 
``Exceptions,'' below.
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    Two primary conditions, included in each of the exceptions, must be 
satisfied for a subsidiary issuer or guarantor to be eligible to omit 
its separate financial statements:
     Each subsidiary issuer and guarantor must be ``100% 
owned'' by the parent company; and
     each guarantee must be ``full and unconditional.''
    The form and content of the Alternative Disclosures are determined 
based on the facts and circumstances and can range from a brief 
narrative to highly-detailed condensed consolidating financial 
information (``Consolidating Information''). Subsidiary issuers and 
guarantors that are permitted to omit their separate financial 
statements under Rule 3-10 are also automatically exempt from Exchange 
Act reporting under Exchange Act Rule 12h-5. The parent company, 
however, must continue to provide the Alternative Disclosures for as 
long as the guaranteed securities are outstanding.\31\
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    \31\ See Section III.C.1 of the 2000 Release and additional 
discussion in Section II.J, ``Exchange Act Reporting Requirements.''
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    Recently acquired subsidiary issuers and guarantors are addressed 
separately within Rule 3-10. Rule 3-10(g) \32\ requires the Securities 
Act registration statement of a parent company filed in connection with 
issuing guaranteed debt securities to include one year of audited, and, 
if applicable, unaudited interim pre-acquisition financial statements 
for recently-acquired subsidiary issuers and guarantors that are 
significant and have not been reflected in the parent company's audited 
results for at least nine months of the most recent fiscal year.
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    \32\ Rule 3-10(g) of Regulation S-X.
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C. Parent Company Financial Statements

    Each of the exceptions in Rule 3-10 requires the parent company to 
file its financial statements, but Rule 3-10 does not address when an 
issuer or guarantor is, in fact, the ``parent company'' because, as 
noted in the 2000 Release, the identity of the parent company will vary 
based on the particular corporate structure.\33\ The 2000 Release 
identified three conditions that must be met before an entity can be 
considered the ``parent company'' for purposes of Rule 3-10, including 
that the entity owns 100% of each subsidiary issuer or guarantor 
directly or indirectly.\34\
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    \33\ See Section III.A.6. of the 2000 Release.
    \34\ The three conditions for an entity to be considered the 
``parent company'' are that the entity: (1) Is an issuer or 
guarantor of the subject securities; (2) is an Exchange Act 
reporting company, or will become one as a result of the subject 
Securities Act registration statement; and (3) owns 100% of each 
subsidiary issuer or guarantor directly or indirectly. See id. A 
number of examples illustrating when an entity is or is not the 
parent company were included in an appendix to the 2000 Release. See 
id. at Appendix C.
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D. 100% Owned

    Rule 3-10(h)(1) defines a subsidiary as ``100% owned'' if all of 
its outstanding voting shares are owned, either directly or indirectly, 
by its parent company. A subsidiary not in corporate form is ``100% 
owned'' if the sum of all interests are owned, either directly or 
indirectly, by its parent company, except that the following are not 
included in the sum of all interests owned: (1) Securities that are 
guaranteed by its parent, and, if applicable, other 100%-owned 
subsidiaries of its parent; and (2) securities that guarantee 
securities issued by its parent and, if applicable, other 100%-owned 
subsidiaries of its parent.\35\ This condition was adopted so the risks 
associated with an investment in the parent company and its subsidiary 
would be ``identical.'' \36\ A subsidiary issuer or guarantor with any 
third party ownership interest would fail to meet this condition and 
not be eligible for an exception in Rule 3-10. This condition would 
also not be met if a subsidiary issued securities convertible into its 
voting securities to someone other than the parent company.\37\
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    \35\ The 2000 Release states that ``[u]nincorporated entities 
operate differently than corporations. For example, in a limited 
liability corporation, the ability to vote can be separated from the 
ability to manage the financial affairs of the entity.'' See Section 
III.A.1.a.ii of the 2000 Release. In recognition of such 
differences, separate definitions of 100% owned were included in 
existing Rule 3-10(h)(1) for corporate and non-corporate entities.
    \36\ See Section III.A.1.a.i.(A) of the 2000 Release.
    \37\ See id.
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E. Full and Unconditional Guarantees

    Rule 3-10(h)(2) defines a guarantee as ``full and unconditional'' 
if, when an issuer of a guaranteed security has failed to make a 
scheduled payment, the guarantor is obligated to make the scheduled 
payment immediately and, if the guarantor does not, any holder of the 
guaranteed security may immediately bring suit directly against the 
guarantor for payment of all amounts due and payable. There can be no 
conditions, beyond the issuer's failure to pay, to the guarantor's 
payment obligation.\38\ The condition that all guarantees be ``full and 
unconditional'' was adopted to limit the availability of Alternative 
Disclosures to situations where the

[[Page 49634]]

payment obligations of the issuer and guarantor are essentially 
identical.\39\
---------------------------------------------------------------------------

    \38\ For example, a guarantee is not full and unconditional if 
it is not operative until some time after default or if the amount 
the guarantor is obligated to pay differs from the amount the issuer 
must pay. As the payment obligation does not fall uniformly across 
the issuer and related guarantors before enforceability of the 
guarantee, each party in that structure must provide separate 
financial statements. See Section III.A.1.b.i. of the 2000 Release. 
However, a guarantee can meet the full and unconditional condition 
if it has a fraudulent conveyance ``savings clause,'' such as the 
guarantee being limited to the maximum amount that can be guaranteed 
without constituting a fraudulent conveyance or fraudulent transfer 
under applicable insolvency laws, or if the guarantee is enforceable 
to the fullest extent of the law. See Section III.A.1.b.ii. of the 
2000 Release. Additionally, a guarantee can be full and 
unconditional even if it has different subordination terms than the 
guaranteed securities. For example, a parent company's guarantee can 
be full and unconditional if the subsidiary's debt obligation ranks 
senior to all of its other debt and the parent company's guarantee 
ranks junior to other debt obligations of the parent company. While 
different subordination terms may mean the guaranteed security 
holders have different rights in the priority of payment with 
respect to the issuer and guarantor, both the issuer and guarantor 
remain fully liable to holders for all amounts due under the 
guaranteed security. See Section III.A.1.b.iii. of the 2000 Release.
    \39\ See Section III.A.1.b of the 2000 Release.
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F. Exceptions

    Each of the five exceptions in the existing rule contains 
conditions that, if satisfied, permit registrants to omit separate 
financial statements of the subject subsidiary issuers and guarantors. 
These five exceptions are:
    (1) A finance subsidiary \40\ issues securities that its parent 
company guarantees; \41\
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    \40\ Rule 3-10(h)(7) of Regulation S-X (``A subsidiary is a 
finance subsidiary if it has no assets, operations, revenues or cash 
flows other than those related to the issuance, administration and 
repayment of the security being registered and any other securities 
guaranteed by its parent company.'').
    \41\ See Rule 3-10(b) of Regulation S-X.
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    (2) an operating subsidiary issues securities that its parent 
company guarantees; \42\
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    \42\ See Rule 3-10(c) of Regulation S-X.
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    (3) a subsidiary issues securities that its parent company and one 
or more other subsidiaries of its parent company guarantee; \43\
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    \43\ See Rule 3-10(d) of Regulation S-X.
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    (4) a parent company issues securities that one of its subsidiaries 
guarantees; \44\ or
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    \44\ See Rule 3-10(e) of Regulation S-X.
---------------------------------------------------------------------------

    (5) a parent company issues securities that more than one of its 
subsidiaries guarantees.\45\
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    \45\ See Rule 3-10(f) of Regulation S-X.
---------------------------------------------------------------------------

    In addition to the two primary conditions discussed above, 
depending on which exception is applicable, additional conditions must 
be satisfied, including providing Alternative Disclosures in the 
footnotes to the parent company's consolidated financial statements. In 
most cases, the Alternative Disclosures consist of Consolidating 
Information. However, there are three situations in which the 
Alternative Disclosures consist of a brief narrative.\46\ These three 
situations are:
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    \46\ The content of the brief narrative is specified within each 
of the exceptions based on the applicable facts and circumstances. 
For example, if the conditions are met, Rule 3-10(b)(4) of 
Regulation S-X specifies that the narrative disclosure to be 
included in a footnote to the parent company's consolidated 
financial statements must state, if true, ``that the issuer is a 
100%-owned finance subsidiary of the parent company and the parent 
company has fully and unconditionally guaranteed the securities.'' 
It also requires the footnote to include ``the narrative disclosures 
specified in paragraphs (i)(9) and (i)(10) of this section.''
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     The subsidiary is a finance subsidiary, and the parent 
company is the only guarantor of the securities;
     the parent company of the subsidiary issuer has no 
independent assets or operations,\47\ the parent company guarantees the 
securities, no subsidiary of the parent company guarantees the 
securities, and any subsidiaries of the parent company other than the 
issuer are minor; \48\ and
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    \47\ Rule 3-10(h)(5) of Regulation S-X (``A parent company has 
no independent assets or operations if each of its total assets, 
revenues, income from continuing operations before income taxes, and 
cash flows from operating activities (excluding amounts related to 
its investment in its consolidated subsidiaries) is less than 3% of 
the corresponding consolidated amount.'').
    \48\ Rule 3-10(h)(6) of Regulation S-X (``A subsidiary is minor 
if each of its total assets, stockholders' equity, revenues, income 
from continuing operations before income taxes, and cash flows from 
operating activities is less than 3% of the parent company's 
corresponding consolidated amount.'').
---------------------------------------------------------------------------

     the parent company issuer has no independent assets or 
operations and all of the parent company's subsidiaries, other than 
minor subsidiaries, guarantee the securities.

G. Consolidating Information

    When the brief narrative disclosure is not permitted, Rule 3-10 
requires the inclusion of Consolidating Information in the financial 
statements. Consolidating Information is detailed financial information 
consisting of a columnar footnote presentation of each category of 
parent and subsidiaries as issuer, co-issuers, guarantor(s), or non-
guarantor(s) that sums to the consolidated amounts. The presentation 
must include all major captions of the balance sheet, income statement, 
and cash flow statement that are required to be shown separately in 
interim financial statements prepared under 17 CFR 210.10-1 (``Article 
10'' of Regulation S-X'').\49\ In order to distinguish the assets, 
liabilities, operations, and cash flows of the entities that are 
legally obligated to make payments under the guarantee from those that 
are not, the columnar presentation must show: (1) A parent company's 
investments in all consolidated subsidiaries based upon its 
proportionate share of their net assets; \50\ and (2) subsidiary issuer 
and guarantor investments in certain consolidated subsidiaries using 
the equity method of accounting.\51\
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    \49\ Rule 10-01(a) of Regulation S-X.
    \50\ See Rule 3-10(i)(3) of Regulation S-X.
    \51\ See Rule 3-10(i)(5) of Regulations S-X. Investments in the 
following subsidiaries are required to be presented under the equity 
method within Consolidating Information: non-guarantor subsidiaries; 
subsidary issuers or subsidiary guarantors that are not 100% owned 
and/or whose guarantee is not full and unconditional; subsidiary 
guarantors whose guarantee is not joint and several with the 
guarantees of other subsidiaries; and subsidiary guarantors with 
differences in domestic or foreign laws that affect the 
enforceability of the guarantees. The equity method is used 
primarily to ensure that a subsidiary guarantor does not 
consolidate, within this presentation, its own non-guarantor 
subsidiary. The equity method of accounting is described in ASC 323. 
Investments--Equity Method and Joint Ventures, for registrants that 
apply U.S. GAAP and in International Accounting Standards (``IAS'') 
28, Investments in Association and Joint Ventures, for foreign 
private issuers that apply IFRS.
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    Consolidating Information must be provided as of, and for, the same 
periods as the parent company's consolidated financial statements and 
must be audited for the same periods that the parent company financial 
statements are required to be audited.\52\ In addition to requiring 
disclosures about restricted net assets,\53\ as well as certain types 
of restrictions on the ability of the parent company or any guarantor 
to obtain funds from their subsidiaries,\54\ the instructions specify 
that the disclosure may not omit information about each guarantor that 
would be material for investors to evaluate the sufficiency of the 
guarantee, and that the disclosure must include sufficient information 
so as to make the financial information presented not misleading.
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    \52\ Rule 3-10(i)(2) of Regulation S-X.
    \53\ Rule 3-10(i)(10) of Regulation S-X.
    \54\ Rule 3-10(i)(9) of Regulation S-X.
---------------------------------------------------------------------------

H. Securities to Which Rule 3-10 Applies

    The exceptions to the general rule in existing Rules 3-10(b) 
through (f) are available only to issuers and guarantors of debt 
securities.\55\ In the 2000 Release, the Commission explained the 
circumstances under which a guaranteed security should be considered 
``debt or debt-like'' and described certain characteristics of such a 
security. Generally, the substance of the security's obligation will 
dictate eligibility for Rule 3-10 rather than the form or title of the 
security. The characteristics that identify a guaranteed security as 
debt or debt-like are: (1) The issuer has a contractual obligation to 
pay a fixed sum at a fixed time; and (2) where the obligation to make 
such payments is cumulative, a set amount of interest must be paid.\56\
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    \55\ The 2000 Release states that ``modified financial 
information permitted by paragraphs (b)-(f) will be available only 
for guaranteed debt and debt-like instruments.'' See Section 
III.4.b.i. of the 2000 Release. As discussed below, we are proposing 
to state this requirement in the rule for clarity.
    \56\ The Commission provided implementation guidance for certain 
types of securities such as preferred securities, trust preferred 
securities, and convertible debt or debt-like securities. See 
Section III.4.b.i and ii of the 2000 Release.
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I. Recently-Acquired Subsidiary Issuers and Guarantors

    If a parent company acquires a new subsidiary issuer or guarantor 
that otherwise qualifies for one of the

[[Page 49635]]

exceptions in Rules 3-10(c) through (f), the parent company may be 
required to provide one year of audited pre-acquisition financial 
statements of the newly-acquired issuer or guarantor and, if 
applicable, unaudited interim financial statements. This requirement is 
triggered when: (1) A parent company acquires the new subsidiary during 
or subsequent to one of the periods for which financial statements are 
presented in a Securities Act registration statement filed in 
connection with the offer and sale of the debt securities; (2) the 
subsidiary is deemed significant; and (3) the subsidiary is not 
reflected in the audited consolidated results of the parent company for 
at least nine months of the most recent fiscal year.\57\ A subsidiary 
is significant if its net book value or purchase price, whichever is 
greater, is 20 percent or more of the principal amount of the 
securities being registered.\58\ The financial statements of the 
recently-acquired subsidiary must conform to the requirements of 
Regulation S-X because, as an issuer of a security or provider of a 
guaranty, it is an issuer. These include the requirement that an audit 
be performed in accordance with the standards of the Public Company 
Accounting Oversight Board (``PCAOB'') by an auditor registered with 
the PCAOB.\59\
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    \57\ Rule 3-10(g)(1) of Regulation S-X.
    \58\ Rule 3-10(g)(1)(ii) of Regulation S-X.
    \59\ In certain circumstances, pre-acquisition financial 
statements of a recently-acquired subsidiary that were previously 
provided by a parent company may not meet the requirements of Rule 
3-10(g). For example, a parent company may provide on Form 8-K pre-
acquisition financial statements of a subsidiary required by 17 CFR 
210.3-05 (``Rule 3-05 of Regulation S-X'') that may be audited in 
accordance with U.S. generally accepted auditing standards or 
audited by an auditor not registered with the PCAOB. If the parent 
company later files a registration statement for the offer and sale 
of its securities that are guaranteed by that same recently acquired 
subsidiary, those previously filed pre-acquisition financial 
statements would not meet the requirements of Rule 3-10(g). The 
parent company would then be required to file pre-acquisition 
financial statements of that recently acquired subsidiary guarantor 
audited in accordance with the standards of the PCAOB by an auditor 
registered with the PCAOB, or request pre-filing relief from the 
staff.
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J. Exchange Act Reporting Requirements

    Issuers and guarantors availing themselves of an exception that 
allows for the Alternative Disclosures in lieu of separate financial 
statements are exempt from Exchange Act reporting by Exchange Act Rule 
12h-5. The parent company, however, must continue to provide the 
Alternative Disclosures for as long as the guaranteed securities are 
outstanding.\60\ This obligation continues even if the subsidiary 
issuers and guarantors could have suspended their reporting obligations 
under 17 CFR 240.12h-3 (``Rule 12h-3'') or Section 15(d) of the 
Exchange Act,\61\ had they chosen not to avail themselves of a Rule 3-
10 exception and reported separately from the parent company.
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    \60\ See Section III.C.1 of the 2000 Release and Rule 3-10(a).
    \61\ See 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    A subsidiary issuer or guarantor that initially meets the 
requirements but subsequently ceases to satisfy Rule 12h-5 must begin 
separately reporting under the Exchange Act. It must present the 
financial statements required by Regulation S-X in a separate periodic 
report at the time the next report is due and may no longer rely on its 
parent company's provision of Alternative Disclosures in the parent 
company's periodic reports.

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

A. Overarching Principle

    We believe that investors in guaranteed securities would be best 
served by continuing to adhere to the overarching principle upon which 
existing Rule 3-10 is based, namely that investors in guaranteed debt 
securities rely primarily on the consolidated financial statements of 
the parent company and supplemental details about the subsidiary 
issuers and guarantors when making investment decisions.\62\ Although 
the existing rules provide investors with information about issuers of 
guaranteed debt and guarantors of those securities, our experience 
since the adoption of these rules in 2000 suggests the requirements 
could be improved for the benefit of both investors and registrants 
while adhering to the overarching principle. In this regard, the 
existing rules impose certain eligibility restrictions and disclosure 
requirements that may require unnecessary detail, thereby shifting 
investor focus away from the consolidated enterprise towards individual 
entities or groups of entities and may pose undue compliance burdens 
for registrants. For example, a parent company is not eligible, under 
the existing rule, to provide the Alternative Disclosures if a 
subsidiary issuer or guarantor is 99% instead of 100% owned by its 
parent company. As another example, the use of a brief narrative 
instead of Consolidating Information is not available if the total 
assets of either the parent company or non-issuer and non-guarantor 
subsidiaries of the parent company exceed 3% of the parent company's 
consolidated total assets. In both cases, slight variations from the 
conditions set forth in the rule lead to substantially different 
disclosure outcomes despite the investments being substantially the 
same. More broadly, the volume of the Consolidating Information and 
level of detail required can undermine the overarching principle. 
Consolidating Information typically occupies multiple pages of a parent 
company's financial statements, is composed of detailed information 
that may not be material for investors in making an investment 
decision, and could distract from the financial information of the 
obligated entities that is most likely to be material. In addition, 
according to one commenter, debt agreements are often structured to 
either meet or avoid the requirements of Rule 3-10, which may result in 
a guarantor structure that is less beneficial to investors.\63\ Another 
commenter stated that the ``burdensome requirements'' of the existing 
rule ``[lead] to issuers electing to do more unregistered as opposed to 
registered deals.'' \64\ We are proposing amendments to address the 
challenges posed by the current rules in an effort to improve the 
disclosures to investors, encourage more registered offerings, and 
facilitate debt structures where the provision of guarantees is less 
burdensome.
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    \62\ See discussion in Section II.A, ``Background.''
    \63\ See letter from DT.
    \64\ See letter from Davis Polk.
---------------------------------------------------------------------------

B. Overview of the Proposed Amendments

    Under the proposed amendments, the rules would continue to permit 
the omission of separate financial statements of subsidiary issuers and 
guarantors when certain conditions are met and the parent company 
provides supplemental financial and non-financial disclosure about the 
subsidiary issuers and/or guarantors and the guarantees (``Proposed 
Alternative Disclosures''). Similar to the existing rule, proposed Rule 
3-10 would provide the conditions that must be met in order to omit 
separate subsidiary issuer or guarantor financial statements. Proposed 
Rule 13-01 would specify the disclosure requirements for the 
accompanying Proposed Alternative Disclosures. The proposed amendments 
would:
     Replace the condition that a subsidiary issuer or 
guarantor be 100% owned by the parent company with a condition that it 
be consolidated in the parent company's consolidated financial 
statements;
     replace Consolidating Information with summarized 
financial information,

[[Page 49636]]

as defined in 17 CFR 210.1-02,\65\ (``Summarized Financial 
Information'') of the issuers and guarantors (together, ``Obligor 
Group''), which may be presented on a combined basis, and reduce the 
number of periods presented;
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    \65\ Rule 1-02(bb)(1) of Regulation S-X.
---------------------------------------------------------------------------

     expand the qualitative disclosures about the guarantees 
and the issuers and guarantors;
     eliminate quantitative thresholds for disclosure and 
require disclosure of additional information that would be material to 
holders of the guaranteed security;
     permit the Proposed Alternative Disclosures to be provided 
outside the footnotes to the parent company's audited annual and 
unaudited interim consolidated financial statements in the registration 
statement covering the offer and sale of the subject securities and any 
related prospectus, and in certain Exchange Act reports filed shortly 
thereafter;
     require that the Proposed Alternative Disclosures be 
included in the footnotes to the parent company's consolidated 
financial statements for annual and quarterly reports beginning with 
the annual report for the fiscal year during which the first bona fide 
sale of the subject securities is completed;
     eliminate the requirement to provide pre-acquisition 
financial statements of recently-acquired subsidiary issuers and 
guarantors; and
     require the Proposed Alternative Disclosures for as long 
as the issuers and guarantors have an Exchange Act reporting obligation 
with respect to the guaranteed securities rather than for so long as 
the guaranteed securities are outstanding.
    The proposed amendments would simplify and streamline the rule 
structure in several ways. Most significantly, under proposed Rules 3-
10(a) and 3-10(a)(1) there would be only a single set of eligibility 
criteria that would apply to all issuer and guarantor structures 
instead of having separate sets of criteria in each of the five 
exceptions in existing Rules 3-10(b) through (f). Similarly, the 
requirements for the Proposed Alternative Disclosures would be included 
in a single location within proposed Rule 13-01, rather than spread 
among the multiple paragraphs of existing Rule 3-10. We believe these 
changes would simplify the rule structure and facilitate compliance.
Request for Comment
    1. Would the proposed amendments to existing Rule 3-10 result in an 
increase in the number of registered debt offerings that include 
guarantees? Why or why not? How would increasing the number of 
registered debt offerings that include guarantees affect investors and 
issuers?
    2. What factors do issuers consider when deciding whether to engage 
in a registered debt offering or an offering in the private market? Do 
issuers structure registered debt offerings to not include guarantees 
because of concerns about compliance with existing Rule 3-10? If so, 
what are the specific concerns? Are issuers choosing to engage in 
private debt offerings that include guarantees? If so, what exemptions 
or safe harbors are issuers using? If these issuers are relying on 17 
CFR 230.144A (``Rule 144A''), do these offerings typically include 
registration rights, or are they offered pursuant to Rule 144A without 
registration rights? Why or why not?
    3. To what type of investors are issuers of registered debt 
offerings selling or marketing their securities--Qualified 
Institutional Buyers (``QIBs''), other institutional investors, or 
retail investors? What is the typical investor break down in this 
regard?
    4. What factors do issuers consider in determining whether to 
structure a debt offering to include guarantees, and how are they 
considered?
    5. How do investors use the Alternative Disclosures under existing 
Rule 3-10? For example, how do retail investors, institutional 
investors, or third parties, such as financial analysts, use the 
information? How would these investors use the Proposed Alternative 
Disclosures?
    6. Would the proposed amendments to existing Rule 3-10 improve the 
disclosures provided to investors? If so, how? Are there other changes 
to the rule that we should consider that would improve disclosures to 
investors? If so, what are they and how would they improve disclosure?
    7. Would the proposed amendments to existing Rule 3-10 make the 
rule less burdensome and, thereby, encourage issuers to structure debt 
offerings to include guarantees? Are there other changes to the rule 
that we should consider that would reduce compliance burdens for 
issuers but continue to provide the material information investors need 
to make informed investment decisions?
    8. Would the proposed amendments to existing Rule 3-10 remove 
disclosures that investors or financial analysts rely on? If so, which 
disclosures? Would the removal of such disclosures have an effect on 
investor participation in registered debt offerings that include 
guarantees?
    9. What effects do registered debt offerings have on the covenants 
contained in the related indentures? Do private debt offerings 
typically contain more or fewer covenants in the related indentures? 
Why or why not? Would an issuer's offering of debt contain more 
covenants if offered privately than if offered publicly? Why or why 
not? What effects would the proposed rules have on the covenants 
contained in the related indentures?
    10. Are there alternative approaches to disclosures about 
guarantors and guarantees that would benefit investors? If so, what are 
they and why? How would investors use the disclosures under these 
alternative approaches?

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

    Under the proposed rules, the financial statements of a subsidiary 
issuer or guarantor could be omitted if the eligibility conditions 
contained in proposed Rules 3-10(a) and 3-10(a)(1) are met and the 
Proposed Alternative Disclosures specified in proposed Rule 13-01 are 
provided in the filing, as required by proposed Rule 3-10(a)(2). As 
proposed, the eligibility conditions would be that:
     The consolidated financial statements of the parent 
company have been filed;
     the subsidiary issuer or guarantor is a consolidated 
subsidiary of the parent company;
     the guaranteed security is a debt security; and
     one of the following eligible issuer and guarantor 
structures is applicable:
    [cir] The parent company issues the security or co-issues the 
security, jointly and severally, with one or more of its consolidated 
subsidiaries; or
    [cir] a consolidated subsidiary issues the security or co-issues 
the security with one or more other consolidated subsidiaries of the 
parent company, and the security is guaranteed fully and 
unconditionally by the parent company.
1. Eligibility Conditions
a. Parent Company Financial Statements Condition
    Proposed Rule 3-10 would continue to require the filing of the 
parent company's consolidated financial statements. Additionally, under 
the proposed amendments, ``parent company'' would still be defined as 
in the 2000 Release, with one change. The first two conditions would 
continue to be that the entity is: (1) An issuer or guarantor of the 
securities; and (2) an Exchange Act reporting company, or will become 
one as a result of the subject Securities Act registration

[[Page 49637]]

statement. However, the third condition, that the entity owns, directly 
or indirectly, 100% of each subsidiary issuer and guarantor, would no 
longer be required for an entity to be considered the parent 
company.\66\ Instead, the third condition would be that the entity 
consolidates each subsidiary issuer and guarantor in its consolidated 
financial statements.\67\ For clarity, the definition of ``parent 
company'' would be included in proposed Rule 3-10(b)(1), stating that 
the parent company is the entity that meets the three aforementioned 
conditions.
---------------------------------------------------------------------------

    \66\ See Section III.A.6. of the 2000 Release.
    \67\ See Section III.C.1.b, ``Consolidated Subsidiary,'' below.
---------------------------------------------------------------------------

    Consistent with the note to existing Rule 3-10(a)(2), the financial 
statements of an entity that is not an issuer or guarantor of the 
registered security could not be substituted for those of the parent 
company. For example, it would not be appropriate to file, in 
substitution for the financial statements of the parent company, 
financial statements of an entity that files Exchange Act reports but 
is not an issuer or guarantor of the securities being registered even 
if the financial statements of that entity are virtually identical to 
those of the parent company, because the security holders cannot 
enforce payment of the obligation against that particular entity. 
Because we have included the definition of parent company in proposed 
Rule 3-10(b)(1), which clearly states that the parent company must be 
an issuer or guarantor of the guaranteed security, we do not believe 
the note to existing Rule 3-10(a)(2) is necessary and have removed it 
from the proposed rule.
Request for Comment
    11. Is the proposed definition of ``parent company'' included in 
proposed Rule 3-10(b)(1) sufficiently clear? Why or why not? Are there 
other modifications to the proposed definition of ``parent company'' 
that would be appropriate? If so, what are they and why should they be 
included?
    12. Are there other definitions of ``parent company'' that may 
differ from our proposed definition? If so, which definitions and what 
are the similarities or differences? How would any such differences 
affect issuers' ability to apply our rule? Should we make any 
modifications to the proposed definition of ``parent company'' in light 
of those other definitions?
    13. Should the proposed rule include a requirement similar to the 
note to existing Rule 3-10(a)(2) that the financial statements of an 
entity that is not an issuer or guarantor of the registered security 
could not be substituted for those of the parent company, or does the 
proposed definition of ``parent company'' render such a requirement 
unnecessary?
b. Consolidated Subsidiary Condition
    The 2000 Release states that the Commission was adopting the 
existing rule's definition of 100% owned ``because it assures investors 
in the guaranteed securities that there is no competing common equity 
interest in the assets or revenues of the subsidiary. This allows 
investors to evaluate the creditworthiness of the parent and subsidiary 
as a single, indivisible business.'' \68\ The Commission explained that 
the risks associated with an investment in a parent company and its 
subsidiary issuers and/or guarantors would need to be identical to 
justify the use of the Alternative Disclosures in lieu of separate 
financial statements of each of those subsidiaries, and if a third 
party holds an interest in a subsidiary, those risks are not 
identical.\69\
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    \68\ See Section III.A.1.a.i.(A) of the 2000 Release.
    \69\ See id.
---------------------------------------------------------------------------

    A number of commenters suggested that existing Rule 3-10's 100%-
owned condition be replaced,\70\ suggesting various alternative 
conditions.\71\ One commenter recommended permitting guarantor 
subsidiaries to be majority-owned instead of 100% owned, explaining 
that any risks associated with a minority investor could be addressed 
through disclosure,\72\ and another stated that ``as long as a 
registrant controls the subsidiary, a third party minority equity 
interest in the subsidiary's assets and earnings would not affect the 
subsidiary's creditworthiness from a debt holder's perspective.'' \73\ 
One commenter recommended retaining the requirement.\74\
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    \70\ See, e.g., letters from ABA-Committees, AB-NYC, Chamber, 
Comcast, EY, and SIFMA.
    \71\ For example, some commenters recommended permitting 
subsidiary issuers and guarantors to be ``wholly-owned'' by the 
parent company as that term is defined in Rule 1-02(aa) of 
Regulation S-X, which states ``[t]he term wholly owned subsidiary 
means a subsidiary substantially all of whose outstanding voting 
shares are owned by its parent and/or the parent's other wholly 
owned subsidiaries.'' See letters from ABA-Committees, AB-NYC, and 
EY.
    \72\ See letter from SIFMA.
    \73\ See letter from Comcast.
    \74\ See letter from CalPERS.
---------------------------------------------------------------------------

    We continue to believe that a subsidiary issuer or guarantor should 
be controlled by the parent company and consolidated into the financial 
statements of the parent company to be eligible to omit its financial 
statements. However, having considered commenters' suggestions and our 
experience since the adoption of the existing rule, it appears that the 
existence of non-controlling ownership interests in the subsidiary 
issuer or guarantor does not necessarily mean that separate financial 
statements are warranted.
    We note that the existence of non-controlling interest holders 
generally does not alter the fundamental nature of the investment such 
that it should be evaluated similar to multiple investments in 
different issuers. Specifically, we believe that where a parent company 
is obligated as issuer or full and unconditional guarantor of a 
guaranteed security and it controls and includes the subsidiary 
issuer(s) and guarantor(s) in its consolidated financial statements, 
there is sufficient financial unity between the parent company and the 
related subsidiary with respect to the guaranteed debt security such 
that the consolidated financial statements of that parent company and 
the Proposed Alternative Disclosures would enable investors to evaluate 
and sufficiently assess the risks associated with an investment in such 
guaranteed debt security. In the event of default on the debt security, 
there could be circumstances where non-controlling interest holders may 
have the potential to influence certain matters affecting payments to 
holders of the guaranteed debt security. However, as one commenter 
suggested,\75\ such risks, when material, can be addressed through 
disclosures tailored to those facts and circumstances \76\ rather than 
requiring separate financial statements of the subsidiary issuer or 
guarantor.
---------------------------------------------------------------------------

    \75\ See letter from SIFMA.
    \76\ See proposed Rules 13-01(a)(3) and (4).
---------------------------------------------------------------------------

    Proposed Rule 3-10(a) would require the subsidiary issuer or 
guarantor to be a consolidated subsidiary of the parent company 
pursuant to the relevant accounting standards already in use.\77\ This 
proposed change would eliminate the distinction between subsidiaries in 
corporate form and those in other than corporate form, applying a 
consistent eligibility condition across entities. Also, certain 
subsidiary issuers and guarantors that are currently not eligible to 
omit their financial statements under existing Rule 3-10, such as 
consolidated subsidiary issuers or guarantors that have issued 
securities convertible into

[[Page 49638]]

their own voting shares, would be eligible to omit their financial 
statements. The proposed amendments would instead require the parent 
company to provide disclosures that address the material risks, if any, 
associated with non-controlling interests in the subsidiary issuer or 
guarantor, including any risks arising from securities issued by the 
subsidiary that may be convertible into voting shares and may cause the 
percentage of non-controlling interest to increase, and to separately 
provide Summarized Financial Information attributable to those 
subsidiaries.
---------------------------------------------------------------------------

    \77\ For example, a parent company that prepares its financial 
statements in accordance with U.S. GAAP would apply ASC 810, 
Consolidation, and a parent company that qualifies as a foreign 
private issuer and prepares its financial statements in accordance 
with IFRS would apply IFRS 10, Consolidated Financial Statements.
---------------------------------------------------------------------------

    Specifically, proposed Rule 13-01(a)(3) would require, to the 
extent material, a description of any factors that may affect payments 
to holders of the guaranteed security, such as the rights of a non-
controlling interest holder. In addition, proposed Rule 13-01(a)(4) 
would require separate disclosure of Summarized Financial Information 
for subsidiary issuers and guarantors affected by those factors. For 
example, if, through its ability to exercise significant influence \78\ 
over a subsidiary guarantor, a non-controlling interest holder could 
materially affect payments to holders of the guaranteed security, the 
parent company would be required to disclose those factors and the 
Summarized Financial Information attributable to that subsidiary 
guarantor. Because this disclosure would highlight the material 
repayment risks and financial information associated with consolidated 
issuers and guarantors with non-controlling interests, it may no longer 
be necessary to categorically prohibit such issuers and guarantors from 
being eligible to omit their financial statements under proposed Rule 
3-10.
---------------------------------------------------------------------------

    \78\ See ASC 323, Investments--Equity Method and Joint Ventures. 
Representation on the board of directors, participation in policy-
making processes, and extent of ownership by an investor in relation 
to the concentration of other shareholdings are among the ways 
listed in ASC 323-10-15-6 that may indicate the ability to exercise 
significant influence over operating and financial policies of an 
investee.
---------------------------------------------------------------------------

Request for Comment
    14. Should the proposed rule use consolidation of the subsidiary 
issuer or guarantor under the applicable accounting standards as an 
eligibility condition? If not, what relationship between the parent 
company and subsidiary issuer or guarantor should the proposed rule use 
and why?
    15. Would using consolidation of the subsidiary issuer or guarantor 
under the applicable accounting standards as an eligibility condition 
allow investors or financial analysts to adequately understand the 
credit risk of such subsidiary issuer or guarantor? Would the proposed 
use of consolidation allow investors or financial analysts to 
adequately understand these credit risks in lieu of the subsidiary 
issuer or guarantor's financial statements? Why or why not?
    16. Should the proposed condition that each issuer and guarantor be 
a consolidated subsidiary of the parent company be limited such that it 
would not be available to certain types of entities? If so, what 
entities and why? For example, should an entity be ineligible if it is 
consolidated in the parent company's financial statements for reasons 
other than the parent company holding the majority of voting interests? 
\79\
---------------------------------------------------------------------------

    \79\ Such circumstances may arise when, in accordance with ASC 
810, Consolidation, the entity is a variable interest entity and the 
parent company is its primary beneficiary.
---------------------------------------------------------------------------

    17. Should a consolidated subsidiary that has issued and 
outstanding debt that is convertible into its own voting shares not be 
eligible to omit its financial statements under the proposed rule? Why 
or why not? Should a consolidated subsidiary that has issued and 
outstanding debt that is convertible into its own voting shares, which, 
upon conversion, would result in the parent company losing control of 
that subsidiary, not be eligible to omit its financial statements under 
the proposed rule? Why or why not? Should a consolidated subsidiary 
that has issued and outstanding debt that is convertible into its own 
voting shares, which, upon conversation, would result in the parent 
company owning less than a particular percentage of the voting shares 
of that subsidiary, not be eligible to omit its financial statements 
under the proposed rule? If so, what should that percentage be and why?
    18. Would any entities that meet the 100%-owned condition under 
existing Rule 3-10 not meet the proposed condition that an issuer or 
guarantor be a consolidated subsidiary of the parent company? If so, 
what are they and why would they not meet this condition?
c. Debt or Debt-Like Securities Condition
    As discussed above,\80\ the exceptions in existing Rules 3-10(b) 
through (f) are available only to issuers and guarantors of debt 
securities. We continue to believe the exceptions provided in Rule 3-10 
should only be available for guaranteed debt and guaranteed preferred 
securities that have payment terms that are substantially the same as 
debt. In order to provide clarity, proposed Rule 3-10(a)(1) would state 
explicitly that the guaranteed security must be ``debt or debt-like.''
---------------------------------------------------------------------------

    \80\ See Section II.H, ``Securities to which Rule 3-10 
Applies.''
---------------------------------------------------------------------------

    For additional clarity, proposed Rule 3-10(b)(2) would specify when 
a guaranteed security would be considered ``debt or debt-like.'' 
Consistent with the guidance provided in the 2000 Release,\81\ a 
guaranteed security would be considered ``debt or debt-like'' under the 
proposed rule if:
---------------------------------------------------------------------------

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

     The issuer has a contractual obligation to pay a fixed sum 
at a fixed time; and
     where the obligation to make such payments is cumulative, 
a set amount of interest must be paid.
    As is currently the case, the substance of the security's 
obligation will determine the availability of relief under Rule 3-10 
rather than the form or title of the security. Accordingly, the 
proposed rule would clarify consistent with the 2000 Release,\82\ that:
---------------------------------------------------------------------------

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

     Neither the form of the security nor its title will 
determine whether a security is debt or debt-like. Instead, the 
substance of the obligation created by the security will be 
determinative; and
     The phrase ``set amount of interest'' is not intended to 
mean ``fixed amount of interest. '' Floating and adjustable rate 
securities, as well as indexed securities, may meet the criteria 
specified in paragraph (b)(2)(ii) as long as the payment obligation is 
set in the debt instrument and can be determined from objective indices 
or other factors that are outside the discretion of the obligor.
Request for Comment
    19. Should the proposed rule expressly state that the guaranteed 
security must be ``debt or debt-like'' and include a definition of that 
term? Why or why not?
    20. Should we modify the proposed definition of ``debt or debt-
like''? If so, why, and how should it be modified?
    21. Should we provide any additional guidance or instructions to 
the proposed definition of ``debt or debt-like''? If so, why, and what 
additional guidance or instructions would be appropriate?
d. Eligible Issuer and Guarantor Structures Condition
    Under the existing rule, an issuer and guarantor structure is 
eligible if it matches one of the specific issuer and guarantor 
structures in Rule 3-10(b) through (f). If an issuer or guarantor 
structure does not match one of those

[[Page 49639]]

specific issuer and guarantor structures, it is ineligible, and the 
subsidiary issuers and guarantors must file separate financial 
statements. Eligibility would still be based on qualifying issuer and 
guarantor structures under the proposed amendments to Rule 3-10. 
However, the proposed amendments would simplify and streamline the 
existing rule by replacing the specific issuer and guarantor structures 
permitted under the five exceptions in existing Rules 3-10(b) through 
(f) with a broader two-category framework. Under this framework, an 
issuer and guarantor structure would be eligible if:
     The parent company issues the security or co-issues the 
security, jointly and severally, with one or more of its consolidated 
subsidiaries;\83\ or
---------------------------------------------------------------------------

    \83\ Proposed Rule 3-10(a)(1)(i).
---------------------------------------------------------------------------

     a consolidated subsidiary issues the security, or co-
issues it with one or more other consolidated subsidiaries of the 
parent company, and the security is guaranteed fully and 
unconditionally by the parent company.\84\
---------------------------------------------------------------------------

    \84\ Proposed Rule 3-10(a)(1)(ii).
---------------------------------------------------------------------------

    In a change from the existing exceptions, the status of subsidiary 
guarantors would not be specified in the proposed categories of 
eligible issuer and guarantor structures. Although one or more other 
subsidiaries of the parent company may, and we expect often would, 
guarantee the security, we believe the eligibility of an issuer and 
guarantor structure should depend on the role of the parent company. 
Accordingly, as discussed further in Section III.C.1.d.ii, ``Role of 
Subsidiary Guarantors'' below, separate financial statements of 
consolidated subsidiary guarantors may be omitted for each issuer and 
guarantor structure that is eligible under the proposed rule if the 
other conditions of proposed Rule 3-10 are met.
i. Role of Parent Company
    Under the proposed amendments, the parent company's role as issuer, 
co-issuer, or full and unconditional guarantor with respect to the 
guaranteed security would determine whether the issuer and guarantor 
structure is eligible. Below we further describe conditions that a 
parent company must meet under the proposed rule.
(A) Parent Company Obligation Is Not Limited or Conditional
    Because the parent company's consolidated financial statements 
serve as the primary source of information for investors, we believe 
the parent company's obligation as either issuer or guarantor of the 
guaranteed security should not be conditional or limited. If the parent 
company's obligation was limited or conditional, focusing on the parent 
company's financial statements may not be sufficient for investors to 
evaluate the investment. For example, if a subsidiary issued securities 
guaranteed by its parent company, but that parent company's obligation 
under the guarantee's terms was less than the subsidiary's obligation, 
the parent company's financial statements supplemented with the 
Proposed Alternative Disclosures would not be sufficient. Instead, the 
separate financial statements of the subsidiary issuer would likely be 
material for investors to make an informed investment decision. 
Therefore, under the proposed amendments, the ability to provide the 
Proposed Alternative Disclosures in lieu of separate subsidiary issuer 
and guarantor financial statements would only be available when the 
parent company's obligation is not limited or conditional.
Request for Comment
    22. Should the eligibility of an issuer and guarantor structure 
under the proposed rule require the parent company's obligation not to 
be limited or conditional? Why or why not?
    23. Are there circumstances where the parent company's consolidated 
financial statements are not the primary source of information for 
investors in these situations? If so, what are those circumstances, and 
what other sources of information would be material in making an 
investment decision?
    24. Should the eligibility of an issuer and guarantor structure 
continue to depend on the status of subsidiary guarantors? If so, in 
what way? If not, why not?
(B) Parent Company as Issuer or Co-Issuer
    Under the first category of eligible issuer and guarantor 
structures in proposed Rule 3-10(a)(1)(i), the parent company must 
issue the security or co-issue the security, jointly and severally, 
with one or more of its consolidated subsidiaries. When acting as the 
sole issuer, the parent company would be fully and unconditionally 
obligated for the full amount of any scheduled payments when they come 
due. Also, the parent company would be permitted to co-issue a security 
with one or more of its consolidated subsidiaries, but all co-issuers 
would be required to be jointly and severally liable under the 
guaranteed security. This would obligate each of the parent company and 
its subsidiary co-issuers to all legal responsibilities of an issuer, 
including making scheduled payments on the debt security in full when 
they come due. Under this category of eligible issuer and guarantor 
structures, the parent company would control each consolidated co-
issuer, the financial information of the subsidiary co-issuer(s) would 
be reflected in the consolidated financial statements of the parent 
company, and the parent company would be fully and unconditionally 
obligated to make payments in full when due under the guaranteed 
security. As such, we believe the parent company's consolidated 
financial statements would serve as the primary source of information 
for investors in these circumstances and, if all other eligibility 
conditions of the proposed rule were satisfied, that separate financial 
statements of the subsidiary co-issuers would be unnecessary. 
Supplemental information about the subsidiary co-issuer(s) would be 
included in the Proposed Alternative Disclosures.
Request for Comment
    25. Should this first category of eligible issuer and guarantor 
structures under the proposed rule require the parent company to issue 
or co-issue the security, jointly and severally, with one or more of 
its consolidated subsidiaries? Why or why not?
    26. Are there other conditions that should be included in this 
first permissible category of eligible issuer and guarantor structures? 
If so, what are they and why would they be appropriate?
    27. If the parent company co-issues the guaranteed security with 
one or more of its consolidated subsidiaries, is separate financial 
information about issuer entities material to an investment decision? 
If so, why?
(C) Parent Company as Full and Unconditional Guarantor
    Under the second category of eligible issuer and guarantor 
structures in proposed Rule 3-10(a)(1)(ii), a debt security issued by a 
parent company's consolidated subsidiary, or co-issued by more than one 
of the parent company's consolidated subsidiaries, must be fully and 
unconditionally guaranteed by that parent company. For purposes of the 
proposed rule, whether the parent company's guarantee is ``full and 
unconditional'' would be determined in the same manner as in existing 
Rule 3-10(h)(2) and the 2000 Release \85\ and would be included in 
proposed Rule 3-10(b)(3). Under this category of eligible issuer and 
guarantor structures, the

[[Page 49640]]

parent company would control each consolidated subsidiary issuer, the 
financial information of the subsidiary issuer(s) would be reflected in 
the consolidated financial statements of the parent company, and the 
parent company would be fully and unconditionally obligated to make 
payments in full when due under the guaranteed security. In these 
circumstances, we believe the parent company's financial statements 
would serve as the primary source of information for investors and, if 
all other eligibility conditions of the proposed rule were satisfied, 
that separate financial statements of the subsidiary issuers would be 
unnecessary. Supplemental information about the subsidiary issuer(s) or 
co-issuer(s) would be included in the Proposed Alternative Disclosures.
---------------------------------------------------------------------------

    \85\ See Section III.A.1.b of the 2000 Release.
---------------------------------------------------------------------------

Request for Comment
    28. Should this second category of eligible issuer and guarantor 
structures under the proposed rule require parent company to fully and 
unconditionally guarantee the debt security that is either issued by 
that parent company's consolidated subsidiary, or co-issued by more 
than one of that parent company's consolidated subsidiaries? Why or why 
not?
    29. Are there other conditions that should be included in this 
second permissible category of eligible issuer and guarantor 
structures? If so, what are they and why would they be appropriate?
    30. Should we retain the existing definition of ``full and 
unconditional''? Why or why not?
ii. Role of Subsidiary Guarantors
    As noted above,\86\ one or more consolidated subsidiaries of the 
parent company could, and we expect often would, guarantee the 
securities in either of the two proposed eligible categories of issuer 
and guarantor structures. Existing Rule 3-10(b) through (f) specify the 
permissible roles of subsidiary guarantors in an issuer and guarantor 
structure and also impose certain conditions, such as the guarantees 
being full and unconditional and, where there are multiple guarantees, 
being joint and several.\87\ A few commenters specifically addressed 
the conditions that subsidiary guarantees be ``full and unconditional'' 
and ``joint and several.'' One commenter recommended the elimination of 
these conditions. According to this commenter, investors place less 
reliance on a guarantee that is not full and unconditional as a source 
of credit, and accordingly, financial statements of such a guarantor 
are even less important to an investor and should not be required.\88\ 
Instead, the commenter recommended requiring separate disclosure of 
those subsidiaries providing lesser guarantees. Another commenter 
stated that the existing condition should remain unchanged.\89\
---------------------------------------------------------------------------

    \86\ See Section III.C.1.d, ``Eligible Issuer and Guarantor 
Structures Condition.''
    \87\ Where there are multiple subsidiary guarantors, and the 
guarantee of one or more subsidiaries is not joint and several with 
other subsidiary guarantors, or as applicable, with the parent 
company's guarantee, note 4 to existing Rule 3-10(d) and note 3 to 
existing Rule 3-10(f) permit the use of Consolidating Information in 
lieu of providing separate financial statements of that subsidiary 
guarantor so long as each subsidiary whose guarantee is not joint 
and several is included in a separate column of the Consolidating 
Information.
    \88\ See letter from SIFMA.
    \89\ See letter from CalPERS.
---------------------------------------------------------------------------

    The 2000 Release stated that the Commission was adopting the 
definition of ``full and unconditional,'' which was applicable to the 
guarantees of both subsidiaries and the parent company, with the 
intention of limiting the availability of the Alternative Disclosures 
to those situations where the payment obligations of the issuer and 
guarantor are essentially identical.\90\ We continue to believe it is 
necessary for the guarantee of a parent company to be full and 
unconditional in order to rely on its consolidated financial statements 
as the primary source of information for investors. However, our 
experience since adoption of the existing rule in 2000 suggests that 
limitations or conditions on a subsidiary guarantee should not preclude 
the use of the Proposed Alternative Disclosures when the consolidated 
subsidiary guarantor is controlled by the parent company and the 
subsidiary guarantor's financial information is included in the parent 
company's consolidated financial statements. Instead, similar to 
existing Rule 3-10's approach to subsidiary guarantees that are not 
joint and several,\91\ we believe such limitations and conditions on a 
subsidiary's guarantee could be highlighted for investors through 
incremental financial and non-financial disclosure in the Proposed 
Alternative Disclosures rather than requiring separate financial 
statements of the subsidiary guarantor.
---------------------------------------------------------------------------

    \90\ See Section III.A.1.b of the 2000 Release.
    \91\ Each of existing Rules 3-10(d)(3) and 3-10(f)(3) specify 
that all guarantees must be joint and several as a condition to 
permit the omission of the separate financial statements of 
subsidiary guarantors. However, if all other conditions of the 
applicable exception paragraph are met, Note 4 to existing Rule 3-
10(d) and Note 3 to existing Rule 3-10(f) permit the omission of the 
separate financial statements of a subsidiary guarantor whose 
guarantee is not joint and several so long as the Consolidating 
Information includes a separate column for each such subsidiary 
guarantor.
---------------------------------------------------------------------------

    Under the proposed rule, because the role of the parent company 
determines whether an issuer and guarantor structure is eligible, the 
role of subsidiary guarantors would be irrelevant for determining 
overall eligibility. As a result, the subsidiary guarantors' role in 
the issuer and guarantor structure would not need to be specified and 
the aforementioned conditions (the guarantees being full and 
unconditional and, where there are multiple guarantees, being joint and 
several) would no longer be imposed on subsidiary guarantors. 
Regardless, as stated in proposed Rule 3-10(a), if a subsidiary 
guarantor is consolidated in its parent company's consolidated 
financial statements, and the other conditions of proposed Rule 3-10 
are met, including providing the disclosures about that subsidiary and 
its guarantee as specified in proposed Rule 13-01, the subsidiary's 
financial statements could be omitted.
    The role of subsidiary guarantors and their guarantees would affect 
the required disclosure under the proposed rule. For example, the 
subsidiary guarantors would be required to be identified pursuant to 
proposed Rule 13-01(a)(1), and if the guarantees of those subsidiaries 
were not full and unconditional, disclosure of the limitations and 
conditions would be required by proposed Rule 13-01(a)(2), to the 
extent material.\92\ Furthermore, proposed Rule 13-01(a)(4) would 
require separate disclosure of Summarized Financial Information 
applicable to subsidiary guarantors whose guarantees were not full and 
unconditional, to the extent material.\93\
---------------------------------------------------------------------------

    \92\ See discussion in Section III.C.2.b, ``Non-Financial 
Disclosures.''
    \93\ See discussion in Section III.C.2.a.ii, ``Presentation on a 
Combined Basis.''
---------------------------------------------------------------------------

Request for Comment
    31. Would the proposed changes improve the disclosures for 
investors? Why or why not?
    32. Proposed Rule 3-10(a)(1)(ii) specifies only that the parent 
company guarantee must be full and unconditional. Should the 
requirement that a guarantee be full and unconditional also extend to 
subsidiary guarantors? Why or why not?
    33. Where there is more than one subsidiary guarantor, or when the 
parent company and one or more of its subsidiaries guarantees the 
security, should all guarantees be joint and several to be eligible to 
omit separate financial statements of subsidiary guarantors? Why or why 
not?

[[Page 49641]]

(A) Subsidiary Guarantee Release Provisions
    One of the conditions a subsidiary guarantor must meet under the 
existing rule is that its guarantee must be full and unconditional. A 
subsidiary's guarantee may have the characteristics of a full and 
unconditional guarantee at its inception except that there may be 
contractual provisions permitting the subsidiary to be released from 
that guarantee under certain circumstances. Such release provisions 
could cause the subsidiary's guarantee to fail to meet the requirement 
that the guarantee be full and unconditional because the potential 
elimination of the guarantee is a condition beyond the issuer's failure 
to pay. The staff has previously provided guidance that, under certain 
circumstances, a subsidiary whose guarantee could be released should be 
able to rely on existing Rule 3-10 so long as all other required 
conditions of the rule are met.\94\ Several commenters recommended 
codifying this staff guidance into our rules.\95\ As noted above,\96\ 
because the nature of the guarantee of a subsidiary guarantor does not 
affect whether the issuer and guarantor structure is eligible under the 
proposed rule, a subsidiary guarantee would no longer be required to be 
full and unconditional. As such, the existence of subsidiary guarantee 
release provisions would not prevent that subsidiary guarantor from 
omitting its financial statements. However, to the extent material, 
such release provisions would be required to be disclosed pursuant to 
proposed Rule 13-01(a)(2) \97\ and separate disclosure of Summarized 
Financial Information applicable to that subsidiary guarantor would be 
required by proposed Rule 13-01(a)(4).\98\
---------------------------------------------------------------------------

    \94\ See U.S. Sec. & Exch. Comm'n, Div. of Corp. Fin., Financial 
Reporting Manual Section 2510.5, https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf (last updated Dec. 1, 2017). 
These circumstances include, for example, when: (1) the subsidiary 
is sold or sells all of its assets; (2) the subsidiary is declared 
``unrestricted'' for covenant purposes; (3) the subsidiary's 
guarantee of other indebtedness is terminated or released; (4) the 
requirements for legal defeasance or covenant defeasance or to 
discharge the indenture have been satisfied; (5) the rating on the 
parent's debt securities is changed to investment grade; or (6) the 
parent's debt securities are converted or exchanged into equity 
securities. The staff guidance also indicates that subsidiary 
guarantees with such release provisions should not be characterized 
as full and unconditional without disclosure describing any 
qualifications to the subsidiary guarantees (e.g., the circumstances 
in which they could be released). If the proposed changes described 
herein are adopted, this staff interpretation would no longer be 
applicable.
    \95\ See, e.g., letters from ABA-Committees, AB-NYC, and EY.
    \96\ See Section III.C.1.d.ii, ``Role of Subsidiary 
Guarantors.''
    \97\ See discussion in Section III.C.2.b, ``Non-Financial 
Disclosures.''
    \98\ See discussion in Section III.C.2.a.ii, ``Presentation on a 
Combined Basis.''
---------------------------------------------------------------------------

Request for Comment
    34. Should the proposed rule specify that subsidiary guarantees 
must be full and unconditional except that certain subsidiary release 
provisions would be expressly permitted? If so, why? In this regard, 
which release provisions should be permitted in the proposed rule and 
why would they be appropriate?
iii. Treatment of Currently Eligible Issuer and Guarantor Structures 
Under Proposed Rule 3-10
    The proposed amendments are not intended to reduce the types of 
entities or structures that would be able to rely on proposed Rule 3-
10. We expect issuer and guarantor structures that are currently 
eligible under existing Rule 3-10 to be eligible under the two proposed 
categories of eligible issuer and guarantor structures. As shown in the 
table below, issuer and guarantor structures that currently fall under 
existing Rules 3-10(b), (c), or (d) would be eligible to omit their 
financial statements under the eligible categories in proposed Rules 3-
10(a)(1)(i) or (ii), depending on the role of the parent company as 
either co-issuer or full and unconditional guarantor of the guaranteed 
security. Issuer and guarantor structures that currently fall under 
existing Rules 3-10(e) or (f), wherein the parent company is the sole 
issuer of the guaranteed security, would be able to rely on the first 
category in proposed Rule 3-10(a)(1)(i). We discuss the proposed 
amendments in greater detail below.

------------------------------------------------------------------------
             Existing Rule                        Proposed Rule
------------------------------------------------------------------------
Rules 3-10(b), 3-10(c), and 3-10(d)....  Rule 3-10(a)(1)(i), if the
                                          subsidiary co-issued the
                                          security, jointly and
                                          severally, with its parent.
                                         Rule 3-10(a)(1)(ii), if the
                                          subsidiary issued the security
                                          that is fully and
                                          unconditionally guaranteed by
                                          its parent.
Rules 3-10(e) and 3-10(f)..............  Rule 3-10(a)(1)(i).
------------------------------------------------------------------------

(A) Finance Subsidiary Issuer of Securities Guaranteed by Its Parent 
Company
    Existing Rule 3-10(b) applies when a ``finance subsidiary,'' as 
that term is defined in existing Rule 3-10(h)(7), issues securities 
guaranteed by its parent company. This exception was included to 
address situations where a parent company directs one of its 
subsidiaries to issue debt securities that the parent company 
guarantees, and that subsidiary ``has no assets, operations, revenues, 
or cash flows other than those related to the issuance, administration, 
and repayment of the security and any other securities guaranteed by 
its parent.'' \99\ In such cases, the Commission has determined that 
detailed financial information about the finance subsidiary is unlikely 
to be material to an investment decision. Instead, an investor would 
look to the consolidated financial statements of the parent company 
that guaranteed the debt to evaluate the investment in the guaranteed 
security and generally not need additional information other than a 
brief narrative describing the arrangement.
---------------------------------------------------------------------------

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

    Because the proposed amendments to Rule 3-10 do not focus on the 
role and nature of the subsidiary as a condition to eligibility, the 
proposed amendments would no longer require a subsidiary issuer or 
guarantor to be designated as a ``finance subsidiary'' in any 
particular circumstances. Likewise, the proposed amendments would 
remove the definition of ``finance subsidiary'' from the existing rule, 
since it is not otherwise used in Regulation S-X. However, a finance 
subsidiary used to issue a debt security guaranteed by the parent 
company, would be addressed by proposed Rule 3-10(a)(1)(ii) or, if the 
security were to be co-issued, jointly and severally, with its parent, 
proposed Rule 3-10(a)(1)(i) would apply. We believe eliminating the 
provisions that apply only to finance subsidiaries, together with the 
other proposed changes, would simplify the rules while

[[Page 49642]]

ensuring that they remain appropriately available for finance 
subsidiary arrangements. Furthermore, we generally expect detailed 
financial disclosures about those subsidiaries would not be material, 
given the nature and amounts of those subsidiaries' assets and 
operations.\100\ While a parent company would be permitted to omit 
immaterial detailed financial disclosures, all other disclosures 
required by proposed Rule 13-01, such as the non-financial disclosures 
specified in proposed Rule 13-01(a)(1) though (3), would be required, 
to the extent material.
---------------------------------------------------------------------------

    \100\ See discussion and example within Section III.C.2.c, 
``When Disclosure is Required.''
---------------------------------------------------------------------------

Request for Comment
    35. Should we eliminate the ``finance subsidiary'' exception as 
proposed? Would the proposed elimination of the ``finance subsidiary'' 
exception under existing Rule 3-10(b) result in supplemental financial 
information about the finance subsidiary and its parent company being 
required under the proposed rule where it would not be required under 
the existing rule? If so, in what circumstances? Would such financial 
information be material to investors? Why or why not?
(B) Obligated Parent Company and Single Obligated Subsidiary
    Existing Rule 3-10(c) applies when an ``operating subsidiary'' 
issues securities guaranteed by its parent company. Existing Rule 3-
10(h)(8) defines an ``operating subsidiary'' to differentiate it from a 
``finance subsidiary.'' Since the proposed amendments would remove the 
``finance subsidiary'' distinction and definition, proposed Rule 3-10 
likewise would no longer need to refer to or define ``operating 
subsidiary.'' The operating subsidiary structure of existing Rule 3-
10(c) would be covered in the issuer and guarantor structure in 
proposed Rule 3-10(a)(1)(ii) if the security were to be issued by the 
subsidiary or proposed Rule 3-10(a)(1)(i) if the security were to be 
co-issued, jointly and severally, with its parent company as 
contemplated in existing Note 3 to Rule 3-10(c).
    Existing Rule 3-10(e) applies to a single subsidiary guarantor of 
securities issued by the parent company of that subsidiary. This 
structure would be included in the issuer and guarantor structure in 
proposed Rule 3-10(a)(1)(i). As discussed above,\101\ the requirement 
in the existing rule that the subsidiary guarantor's guarantee be full 
and unconditional would not be a condition of eligibility under the 
proposed rule, but disclosure of any material limitations or conditions 
to the subsidiary guarantee would be required pursuant to proposed Rule 
13-01(a)(2).
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    \101\ See Sections III.C.1.d.ii, ``Role of Subsidiary 
Guarantors.''
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(C) Obligated Parent Company and Multiple Obligated Subsidiaries
    Existing Rule 3-10(d) applies to a subsidiary that issues 
securities guaranteed by its parent company and one or more other 
subsidiaries of that parent company. Existing Rule 3-10(f) applies to 
multiple subsidiary guarantors of securities issued by the parent 
company of those subsidiaries. Both of these existing exceptions 
involve more than one of the parent company's subsidiaries that are 
obligated as guarantor or issuer of the guaranteed security, and 
require that all guarantees be joint and several as well as full and 
unconditional. For issuer and guarantor structures currently included 
in Rule 3-10(d), proposed Rule 3-10(a)(1)(ii) would apply if the 
guaranteed security were issued by a subsidiary and proposed Rule 3-
10(a)(1)(i) would apply if the guaranteed security were co-issued, 
jointly and severally, with its parent company as contemplated in 
existing Note 3 to Rule 3-10(d). Proposed Rule 3-10(a)(1)(i) would 
apply to parent company issuer and subsidiary guarantor structures 
currently included in Rule 3-10(f).
    As discussed above,\102\ while subsidiaries' guarantees would no 
longer be required to be full and unconditional or joint and several, 
and would not affect whether an issuer and guarantor structure is 
eligible under the proposed rule, the terms and conditions of the 
subsidiary guarantee, including any limitations and conditions, would 
be required to be disclosed as part of proposed Rule 13-01(a)(2), to 
the extent material.
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    \102\ See Section III.C1.d.ii, ``Role of Subsidiary 
Guarantors.''
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    Finally, under existing Rule 3-10, issuer and guarantor structures 
that include more than one subsidiary co-issuer do not explicitly fall 
into the existing exceptions. Currently, under those circumstances, a 
registrant would generally seek pre-filing relief from the Commission 
staff.\103\ Multiple subsidiary co-issuers should not change the 
analysis as to what financial statement disclosures should be provided 
to investors, because, consistent with the other proposed eligible 
issuer and guarantor structures, the parent company controls each 
consolidated co-issuer, the financial information of the subsidiary co-
issuers would be reflected in the consolidated financial statements of 
the parent company, and the parent company would be fully and 
unconditionally obligated to make payments in full when due under the 
guaranteed security. Therefore, proposed Rule 3-10(a)(1)(i) would apply 
to such structures if the subsidiaries co-issued the guaranteed 
securities jointly and severally with the parent company. Proposed Rule 
3-10(a)(1)(ii) would apply if the parent company is a full and 
unconditional guarantor of securities co-issued by the subsidiaries.
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    \103\ Upon request, pursuant to its delegated authority under 17 
CFR 210.3-13 (``Rule 3-13 of Regulation S-X''), the staff has 
permitted the omission of separate subsidiary issuer and guarantor 
financial statements for issuer and guarantor structures that 
included more than one subsidiary co-issuer, provided the other 
conditions of existing Rule 3-10 were met.
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Request for Comment
    36. Would any issuer and guarantor structures that are currently 
eligible under existing Rule 3-10 no longer be eligible under the 
proposed amendments? If so, what specific structures would not be 
eligible and why?
    37. Should any issuer and guarantor structures that would be 
eligible under the proposed categories be disallowed? Should any issuer 
and guarantor structures that are ineligible under the proposed 
categories be allowed? If so, which ones and why?
2. Disclosure Requirements
    Under existing Rule 3-10, one of the conditions to omitting 
separate financial statements of a subsidiary issuer or guarantor is 
providing the Alternative Disclosures in the footnotes to the parent 
company's consolidated financial statements. We are proposing to retain 
the requirement to provide Alternative Disclosures, with modifications, 
as we believe the disclosures are an important supplement to the 
consolidated parent company disclosures. If the eligibility conditions 
in proposed Rule 3-10(a) and (a)(1) are satisfied, a parent company 
must include the Proposed Alternative Disclosures specified in proposed 
Rule 13-01 in the relevant filing, but could omit the separate 
financial statements of subsidiary issuers and guarantors.\104\ The 
proposed amendments would streamline and simplify the rule by including 
the Proposed Alternative Disclosures in a single location within 
proposed Rule 13-01 rather than having such requirements in multiple 
paragraphs.

[[Page 49643]]

The proposed amendments are described below.
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    \104\ This requirement is specified in proposed Rule 3-10(a)(2).
---------------------------------------------------------------------------

a. Financial Disclosures
    The Consolidating Information currently required by existing Rule 
3-10 provides highly-detailed financial information about individual 
issuers and guarantors or groups of issuers and guarantors within the 
consolidated parent company, as well as non-guarantor subsidiaries.
    Several commenters cited various challenges registrants face in 
preparing Consolidating Information, such as the complexities of the 
disclosures; that registrants' books and records often are not 
maintained on a basis that facilitates the preparation of the 
disclosures; that extensive manual processes are often necessary; and 
the difficulty, time, and costs to prepare the disclosures.\105\ A 
number of commenters \106\ suggested aligning the disclosure 
requirements of Rule 3-10 with disclosure practices of issuers and 
guarantors in the private debt markets that comply with Securities Act 
Rule 144A.\107\ Some commenters stated that the type of information 
included in debt offerings under Rule 144A, which is less detailed than 
what is required by Consolidating Information, provides all the 
material information necessary for investors to make informed 
investment decisions.\108\ For example, one commenter stated that the 
typical offering memorandum in a Rule 144A offering includes revenues, 
operating income (or a similar metric) when available, assets and 
liabilities of the issuers and guarantors as a consolidated group, and 
the non-guarantor subsidiaries as a consolidated group.\109\ Another 
commenter stated that it was ``not aware of a single Rule 144A offering 
that has ever included [Rule 3-10]. . .financial statements that were 
not otherwise already available'' and that the Consolidating 
Information is ``routinely omitted in unregistered offerings.'' \110\
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    \105\ See letters from ABA-Committees, Anuradha, BDO, Cahill, 
CAQ, DT, EY, FedEx, GM, Grant, Headwaters, KPMG, Medtronic, and 
Noble-UK.
    \106\ See letters from ABA-Committees, Davis Polk, EY, PwC, and 
SIFMA.
    \107\ The majority of private debt offerings are conducted using 
Rule 144A, and 99% of Rule 144A offerings are debt offerings. 
Additionally, although most Regulation D offerings are equity 
offerings, a significant number include debt securities. See Access 
to Capital and Market Liquidity Report, at p. 38; Scott Bauguess et 
al., U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis, 
Capital Raising in the U.S.: An Analysis of the Market for 
Unregistered Securities Offerings, 2009-2014 (Oct. 2015), https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html.
    \108\ See, e.g., letters from ABA-Committees, Cahill, and Davis 
Polk.
    \109\ See letter from Cahill.
    \110\ See letter from Davis Polk.
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    Prior to the adoption of existing Rule 3-10 in 2000, under Staff 
Accounting Bulletin No. 53 (1983) (``SAB 53''), subsidiary issuers were 
``permitted to include summarized financial information,'' \111\ which 
was presented for each subsidiary issuer or guarantor and did not 
exclude the financial information of non-guarantor subsidiaries 
consolidated by those subsidiary issuers and guarantors. In discussing 
its reasons in the 2000 Release for requiring Consolidating Information 
instead of summarized financial information, the Commission highlighted 
that the summarized financial information in SAB 53 did not allow for 
the more complete and independent assessment of a subsidiary's 
financial condition that may be necessary in the case of ``more 
complex'' guarantee structures.\112\ Additionally, the Commission noted 
that SAB 53 disclosures could result in a high number of sets of 
summarized financial information, which would be burdensome for the 
parent company and would not likely be useful to investors.\113\
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    \111\ See Section III.A.3.a of the 2000 Release.
    \112\ In the 2000 Release, the Commission stated that SAB 53 
``did not contemplate more complex guarantee structures where 
investors must assess the subsidiary's financial condition more 
completely and independently of its parent company and other 
subsidiaries of its parent company,'' and also stated that 
``summarized financial information is inadequate for this purpose. 
For example, although cash flow information is significant in 
assessing creditworthiness, summarized financial information 
includes no cash flow information.'' See id.
    \113\ In discussing the use of the summarized financial 
information in SAB 53 to address disclosures involving multiple 
guarantors, the Commission, in the 2000 Release, stated ``[m]any 
structures presented to the staff involved a subsidiary issuer, a 
parent company guarantor, multiple subsidiary guarantors, and 
multiple subsidiaries that are not guarantors. Other structures 
involved more than 100 subsidiary guarantors. [SAB 53 disclosures in 
such structures would have included]. . .more than 100 sets of 
summarized financial information. Not only would that disclosure 
have been burdensome for the registrant to provide, it is unlikely 
to have been useful to investors.'' See Section III.A.3.a of the 
2000 Release. Other reasons cited by the Commission for requiring 
Consolidating Information in the 2000 Release are discussed in 
Sections III.C.2.a.i, ``Level of Detail,'' and III.C.2.a.ii, 
``Presentation on a Combined Basis,'' below.
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    In considering changes to the existing Rule 3-10 disclosure 
requirements, we have sought to improve the disclosure provided to 
investors by focusing on the material information needed to make an 
informed investment decision while reducing the cost and burdens for 
registrants in providing the information. Our experience since the 
adoption of the existing Rule 3-10 in 2000 suggests that the level of 
information required by Consolidating Information, although detailed, 
could be better focused on what is material to an investment decision. 
Additionally, we believe that many of the reasons for requiring 
Consolidating Information instead of summarized financial information 
highlighted by the Commission in the 2000 Release could be addressed 
without requiring the use of Consolidating Information, thereby 
addressing the concerns noted above regarding the burdens associated 
with issuers' preparation of Consolidating Information.
    Accordingly, as discussed below,\114\ the financial disclosure 
requirements in proposed Rule 13-01 are tailored to the type of 
material information, in addition to the parent company's consolidated 
financial statements, that we believe investors in registered offerings 
need to make informed investment decisions about guaranteed debt 
securities. In seeking to identify the material information investors 
need, we have considered commenters' suggestion that we look to the 
disclosures provided in the Rule 144A debt markets. In this regard, we 
note that the proposed disclosures would be more detailed than that 
typically provided in exempt offerings, in which investors have the 
ability to request additional information from potential issuers when 
they deem it necessary, such as additional financial information about 
the issuers and guarantors or qualitative disclosures pertaining to the 
issuer and guarantor structure. Under the proposed revisions, 
registrants would:
---------------------------------------------------------------------------

    \114\ See Section III.C.2.a.i, ``Level of Detail.''
---------------------------------------------------------------------------

     Be required to provide Summarized Financial Information 
rather than Consolidating Information;
     be required to provide disclosure about the Obligor Group 
without financial information of non-obligated entities (financial 
information of each issuer and guarantor could be combined into a 
single column); and
     be permitted to reduce the number of periods presented.
    As a result of the proposed revisions, the instructions for 
preparing Consolidating Information in existing Rule 3-10(i) would be 
eliminated.
i. Level of Detail
    Unless a brief narrative is permitted, existing Rule 3-10 requires 
Consolidating Information, which includes all major captions of the 
balance sheet, income statement, and cash flow statement that Article 
10 of Regulation S-X requires to be shown

[[Page 49644]]

separately in interim financial statements. As noted above, a number of 
commenters recommended reducing the level of detail in financial 
disclosures by replacing the Consolidating Information with summarized 
financial information in the notes to the parent company's financial 
statements.\115\
---------------------------------------------------------------------------

    \115\ See letters from BDO, CAQ, DT, EY, Grant, and KPMG.
---------------------------------------------------------------------------

    The Commission stated in the 2000 Release that Consolidating 
Information ``provides the same level of detail about the financial 
position, results of operations, and cash flows of subsidiary issuers 
and subsidiary guarantors that investors are accustomed to obtaining in 
interim financial statements of a registrant.'' \116\ In our 
experience, this level of detail about subsidiary issuers and 
guarantors occupies multiple pages of a parent company's financial 
statements, potentially obscuring important information contained 
therein.\117\ We believe the required supplemental financial 
information about issuers and guarantors should instead be focused on 
the information that is most likely to be material to an investment 
decision. If additional line items beyond those specifically required 
are material to an investment decision, they would be required to be 
disclosed as well. Proposed Rule 13-01(a)(4) would therefore require 
Summarized Financial Information, which would include select balance 
sheet and income statement line items. Disclosure of additional line 
items of financial information beyond what is specified in proposed 
Rule 13-01(a)(4) would be required by proposed Rule 13-01(a)(5), to the 
extent they are material to an investment decision. For example, if a 
material amount of reported revenues of the obligated entities are 
derived from transactions with related parties, such as other non-
issuer and non-guarantor subsidiaries of the parent company, disclosure 
of such related party revenues would be required. This Summarized 
Financial Information and any additional disclosures that would be 
required based on materiality would supplement the parent company's 
consolidated financial statements and would simplify compliance and 
reduce costs for preparers, while providing investors with more 
streamlined and easier to understand financial information that is 
material to an investment decision.
---------------------------------------------------------------------------

    \116\ See Section III.A.3.a of the 2000 Release.
    \117\ See also letter from BDO (``In some cases, the value of 
the alternative disclosure may be overshadowed by its multi-column 
voluminous nature.'').
---------------------------------------------------------------------------

    While investors are provided cash flow information at the parent 
company consolidated level, supplemental cash flow information about 
subsidiary issuers and guarantors is not typically included in 
disclosures provided in the Rule 144A debt markets.\118\ This leads us 
to believe that investors in a registered offering look primarily to a 
parent company's consolidated cash flow information to assess 
creditworthiness where the parent is the primary obligor or its 
guarantor obligation is full and unconditional. Based on this 
observation, and the difficulties and significant costs associated with 
the preparation of cash flow information for inclusion in Consolidating 
Information highlighted by several commenters,\119\ supplemental cash 
flow information would not be a required disclosure under the proposed 
rule.
---------------------------------------------------------------------------

    \118\ See letters from ABA-Committees, Cahill, Davis Polk, and 
PwC.
    \119\ See, e.g., letter from GM (``There are many challenges 
when preparing the Consolidating Information, in particular the 
consolidating statement of cash flows. Our underlying books and 
records are not based on a guarantor/non-guarantor structure, and 
due to a centralized cash management function numerous intercompany 
transactions exist. These factors complicate the preparation of 
Consolidating Information prepared `as if' the registrant was a 
stand-alone entity. These intercompany transactions require 
extensive analysis and manual reclassification adjustments to permit 
the preparation of the Consolidating Information, resulting in 
excessive complexity and effort relative to the limited benefits of 
providing this information to investors.''). See also letters from 
ABA-Committees, CAQ, Grant, KPMG, and PwC.
---------------------------------------------------------------------------

Request for Comment
    38. Should the Proposed Alternative Disclosures require Summarized 
Financial Information rather than Consolidating Information? Would the 
Summarized Financial Information, along with the other disclosures 
required by proposed Rule 13-01, provide the financial information 
investors need to make an informed investment decision with respect to 
the guaranteed security?
    39. How would issuers and investors be affected by requiring 
Summarized Financial Information? Are there particular items in 
Consolidating Information that investors need to make informed 
investment decisions that would not be provided separately through 
Summarized Financial Information? Is there any such financial 
information that underwriters would still require? If so, what would be 
the effect on the costs associated with the offering?
    40. Would additional line items of financial information beyond 
what would be required by Summarized Financial Information help 
investors make informed investment decisions? If so, what line items 
and why? For example, should the proposed rule specifically require 
supplemental summarized cash flow information resulting from operating, 
financing, and investing activities? Would issuers face challenges in 
providing such information?
    41. Do investors need summarized cash flow information about 
issuers and guarantors in addition to the parent company's consolidated 
cash flow statements to make informed investment decisions about 
guaranteed securities? If so, how is it used? If not, why not?
ii. Presentation on a Combined Basis
    Consolidating Information distinguishes the assets, liabilities, 
operations, and cash flows of each category of parent and subsidiaries 
as issuer, guarantor, or non-guarantor. Comments varied with respect to 
whether and how the financial information of the entities in the 
issuers and guarantors should be grouped. Some commenters suggested 
permitting disclosure of financial information of either the Obligor 
Group or the non-obligated entities as groups,\120\ other commenters 
recommended requiring disclosure of both groups separately,\121\ and 
another commenter suggested several possible groupings.\122\ Other 
commenters stated that investors use the existing Rule 3-10 disclosures 
to evaluate separately the likelihood of payment by the issuer and 
guarantors.\123\
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    \120\ See, e.g., letters from BDO and EY.
    \121\ See, e.g., letters from CAQ and KPMG.
    \122\ This commenter suggested the Commission consider 
summarized financial information related only to: (1) The issuers 
separately and the combined guarantor subsidiaries separately; (2) 
the issuers and guarantors on a combined basis; or (3) the guarantor 
subsidiaries. See letter from DT.
    \123\ See, e.g., letters from CalPERS and CFA.
---------------------------------------------------------------------------

    The Commission observed in the 2000 Release that there were 
``complex guarantee structures where investors must assess the 
subsidiary's financial condition more completely and independently of 
its parent company and other subsidiaries of its parent company.'' 
\124\ The Commission also stated that it was ``requiring [Consolidating 
Information] because it clearly distinguishes the assets, liabilities, 
revenues, expenses, and cash flows of the entities that are legally 
obligated under the indenture from those that are not'' and ``[i]t also 
facilitates analysis of trends affecting subsidiary issuers and 
subsidiary guarantors and relationships among the various components of 
a consolidated

[[Page 49645]]

organization.'' \125\ We continue to believe it is important to clearly 
distinguish in the supplemental financial information the entities 
obligated under the guaranteed security from those that are not 
obligated. Along with some commenters, however, we believe investors 
focus largely on whether payment will be made in full on the dates 
specified in the guaranteed security, rather than whether payment comes 
from an issuer or one or more guarantors in the same consolidated 
group.\126\ We therefore believe that it is appropriate for our 
disclosure rules to focus on the obligated entities as a group, and 
that the parent company should be able to provide financial disclosures 
that convey information about the Obligor Group on a combined, rather 
than disaggregated, basis. Accordingly, the proposed rule would permit 
the parent company to present the Summarized Financial Information of 
the parent company issuer or guarantor, each consolidated subsidiary 
issuer, and each consolidated subsidiary guarantor, on a combined 
basis. Proposed Rule 13-01(a)(4) would require intercompany 
transactions between issuers and guarantors presented on a combined 
basis to be eliminated.
---------------------------------------------------------------------------

    \124\ See Section III.A.3.a of the 2000 Release.
    \125\ See id.
    \126\ See, e.g., letters from BDO and EY.
---------------------------------------------------------------------------

    We recognize that there may be circumstances in which separate 
financial information about certain issuers and guarantors is material 
to an investment decision. Accordingly, when information provided in 
response to proposed Rule 13-01 is applicable to one or more, but not 
all, issuers and guarantors, proposed Rule 13-01(a)(4) would require, 
to the extent it is material, separate disclosure of Summarized 
Financial Information for the issuers and guarantors to which the 
information applies. For example, if a subsidiary's guarantee were 
limited to a particular dollar amount, disclosure of that limitation 
would be required by proposed Rule 13-01(a)(2). In that case, separate 
disclosure of the Summarized Financial Information specified in 
proposed Rule 13-01(a)(4) would be required for that subsidiary 
guarantor, if material.
    Because non-guarantor subsidiaries are not obligated to make 
payments as either issuer or guarantor, we do not believe separate 
supplemental disclosure of their financial information as required 
under the existing rule is likely to be material to an investment 
decision. As such, the proposed rule would no longer require separate 
disclosure of the financial information of non-guarantor subsidiaries.
    In order to present the assets, liabilities, and operations of the 
Obligor Group accurately, it is necessary to exclude the financial 
information of subsidiaries not obligated under the guaranteed 
security. Within Consolidating Information under the existing rule, a 
parent company should present investments in all subsidiaries based 
upon their proportionate share of the subsidiary's net assets,\127\ and 
subsidiary issuer or guarantor columns should present investments in 
certain subsidiaries, including but not limited to non-guarantor 
subsidiaries, under the equity method of accounting.\128\ This 
presentation avoids presenting the financial information of a non-
issuer or non-guarantor subsidiary as though it were an issuer or 
guarantor. We continue to believe that the financial information of 
non-issuer and non-guarantor subsidiaries should be excluded from the 
Summarized Financial Information of the Obligor Group, even if those 
non-issuer and non-guarantor subsidiaries would be consolidated by an 
issuer or guarantor. We have included a corresponding requirement in 
proposed Rule 13-01(a)(4). However, the proposed rule would allow the 
parent company to determine which method best meets the objective of 
excluding the financial information of non-issuer and non-guarantor 
subsidiaries from the Proposed Alternative Disclosures, so long as the 
selected method is disclosed and used for all non-issuer and non-
guarantor subsidiaries for all classes of guaranteed securities for 
which the disclosure is required, and is reasonable in the 
circumstances.\129\ For example, the parent company could exclude the 
assets, liabilities, and operations of non-issuer and non-guarantor 
subsidiaries by using the equity method of accounting for those 
subsidiaries.
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    \127\ See Rule 3-10(i)(3) of Regulation S-X.
    \128\ See Rule 3-10(i)(5) of Regulation S-X.
    \129\ This proposed amendment may result in decreased 
comparability in the combined Summarized Financial Information of 
the Obligor Group between parent companies that elect to use 
different methods of excluding the financial information of their 
non-issuer and non-guarantor subsidiaries. In proposing this change, 
we considered the costs to the parent company of requiring the use 
of a specific method of accounting for non-issuer and non-guarantor 
subsidiaries to remove their financial information from the combined 
Obligor Group, particularly if that parent company's systems are not 
designed to readily produce such information. See, e.g., letters 
from CAQ, EY, Grant, KPMG, and PwC (highlighting the challenges of 
this requirement under the existing rule). We expect any decrease of 
comparability to be limited, as most line items required to be 
disclosed in Summarized Financial Information would be unaffected by 
the use of different methods for this purpose (e.g., current assets, 
current liabilities, net sales or gross revenues and gross profit).
---------------------------------------------------------------------------

    As discussed above,\130\ separate disclosure of the Summarized 
Financial Information of one or more subsidiary issuers or guarantors 
may be necessary under the proposed rule. In this case, the same method 
of excluding a non-issuer's or non-guarantor's financial information 
from the Summarized Financial Information of the Obligor Group would 
also be required for the subsidiary issuers or guarantors whose 
financial information is presented separately. For example, if a 
subsidiary's guarantee is limited and its Summarized Financial 
Information is presented separately from that of the combined Obligor 
Group, that subsidiary guarantor's financial information should be 
excluded from the Obligor Group information consistent with the method 
selected for excluding the financial information of non-issuer and non-
guarantor subsidiaries from the Obligor Group information.
---------------------------------------------------------------------------

    \130\ See Section III.C.2.a.ii, ``Presentation on a Combined 
Basis.''
---------------------------------------------------------------------------

Request for Comment
    42. Should we permit the financial disclosure of the Obligor Group 
to be combined within the proposed Summarized Financial Information? 
Why or why not? If not, what groupings of issuers and guarantors should 
be required or permitted, and why? How would this impact the 
information for investment decisions? Are there specific circumstances 
where separate information should be required?
    43. Does presentation of the financial information of non-guarantor 
subsidiaries provide investors with information they need to make 
informed investment decisions? Do investors use the financial 
information of non-obligated entities as part of their investment 
analyses? For example, do investors consider ratios or any similar 
derivation of the information from the non-obligated entities? If so, 
how is it used and in what circumstances? Should Summarized Financial 
Information of the non-obligated entities also be provided? Why or why 
not?
    44. Should we require a specific method of accounting (e.g., the 
equity method) to be used to exclude the financial information of non-
obligated subsidiaries from the Summarized Financial Information of the 
Obligor Group instead of permitting the parent company to choose? If 
so, what method should we require, and why? If not, why? If we do not 
prescribe a specific

[[Page 49646]]

method, should we limit the permissible methods to those concepts 
included within U.S. GAAP, or IFRS, as applicable? Alternatively, 
should we limit the permissible methods to concepts included within 
U.S. GAAP, or IFRS, as applicable, only when the Proposed Alternative 
Disclosures are placed in the parent company's financial statements? 
How would allowing different methods affect the disclosures for 
investors?
iii. Periods To Present
    In addition to the parent company's consolidated information, the 
supplemental information included in the Proposed Alternative 
Disclosures would help facilitate an investor's evaluation of whether 
the entities in the Obligor Group have the ability to make payments as 
required under the guaranteed security, including what assets are 
available to satisfy those obligations. We believe the required periods 
of Summarized Financial Information of the Obligor Group should be 
based on the most recent financial information. Instead of the periods 
specified in 17 CFR 210.3-01 and 210.3-02 (``Rules 3-01 and 3-02 of 
Regulation S-X'') required by the existing rule, the proposed rule 
would require Summarized Financial Information only as of, and for, the 
most recently completed fiscal year and year-to-date interim period 
(``interim period''), if applicable. When used in conjunction with the 
parent company's consolidated financial statements, we believe the most 
recent full fiscal year and interim period should provide investors the 
additional information that is material to an investment decision in 
the guaranteed security and would eliminate unnecessary compliance 
costs for registrants.
    Commenters recommended limiting disclosure to the current year, 
citing challenges recasting prior period information for circumstances 
such as legal-entity mergers and discontinued operations.\131\ A number 
of commenters stated that interim reporting of the Proposed Alternative 
Disclosures should only be required if material changes have occurred 
since the most recent annual period that is required to be 
presented.\132\ However, we believe that the most recent interim period 
should be provided so that investors can make decisions based on the 
most recent information available.
---------------------------------------------------------------------------

    \131\ See letters from Medtronic and PwC.
    \132\ See letters from BDO, CAQ, CFA, Comcast, DT, EY, GM, 
Grant, KPMG, and Medtronic. In making this suggestion, several of 
these commenters made reference to Rule 10-01(a)(5) of Regulation S-
X, which allows registrants to apply judgment and omit details of 
accounts which have not changed significantly in amount or 
composition since the end of the most recently completed fiscal 
year. See Rule 10-01(a)(5) of Regulation S-X.
---------------------------------------------------------------------------

    Lastly, because Item 1 of Part I of Form 10-Q \133\ requires a 
registrant to provide the information required by Rule 10-01 of 
Regulation S-X, we are proposing to add Rule 10-01(b)(9) to require 
compliance with Rules 3-10 and 13-01.
---------------------------------------------------------------------------

    \133\ 17 CFR 249.308a.
---------------------------------------------------------------------------

Request for Comment
    45. What periods of presentation are material for investors when 
evaluating the credit risk of the Obligor Group?
    46. Should the required periods of Summarized Financial Information 
of the Obligor Group be based on the most recent financial information? 
Why or why not? If so, what periods should be considered ``most 
recent,'' and why?
    47. Should we require additional periods of Summarized Financial 
Information beyond the most recent fiscal year and interim period? Why 
or why not? If yes, which periods and why?
    48. Rather than requiring disclosure of the most recent interim 
period, should the proposed rule focus on significant changes similar 
to Rule 10-01(a)(5) of Regulation S-X, which allows registrants to 
apply judgment and omit details of accounts that have not changed 
significantly in amount or composition since the end of the most 
recently completed fiscal year? Why or why not?
b. Non-Financial Disclosures
    When Consolidating Information is presented, the existing rule 
requires limited non-financial disclosures about the issuers and 
guarantors and the guarantees,\134\ restricted net assets,\135\ and 
certain types of restrictions on the ability of the parent company or 
any guarantor to obtain funds from their subsidiaries.\136\ Although 
the Request for Comment asked if there is different or additional 
information that investors need about guarantors and issuers of 
guaranteed securities, we received no comments on non-financial 
disclosures.
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    \134\ Existing Rules 3-10(i)(8)(i)-(iii) requires disclosure, if 
true, that each subsidiary issuer or subsidiary guarantor is 100% 
owned by the parent company, that all guarantees are full and 
unconditional, and where there is more than one guarantor, that all 
guarantees are joint and several.
    \135\ Rule 3-10(i)(10) of Regulation S-X.
    \136\ Rule 3-10(i)(9) of Regulation S-X.
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    In addition to proposing amendments to existing Rule 3-10 for 
financial disclosures, we are also proposing amendments to require 
specific non-financial disclosures. We are proposing these amendments 
to enhance the information provided about subsidiary issuers and 
guarantors, particularly in light of our proposal to require Summarized 
Financial Information for these subsidiaries. Proposed Rules 13-
01(a)(1) through (3) would require certain disclosures, to the extent 
material,\137\ about the issuers and guarantors, the terms and 
conditions of the guarantees, and how the issuer and guarantor 
structure and other factors may affect payments to holders of the 
guaranteed securities. Although a parent company must provide narrative 
disclosure under the existing requirements, we believe the proposed 
requirements would result in enhanced narrative disclosures that would 
improve investor understanding of the issuers, guarantors, and 
guarantees, and make the financial disclosures they accompany easier to 
understand. While the proposed requirements are composed of the items 
we believe are most likely to be material to an investor, there may be 
additional facts and circumstances specific to particular issuers and 
guarantors that would be material to holders of the guaranteed 
security. In that case, similar to existing Rule 3-10(i)(11),\138\ 
proposed Rule 13-01(a)(5) would require disclosure of those facts and 
circumstances.\139\ Additionally, when a non-financial disclosure is 
applicable to one or more, but not all, issuers and guarantors, 
proposed Rule 13-01(a)(4) would require, to the extent it is material, 
separate disclosure of Summarized Financial Information for the issuers 
and guarantors to which it applies.\140\
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    \137\ See discussion within Section III.C.2.c, ``When Disclosure 
is Required.''
    \138\ Existing Rule 3-10(i)(11)(i) specifies that the parent 
company ``[m]ay not omit any financial and narrative information 
about each guarantor if the information would be material for 
investors to evaluate the sufficiency of the guarantee,'' and 
existing Rule 3-10(i)(11)(ii) states that the disclosure ``[s]hall 
include sufficient information so as to make the financial 
information presented not misleading.''
    \139\ See discussion within Section III.C.2.c, ``When Disclosure 
is Required.''
    \140\ See discussion within Section III.C.2.ii, ``Presentation 
on a Combined Basis.''
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Request for Comment
    49. Are the proposed non-financial disclosures material to an 
investment decision? Should we explicitly require any non-financial 
disclosures in addition to what is proposed? If so, what information 
and why?
c. When Disclosure Is Required
    One of the conditions that must be met under existing Rule 3-10 to 
be eligible to omit the financial statements of a subsidiary issuer and 
guarantor is

[[Page 49647]]

providing the Alternative Disclosures. If certain numerical thresholds 
are met, including that the parent company has ``no independent assets 
or operations'' and that all non-issuer and non-guarantor subsidiaries 
are ``minor,'' \141\ the Alternative Disclosures may take the form of a 
brief narrative in lieu of detailed Consolidating Information, but some 
type of the Alternative Disclosures is always required.\142\ Under 
these thresholds, minor changes in circumstances can result in 
dramatically different disclosures being required. A number of 
commenters indicated that these thresholds are unnecessarily 
restrictive.\143\
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    \141\ Rules 3-10(h)(5) and (6) specify the numerical thresholds 
that must not be exceeded for a parent company to have ``no 
independent assets or operations,'' and for a subsidiary to be 
``minor,'' respectively. See additional discussion above in Section 
II.F, ``Exceptions.''
    \142\ See discussion of existing requirements in Section II.F, 
``Exception Paragraphs.''
    \143\ See letters from ABA-Committees, AB-NYC, CAQ, DT, EY, 
FedEx, KPMG, and PwC.
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    Instead of using the existing rule's numerical thresholds to 
determine the form and content of disclosure, we believe investors 
should receive all disclosures specified in the proposed rule, unless 
such information is immaterial. As such, the proposed amendments would 
eliminate the ``no independent assets or operations'' and ``minor'' 
numerical thresholds, as well as the brief narrative form of 
Alternative Disclosures, and instead require financial and non-
financial disclosures to the extent material to holders of the 
guaranteed security.\144\ For example, under the proposed rule, the 
Summarized Financial Information of the Obligor Group could be omitted 
if the parent company's consolidated financial statements do not differ 
in any material respects from the Obligor Group.\145\ As another 
example, if a finance subsidiary issues securities that are guaranteed 
by its parent company, the Summarized Financial Information could be 
omitted because the finance subsidiary has no independent material 
debt-paying ability and has no material assets or operations other than 
those related to the issuance, administration, and repayment of the 
guaranteed security. While the disclosures specified in proposed Rule 
13-01(a)(1) through (4) may be omitted if immaterial to holders of the 
guaranteed security, for clarity, proposed Rule 13-01(a)(4) requires 
the registrant to disclose a statement that those financial disclosures 
have been omitted and the reason(s) why the disclosures are not 
considered to be material.
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    \144\ This requirement is specified in proposed Rule 13-01(a). 
Whether a disclosure specified in proposed Rule 13-01 may be omitted 
or whether additional disclosure would be required by proposed Rule 
13-01(a)(5), discussed below, depends on whether the disclosure 
would be material to a reasonable investor. The Supreme Court in TSC 
v. Northway held that a fact is material if there is ``a substantial 
likelihood that the disclosure of the omitted fact would have been 
viewed by the reasonable investor as having significantly altered 
the `total mix' of information made available.'' See TSC Indus., 
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
    \145\ For example, a parent company issuer could have guarantor 
subsidiaries as well as non-guarantor subsidiaries. If the non-
guarantor subsidiaries are immaterial such that the combined 
Summarized Financial Information of the Obligor Group was not 
materially different from the corresponding amounts in the parent 
company's consolidated financial statements, Summarized Financial 
Information could be omitted. However, if at a later time, non-
guarantor subsidiaries become a larger part of the parent company's 
business such that the combined Summarized Financial Information of 
the Obligor Group is materially different from the corresponding 
amounts in the parent company's consolidated financial statements, 
the parent company would then be required to provide such Summarized 
Financial Information.
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    Existing Rules 3-10(i)(11)(i) and (ii), respectively, require 
disclosure of any financial and narrative information about each 
guarantor if it would be material for investors to evaluate the 
sufficiency of the guarantee, and disclosure of sufficient information 
to make the financial information presented not misleading. This 
disclosure is required when Consolidating Information is disclosed.
    While we have proposed specific financial and non-financial 
disclosures, there may be other information about the guarantees, 
issuers, and guarantors that could be material to holders of the 
guaranteed security. Accordingly, proposed Rule 13-01(a)(5) would 
require disclosure of any information that would be material to holders 
of the guaranteed security, rather than the sufficiency of the 
guarantee as stated in the existing rule. This requirement would apply 
in all cases, including when the proposed Summarized Financial 
Information is omitted in accordance with the proposed rule.
Request for Comment
    50. Should we eliminate the existing numerical thresholds for 
disclosure, such as the parent company having ``no independent assets 
or operations'' and/or that all non-issuer and non-guarantor 
subsidiaries are ``minor,'' and instead use a materiality standard to 
determine the appropriate level of disclosure? Would this cause 
difficulty in practice? If so, what are those difficulties and how can 
they be avoided? Would further guidance be necessary? If so, please 
explain what guidance is needed. Would the elimination of the numerical 
thresholds and use of a materiality standard result in a loss of 
material information that investors currently use to analyze these 
securities? If so, what material information would be lost and would it 
be material information necessary for an investor's investment 
decision? Would this principles-based approach result in different 
levels of disclosure provided by issuers who, for example, may be in 
similar industries or have similar operations? If so, how would 
investors view such differences in making investment decisions?
    51. Should any additional disclosures be specifically required if 
default on the guaranteed security reaches a certain level of 
likelihood? If so, what type of disclosures and when should they be 
provided?
    52. Are the proposed rules sufficiently clear about what 
disclosures should be provided and when? If not, how should the rules 
be revised to ensure clarity?
d. Location of Proposed Alternative Disclosures and Audit Requirement
    The primary source of financial information provided to investors--
the consolidated financial statements of the parent company--is 
required to be audited as specified in Regulation S-X.\146\ Existing 
Rule 3-10 requires the Alternative Disclosures to be included in the 
notes to the parent company's consolidated financial statements, 
thereby requiring them to be audited for the same periods. A few 
commenters specifically addressed whether the Alternative Disclosures, 
as revised by their suggestions, should be audited, and those 
recommendations were mixed.\147\
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    \146\ Rules 3-01 and 3-02 of Regulation S-X.
    \147\ For example, one commenter suggested its recommended 
disclosures be provided on an unaudited basis, see letter from 
WhiteWave, whereas another commenter suggested requiring, on an 
audited basis, the type of information typically included on an 
unaudited basis in offering memoranda for Rule 144A debt offerings. 
See letter from ABA-Committees.
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    The Proposed Alternative Disclosures would provide incremental 
detail as a supplement to the parent company's audited annual and 
unaudited interim consolidated financial statements to facilitate an 
analysis of the parts of the consolidated enterprise that are obligated 
to make payments as issuers or guarantors. We believe the supplemental 
nature of this information supports providing parent companies with the 
flexibility to provide the Proposed Alternative Disclosures inside or 
outside of the consolidated financial statements in registration 
statements covering the offer and sale of the guaranteed debt 
securities and any

[[Page 49648]]

related prospectus, as well as annual and quarterly Exchange Act 
periodic reports required to be filed during the fiscal year in which 
the first bona fide sale of the subject securities is completed. This 
proposed optionality should reduce costs and burdens for parent 
companies and reduce the potential for delay in offerings that exists 
under the existing rule due to the need to prepare audited Alternative 
Disclosures. Parent companies using this proposed option to provide the 
disclosures outside the consolidated financial statements may be able 
to register guaranteed debt offerings and go to market more quickly 
than under the existing rule. This may allow parent companies to more 
promptly access favorable market conditions. If a parent company elects 
to provide the Proposed Alternative Disclosures outside its audited 
financial statements, the disclosures would be required in specified 
prominent locations in its offering documents and periodic reports.
    Accordingly, the note to proposed Rule 13-01(a) would allow the 
parent company to provide the Proposed Alternative Disclosures in a 
footnote to its consolidated financial statements or, alternatively, in 
management's discussion and analysis of financial condition and results 
of operations (``MD&A''),\148\ in its registration statement covering 
the offer and sale of the subject securities and any related 
prospectus, and in Exchange Act reports on Forms 10-K and 10-Q \149\ 
required to be filed during the fiscal year in which the first bona 
fide sale of the subject securities is completed. If a parent company 
elects to provide the disclosures in its audited financial statements, 
the Proposed Alternative Disclosures would be required to be 
audited.\150\ If not otherwise included in the consolidated financial 
statements or in the MD&A, the parent company would be required to 
include the Proposed Alternative Disclosures in its prospectus 
immediately following ``Risk Factors,'' if any, or otherwise, 
immediately following pricing information described in 17 CFR 
229.503(c) (``Item 503(c) of Regulation S-K''). Beginning with the 
parent company's annual report filed on Form 10-K for the fiscal year 
during which the first bona fide sale of the subject securities is 
completed, however, the parent company would be required to provide the 
Proposed Alternative Disclosures in a footnote to its consolidated 
financial statements in its annual and quarterly reports.
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    \148\ See 17 CFR 229.303 (Item 303 of Regulation S-K).
    \149\ These proposed amendments also apply to foreign private 
issuers and issuers offering securities pursuant to 17 CFR 230.251 
through 230.263 (``Regulation A'') and the forms applicable to such 
entities. See Section III.D, ``Application of Proposed Amendments to 
Certain Types of Issuers,'' below.
    \150\ Regardless of where the Proposed Alternative Disclosures 
are presented in the filing, U.S. GAAP requires disclosure in the 
financial statements of the pertinent rights and privileges of the 
various securities outstanding. See ASC 470-10-50-5 and ASC 505-10-
50-3.
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    The increased flexibility that would be afforded to the parent 
company in choosing where to locate the Proposed Alternative 
Disclosures during the fiscal year in which the first bona fide sale of 
the subject securities is completed gives rise to certain disclosure 
location considerations. If the parent company were to elect to provide 
the Proposed Alternative Disclosures in its financial statements, 
consistent with the existing rule, the disclosures would be subject to 
annual audit, interim review, and internal control over financial 
reporting requirements. By doing so, investors and other users may 
benefit to the extent that they consider the information included in 
the financial statements more reliable because it is subject to these 
audit and other requirements. Also consistent with the existing rule, 
Proposed Alternative Disclosures located in the financial statements 
would be subject to XBRL tagging requirements.\151\ The parent company 
may incur additional costs to comply with these tagging requirements, 
whereas investors and other users may benefit from more readily-
available information in structured formats.
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    \151\ On June 28, 2018, the Commission adopted rule and form 
amendments to require filers, on a phased in basis, to use the 
Inline XBRL format for financial statement information and risk/
return summary information. See Inline XBRL Filing of Tagged Data, 
Release No. 33-10514 (Jun. 28, 2018).
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    In contrast, if the parent company were to elect to provide the 
Proposed Alternative Disclosures outside its financial statements 
during this time period, it would not incur costs to comply with these 
requirements, but investors would not benefit from the enhanced 
reliability of information included in the financial statements. In 
addition, the safe harbor under the Private Securities Litigation 
Reform Act of 1995 (``PSLRA'') would not be available for the 
disclosures if provided in the financial statements, but would be 
available for disclosure provided in other sections of the filing, such 
as the MD&A.\152\ If the safe harbor is available, a parent company may 
be more likely to supplement its disclosures, which would benefit 
investors. When provided outside of the financial statements, the 
Proposed Alternative Disclosures would be subject to the parent 
company's disclosure controls and procedures and related certification 
requirements.
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    \152\ Public Law 104-67, 109 Stat. 737 (1995). Since the PSLRA 
does not provide a safe harbor for forward-looking information 
located within the financial statements, a parent company presenting 
the Proposed Alternative Disclosures in its financial statements may 
be less likely to voluntarily supplement those disclosures with 
forward-looking information as compared with disclosures made 
outside the financial statements. However, a parent company retains 
the option of providing forward-looking information outside its 
financial statements so that such information is covered by the safe 
harbor.
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Request for Comment
    53. Should the proposed rule permit the parent company to provide 
the Proposed Alternative Disclosures outside its financial statements 
in the proposed circumstances described above? Alternatively, should 
the parent company be permitted to provide the Proposed Alternative 
Disclosures outside its financial statements in all circumstances? What 
are the potential benefits or concerns for investors and issuers with 
either approach?
    54. Would requiring the Proposed Alternative Disclosures to be 
included in a footnote to the parent company's audited annual and 
unaudited interim financial statements beginning with its annual report 
filed on Form 10-K or Form 20-F for the fiscal year during which the 
first bona fide sale of the guaranteed securities is completed be 
useful to investors? If so, why? If not, why not? What are the 
potential benefits or concerns for investors and issuers with either 
approach?
    55. Would requiring the Proposed Alternative Disclosures to be 
audited or reviewed present costs or challenges for parent companies? 
If so, what are they? For example, would it cause delays in the 
offering process?
    56. Should the proposed rule specify where in a filing the Proposed 
Alternative Disclosures must appear if the parent company chooses not 
to include them in its financial statements? Why or why not? If yes, 
are the locations required by the note to proposed Rule 13-01(a) 
appropriate? If so, why? If not, why not? Where should the Proposed 
Alternative Disclosures be disclosed, and why is that location 
appropriate?
    57. Would issuers be more likely to voluntarily provide 
supplemental information in addition to the required Proposed 
Alternative Disclosures to the extent the PSLRA applied to such 
supplemental information? Why or why not? What would that additional 
supplemental information be?

[[Page 49649]]

    58. Should the proposed rule instead require the Proposed 
Alternative Disclosures to be provided in the parent company's 
financial statements in the subject registration statement and 
subsequent Exchange Act periodic reports for the fiscal year in which 
the first bona fide sale of the subject securities is completed, but 
permit the parent company to provide the Proposed Alternative 
Disclosures outside its financial statements in subsequent Exchange Act 
periodic reports? If so, why? If not, why not? Does the answer change 
the larger the parent company is? Why or why not? Would investors and 
issuers benefit from such a requirement? Why or why not? Should the 
Proposed Alternative Disclosures be required to be included in the 
parent company's financial statements for a different period of time 
before the parent company is permitted to provide them outside its 
financial statements? If so, what time period and why?
    59. Should the note to proposed Rule 13-01(a) apply differently to 
emerging growth companies? \153\ Why or why not? For example, should 
there be different filings or periods of time if the parent company is 
an emerging growth company? If so, what should be different and why? 
How would investors and issuers be affected?
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    \153\ 17 CFR 230.405 (``Rule 405'') under the Securities Act 
defines an emerging growth company as an issuer that had total gross 
revenues of less than $1.07 billion during its most recently 
completed fiscal year. It retains that status for five years after 
its initial public offering unless its revenues rise above $1.07 
billion, it issues more than $1 billion of non-convertible debt in a 
three year period, or it qualifies as a large accelerated filer 
pursuant to 17 CFR 240.12b-2 (``Rule 12b-2'') under the Exchange 
Act.
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e. Recently-Acquired Subsidiary Issuers and Guarantors
    Existing Rule 3-10(g) requires pre-acquisition audited financial 
statements of a recently acquired subsidiary issuer or guarantor in 
certain circumstances. One commenter noted that the information 
provided for recently acquired subsidiary issuers and guarantors is 
more detailed than the information required for the other subsidiary 
issuers and guarantors.\154\ Another commenter made a similar 
observation but also noted that these financial statements will only be 
included at the time the issuers and guarantors are first registering 
the guaranteed security, at which time the probability of the guarantee 
being invoked would usually be remote.\155\ Several commenters 
recommended eliminating the requirement to provide audited pre-
acquisition financial statements of recently-acquired issuers and 
guarantors but differed on whether any other disclosure should be 
provided, and, if so, what type.\156\
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    \154\ See letter from DT.
    \155\ See letter from PwC.
    \156\ See, e.g., letters from CAQ, DT, EY, Grant, KPMG, PwC, and 
SIFMA. A few commenters recommended rescinding the requirement 
altogether. See letters from EY and SIFMA. Several commenters 
suggested requiring disclosure about recently acquired issuer and 
guarantor subsidiaries to mirror what is required for other issuer 
and guarantor subsidiaries (i.e., form and content of Alternative 
Disclosures). See letters from CAQ, DT, Grant, KPMG, and PwC.
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    Commenters also noted that, in addition to being presented with a 
far greater level of detail than is required for existing subsidiary 
issuers and guarantors in the Alternative Disclosures under existing 
Rule 3-10, these pre-acquisition audited financial statements are 
burdensome and costly for preparers.\157\ Additionally, Rule 3-05 of 
Regulation S-X already requires pre-acquisition audited financial 
statements of an acquired business to be provided if it exceeds 
specified thresholds of significance,\158\ which one commenter 
indicated is sufficient for investors.\159\
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    \157\ See, e.g., letters from PwC (stating that a ``company can 
incur significant costs and effort to prepare such financial 
statements that will never be required again'') and EY (''The 
requirements to provide separate pre-acquisition financial 
statements of recently acquired guarantors under S-X Rule 3-10(g) 
are unnecessary and potentially burdensome.''). See also letters 
from CAQ, DT, Grant, and KPMG.
    \158\ Rule 3-05 of Regulation S-X specifies requirements for 
pre-acquisition financial statements of an acquired or to be 
acquired significant ``business.'' Registrants determine whether a 
``business'' has been acquired by applying Rule 11-01(d) of 
Regulation S-X, and whether an acquisition is significant by using 
the investment, asset, and income tests described in Rule 1-02(w) of 
Regulation S-X. If the parent company is a smaller reporting 
company, 17 CFR 210.8-04 (``Rule 8-04 of Regulation S-X'') specifies 
requirements for pre-acquisition financial statements of an acquired 
or to be acquired significant business, including the tests used to 
determine if an acquisition is significant. Recently-acquired 
subsidiary issuers and guarantors would typically be considered a 
``business'' because separate entities, subsidiaries, or divisions 
are presumed to be businesses. The requirements of Rule 3-05 of 
Regulation S-X overlap with Rule 3-10(g) if a parent company files a 
registration statement in connection with the offering of guaranteed 
debt or debt-like securities and acquires a subsidiary issuer or 
guarantor. However, the significance test under Rule 3-10(g) 
measures significance based on the purchase price of the recently 
acquired subsidiary issuer or guarantor relative to the size of the 
offering, which often results in a requirement to provide financial 
statements at a far lower level of significance than under Rule 3-05 
of Regulation S-X. The proposed elimination of Rule 3-10(g) would 
generally result in an investor receiving pre-acquisition financial 
statements of a recently-acquired subsidiary issuer or guarantor 
only if it exceeded the thresholds of significance specified in Rule 
3-05 of Regulation S-X or 8-04 of Regulation S-X, as applicable.
    \159\ See letter from SIFMA.
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    Based on these observations, and our belief that existing 
requirements under Rule 3-05 of Regulation S-X provide sufficient 
information in this context, we do not believe the pre-acquisition 
financial statements of recently-acquired subsidiary issuers and 
guarantors required by existing Rule 3-10(g) are necessary. We are 
therefore proposing to delete existing Rule 3-10(g). Although we are 
not proposing to require specific disclosures about recently-acquired 
subsidiary issuers and guarantors in lieu of pre-acquisition financial 
statements, information about these recently-acquired subsidiaries 
would be required if material to an investment decision in the 
guaranteed security pursuant to proposed Rule 13-01(a)(5).
    Due to the proposed deletion of Rule 3-10(g), we also propose a 
conforming change to remove paragraph (b) of Rule 12h-5.\160\
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    \160\ If the proposed removal of paragraph (b) of existing Rule 
12h-5 is adopted, a subsidiary issuer or guarantor that was 
previously required to provide pre-acquisition financial statements 
pursuant to existing Rule 3-10(g) but was exempt from Exchange Act 
reporting by paragraph (b) of existing Rule 12h-5 would continue to 
be exempt from Exchange Act reporting through proposed Rule 12h-5.
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Request for Comment
    60. Should we eliminate the existing requirement to provide pre-
acquisition financial statements of recently-acquired subsidiary 
issuers and guarantors? Why or why not? Alternatively, should the 
proposed rule require some other type of disclosure about recently-
acquired subsidiary issuers and guarantors instead of pre-acquisition 
financial statements? If so, what type of disclosure and in what 
instances should it be required? For example, should disclosure of pre-
acquisition financial information about recently-acquired subsidiary 
issuers and guarantors mirror that of existing subsidiary issuers and 
guarantors?
f. Continuous Reporting Obligation
    An issuer of securities is required to file Exchange Act reports 
with the Commission under Section 13(a), with respect to any class of 
securities registered pursuant to Sections 12(b) or 12(g), or for any 
class of securities for which it has a reporting obligation under 
Section 15(d) of the Exchange Act.\161\ Section 12(b) registration is 
required only for so long as the class of securities is listed for 
trading on a

[[Page 49650]]

national securities exchange.\162\ An issuer incurs a Section 15(d) 
reporting obligation for each class of securities that is the subject 
of a Securities Act registration statement that becomes effective or is 
required to be updated under Securities Act Section 10(a)(3).\163\ 
Section 15(d)(1) \164\ provides that if, at the beginning of any 
subsequent fiscal year, the securities of any class to which the 
registration statement relates are held of record by fewer than 300 
persons, or in the case of a bank, a savings and loan holding 
company,\165\ or bank holding company,\166\ by fewer than 1,200 
persons, the registrant's Section 15(d) reporting obligation is 
automatically suspended with respect to that class.\167\ Rule 12h-3 
permits registrants to suspend a Section 15(d) reporting obligation at 
any time during a fiscal year provided the conditions of the rule are 
met.\168\
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    \161\ Section 12(g) registration is triggered when an issuer 
exceeds specified asset and ownership thresholds with respect to a 
class of equity securities and does not apply to securities subject 
to Rule 3-10.
    \162\ Accordingly, Section 12(b) reporting obligations are 
terminated when, for example, the class no longer qualifies for 
exchange listing or the registrant determines to no longer list the 
securities on a national securities exchange.
    \163\ 15 U.S.C. 78 j(a)(3).
    \164\ 15 U.S.C. 78o(d)(1).
    \165\ As that term is defined in Section 10 of the Home Owners' 
Loan Act, 12 U.S.C. 1461.
    \166\ As that term is defined in Section 2 of the Bank Holding 
Company Act of 1956, 12 U.S.C. 1841.
    \167\ The automatic statutory suspension of an issuer's Section 
15(d) reporting obligation is not available as to any fiscal year in 
which the issuer's Securities Act registration statement becomes 
effective or is required to be updated pursuant to Section 10(a)(3) 
of the Securities Act.
    \168\ Rule 12h-3 provides that the duty to file reports under 
Section 15(d) for a class of securities is suspended immediately 
upon the filing of a certification on Form 15, provided that the 
issuer has fewer than 300 holders of record, fewer than 500 holders 
of record where the issuer's total assets have not exceeded $10 
million on the last day of each of the preceding three years, or, in 
the case of a bank, a savings and loan holding company, or a bank 
holding company, 1,200 holders of record; the issuer has filed its 
Section 13(a) reports for the most recent three completed fiscal 
years, and for the portion of the year immediately preceding the 
date of filing the Form 15 or the period since the issuer became 
subject to the reporting obligation; and a registration statement 
has not become effective or was required to be updated pursuant to 
Exchange Act Section 10(a)(3) during the fiscal year.
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    The Commission explained in the 2000 Release that the parent 
company must continue to provide the Alternative Disclosures in its 
periodic reports for as long as the subject securities are 
outstanding.\169\ This disclosure requirement continues to apply to the 
parent company even if the reporting obligation of its subsidiary 
issuer or guarantor with respect to the subsidiary's guaranteed 
securities or subsidiary's guarantees could be suspended under either 
Section 15(d) or Rule 12h-3 of the Exchange Act.
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    \169\ See Section III.C.1 of the 2000 Release (``The parent 
company periodic reports must include the modified financial 
information permitted by paragraphs (b) through (f) of Rule 3-10. 
The parent company periodic reports must contain this information 
for as long as the subject securities are outstanding.'').
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    A number of commenters indicated that a parent company should be 
able to cease providing the Alternative Disclosures for its subsidiary 
issuers and guarantors at the same time that a subsidiary's reporting 
obligation under Section 15(d) of the Exchange Act with respect to the 
subject security could be suspended.\170\ Some of these commenters 
noted that requiring a parent company to continue providing the 
Alternative Disclosures once its subsidiary issuers' and guarantors' 
obligations to file reports could be suspended under Section 15(d) or 
Rule 12h-3 is inconsistent with other reporting rules.\171\ One 
commenter stated, the ``disparate treatment is illogical, and should be 
harmonized by expressly allowing registrants to cease providing the 
information called for by the Rule 3-10 accommodations when the 
[reporting obligation related to the] guaranteed security is 
[suspended] pursuant to Section 15(d) of the Exchange Act.'' \172\ 
Additionally, some commenters \173\ stated that this requirement 
unnecessarily burdens registrants and ``acts as a disincentive for 
registrants to engage in public debt offerings as opposed to offerings 
under Rule l44A or pursuant to other Securities Act exceptions.'' \174\
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    \170\ See letters from ABA-Committees, BDO, CAQ, Chamber, DT, 
EY, KPMG, PwC, SIFMA, and Simpson.
    \171\ See letters from ABA-Committees, DT, EY, PwC, SIFMA, and 
Simpson (noting that a continuous reporting obligation appears 
inconsistent with the reporting obligation of a registrant that 
provides separate financial statements because that registrant may 
stop providing the separate financial statements, even if the debt 
is outstanding).
    \172\ See letter from SIFMA.
    \173\ See letters from DT and Simpson.
    \174\ See letter from Simpson.
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    We are proposing that a parent company be permitted to cease 
providing the Proposed Alternative Disclosures if the corresponding 
subsidiary issuer's or guarantor's Section 15(d) obligation is 
suspended automatically by operation of Section 15(d)(1) or through 
compliance with Rule 12h-3. To implement this change, the proposed rule 
would eliminate the statement in existing Rule 3-10(a) that ``[e]very 
issuer of a registered security that is guaranteed and every guarantor 
of a registered security must file the financial statements required 
for a registrant by Regulation S-X.'' As proposed, if a subsidiary 
issuer or guarantor is required to file financial statements required 
by Regulation S-X with respect to the guarantee or guaranteed security, 
the subsidiary may omit such financial statements if it complies with 
conditions set forth in proposed Rule 3-10. The parent company would be 
able to cease providing the Proposed Alternative Disclosures for a 
subsidiary issuer or guarantor that is not required to file financial 
statements required by Regulation S-X with respect to the guarantee or 
guaranteed security.
    As described above, Section 12(b) registration is required for so 
long as a class of securities is listed for trading on a national 
securities exchange. As a continued condition of eligibility to omit 
the financial statements of a subsidiary issuer or guarantor, a parent 
company must continue providing the Proposed Alternative Disclosures 
for so long as the subsidiary issuer or guarantor has a Section 12(b) 
reporting obligation with respect to the guarantee or guaranteed 
security. If the subsidiary issuer's or guarantor's reporting 
obligation with respect to the guarantee or guaranteed security is 
terminated under Section 12(b), the parent may cease providing the 
Alternative Disclosures once the subsidiary issuer's and guarantor's 
Section 15(d) obligation is suspended automatically by operation of 
Section 15(d)(1) or through compliance with Rule 12h-3.
    Under the proposed rule, which is consistent with the 2000 
Release,\175\ if a subsidiary issuer or guarantor with an Exchange Act 
reporting obligation for the guaranteed securities would initially be 
eligible to omit its financial statements, because it would meet the 
requirements of proposed Rule 3-10 and could rely on proposed Rule 12h-
5, but later ceased to satisfy those requirements (e.g., it ceases to 
be a consolidated subsidiary of the parent company), that subsidiary 
would then be required to begin filing Exchange Act reports for the 
period during which it ceased to satisfy the requirements of proposed 
Rule 3-10.\176\ Also, the subsidiary would be required to present the 
financial statements that are required by Regulation S-X at the time a 
report is due, and would not be able to present the Proposed 
Alternative Disclosures that proposed Rule 3-10 would have allowed it 
to present for historical periods.
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    \175\ See Section III.C.3. of the 2000 Release.
    \176\ Additionally, a subsidiary issuer or guarantor should 
consider promptly filing a Form 8-K or a Form 6-K to report this 
change in circumstance.

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[[Page 49651]]

Request for Comment
    61. Would the proposed changes to Rule 3-10(a) achieve the intended 
result of permitting a parent company to cease providing the Proposed 
Alternative Disclosures if each subsidiary issuer's and guarantor's 
reporting obligation is suspended automatically by operation of Section 
15(d)(1) or through compliance with Rule 12h-3? If not, why, and what 
changes are necessary to achieve that result?
    62. We expect that the proposed changes to both eligibility to 
provide the Proposed Alternative Disclosures and the content of the 
Proposed Alternative Disclosures would reduce the burden on a parent 
company's periodic reporting. In light of these proposed changes, 
should we continue to require the parent company to provide the 
Proposed Alternative Disclosures in its periodic reports for as long as 
the subject securities are outstanding? Why or why not?
    63. If the proposed amendments are adopted, should there be a 
phase-in period for parent companies that provide the Alternative 
Disclosures under existing Rule 3-10 in reliance on Rule 12h-5? If so, 
why would such a phase-in be needed? How long should that phase-in 
period be? Should it begin with the beginning of the first fiscal year 
after adoption of the proposals? Should we permit early adoption? If 
so, why or why not?
    64. Should the proposed rule include a requirement to provide 
current notification to investors when a subsidiary issuer or guarantor 
fails to meet the conditions of proposed Rule 3-10 and must begin 
reporting pursuant to the Exchange Act? If so, what should that 
requirement be? If not, why not?

D. Application of Proposed Amendments to Certain Types of Issuers

    Rule 3-10's requirements apply to several categories of issuers, 
including foreign private issuers,\177\ smaller reporting companies 
(``SRCs''),\178\ and issuers offering securities pursuant to Regulation 
A. The proposed amendments also would apply to these types of issuers, 
because, for the reasons discussed above, we believe investors would 
benefit from the simplified and improved disclosures that would result 
from the proposed amendments and the cost of providing the disclosures 
would be reduced for these types of issuers. In certain circumstances, 
Rule 3-10 also applies to the financial information of third parties 
provided by issuers of asset-backed securities (``ABS''). We also 
believe the proposed amendments should be extended to the financial 
information of such third parties for the reasons discussed above.
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    \177\ See 17 CFR 230.405, 240.3b-4 (defining ``foreign private 
issuer'').
    \178\ See 17 CFR 230.405, 240.12b-2 (defining ``smaller 
reporting company'').
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Request for Comment
    65. Should the proposed changes to Rule 3-10 also apply to these 
types of issuers? If so, why? If not, why not? Do investors in 
guaranteed securities issued by these types of issuers require 
additional, different, or less information to make informed investment 
decisions than would be required by the proposed rule? If so, what 
information and why?
    66. How frequently do these types of issuers issue guaranteed 
securities? Is there a reason to believe they may offer them more often 
under the proposed rules? Why or why not?
    67. Are other conforming changes to the proposed rules necessary 
for them to apply to these types of issuers? If so, what changes are 
necessary and why?
    68. Should the proposed amendment that would permit the parent 
company to provide the Proposed Alternative Disclosures outside the 
footnotes to its audited annual and unaudited interim consolidated 
financial statements in its registration statement covering the offer 
and sale of the guaranteed securities and any related prospectus, and 
in Exchange Act annual and quarterly reports required to be filed 
during the fiscal year in which the first bona fide sale of the subject 
securities is completed apply differently to these types of issuers? 
Why or why not? For example, are there different filings or periods of 
time that the parent company should be permitted to provide the 
Proposed Alternative Disclosures outside of its financial statements 
for these types of issuers? As another example, should the proposed 
rule prescribe different locations outside the financial statements 
where the Proposed Alternative Disclosures should be provided for these 
types of issuers? In each case, what are they and why? How would 
investors and issuers be affected?
1. Foreign Private Issuers
    Under the proposal, foreign private issuers would continue to be 
required to comply with Rule 3-10, and would also be required to comply 
with proposed Rule 13-01. As foreign private issuers would be required 
to provide the disclosures specified in proposed Rule 13-01, 
Instruction 1 to Item 8 of Form 20-F would be amended to specifically 
require compliance with proposed Rule 13-01. We are also proposing 
amendments to conform Forms F-1 and F-3 to the streamlined structure of 
proposed Rule 3-10(a). General Instruction I.B of Form F-1 and the note 
to General Instruction I.A.5 of Form F-3 contain eligibility 
requirements for the use of these forms applicable to issuers and 
guarantors of guaranteed securities that are majority-owned 
subsidiaries. Rather than the current form language stating that Rule 
3-10 specifies the financial statements that are required, we are 
proposing to amend these forms to instead state that the requirements 
of Rule 3-10 are applicable to financial statements for those 
subsidiary issuers or guarantors.
    Existing Rule 3-10(a)(3) includes a reference, solely for 
convenience, directing foreign private issuers to Item 8.A of Form 20-F 
rather than having them go first to Rules 3-01 and 3-02 of Regulation 
S-X to determine the periods for which financial statements are 
required.\179\ We propose to simplify the rule by deleting this 
reference.
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    \179\ Rule 3-01(h) of Regulation S-X and Rule 3-02(d) of 
Regulation S-X direct foreign private issuers to Item 8.A of Form 
20-F.
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    Also, existing Rule 3-10(i)(12) requires a parent company that 
prepares its financial statements on a comprehensive basis other than 
U.S. GAAP or IFRS as issued by the International Accounting Standards 
Board to reconcile Consolidating Information to U.S. GAAP. Because of 
the supplemental nature of the Proposed Alternative Disclosures and the 
requirement in Item 18 of Form 20-F that the parent company's 
consolidated financial statements be reconciled to U.S. GAAP, we do not 
believe continuing to include a requirement to reconcile the financial 
information included in the Proposed Alternative Disclosures to U.S. 
GAAP is necessary. Although the reconciliation requirement would be 
eliminated, proposed Rule 13-01(a)(5) would require the parent company 
to disclose any other quantitative or qualitative information that 
would be material to making an investment decision with respect to the 
guaranteed security.
Request for Comment
    69. Should a parent company that prepares its financial statements 
on a comprehensive basis other than U.S. GAAP or IFRS as issued by the 
International Accounting Standards Board be required to reconcile the 
proposed financial disclosures specified in proposed Rule 13-01(a)(4) 
to U.S. GAAP, similar to the requirement of existing Rule 3-10(i)(12)? 
If so, why? If not, why not?

[[Page 49652]]

2. Smaller Reporting Companies
    Note 3 to Rule 8-01 of Regulation S-X requires compliance with 
existing Rule 3-10 if the subsidiary of an SRC issues securities 
guaranteed by the SRC or the subsidiary guarantees securities issued by 
the SRC, except that the periods presented are those required by 17 CFR 
210.8-02 (``Rule 8-02 of Regulation S-X''). Because the subsidiary 
issuer or guarantor is itself a registrant, it is required to file 
financial statements meeting the requirements of Regulation S-X. Such 
financial statements may be prepared in accordance with 17 CFR 210.8-01 
through 210.8-08 (Article 8 of Regulation S-X) so long as the 
subsidiary issuer or guarantor qualifies as an SRC.\180\ Consistent 
with the existing rule, if the conditions of proposed Rule 3-10 are 
satisfied, the subsidiary issuer's or guarantor's financial statements 
may be omitted. While the substance of this requirement would not 
change, we are proposing amendments to Note 3 to Rule 8-01 to conform 
it to the streamlined structure of proposed Rule 3-10(a). Rather than 
stating that the subsidiary issuer or guarantor of the SRC issuer or 
guarantor must present financial statements as required by existing 
Rule 3-10, Note 3 to Rule 8-01 would instead state that the 
requirements of proposed Rule 3-10 are applicable to financial 
statements of the subsidiary issuer or guarantor. In addition, we are 
proposing to add a sentence to Note 3 to Rule 8-01 to require an SRC to 
provide the disclosures specified in proposed Rule 13-01. Lastly, 
because Item 1 of Part I of Form 10-Q permits an SRC to provide the 
information required by Rule 8-03 of Regulation S-X if it does not 
provide the information required by Rule 10-01, we are proposing to add 
Rule 8-03(b)(7) to require compliance with Rules 3-10 and 13-01.
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    \180\ 17 CFR 229.10(f).
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3. Offerings Pursuant to Regulation A
    In connection with offerings made pursuant to Regulation A,\181\ 
Forms 1-A,\182\ 1-K,\183\ and 1-SA \184\ direct an entity (``Regulation 
A Issuer'') to present financial statements of a subsidiary that issues 
securities guaranteed by the parent company or guarantees securities 
issued by the parent company as required by Rule 3-10 for the same 
periods as the Regulation A Issuer's financial statements,\185\ because 
under these circumstances such subsidiary issuers or guarantors would 
themselves be Regulation A Issuers. Consistent with existing 
requirements, if the conditions of proposed Rule 3-10 are satisfied, 
the subsidiary issuer's or guarantor's financial statements may be 
omitted. While the substance of this requirement would not change, we 
are proposing amendments to Forms 1-A, 1-K, and 1-SA to conform the 
requirements to the streamlined structure of proposed Rule 3-10(a). 
Rather than stating that the subsidiary issuer or guarantor of the 
parent company must present financial statements as required by 
existing Rule 3-10, Forms 1-A, 1-K, and 1-SA would instead state that 
the requirements of proposed Rule 3-10 are applicable to financial 
statements of the subsidiary issuer or guarantor. Additionally, the 
proposed amendments would modify each form to require the disclosures 
specified in proposed Rule 13-01 and specify the location of the 
disclosures, similar to the proposed note to Rule 13-01(a) but 
consistent with the requirements of Regulation A. However, if a parent 
company elects to provide the disclosures in its audited financial 
statements, the Proposed Alternative Disclosures would be required to 
be audited.
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    \181\ 17 CFR 230.251-230.263.
    \182\ 17 CFR 239.90.
    \183\ 17 CFR 239.91.
    \184\ 17 CFR 239.92.
    \185\ Forms 1-A and 1-K also specify the audit requirements 
applicable to financial statements of other entities, which includes 
those of subsidiary issuers and guarantors of an issuer offering 
guaranteed securities pursuant to Regulation A. We are not proposing 
any changes to these audit requirements for circumstances where the 
separate financial statements of subsidiary issuers and guarantors 
are filed.
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4. Issuers of Asset-Backed Securities--Third Party Financial Statements
    The disclosure items for issuers of ABS, set forth in Regulation 
AB,\186\ specify circumstances when an ABS issuer must provide 
financial information for certain third parties \187\ in its filings. 
For example, under Regulation AB, financial information about 
significant obligors of pool assets and guarantors of those pool assets 
may be required. In lieu of providing the financial information of 
certain unrelated significant obligors, if certain conditions are met, 
Item 1100(c)(2) of Regulation AB permits the ABS issuer to reference 
the significant obligor's Exchange Act reports (or, for certain 
circumstances, its parent's Exchange Act reports) on file with the 
Commission. One of these conditions is that the significant obligor 
meets one of the categories of eligible significant obligors specified 
in Item 1100(c)(2)(ii) of Regulation AB. Of these eligible categories, 
two relate to pool assets guaranteed by a parent or subsidiary of the 
significant obligor, as outlined in Items 1100(c)(2)(ii)(C) and (D). 
For these two categories, Item 1100(c)(2)(ii) permits an ABS issuer to 
reference Exchange Act reports containing the parent's consolidated 
financial statements if the information requirements of Rule 3-10 of 
Regulation S-X and certain other conditions are satisfied.
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    \186\ 17 CFR 229.1100 through 229.1125.
    \187\ These third parties include: (1) Significant obligors of 
pool assets, 17 CFR 229.1112(b); (2) entities that provide credit 
enhancement and other support, except for certain derivative 
instruments, 17 CFR 229.1114(b)(2); and (3) certain derivative 
instrument counterparties, 17 CFR 229.1115(b). Depending on the 
specified measures of significance, the financial information 
required for these third parties ranges from selected financial data 
required by 17 CFR 229.301 (Item 301 of Regulation S-K) to audited 
financial statements meeting the requirements of Regulation S-X 
(except Rule 3-05 of Regulation S-X and 17 CFR 210.11-01 through 
210.11-03 (Article 11 of Regulation S-X)).
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    We are proposing conforming amendments to Items 1100(c)(2)(ii)(C) 
and (D) of Regulation AB because we are proposing to relocate the 
disclosure requirements associated with issuers and guarantors of 
guaranteed securities to proposed Rule 13-01. Thus, rather than refer 
to the information requirements of Rule 3-10, Items 1100(c)(2)(ii)(C) 
and (D) would instead state that disclosures specified in proposed Rule 
13-01 must be provided in the reports to be referenced and that 
financial statements of the subsidiary third party or subsidiary 
guarantor, as applicable, may be omitted if the requirements of 
proposed Rule 3-10 are satisfied. The function of the eligible 
categories in Items 1100(c)(2)(ii)(C) and (D) would not change under 
the proposed revisions.
    Additionally, we are proposing conforming amendments to Items 1112, 
1114, and 1115 of Regulation AB and Item 504 of Regulation S-K because 
the citations to Regulation S-X in those item requirements refer to 
Regulation S-X as encompassing ``210.1-01 through 210.12-29.'' Those 
citations would be updated to include proposed Rules 13-01 and 13-02 of 
Regulation S-X.

IV. Rule 3-16 of Regulation S-X

    Rule 3-16 contains requirements for affiliates whose securities are 
pledged as collateral for securities registered or being registered. 
Existing Rule 3-16 requires a registrant to provide separate annual and 
interim \188\ financial statements for each affiliate whose

[[Page 49653]]

securities constitute a ``substantial portion'' of the collateral for 
any class of securities registered or being registered as if the 
affiliate were a separate registrant (``Rule 3-16 Financial 
Statements'').\189\ Rule 1-02(b) of Regulation S-X defines an 
``affiliate'' by stating that an ``affiliate of, or a person affiliated 
with, a specific person is a person that directly, or indirectly 
through one or more intermediaries, controls, or is controlled by, or 
is under common control with, the person specified'' (emphasis in 
original).\190\ In practice, affiliates whose securities collateralize 
a registered security are almost always consolidated subsidiaries of 
that registrant.
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    \188\ Rule 3-16 Financial Statements are not required in 
quarterly reports, such as on Form 10-Q. See Section III.A.6. of the 
2000 Release.
    \189\ Rule 3-16(a) of Regulation S-X. These financial statements 
are required to be provided for the periods required by Rules 3-01 
and 3-02 of Regulation S-X.
    \190\ Rule 1-02(b) of Regulation S-X.
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    Whether an affiliate's portion of the collateral is a ``substantial 
portion'' is determined by comparing the highest amount among the 
aggregate principal amount, par value, book value, or market value of 
the affiliate's securities to the principal amount of the securities 
registered or being registered. If the highest of those values equals 
or exceeds 20 percent of the principal amount of the securities 
registered or being registered for any fiscal year presented by the 
registrant, Rule 3-16 Financial Statements are required.\191\
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    \191\ Rule 3-16(b) of Regulation S-X.
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    The requirements in existing Rule 3-16 have remained unchanged for 
many years,\192\ and we are proposing changes to improve the 
disclosures required by the rule.
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    \192\ See Separate Financial Statements Required by Regulation 
S-X, Release No. 33-6359 (Nov. 6, 1981) [46 FR 56171 (Nov. 16, 
1981)].
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V. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02

A. Overarching Principle

    Our proposed amendments to Rule 3-10 are based on the principle 
that investors in guaranteed securities rely primarily on the 
consolidated financial statements of the parent company as supplemented 
by details about the subsidiary issuers and guarantors when making 
investment decisions. Similarly, we believe that the consolidated 
financial statements of the registrant are the most relevant 
information for investors when making investment decisions about that 
registrant's securities that are collateralized by securities of its 
affiliate(s). The pledge of collateral is a residual equity interest 
that could potentially be foreclosed upon only in the event of default 
and almost always relates to an affiliate whose financial information 
is already included in the registrant's consolidated financial 
statements.\193\ While we believe information about the affiliate(s) 
whose securities are pledged as collateral is material for an investor 
to consider potential outcomes in the event of foreclosure, we believe 
that separate financial statements of each such affiliate are not 
material in most situations. Rather, we believe the nature and extent 
of disclosures about the affiliate(s) and the related collateral 
arrangement should be consistent with the supplemental nature of the 
information and better balanced with the cost of providing such 
disclosures.
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    \193\ Generally, in the event of default, the holders of debt 
without the benefit of a pledge of collateral are comparatively 
disadvantaged. In the event of default, a holder of a debt security 
can make claims for payment directly against the issuer. Unpledged 
assets of an issuer's subsidiaries would generally only be 
indirectly accessible to the holder through bankruptcy proceedings, 
subordinate to direct claims against those subsidiaries or their 
assets. A debt security that is secured by a pledge of collateral 
typically allows a holder to make direct claims to that collateral 
in the event of default.
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B. Overview of the Proposed Changes

    Although affiliates whose securities are pledged as collateral are 
not registrants with respect to the collateralized security, and are 
not generally subject to the related reporting requirements, existing 
Rule 3-16 requires financial statements as if the affiliates were 
registrants. This requirement is more onerous than those that apply to 
other forms of credit enhancements, such as the Alternative Disclosures 
permitted under existing Rule 3-10 or the disclosures required by 17 
CFR 210.4-08(b) (``Rule 4-08(b) of Regulation S-X'') for assets that 
are pledged.\194\ Additionally, while the importance of the collateral 
to an investor may vary widely from situation to situation, the 
existing rule requires full, audited financial statements for the 
affiliate in all circumstances when the ``substantial portion'' 
threshold is met, but no disclosure if the threshold is not met. For 
example, Rule 3-16 Financial Statements may be required if a registrant 
issues a small amount of debt securities, even though an affiliate may 
be only a small percentage of the registrant's assets and operations, 
but may not be required if a registrant issues a substantial amount of 
debt securities, even though an affiliate constitutes a large 
percentage of a registrant's assets and operations.
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    \194\ Rule 4-08(b) of Regulation S-X requires disclosure of the 
approximate amounts of assets mortgaged, pledged, or otherwise 
subject to lien and a brief identification of the obligations 
collateralized.
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    A number of commenters stated that debt offerings are often 
structured to avoid or limit Rule 3-16 disclosures by reducing the 
amount of collateral an investor might receive in the event of default, 
resulting in reduced collateral packages, or are otherwise structured 
as unregistered offerings.\195\ Other commenters indicated that debt 
agreements may be structured to specifically release an affiliate's 
securities from collateral if and when their inclusion would trigger 
the requirements of existing Rule 3-16.\196\ Another commenter 
indicated that the requirements of existing Rule 3-16 often make it 
uneconomical to secure publicly-offered bonds with pledges of 
stock.\197\
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    \195\ See, e.g., letters from ABA-Committees, Cahill, Chamber, 
Davis Polk, DT, and EY.
    \196\ See, e.g., letters from Covenant, Davis Polk, KPMG, and 
PwC.
    \197\ See letter from Davis Polk.
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    We are proposing to replace the existing requirement--that a 
registrant provide separate financial statements for each affiliate 
whose securities are pledged as collateral--with a requirement that a 
registrant provide financial and non-financial disclosures about the 
affiliate(s) and the collateral arrangement as a supplement to the 
registrant's consolidated financial statements. The supplemental nature 
of this information, similar to the proposed disclosures for issuers 
and guarantors of guaranteed securities discussed above, supports 
providing registrants with the flexibility to provide the proposed 
disclosures inside or outside the registrant's audited annual and 
unaudited interim financial statements in registration statements 
covering the offer and sale of the collateralized securities and any 
related prospectus, as well as annual and quarterly Exchange Act 
periodic reports required to be filed during the fiscal year in which 
the first bona fide sale of the subject securities is completed.\198\ 
Accordingly, the

[[Page 49654]]

disclosure requirements in Rule 3-16 would be amended and relocated to 
proposed Rule 13-02.
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    \198\ Similar to the proposed disclosures for issuers and 
guarantors of guaranteed securities discussed above, the note to 
proposed Rule 13-02(a) would allow the registrant to provide the 
disclosures required by this section in a footnote to its 
consolidated financial statements or alternatively, in MD&A in its 
registration statement covering the offer and sale of the subject 
securities and any related prospectus, and in Exchange Act reports 
on Form 10-K, Form 20-F, and Form 10-Q required to be filed during 
the fiscal year in which the first bona fide sale of the subject 
securities is completed. If not otherwise included in the 
consolidated financial statements or in MD&A, the registrant would 
be required to include the disclosures in its prospectus immediately 
following ``Risk Factors,'' if any, or otherwise, immediately 
following pricing information described in Item 503(c) of Regulation 
S-K. The registrant, however, would be required to provide the 
disclosures in a footnote to its consolidated financial statements 
in its annual and quarterly reports beginning with its annual report 
filed on Form 10-K or Form 20-F for the fiscal year during which the 
first bona fide sale of the subject securities is completed. If the 
registrant elects to provide the proposed disclosures in its 
financial statements, the disclosures would be subject to annual 
audit, interim review, internal control over financial reporting, 
and XBRL tagging requirements. See Section III.C.2.d, ``Location of 
Proposed Alternative Disclosures and Audit Requirement.'' These 
proposed amendments would also apply to foreign private issuers and 
issuers offering securities pursuant to Regulation A and the forms 
applicable to such entities. See Section V.F, ``Application of 
Proposed Amendments to Certain Types of Issuers,'' below.
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    Additionally, instead of requiring disclosure only when the pledged 
securities meet or exceed a numerical threshold relative to the 
securities registered or being registered under the existing rule's 
``substantial portion'' test, the proposed amendments would require 
disclosure unless they are immaterial to holders of the collateralized 
security. Further, the proposed changes would require disclosure of any 
additional information about the collateral arrangement and each 
affiliate whose security is pledged as collateral that would be 
material to holders of the collateralized securities. We believe these 
proposed disclosures would enable an investor to evaluate the potential 
outcomes in the event of foreclosure, would reduce costs and burdens on 
registrants, and may facilitate the use of debt structures that include 
pledges of affiliate securities, resulting in improved collateral 
packages being available to investors. The proposed disclosure 
requirements are discussed further below.
Request for Comment
    70. Should the proposed amendments to Rule 3-16 be based on the 
approach described above? If so, why? If not, what approach should be 
used and why?
    71. Would the proposed amendments to existing Rule 3-16 result in 
an increase in the number of registered debt offerings that include 
pledges of affiliate securities as collateral? Why or why not? How 
would increasing the number of registered debt offerings that include 
pledges of affiliate securities affect investors and issuers?
    72. Do issuers structure registered debt offerings to not include 
pledges of affiliate securities as collateral because of concerns about 
compliance with existing Rule 3-16? If so, what are the specific 
concerns? Are issuers choosing to engage in private debt offerings that 
include pledges of affiliate securities as collateral?
    73. What factors do issuers consider in determining whether to 
structure a debt offering to include pledges of affiliate securities as 
collateral, and how are they considered?
    74. How do investors use the Rule 3-16 Financial Statements? For 
example, how do retail investors, institutional investors, or third 
parties, such as financial analysts, use the information? How would 
these investors use the proposed disclosures specified in proposed Rule 
13-02?
    75. Would the proposed amendments to existing Rule 3-16 improve the 
disclosures provided to investors? If so, how? Are there other changes 
to the rule that we should consider that would improve disclosures to 
investors? If so, what are they and how would they improve disclosure?
    76. Would the proposed amendments to existing Rule 3-16 make the 
rule less burdensome and, thereby, encourage issuers to structure debt 
offerings to include pledges of affiliate securities as collateral? Are 
there other changes to the rule that we should consider that would 
reduce compliance burdens for issuers but continue to provide the 
material information investors need to make informed investment 
decisions?
    77. Would the proposed amendments to existing Rule 3-16 result in 
issuers omitting disclosures that investors or financial analysts rely 
on? If so, which disclosures? Would such a change in the disclosures 
have an effect on investor participation in registered debt offerings 
that include pledges of affiliate securities as collateral?
    78. Are there alternative approaches to disclosures about 
affiliates whose securities are pledged as collateral that would 
benefit investors? If so, what are they and why? How would investors 
use the disclosures under these alternative approaches? How would such 
approaches impact issuers?
    79. Should the proposed rule permit the registrant to provide the 
proposed disclosures outside its financial statements in the proposed 
circumstances described? Alternatively, should the registrant be 
permitted to provide the proposed disclosures outside its financial 
statements in all circumstances? What are the potential benefits or 
concerns for investors and issuers with either approach?
    80. Would requiring the proposed disclosures to be included in a 
footnote to the registrant's audited annual and unaudited interim 
financial statements beginning with its annual report filed on Form 10-
K or Form 20-F for the fiscal year during which the first bona fide 
sale of the guaranteed securities is completed be useful to investors? 
If so, why? If not, why not? What are the potential benefits or 
concerns for investors and issuers with either approach?
    81. Would requiring the proposed disclosures to be audited or 
reviewed present costs or challenges for registrants? If so, what are 
they? For example, would it cause delays in the offering process?
    82. Should the proposed rule specify where in a filing the 
disclosures required by proposed Rule 13-02 must appear if the 
registrant chooses not to include them in its financial statements? Why 
or why not? If yes, are the locations required by the Note to proposed 
Rule 13-02(a) appropriate? If so, why? If not, why not? Where should 
these disclosures be located and why is that location appropriate?
    83. Would issuers be more likely to voluntarily provide 
supplemental information in addition to the required proposed 
disclosures to the extent the PSLRA applied to such supplemental 
information? Why or why not?
    84. Should the note to proposed Rule 13-02(a) apply differently to 
emerging growth companies? Why or why not? For example, should there be 
different filings or periods of time if the registrant is an emerging 
growth company? If so, what should be different and why? How would 
investors and issuers be affected?

C. Financial Disclosures

1. Level of Detail
    Existing Rule 3-16 requires separate financial statements of each 
affiliate whose securities constitute a substantial portion of the 
collateral. Commenter recommendations for the type of financial 
disclosure that should be provided about such affiliates were varied. 
For example, one commenter expressed its support for the existing 
requirements,\199\ and another suggested elimination of the existing 
rule.\200\ A number of commenters recommended allowing disclosures 
other than separate financial statements,\201\ and some specifically 
suggested requiring summarized financial information.\202\
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    \199\ This commenter supported requiring financial statements as 
though the affiliate were a registrant, despite the fact that the 
collateral pledge is not considered a separate security. See letter 
from CalPERS.
    \200\ This commenter stated that it is not aware of a single 
Rule 144A offering that has included Rule 3-16 financial statements 
that were not otherwise already available. See letter from Davis 
Polk.
    \201\ See, e.g., letters from BDO, CAQ, Chamber, Covenant, DT, 
EY, KPMG, and PwC.
    \202\ See, e.g., letters from ABA-Committees, BDO, Chamber, and 
EY.
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    The affiliates whose securities are pledged as collateral are 
almost always

[[Page 49655]]

consolidated subsidiaries of the registrant, and their financial 
information is thus already reflected in the registrant's consolidated 
financial statements. We therefore believe the required supplemental 
financial information about such affiliates should be focused on the 
information that is most likely to be material to an investment 
decision. As such, proposed Rule 13-02(a)(4) would require Summarized 
Financial Information, a widely understood and common set of 
requirements, for each such affiliate, which would include select 
balance sheet and income statement line items.\203\ Disclosure of 
additional line items of financial information beyond what is specified 
in proposed Rule 13-02(a)(4) would be required by proposed Rule 13-
02(a)(5) if they are material to an investment decision. For example, 
if a material amount of reported revenues of the affiliate(s) are 
derived from transactions with related parties, such as other 
subsidiaries of the registrant whose securities are not pledged as 
collateral, disclosure of such related party revenues would be 
required. When used in conjunction with the consolidated financial 
statements of the registrant, we believe this supplemental disclosure 
of select balance sheet and income statement line items of the 
affiliate(s) whose securities are pledged would provide the information 
investors need to evaluate the potential outcomes in the event of 
foreclosure. We believe this proposed amendment also would 
significantly simplify compliance efforts and reduce costs for 
preparers.
---------------------------------------------------------------------------

    \203\ As with proposed Rule 13-01(a)(4), the Summarized 
Financial Information is the information specified in Rule 1-
02(bb)(1) of Regulation S-X.
---------------------------------------------------------------------------

    One commenter suggested retaining a financial statement requirement 
when the affiliate is not a guarantor and is either a non-subsidiary 
controlled affiliate of the registrant or a controlling affiliate of 
the issuer.\204\ We are not proposing to retain such a requirement 
because practice has demonstrated that affiliates whose securities are 
pledged as collateral are almost always consolidated subsidiaries of 
the registrant. In the rare circumstances where the affiliate is not a 
consolidated subsidiary of the registrant, proposed Rule 13-02(a)(5) 
would require the registrant to provide any other quantitative or 
qualitative information that would be material to making an investment 
decision with respect to the collateralized security.\205\ Because the 
unconsolidated affiliate's financial information is not included in the 
registrant's consolidated financial statements, we would expect 
disclosure beyond what is specified in proposed Rule 13-02(a)(1) 
through (4) to be provided in these circumstances. In this regard, 
separate financial statements of the unconsolidated affiliate may be 
necessary if material to an investment decision.\206\
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    \204\ See letter from Cahill.
    \205\ See Section V.E, ``When Disclosure is Required.''
    \206\ See proposed Rule 13-02(a)(5). See also Rule 3-13 of 
Regulation S-X.
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Request for Comment
    85. Should the proposed rule require Summarized Financial 
Information about the affiliates whose securities are pledged as 
collateral rather than separate financial statements of each such 
affiliate? Why or why not? Would the Summarized Financial Information, 
along with the other disclosures required by proposed Rule 13-02, 
provide the financial information investors need to make an informed 
investment decision with respect to the collateralized security? Should 
the proposed rule require a different type of information be provided 
about such affiliates? How would investors use this information to 
assess the value of affiliate securities pledged as collateral?
    86. How would issuers and investors be affected by requiring 
Summarized Financial Information? Are there particular items in Rule 3-
16 Financial Statements that investors need to make informed investment 
decisions that would not be provided separately through Summarized 
Financial Information? Is there any such financial information that 
underwriters would still require? If so, what would be the effect on 
the costs associated with the offering?
    87. An affiliate whose securities are pledged as collateral for a 
registrant's securities is almost always a consolidated subsidiary of 
the registrant. Should our requirements specifically address the rare 
circumstances where the affiliate is not a consolidated subsidiary of a 
registrant? If so, what should those requirements be and why? For 
example, should we require separate financial statements of such 
unconsolidated affiliates?
    88. Would additional line items of financial information beyond 
what would be required by Summarized Financial Information help 
investors make informed investment decisions? If so, what line items 
and why? For example, should the proposed rule specifically require 
supplemental summarized cash flow information resulting from operating, 
financing, and investing activities? Would issuers face challenges in 
providing such information?
    89. Do investors need summarized cash flow information about 
affiliates whose securities are pledged as collateral in addition to 
the registrant's consolidated cash flow statements to make informed 
investment decisions about collateralized securities? If so, how is it 
used? If not, why not?
2. Presentation on a Combined Basis
    The existing test used to determine whether the securities of an 
affiliate constitute a ``substantial portion'' of the collateral for 
securities registered or being registered is required to be performed 
for each affiliate whose securities are pledged. The views of 
commenters were mixed regarding whether financial disclosures about 
affiliates whose securities are pledges should be combined. For 
example, one commenter recommended financial disclosures of each 
affiliate be required,\207\ another recommended that we permit 
financial information to be combined in certain circumstances,\208\ and 
another recommended separate or combined presentation.\209\
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    \207\ See letter from PwC.
    \208\ This commenter recommended that we permit the combining of 
the financial information of affiliates whose ownership percentages 
are essentially the same. See letter from EY.
    \209\ See letter from DT.
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    When the securities of more than one affiliate that is consolidated 
in the registrant's financial statements are pledged as collateral, we 
believe disclosure of the financial information of such affiliates on a 
combined basis would provide investors with the material information 
they need to assess the value of possible recoveries from the pledged 
securities in a more clear and streamlined manner than if individual 
sets of financial information were required for each such affiliate. We 
note that the existing requirements can result in potentially confusing 
disclosure about the extent of collateral. For example, when the 
securities of a registrant's subsidiary (``Subsidiary A'') are pledged 
as collateral and the securities of an entity consolidated by 
Subsidiary A (``Subsidiary B'') are also pledged, separate Rule 3-16 
Financial Statements may be required for both Subsidiary A and 
Subsidiary B. In such a scenario, Subsidiary B's assets, liabilities, 
operations, and cash flows would be included twice (i.e., in the 
financial statements of both Subsidiary A and Subsidiary B). We believe 
disclosure on a combined basis of all consolidated affiliates whose 
securities are pledged would address this

[[Page 49656]]

potential confusion. Furthermore, in the event of default by the 
registrant, we would expect an investor to make claims to all of the 
affiliate securities that are pledged.
    Accordingly, we believe an investor could more effectively and 
efficiently assess the value of possible recoveries from the securities 
pledged as collateral by evaluating the combined financial information 
of the group of consolidated affiliates whose securities are pledged as 
opposed to performing this assessment for each such affiliate 
individually. As such, our proposed amendments would permit a 
registrant to disclose the financial information of such consolidated 
affiliates on a combined rather than individual basis. Proposed Rule 
13-02(a)(4) would require intercompany transactions between affiliates 
presented on a combined basis to be eliminated. Unlike the proposed 
amendments to Rule 13-01, because the securities pledged as collateral 
are an equity interest in that pledgor affiliate, the financial 
information of all subsidiaries that would be consolidated by that 
affiliate would be included in the Summarized Financial Information 
presented pursuant to proposed Rule 13-02(a)(4), even if the securities 
of those subsidiaries are not pledged as collateral.\210\
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    \210\ Proposed Rule 13-01 prohibits combining the financial 
information of non-issuer and non-guarantor subsidiaries of issuers 
and guarantors with that of issuers and guarantors in the Proposed 
Alternative Disclosures in order to distinguish the financial 
information of entities that are legally obligated to pay from those 
that are not. Proposed Rule 13-02 relates to pledged residual equity 
interests in affiliates as opposed to guarantees to pay, and as 
such, no similar prohibition is necessary.
---------------------------------------------------------------------------

    We recognize that there may be circumstances where separate 
financial information about certain affiliates is material to an 
investment decision. Accordingly, when the information provided in 
response to proposed Rule 13-02 is applicable to one or more, but not 
all, affiliates, proposed Rule 13-02(a)(4) would require, if it is 
material, separate disclosure of Summarized Financial Information for 
the affiliates to which it is applicable. For example, if securities of 
one, but not all, of the affiliates that are pledged as collateral are 
subject to a contractual or statutory delay from being transferred to 
the holder of the collateralized security in the event of default, 
disclosure of these facts and circumstances would be required by 
proposed Rule 13-02(a)(2). In that case, proposed Rule 13-02(a)(4) 
would require separate disclosure of the Summarized Financial 
Information specified in proposed Rule 13-02(a)(4) for that affiliate, 
if material.
    Generally, a pledge of an affiliate's securities as collateral 
includes all of the outstanding ownership interests in that affiliate, 
which are held directly or indirectly by the entity issuing the debt 
securities. There could be circumstances where either the pledge of 
collateral does not include all of the outstanding ownership interests 
in the affiliate held by the issuing entity, or certain ownership 
interests in the affiliate are held by a third party and therefore 
unpledged. In such cases, disclosure of these facts and circumstances 
would be required by proposed Rule 13-02(a)(5). If such circumstances 
are applicable to one or more, but not all, affiliates, proposed Rule 
13-02(a)(4) would require, if it is material, separate disclosure of 
Summarized Financial Information for the affiliates to which it is 
applicable.
Request for Comment
    90. Is separate financial information of each affiliate whose 
securities are pledged as collateral material information necessary for 
an investor to assess the value of the collateral? If so, why? If not, 
why not? How would providing the information of each such affiliate on 
a combined basis affect this assessment? Are there specific 
circumstances where separate information should be required?
    91. Should we permit the financial disclosure of the consolidated 
affiliates whose securities are pledged as collateral to be combined 
within the proposed Summarized Financial Information? Why or why not? 
Alternatively, should combined disclosure of the proposed Summarized 
Financial Information only be permitted under certain circumstances? If 
so, under which circumstances should it be permitted and why?
3. Periods to Present
    Proposed Rule 13-02(a)(4) would require the disclosure of 
Summarized Financial Information as of, and for, the most recently 
ended fiscal year and interim period included in the registrant's 
consolidated financial statements. When used in connection with the 
registrant's consolidated financial statements, we believe the most 
recent full fiscal year and interim period should provide investors the 
information that is material in evaluating possible recoveries from the 
pledged securities of affiliate(s) in the event of default. Under the 
existing rule, Rule 3-16 Financial Statements are not required in 
quarterly reports, such as on Form 10-Q.\211\ One commenter suggested 
that interim information may not be meaningful given it is currently 
only required in certain registration statements but not in subsequent 
Forms 10-Q.\212\ However, we believe that the most recent interim 
period should be provided so that investors can make decisions based on 
the most recent information available. As such, the disclosures would 
be required in quarterly filings, such as Form 10-Q. Because Item 1 of 
Part I of Form 10-Q requires a registrant to provide the information 
required by Rule 10-01 of Regulation S-X, we are proposing to add Rule 
10-01(b)(10) to require compliance with proposed Rule 13-02.
---------------------------------------------------------------------------

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

Request for Comment
    92. What periods of presentation of supplemental financial 
information about affiliates whose securities are pledged as collateral 
are material for investors when evaluating the collateralized security?
    93. Should the required periods of supplemental financial 
information of affiliates whose securities are pledged as collateral be 
based on the most recent financial information? Why or why not? If so, 
what periods should be considered ``most recent,'' and why?
    94. Should the proposed rule require any additional periods of 
Summarized Financial Information beyond the most recent fiscal year and 
interim period? Why or why not? If yes, which periods and why?
    95. Rather than requiring disclosure of the most recent interim 
period, should the proposed rule focus on significant changes similar 
to Rule 10-01(a)(5) of Regulation S-X, which allows registrants to 
apply judgment and omit details of accounts that have not changed 
significantly in amount or composition since the end of the most 
recently completed fiscal year? Why or why not?

D. Non-Financial Disclosures

    Under the existing rule, a registrant is not required to provide 
non-financial disclosures about the affiliates and the collateral 
arrangement unless they would be included as part of the Rule 3-16 
Financial Statements. Although the Request for Comment asked if there 
is different or additional information that investors need about 
affiliates whose securities collateralize registered securities, we 
received no commentary on non-financial disclosures.
    In addition to proposing amendments to the financial information 
required about the affiliates whose securities are pledged as 
collateral, the proposed rule

[[Page 49657]]

would also require specific non-financial disclosures to be provided. 
We are proposing these changes to enhance the material information 
provided about the affiliates whose securities are pledged and the 
pledged securities, particularly in light of our proposal to require 
Summarized Financial Information for these affiliates. Proposed Rules 
13-02(a)(1) through (3) would require certain non-financial 
disclosures, to the extent material,\213\ about the securities pledged 
as collateral, each affiliate whose securities are pledged, the terms 
and conditions of the collateral arrangement, and whether a trading 
market exists for the pledged securities.
---------------------------------------------------------------------------

    \213\ See discussion within Section V.E, ``When Disclosure is 
Required.''
---------------------------------------------------------------------------

    We believe the proposed requirements would result in enhanced 
narrative disclosures that would improve investor understanding of the 
affiliates and the collateral arrangement(s), and make the financial 
disclosures they accompany easier to understand. While the proposed 
requirements comprise the items we believe are most likely to be 
material to an investor, there may be additional facts and 
circumstances specific to particular affiliates that would be material 
to holders of the collateralized security. In that case, proposed Rule 
13-02(a)(5) would require disclosure of those facts and 
circumstances.\214\ Additionally, when a non-financial disclosure is 
applicable to one or more, but not all, affiliates, proposed Rule 13-
02(a)(4) would require, if it is material, separate disclosure of 
Summarized Financial Information for the affiliates to which it is 
applicable.\215\
---------------------------------------------------------------------------

    \214\ See discussion within Section V.E, ``When Disclosure is 
Required.''
    \215\ See discussion within Section V.C.2, ``Presentation on a 
Combined Basis.''
---------------------------------------------------------------------------

Request for Comment
    96. Are the proposed non-financial disclosures material to an 
investment decision? Should we explicitly require any non-financial 
disclosures in addition to what is proposed? If so, what information 
and why?

E. When Disclosure Is Required

    As discussed above,\216\ existing Rule 3-16 requires separate 
financial statements for each affiliate whose securities are pledged as 
collateral when those securities constitute a ``substantial portion'' 
of the collateral. If the numerical thresholds specified in the rule 
are not met, no disclosure is required. At the same time, if the 
numerical thresholds are met, Rule 3-16 Financial Statements may be 
required even though the affiliate represents an insignificant portion 
of the registrant's consolidated financial statements. Several 
commenters recommended revising the existing ``substantial portion'' 
test by making the denominator the amount of the collateralized 
securities originally issued, not the amount outstanding as of the 
reassessment date,\217\ or raising the threshold from 20% to 50%.\218\ 
Another commenter suggested considering whether other indicators of 
significance besides ``market value'' \219\ may be appropriate given 
the challenges of performing the ``market value'' calculation as part 
of determining whether the collateral constitutes a ``substantial 
portion.'' \220\
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    \216\ See Section IV, ``Rule 3-16 of Regulation S-X.''
    \217\ See, e.g., letters from BDO, CAQ, DT, EY, KPMG, and PwC. 
Several of these commenters noted that, because the denominator of 
the ``substantial portion of the collateral'' test is based on the 
outstanding principal balance of the registered debt, the 
significance of the tested affiliates will tend to increase as the 
principal obligation is reduced.
    \218\ See letter from SIFMA. This commenter noted that the 
introduction to existing Rule 3-16(a) states that the rule shall 
apply to affiliates whose securities constitute a ``substantial'' 
portion of the collateral and asserted that, in other contexts, 
``substantial'' is understood to be well above 20%.
    \219\ Rule 3-16(b) of Regulation S-X.
    \220\ See letter from DT.
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    Instead of revising the existing ``substantial portion'' of 
collateral test, we propose to replace this test with one based on 
materiality, similar to the framework in proposed Rule 13-01.\221\ 
Under this approach, investors would be provided with disclosure unless 
it is immaterial, whereas under the existing rule, no disclosure would 
be provided unless the collateral represented a ``substantial 
portion.'' We believe any incremental burden to registrants of being 
required to provide the disclosures specified in proposed Rule 13-02 in 
instances where the securities pledged as collateral did not meet the 
``substantial portion'' numerical threshold under the existing rule is 
justified by the benefit of investors receiving the disclosures 
specified in proposed Rule 13-02 and the reduced costs to registrants 
of providing such proposed disclosures as compared to the existing Rule 
3-16 Financial Statements.
---------------------------------------------------------------------------

    \221\ Whether a disclosure specified in proposed Rule 13-02 may 
be omitted or whether additional disclosure would be required by 
proposed Rule 13-02(a)(5), as discussed below, depends on whether it 
would be material to a reasonable investor. See Section III.C.2.i, 
``Level of Detail,'' above.
---------------------------------------------------------------------------

    Proposed Rule 13-02(a) would require the disclosures specified in 
proposed Rule 13-02(a)(1) through (4) to the extent material to holders 
of the collateralized security. For example, under the proposed rule, 
if the Summarized Financial Information of the combined affiliates 
required by proposed Rule 13-02(a)(4) is not materially different from 
corresponding amounts in the registrant's consolidated financial 
statements, the information could be omitted. As another example, if 
the securities of an affiliate pledged as collateral do not represent a 
material amount of collateral to an investor, the investor would likely 
not require detailed disclosures about that affiliate or the collateral 
arrangement because the collateral provides little, if any, credit 
support, and therefore such information could be omitted. While the 
disclosures specified in proposed Rule 13-02(a)(1) through (4) may be 
omitted if not material to holders of the collateralized security, for 
clarity, proposed Rule 13-02(a)(4) requires the registrant to disclose 
a statement that those financial disclosures have been omitted and the 
reasons why the disclosures are not material.
    Conversely, there may be additional information about the 
collateral arrangement and affiliates beyond the financial disclosures 
specified in proposed Rule 13-02(a)(4) or the non-financial disclosures 
specified in proposed Rules 13-02(a)(1) through (3) that would be 
material to holders of the collateralized security. Accordingly, 
proposed Rule 13-02(a)(5) would require disclosure of any quantitative 
or qualitative information that would be material to making an 
investment decision with respect to the collateralized security. For 
example, additional financial information beyond what is required by 
Summarized Financial Information would be required if that information 
is material to an investor that holds the collateralized security.
Request for Comment
    97. Should we eliminate the existing ``substantial portion'' test 
for determining whether disclosure is necessary and instead use a 
materiality standard to determine the appropriate level of disclosure? 
Would this cause difficulty in practice? If so, what are those 
difficulties and how can they be avoided? Would further guidance be 
necessary? If so, please explain what guidance is needed. Would the 
elimination of the ``substantial portion'' test and use of a 
materiality standard result in a loss of information that investors 
currently use to analyze these securities? If so, what information 
would be lost and would it be material for an investor's understanding 
or an investment decision?

[[Page 49658]]

    98. Should the proposed rule also permit the financial disclosures 
specified in proposed Rule 13-02(a)(4) to be omitted if the amount of 
collateral pledged does not exceed a specified level of significance? 
Why or why not? If so, how should significance be determined, and what 
should the level of significance be?
    99. Should any additional disclosures be specifically required if 
default on the collateralized security reaches a certain level of 
likelihood? If so, what type of disclosure and when should it be 
provided?
    100. Are the proposed rules sufficiently clear about what 
disclosures should be provided and when? If not, how should the rules 
be revised to ensure clarity?

F. Application of Proposed Amendments to Certain Types of Issuers

    Rule 3-16's requirements apply to several categories of issuers, 
including foreign private issuers, SRCs, and issuers offering 
securities pursuant to Regulation A. The proposed amendments would also 
apply to these types of issuers, because, for the reasons discussed 
above, we believe investors would benefit from the simplified and 
improved disclosures that would result from the proposed amendments and 
the cost of providing the disclosures would be reduced for these types 
of issuers.
Request for Comment
    101. Should the proposed changes to Rule 3-16 also apply to these 
types of issuers? If so, why? If not, why not? Do investors in 
securities that include pledges of affiliate securities as collateral 
issued by these types of issuers require additional, different, or less 
information to make informed investment decisions than would be 
required by the proposed rule? If so, what information and why?
    102. How frequently do these types of issuers issue securities that 
include pledges of affiliate securities as collateral? Is there a 
reason to believe they may offer them more often under the proposed 
rules? Why or why not?
    103. Are other conforming changes to the proposed rules necessary 
for them to apply to these types of issuers? If so, what changes are 
necessary and why?
    104. Should the proposed amendment that would permit the registrant 
to provide the proposed disclosures outside the footnotes to its 
audited annual and unaudited interim consolidated financial statements 
in its registration statement covering the offer and sale of the 
collateralized securities and any related prospectus, and in Exchange 
Act annual and quarterly reports required to be filed during the fiscal 
year in which the first bona fide sale of the subject securities is 
completed apply differently to these types of issuers? Why or why not? 
For example, are there different filings or periods of time that the 
registrant should be permitted to provide the proposed disclosures 
outside of its financial statements for these types of issuers? As 
another example, should the proposed rule prescribe different locations 
outside the financial statements where the proposed disclosures should 
be provided for these types of issuers? In each case, what are they and 
why? How would investors and issuers be affected?
1. Foreign Private Issuers
    Foreign private issuers are required to comply with existing Rule 
3-16, and would continue to be required to comply with the disclosures 
specified in proposed Rule 13-02. Instruction 1 to Item 8 of Form 20-F 
would be amended to specifically require compliance with proposed Rule 
13-02.
2. Smaller Reporting Companies
    Note 4 to Rule 8-01 of Regulation S-X requires financial statements 
to be presented as required by Rule 3-16 for an SRC's affiliate whose 
securities constitute a substantial portion of the collateral for 
securities registered or being registered, except that the periods 
presented are those required by Rule 8-02 of Regulation S-X. As we are 
proposing to eliminate Rule 3-16 and require the disclosures specified 
in proposed Rule 13-02, SRCs would be required to comply with proposed 
Rule 13-02. A corresponding change to Note 4 to Rule 8-01 is therefore 
being proposed. Additionally, as proposed Rule 13-02(a)(4) specifies 
the periods of Summarized Financial Information that would be required 
to be presented, no reference in Note 4 to Rule 8-01 to the periods 
required by Rule 8-02 of Regulation S-X is necessary and would be 
removed. Lastly, because Item 1 of Part I of Form 10-Q permits a SRC to 
provide the information required by Rule 8-03 of Regulation S-X if it 
does not provide the information required by Rule 10-01, we are 
proposing to add Rule 8-03(b)(8) to require compliance with proposed 
Rule 13-02.
3. Offerings Pursuant to Regulation A
    In connection with offerings made pursuant to Regulation A, Forms 
1-A and 1-K direct a Regulation A Issuer to comply with Rule 3-16 for 
the same periods as the Regulation A Issuer's financial statements and 
specifies the applicable audit requirements. Accordingly, we propose to 
replace the existing requirement in the forms that Regulation A Issuers 
comply with Rule 3-16 with a requirement to provide the disclosures 
specified in proposed Rule 13-02 and specify the location of the 
disclosures, similar to the proposed note to Rule 13-02(a) but 
consistent with the requirements of Regulation A.\222\ Additionally, 
consistent with the discussion above about requiring registrants to 
comply with proposed Rule 13-02 in filings made on Form 10-Q, a 
requirement to comply with proposed Rule 13-02 would be added to Form 
1-SA.
---------------------------------------------------------------------------

    \222\ If a Regulation A Issuer elects to provide the proposed 
disclosures in its audited financial statements, such disclosures 
would be required to be audited.
---------------------------------------------------------------------------

VI. General Request for Comment

    We request and encourage any interested person to submit comments 
on any aspect of the proposal, other matters that might have an impact 
on the amendments and any suggestions for additional changes. Comments 
are of greatest assistance to our rulemaking initiative if accompanied 
by supporting data and analysis, particularly quantitative information 
as to the costs and benefits, and by alternatives to the proposals 
where appropriate. Where alternatives to the proposals are suggested, 
please include information as to the costs and benefits of those 
alternatives.

VII. Economic Analysis

A. Introduction

    As discussed above, we are proposing amendments to the financial 
disclosure requirements in Rules 3-10 and 3-16 of Regulation S-X to 
improve those requirements for both investors and registrants. These 
proposed amendments may result in simplified disclosures that highlight 
information that is material to investment decisions. They may also 
serve to reduce existing regulatory burdens that otherwise inhibit 
registrants from engaging in registered debt offerings that are backed 
by guarantees or collateral and may unnecessarily restrict the set of 
investment opportunities available to some investors. The discussion 
below addresses the potential economic effects of the proposed 
amendments, including the likely benefits and costs, as well as the 
likely effects on efficiency, competition, and capital formation, 
measured against a baseline that includes both current regulatory 
requirements and current market practices. We also discuss the 
potential economic effects of certain alternatives

[[Page 49659]]

to the proposed amendments. Throughout this analysis, we draw on 
academic studies and incorporate public comments, where appropriate.
    We are mindful of the costs and benefits of our rules. Section 2(b) 
of the Securities Act, Section 3(f) of the Exchange Act, Section 2(c) 
of the Investment Company Act, and Section 202(c) of the Investment 
Advisers Act require us, when engaging in rulemaking that requires us 
to consider or determine whether an action is necessary or appropriate 
in (or, with respect to the Investment Company Act, consistent with) 
the public interest, to consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation.\223\ Additionally, Exchange Act Section 23(a)(2) 
requires us, when adopting rules under the Exchange Act, to consider, 
among other things, the impact that any new rule would have on 
competition and not to adopt any rule that would impose a burden on 
competition that is not necessary or appropriate in furtherance of the 
Exchange Act.\224\
---------------------------------------------------------------------------

    \223\ 15 U.S.C. 77b(b), 78c(f), 80a-2(c), and 80b-2(c).
    \224\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

B. Baseline and Affected Parties

    The existing regulatory requirements of Rules 3-10 and 3-16 under 
Regulation S-X have been described above \225\ and have prompted 
registrants to adopt disclosure practices and business practices 
specifically designed to comply with or avoid these requirements. We 
analyze the economic effects of the proposed amendments by assessing 
their impact on affected parties as compared to the current state of 
the disclosure regime, including both existing disclosure requirements 
and available exemptions, where applicable. The parties that are likely 
to be affected by the proposed amendments include issuers and 
guarantors of guaranteed debt securities, issuers of debt securities 
collateralized by securities of issuers' affiliate(s), and investors in 
each of these types of securities.\226\
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    \225\ See Section II for Rule 3-10 and Section IV for Rule 3-16.
    \226\ While the proposed amendments would apply to registered 
investment companies, and could thereby affect registered investment 
advisers, based on staff experience, we believe registered 
investment companies are unlikely to engage in the activities 
addressed by the proposed amendments. Accordingly, we also we 
believe the proposed amendments are unlikely to affect registered 
investment advisers.
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1. Market Participants
    The first main group of market participants affected by the 
proposed amendments consists of issuers and guarantors of guaranteed 
debt securities and issuers of debt securities collateralized by 
securities of the issuer's affiliates. These issuers would be affected 
because the disclosure called for by the proposed amendments would 
differ from the content and format of financial information currently 
required to be presented in registered debt offerings and in certain 
ongoing reporting. The proposed amendments may also alter the capital 
raising decisions of potential issuers.
    The second group of market participants affected by the proposed 
amendments consists of investors in these securities. These investors 
can be divided into three main categories: (1) QIBs; \227\ (2) 
institutional investors (other than QIBs); and (3) non-institutional 
(retail) investors. In addition to the change in content and location 
of the disclosed information presented to them, which is discussed 
below in Section VII.C.1.b, the impact on these investors would also 
depend on whether there is a change in the number of registered debt 
offerings by new issuers, issuers that previously offered debt 
securities under Rule 144A, or both, as a result of the proposed 
amendments. Currently, there are four approaches that issuers often use 
when issuing guaranteed or collateralized debt securities. First, 
issuers may offer registered guaranteed and/or collateralized debt 
securities and provide the required disclosures under existing Rules 3-
10 and 3-16. Second, issuers may opt to privately offer the debt 
securities with guarantees or pledges of affiliate securities as 
collateral under Rule 144A with registration rights. This may allow 
issuers to access the capital markets more quickly than if they had to 
comply with existing requirements at initial issuance. Issuers do, 
however, have to provide the disclosures required by existing Rules 3-
10 and 3-16 when the privately issued notes are exchanged for 
registered notes. Third, issuers may opt to privately offer securities 
under Rule 144A without registration rights. Under this approach, 
issuers do not have to provide disclosures required by existing Rules 
3-10 and 3-16, but issuers and investors are not afforded the benefits 
of registration. Fourth, issuers may structure a registered offering to 
not include guarantees or pledges of affiliated securities as 
collateral. Here, while issuers would not have to provide disclosures 
required by existing Rules 3-10 and 3-16, they may incur a higher cost 
of capital than if they had structured their debt agreements with these 
credit enhancements.
---------------------------------------------------------------------------

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

    Only QIBs can participate in Rule 144A offerings; retail and 
institutional investors are unable to participate in such offerings. 
Furthermore, collateralized debt offerings are often structured to 
avoid or limit Rule 3-16 disclosures by reducing the amount of 
collateral investors might receive in the event of default, resulting 
in reduced collateral packages. Overall, investors may experience both 
a change in the number of investment opportunities available, as well 
as a change in the information presented to them in registered 
offerings.
2. Market Conditions
    To provide context for debt securities offerings likely to be 
impacted by this proposal, Table 1 provides estimates of the number and 
dollar amount of all registered debt offerings and Rule 144A debt 
offerings per year since 2013.\228\ The dollar volume of registered 
debt and Rule 144A offerings appears to have increased in recent years, 
which may be a result of improving macroeconomic conditions and a low 
interest rate environment.\229\
---------------------------------------------------------------------------

    \228\ These estimates are based on staff analysis of data from 
the Mergent database. Data specific to offerings of guaranteed 
securities and offerings of securities collateralized by the 
securities of an issuer's affiliate(s) is unavailable. We begin our 
sample in the post-financial crisis timeframe in order to exclude 
capital raising concerns, liquidity shocks, and other constraints 
that are exogenous to our baseline analysis.
     For perspective, the amount of funding obtained through the 
registered debt market on an annual basis is much larger than that 
obtained through the registered equity market. See Access to Capital 
and Market Liquidity Report.
    \229\ See id.

[[Page 49660]]

                      Table 1--Registered Debt and Rule 144A Debt Offerings From 2013-2017
----------------------------------------------------------------------------------------------------------------
                                                          Registered debt                    Rule 144A
                                                 ---------------------------------------------------------------
                      Year                           Number of
                                                     offerings       $ Amount        Number of       $ Amount
                                                       \230\           (bil)         offerings         (bil)
----------------------------------------------------------------------------------------------------------------
2013............................................           1,509           1,052             969             512
2014............................................           1,597           1,113             920             530
2015............................................           1,560           1,206             808             575
2016............................................           1,639           1,329             785             526
2017............................................           1,853           1,298             995             657
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis.

    Studies looking at registered debt offerings and debt offerings 
made under Rule 144A find that the two offerings have distinct 
characteristics. Issuers offering debt securities under Rule 144A have, 
on average, lower credit quality and higher information asymmetry than 
registered debt offerings,\231\ conditions that may increase the 
likelihood that investors require guarantees and collateral relative to 
investment grade issuers who may not need such credit enhancements. 
This is consistent with studies that have found the cost of capital 
associated with debt offerings made under Rule 144A to be higher than 
the cost of capital in registered debt offerings.\232\ According to 
these studies, there are two main benefits of Rule 144A offerings: (1) 
The speed of issuance, given the absence of a registration requirement; 
and (2) relative high liquidity, given the possibility to exchange the 
securities for registered securities.\233\
---------------------------------------------------------------------------

    \230\ Number of offerings does not include registered exchanges 
of debt securities previously issued privately with registration 
rights.
    \231\ See, e.g., Matteo P. Arena, The Corporate Choice Between 
Public Debt, Bank Loans, Traditional Private Debt Placements, and 
144A Debt Issues, 36 Rev. of Quantitative Fin. & Acct. 391 (2011).
    \232\ See George W. Fenn, Speed of Issuance and the Adequacy of 
Disclosure in the 144A High-Yield Debt Market, 56 J. of Fin. Econ. 
383 (2000); Miles Livingston & Lei Zhou, The Impact of Rule 144A 
Debt Offerings Upon Bond Yields and Underwriter Fees, 31 Fin. Mgmt. 
5 (2002); Susan Chaplinsky & Latha Ramchand, The Impact of SEC Rule 
144A on Corporate Debt Issuance by International Firms, 77 J. of 
Bus. 1073 (2004); Usha R. Mittoo & Zhou Zhang, The Evolving World of 
Rule 144A Market: A Cross-Country Analysis (2010) (unpublished 
working paper) (University of Manitoba, Winnipeg MD). The studies of 
Fenn (2000) and Chaplinsky and Ramchand (2004) find the yield 
premium decreased over time, whereas the study of Livingston and 
Zhou (2002) and unpublished working paper of Mittoo and Zhang (2011) 
do not observe that trend. Mittoo and Zhang (2011), however, find 
that the yield premium increased after the Sarbanes-Oxley Act was 
enacted.
    \233\ See, e.g., Fenn, note 232 above.
---------------------------------------------------------------------------

    As discussed above,\234\ Rule 3-10 requires that every issuer of a 
registered security that is guaranteed and every guarantor of a 
registered security file the financial statements required for a 
registrant by Regulation S-X, except under certain circumstances when 
Alternative Disclosures are permitted. There are two forms of 
Alternative Disclosures prescribed by the rule: (1) Consolidating 
Information; and (2) a brief narrative. Consolidating Information is 
the most common type of alternative disclosure under Rule 3-10. Table 2 
presents data on the number of unique registrants and filings that 
included Consolidating Information under Rule 3-10 for the period 2013-
2017; \235\ the data is consistent with estimates provided by one 
commenter.\236\
---------------------------------------------------------------------------

    \234\ See Section II.A, ``Background.''
    \235\ To identify these disclosures, we searched all Forms 10-K, 
10-Q, 20-F, 40-F, S-1, S-4, and F-4 and their amendments using XBRL 
tags most commonly associated with Consolidating Information. The 
amounts in the table represent the number of annual, quarterly, and 
periodic filings including amendments that are unique for the 
covered period in each calendar year from 2013-2017.
    \236\ See letter from EY. The commenter identified 494 
registrants that provided Consolidating Information by searching for 
keywords on Form 10-K filings only. If we limit our search to Form 
10-K filings in 2013, we reach a similar number, which we believe 
provides validity to our methodology.

                     Table 2--Estimated Number of Unique Registrants and Filings Including Consolidating Information Under Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      Number of    Number of
                Year                    unique       total         10-K         10-Q         20-F         40-F         S-1          S-4          F-4
                                     registrants    filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
2013...............................          533        1,834          431        1,339           12            0           15           34            3
2014...............................          530        1,861          461        1,360           10            0            9           21            0
2015...............................          500        1,750          437        1,288            9            0            5           11            0
2016...............................          469        1,641          417        1,199            8            0            1           16            0
2017...............................          403        1,430          369        1,043            5            1            1           11            0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of Edgar Filings.

    The second and less common form of Alternative Disclosures under 
existing Rule 3-10 is a brief narrative. While we believe the number of 
filings including the brief narrative form of Alternative Disclosure is 
smaller than the number of filings using Consolidating 
Information,\237\ we are unable to determine that number due to 
methodological and data extraction challenges.\238\
---------------------------------------------------------------------------

    \237\ As described in Section II.F, ``Exceptions,'' the brief 
narrative form of Alternative Disclosures is available for three 
situations. One of these situations is when a parent company uses a 
finance subsidiary to issue securities that the parent company 
guarantees, which in our experience is limited and generally for 
convenience purposes. As several commenters noted, the other 
situations permitting the brief narrative form of Alternative 
Disclosures require additional restrictive conditions to be met, 
which greatly limit the circumstances in which they can be used. 
See, e.g., letters from ABA-Committees, AB-NYC, CAQ, DT, EY, FedEx, 
KPMG, and PwC. Based on our experience, we believe there are fewer 
instances of the brief narrative form of Alternative Disclosures 
than Consolidating Information.
    \238\ These narrative disclosures are typically no more than a 
paragraph in length and vary in content based on the three scenarios 
under which the brief narrative can be provided. We conducted text 
searches of EDGAR filings in an attempt to accurately identify 
issuers providing narrative disclosure under Rule 3-10. However, 
given the variation in phrasing in these paragraphs, the search did 
not produce meaningful results.

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[[Page 49661]]

    As discussed above,\239\ under existing Rule 3-16, a registrant is 
required to provide Rule 3-16 Financial Statements for each affiliate 
whose securities, which are pledged as collateral, constitute a 
substantial portion of the collateral for any class of securities 
registered or being registered. Table 3 presents data on the number of 
filings and unique registrants that included Rule 3-16 Financial 
Statements since 2013. The number of registrants remained steady over 
this period. Due to the manual process by which we attained these 
estimates, there are likely more registrants providing Rule 3-16 
Financial Statements than are reflected here.\240\ However, based on 
the comments we received, we do not expect the number to be 
significantly larger.\241\
---------------------------------------------------------------------------

    \239\ See Section IV, ``Rule 3-16 of Regulation S-X.''
    \240\ There are no XBRL tags specific to Rule 3-16. To identify 
these disclosures, we searched all Forms 10-K, 10-Q, 20-F, 40-F, S-
1, S-3, S-4, S-11, F-1, F-3, F-4, 10, 1-A, 1-K, and 1-SA and their 
amendments using a text search on the word combination ``Rule 3-
16.'' We applied different text search combinations and found that 
using ``Rule 3-16'' offered the most accurate search results. Even 
so, we received hundreds of false hit returns. These were mainly 
registrants mentioning ``Rule 3-16'' as part of a description of 
collateral release provisions. That is, if Rule 3-16 were triggered, 
the debt agreement would release the collateral that triggered Rule 
3-16. This is consistent with one commenter who noted that issuers 
use such release provisions to avoid compliance with Rule 3-16. See 
letter from PwC. We manually sifted through these false returns to 
identify the positive results listed in Table 3.
    \241\ One commenter noted that Rule 3-16 application is rarely 
seen in practice, see letter from BDO, while another commenter noted 
that many deals are intentionally structured to avoid Rule 3-16 by 
using Rule 144A and not providing registration rights. See letter 
from Covenant.

      Table 3--Estimated Number of Unique Registrants and Filings Including Rule 3-16 Financial Statements
----------------------------------------------------------------------------------------------------------------
                                                     Number of
                      Year                            unique         Number of         10-K            20-F
                                                    registrants    total filings
----------------------------------------------------------------------------------------------------------------
2013............................................               7               7               6               1
2014............................................               7               7               6               1
2015............................................               7               7               6               1
2016............................................               7               7               6               1
2017............................................               7               7               6               1
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of EDGAR filings.

Request for Comment
    105. Are there reliable sources of information or robust means of 
estimating the proportion of Rule 144A offerings that do not include 
registration rights versus those that do include registration rights? 
If so, please describe these sources and methods.
    106. What is the current level of participation of non-QIB and 
retail investors in registered offerings of corporate debt? Are there 
reliable sources of information or robust means of estimating the 
proportion of registered versus unregistered debt offerings held by 
different investor types such as QIBs and non-QIBs? If so, please 
describe these sources and methods.
    107. How do investors and other market participants currently use 
the information required to be disclosed by Rules 3-10 and 3-16? Are 
these disclosures generally consumed directly by investors? Is 
information derived from these disclosures made available to investors 
by financial analysts or other third party service providers?

C. Anticipated Economic Effects

    In this section we discuss the anticipated economic benefits and 
costs of the proposed amendments to Rules 3-10 and 3-16.
1. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule 13-
01
    We received a number of comments indicating that the existing 
requirements often lead registered debt agreements to be structured in 
such a way as to avoid compliance with Rule 3-10,\242\ thereby 
depriving certain investors of the opportunity to invest in guaranteed 
securities. Similarly, others noted that issuers who have not 
previously issued guaranteed debt securities often are deterred by the 
associated compliance costs and prefer instead to issue securities 
privately through Rule 144A.\243\ In light of these comments, we expect 
the proposed amendments to benefit issuers and investors. For example, 
as a result of the overall reduced burdens associated with the proposed 
amendments, investors may benefit from access to more registered 
offerings that are structured to include guarantees and, accordingly, 
the additional protections that come with Section 11 liability for 
disclosures made in those offerings. Also, an increase in the overall 
use of guarantees could reduce structural subordination issues that 
arise. Typically, all of a parent company's subsidiaries support the 
parent company's debt-paying ability. However, in the event of default, 
the holders of debt without the benefit of guarantees are comparatively 
disadvantaged. In the event of default, a holder of a guaranteed debt 
security issued by a parent company can make claims for payment 
directly against the issuer and its subsidiary guarantors. The assets 
of non-guarantor subsidiaries typically would be accessible by the 
debtholder only indirectly through a bankruptcy proceeding. In such a 
proceeding, absent a guarantee, the claims of the debtholder would be 
structurally subordinate to the claims of other creditors, including 
trade creditors of the non-guarantor subsidiaries. The less burdensome 
disclosures under the proposed amendments may lead to greater use of 
guarantees to address these structural subordination issues, which 
could result in more efficient risk sharing within corporate groups and 
potentially a lower cost of capital for registrants.
---------------------------------------------------------------------------

    \242\ See, e.g., letters from CAQ and KPMG.
    \243\ See, e.g., letter from Cahill.
---------------------------------------------------------------------------

    Furthermore, the less burdensome disclosures may lead issuers to 
register the initial offerings of guaranteed securities rather than 
opting to issue them under Rule 144A with registration rights. Issuers 
may be able to comply with the proposed rule and access the capital 
markets more quickly than under the existing Rule 3-10 requirements. 
These issuers would not incur costs associated with exchanging the 
privately issued debt securities for registered guaranteed debt 
securities.
a. Eligibility Conditions To Omit Financial Statements of Subsidiary 
Issuer or Guarantor
    As detailed in Section III.C.1.b, ``Consolidated Subsidiary,'' we 
propose to replace one of the conditions that must be met to be 
eligible to omit the separate financial statements of a subsidiary 
issuer or guarantor--that the

[[Page 49662]]

subsidiary issuer or guarantor be 100% owned by the parent company--
with a condition that the subsidiary issuer or guarantor be 
consolidated in the parent company's consolidated financial statements. 
This proposed change would permit the parent company to omit the 
separate financial statements of a consolidated subsidiary issuer or 
guarantor even if third parties hold non-controlling ownership 
interests in that subsidiary issuer or guarantor. However, the proposed 
rule would require, to the extent material, a description of any 
factors that may affect payments to holders of the guaranteed security, 
such as the rights of a non-controlling interest holder.
    In addition to the proposed change from 100% owned to 
consolidation, we are proposing changes to simplify the Rule's 
eligibility conditions. Namely, as discussed in Section III.C.1.d, 
``Eligible Issuer and Guarantor Structures Condition,'' the proposed 
amendments would replace the five specific issuer and guarantor 
structures currently eligible under the existing rule with a broader 
two-category framework. Under these changes, separate financial 
statements of consolidated subsidiary guarantors may be omitted for 
each issuer and guarantor structure that is eligible. Additionally, 
unlike the existing rule, the nature of the subsidiary guarantees, 
including whether the guarantee is full and unconditional or joint and 
several, would no longer impact the eligibility to omit separate 
subsidiary financial statements and instead would only impact the 
extent of disclosure in the Proposed Alternative Disclosures.
    Overall, these proposed amendments would permit a broader scope of 
issuers and guarantors to be eligible to provide the Proposed 
Alternative Disclosures in lieu of separate financial statements of 
each subsidiary issuer and guarantor than under existing Rule 3-10. 
This, in turn, would reduce the compliance costs associated with 
preparation of disclosures for these registered debt offerings and 
ongoing periodic reporting.\244\ To the extent there are more issuers 
and guarantors that are eligible to provide the less burdensome 
Proposed Alternative Disclosures in lieu of separate financial 
statements of each subsidiary issuer and guarantor under proposed Rule 
3-10, these entities may be more likely to register their debt 
offerings, either at the outset or through an exempt offering with 
registration rights. As a result, some issuers may realize a lower cost 
of capital. Such an outcome would be consistent with previous studies 
that have found the cost of capital associated with registered debt 
offerings to be lower than that of private offerings made under Rule 
144A,\245\ although other issuer characteristics indicative of 
creditworthiness would remain relevant with respect to the cost of 
capital, regardless of offering method. Additionally, subsidiary 
issuers and guarantors that are currently required to file separate 
financial statements because they do not meet existing Rule 3-10's 
eligibility criteria would have reduced compliance costs to the extent 
they meet the revised eligibility criteria under proposed Rule 3-10 and 
the Proposed Alternative Disclosures are provided in lieu of their 
separate financial statements.
---------------------------------------------------------------------------

    \244\ Commenters highlighted the significant time and cost 
associated with preparing the Alternative Disclosures. See, e.g., 
letters from Cahill, FedEx, and Noble-UK. Noble-UK estimated that 
compliance with Rule 3-10 requires the equivalent of approximately 
two full time employees across its organization. FedEx estimated 
that compliance requires approximately 280 hours per year. Based on 
this commenter's estimate of compliance hours, estimated compliance 
costs under the existing rule amount to $97,000 per year (calculated 
as 280 hours x Compliance Attorney at $348 per hour = $97,440 per 
year). The per hour figure for a Compliance Attorney is taken from 
SIFMA's 2013 Management & Professional Earnings in the Securities 
Industry, modified by Commission staff to account for an 1800-hour 
work-year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead and adjusted for inflation. See Sec. 
Indus. and Fin. Mkts. Ass'n (SIFMA), Management & Professional 
Earnings in the Securities Industry (2013), https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013. For purposes of the Paperwork Reduction 
Act of 1995 (``PRA''), 44 U.S.C. 3501 et seq., we estimate that the 
proposed amendments to Rule 3-10 would result in an overall 
reduction of 30 burden hours for each form affected by the proposed 
amendments. See Section VIII.B.1, ``Rule 3-10,'' below.
    \245\ See discussion and references within Section VII.B.2, 
``Market Conditions.''
---------------------------------------------------------------------------

    Certain investors could also benefit from the proposed amendments 
to the eligibility conditions. If issuers opt to register debt 
offerings, rather than structure them as private offerings using Rule 
144A, then new investors--namely, non-QIB institutional investors and 
retail investors who cannot participate in Rule 144A offerings--would 
be eligible to participate in the offerings. To the extent that the 
proposed amendments to the eligibility conditions encourage additional 
registered debt offerings, more investment opportunities would be made 
available, and a resulting increase in market participation would 
improve the overall competitiveness and efficiency of the capital 
markets. Furthermore, these debt offerings would benefit investors by 
extending to them the protections associated with registration.
    We expect little, if any, adverse effect on issuers and guarantors 
of guaranteed debt securities from these proposed amendments. We also 
believe the adverse effects on investors, if any, are likely to be 
limited. Under the existing rule, investors receive separate financial 
statements of subsidiary issuers and guarantors if these entities are 
not 100% owned by the parent company. If these subsidiaries are 
consolidated in the parent company's financial statements and all other 
conditions of proposed Rule 3-10 are met, investors may no longer 
receive the separate financial statements of these subsidiary issuers 
and guarantors. In such cases, although investors would not receive the 
detailed information about each such subsidiary issuer or guarantor 
included in the separate financial statements, a parent company would 
be required to provide, to the extent material, financial and non-
financial information for consolidated subsidiary issuers and 
guarantors with non-controlling interests, as well as a description of 
any factors associated with non-controlling interest holders that may 
affect payments to holders of the guaranteed security. Where all 
eligibility conditions of the proposed rule are met, we believe the 
Proposed Alternative Disclosures would provide the information 
investors need to make informed investment decisions with respect to a 
guaranteed security.
    Several commenters supported modifying the 100% owned condition in 
the existing rule for reasons consistent with the analysis above.\246\ 
One commenter recommended we eliminate this condition and instead 
require separate disclosure of subsidiaries providing lesser 
guarantees,\247\ whereas another commenter stated that the existing 
requirement should remain unchanged.\248\
---------------------------------------------------------------------------

    \246\ See, e.g., letters from ABA-Committees, AB-NYC, Chamber, 
EY, SIFMA, and PwC.
    \247\ See letter from SIFMA.
    \248\ See letter from CalPERS.
---------------------------------------------------------------------------

b. Disclosure Requirements
    As detailed in Section III.C.2, ``Disclosure Requirements,'' one of 
the conditions in the existing rule for omitting separate financial 
statements of a subsidiary issuer or guarantor is providing the 
Alternative Disclosures in the footnotes to the parent company's 
consolidated financial statements. The proposed rule would retain the 
requirement to provide the Alternative Disclosures, but with 
modifications. We address below the proposed amendments related to the 
Alternative

[[Page 49663]]

Disclosures (the Proposed Alternative Disclosures).
i. Financial and Non-Financial Disclosures
    As described in Section III.C.2.a, ``Financial Disclosures,'' we 
propose to simplify the financial disclosures required by current Rule 
3-10 by replacing Consolidating Information with a requirement to 
provide Summarized Financial Information. The level of detail currently 
required in Consolidating Information often contributes to multiple 
pages of detail in the parent company's financial statements. The 
proposed Summarized Financial Information would focus on the 
information that is most likely to be material to an investment 
decision. If additional line items, beyond what is required in the 
Summarized Financial Information are material, they would be required 
to be disclosed.
    The proposed amendments should simplify the disclosures and reduce 
the cost of compliance and could engender further benefits. For 
example, academic literature finds that simplified financial statements 
are associated with more efficient price discovery,\249\ and that 
investors underreact more to firms with less readable financial 
disclosures.\250\ More generally, we believe the proposed amendments 
would provide investors with streamlined and easier to understand 
financial information that we believe is material to an investment 
decision. Thus, to the extent that the proposed amendments have their 
intended effect, reducing complexity while maintaining the material 
completeness of financial disclosures, we anticipate that the financial 
disclosures that result from the proposed amendments would improve 
price discovery, enhance the allocative efficiency of markets, and 
facilitate capital formation.
---------------------------------------------------------------------------

    \249\ See Brian P. Miller, The Effects of Reporting Complexity 
on Small and Large Investor Trading, 85 Acct. Rev. 2107 (2010).
    \250\ See Haifeng You & Xiao-jun Zhang, Financial Reporting 
Complexity and Investor Underreaction to 10-K Information, 14 Rev. 
of Acct. Stud. 559 (2009); Alastair Lawrence, Individual Investors 
and Financial Disclosure, 56 J. of Acct. & Econ. 130 (2013).
---------------------------------------------------------------------------

    We are also proposing that a parent company be permitted to provide 
financial disclosures about the Obligor Group on a combined basis 
rather than on a disaggregated basis. Additionally, if non-financial 
disclosure provided in response to proposed Rule 13-01 were applicable 
to one or more, but not all, guarantors, such as where a subsidiary's 
guarantee is limited to a particular dollar amount, separate disclosure 
of Summarized Financial Information for one or more issuers and 
guarantors would be required, to the extent material.
    To the extent that investors are indifferent about whether payment 
under the guaranteed security comes from the issuer or one or more 
guarantors in the same consolidated group, or both, the disclosure 
resulting from the proposed amendments would not adversely impact 
investment decisions and could offer investors more readable, 
streamlined financial information. To the extent that increased 
readability without loss of material information would facilitate 
investor evaluation of whether the entities in the Obligor Group have 
the ability to make payments as required under the guaranteed security, 
the proposed amendments would promote the efficiency of security prices 
and investor portfolios. Consistent with potential benefits from these 
changes, a growing body of academic literature finds that financial 
statement readability affects the information environment and that more 
readable statements are associated with lower cost of debt capital and 
reduced bond rating agency disagreement.\251\
---------------------------------------------------------------------------

    \251\ See Samuel B. Bonsall & Brian P. Miller, The Impact of 
Narrative Disclosure Readability on Bond Ratings and the Cost of 
Debt, 22 Rev. of Acct. Stud. 608 (2017).
---------------------------------------------------------------------------

    The proposed rule also requires that Summarized Financial 
Information be provided only for the most recently completed fiscal 
year and year-to-date interim period, if applicable, included in the 
parent company's consolidated financial statements, rather than for the 
additional periods specified under existing Rules 3-01 and 3-02 of 
Regulation S-X. This is intended to preserve information that is 
material to an investment decision while reducing compliance costs for 
registrants. This proposed change is consistent with commenter views. 
The commenters that discussed the number of annual periods for 
disclosure recommended limiting disclosure to the current year, citing 
challenges recasting prior period information for circumstances such as 
legal entity mergers and discontinued operations. Others cited 
significant costs to issuers from requiring additional periods.\252\
---------------------------------------------------------------------------

    \252\ See, e.g., letters form BDO, Headwaters, Medtronic, and 
PwC. Headwaters noted that Alternative Disclosure composed 
approximately 15% of the entire financial disclosure in its most 
recent Form 10-K and approximately 28% of the entire financial 
disclosure in its most recent Form 10-Q. Medtronic indicated that it 
has one staff person on its external reporting team that spends over 
80% of his or her time preparing Rule 3-10 related information in 
support of quarterly filings.
---------------------------------------------------------------------------

    In addition, we are proposing to require non-financial disclosures 
to supplement the proposed financial disclosures with additional 
information that may be material to an investment decision. This would 
include material information about how payments to holders of 
guaranteed securities may be affected by such things as the issuer and 
guarantor structure, the terms and conditions of the guarantees, the 
impact of non-controlling ownership interests, or other factors 
specific to the offering. These proposed amendments should enhance the 
information provided to investors about the investment without imposing 
significant burdens on registrants. Overall, this should lead to 
greater transparency and reduce information asymmetries between issuers 
and investors.
    Despite being unable to estimate the number of filings that provide 
brief narrative disclosures under the existing Alternative Disclosure, 
we do not expect parent companies to incur significant costs to provide 
the Proposed Alternative Disclosures. For example, where Alternative 
Disclosures under the current rule would constitute only a brief 
narrative, we generally believe separate financial disclosures about 
the issuers and guarantors of the guaranteed securities likely would 
not be material and therefore could be omitted under the proposed 
amendments. Finally, as with any change to reporting format and 
presentation of information, the recommended proposals may lead 
companies and investors to incur costs to adjust to the new 
disclosures. As further discussed below, we do not expect such costs to 
be substantial.
ii. When Disclosure Is Required
    As explained in Section III.C.2.c, ``When Disclosure is Required,'' 
we propose eliminating the numerical thresholds of existing Rule 3-10 
that are used to determine the form and content of disclosure. Instead, 
all proposed disclosures would be required unless such information 
would not be material to holders of the guaranteed security. While 
numerical thresholds may be easier to apply than a materiality standard 
that requires judgment, this change would allow for a more principles-
based disclosure approach that is more tailored to the specific 
circumstances and the needs of investors.\253\ Allowing the parent

[[Page 49664]]

company to omit immaterial information would lower the costs of 
disclosure relative to existing requirements and may help focus 
investor attention on decision-relevant information. However, this 
change could also increase the risk that a parent company would omit, 
potentially inadvertently, value-relevant information. In such 
instances, investors may make suboptimal investment decisions. Omitting 
material information, however, would subject issuers and guarantors to 
increased litigation risk, providing incentive for issuers to make 
careful determinations on the form and content of disclosures.
---------------------------------------------------------------------------

    \253\ A number of academic studies have explored the use of 
bright-line thresholds and ``when material'' disclosure standards. 
The majority of these papers highlight a preference for principles-
based ``when material'' standard. See generally, e.g., Eugene A. 
Imhoff Jr. & Jacob K. Thomas, Economic Consequences of Accounting 
Standards: The Lease Disclosure Rule Change, 10 J. of Acct. & Econ. 
277 (1988) (providing evidence that management modifies existing 
lease agreements to avoid crossing bright-line threshold for lease 
capitalization).
---------------------------------------------------------------------------

    In certain settings, there is academic evidence that allowing 
issuers to make principles-based disclosure decisions using a 
materiality criterion is consistent with investor preferences.\254\ 
However, there is also evidence of investor benefits from rules-based 
reporting standards.\255\ While the proposed amendments could result in 
reduced comparability across registrants and transactions, using a 
principles-based standard could benefit investors by allowing 
registrants to tailor their disclosure to provide material information 
to them. The proposed amendment also accords with a number of 
commenters who indicated that existing thresholds are overly 
restrictive.\256\
---------------------------------------------------------------------------

    \254\ See Usha Rodrigues & Mike Stegemoller, An Inconsistency in 
SEC Disclosure Requirements? The Case of the ``Insignificant'' 
Private Target, 13 J. of Corp. Fin. 251 (2007) (providing evidence, 
in the context of mergers and acquisitions, that bright-line 
thresholds can deviate from investor preferences).
    \255\ See Mark W. Nelson, Behavioral Evidence on the Effects of 
Principles- and Rules-Based Standards, 17 Acct. Horizons 91 (2003); 
see also Katherine Schipper, Principles-Based Accounting Standards, 
17 Acct. Horizons 61 (2003). These studies note potential advantages 
of rules-based accounting standards, including: Increased 
comparability among firms, increased verifiability for auditors, and 
reduced litigation for firms.
    \256\ See letters from ABA-Committees, AB-NYC, CAQ, DT, EY, 
FedEx, KPMG, and PwC.
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iii. Location of Proposed Alternative Disclosures and Audit Requirement
    The proposed amendments would allow the parent company the choice 
of whether to provide the Proposed Alternative Disclosures in the 
financial statement footnotes or elsewhere in the registration 
statement covering the offer and sale of the guaranteed debt and any 
related prospectus, as well as annual and quarterly Exchange Act 
periodic reports required to be filed during the fiscal year in which 
the first bona fide sale of the subject securities is completed. If the 
parent company were to provide the Proposed Alternative Disclosures in 
its financial statements in its registration statement and in certain 
Exchange Act periodic reports required to be filed during fiscal year 
in which the first bona fide sale of the subject securities is 
completed, consistent with the existing rule, the disclosures would be 
subject to annual audit, interim review, and internal control over 
financial reporting requirements. Investors may perceive this choice of 
placement to mean the disclosures are more reliable than if they were 
not in the financial statements at the time of registration.
    In contrast, if the parent company were to provide the Proposed 
Alternative Disclosures outside its financial statements in its 
registration statement and in certain Exchange Act periodic reports 
required to be filed during the fiscal year in which the first bona 
fide sale of the subject securities is completed, lower compliance 
costs would likely result with respect to these filings. While we 
generally would expect lower compliance costs, disclosures outside the 
financial statements may result in certain costs to parent companies, 
such as legal costs or due diligence activities (e.g., comfort 
letters). Additionally, this proposed optionality may reduce the 
potential for delay in offerings that exists under the current rule due 
to the need to prepare audited Alternative Disclosures. Parent 
companies using this proposed option to provide the disclosures outside 
the consolidated financial statements may be able to register 
guaranteed debt offerings and go to market more quickly than under the 
existing rule. This may allow parent companies to more promptly access 
favorable market conditions. Although these disclosures are 
supplemental in nature, investors may nevertheless be adversely 
impacted as these disclosures would not immediately benefit from the 
enhanced accuracy and reliability associated with information that is 
included in the financial statements at registration. To the extent 
that investors prefer these initial disclosures to be included in the 
parent company's financial statements, their willingness to invest may 
be influenced or they may discount the information provided in the 
unaudited portion of the disclosure, potentially reducing the amount of 
information incorporated into security prices and increasing the 
issuer's cost of capital.\257\
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    \257\ One commenter noted that supplemental information 
typically included in offering memoranda for Rule 144A debt 
offerings, including revenues, operating income, assets and 
liabilities of the non-guarantor group, is provided on an unaudited 
basis. See letter from ABA-Committees. If QIBs currently do not 
require such supplemental disclosures to be audited in 144A debt 
offerings, the costs outlined above would not be expected to apply 
to this group of investors.
---------------------------------------------------------------------------

    Additionally, the amount of information that investors receive in 
the registration statement and in certain Exchange Act periodic reports 
required to be filed during the fiscal year in which the first bona 
fide sale of the subject securities is completed could be affected by 
the choice of placement. The safe harbor for forward-looking 
information under PSLRA is not available for disclosures provided in 
the financial statements. A parent company providing the Proposed 
Alternative Disclosures outside its financial statements may be more 
likely to voluntarily supplement those required disclosures with 
forward-looking information, as compared to a parent company that 
provides the Proposed Alternative Disclosures in its financial 
statements. Such supplemental forward-looking information, if provided, 
could benefit investors. The relocation of disclosures may also affect 
the prominence of the disclosures. Some academic research provides 
indirect evidence that users may treat information differently 
depending on the location of the disclosure.\258\
---------------------------------------------------------------------------

    \258\ For instance, research shows a weaker relation between 
equity prices and disclosed items in the notes to the financial 
statements versus recognized items on the face of the financial 
statements. See, e.g., Maximilian A. M[uuml]ller, Edward J. Riedl & 
Thorsten Sellhorn, Recognition versus Disclosure of Fair Values, 90 
Acct. Rev. 2411 (2015) (showing a lower association between equity 
prices and disclosed investment property fair values relative to 
recognized investment property fair values and finding that reduced 
information processing costs and higher readability mitigates the 
discount applied to disclosed fair values); Hassan Espahbodi et al., 
Stock Price Reaction and Value Relevance of Recognition versus 
Disclosure: The Case of Stock-Based Compensation, 33 J. of Acct. & 
Econ. 343 (2002) (examining the equity price reaction to the 
announcements related to accounting for stock-based compensation to 
assess the value relevance of recognition (on the face of the 
financial statements) versus disclosure (in the notes to the 
financial statements) and concluding that recognition and disclosure 
are not substitutes).
---------------------------------------------------------------------------

    If a parent company provides the Proposed Alternative Disclosures 
in its financial statements, consistent with the existing rule, such 
disclosures would be subject to XBRL requirements. Because the machine-
readable nature of XBRL disclosures facilitates aggregation, 
comparison, and large-scale analysis of reported information through 
automated means, investors stand to benefit from enhanced analysis 
capabilities, particularly in the comparison of disclosures across 
issuers and time periods. The parent company may incur

[[Page 49665]]

additional costs to comply with these tagging requirements. In 
contrast, Proposed Alternative Disclosures provided outside the 
financial statements would not be subject to XBRL tagging requirements. 
Investors would not benefit from the enhanced analysis capabilities and 
the parent company would not incur the related costs to comply with the 
tagging requirements. In general, we believe the incremental cost of 
tagging the Proposed Alternative Disclosures in XBRL, and hence the 
incremental cost savings of not having to tag the proposed Alternative 
Disclosures likely would be relatively low, as issuers already would 
have software or processes in place for tagging financial statement 
information.
    Finally, while a parent company is afforded a choice of where to 
locate disclosures in its registration statement and in certain 
Exchange Act periodic reports required to be filed during fiscal year 
in which the first bona fide sale of the subject securities is 
completed, beginning with its annual report filed on Form 10-K or Form 
20-F for the fiscal year during which the first bona fide sale of the 
subject securities is completed, the parent company would be required 
to locate the disclosures within the footnotes to its consolidated 
financial statements, which are subject to applicable annual audit, 
interim review, and internal control over financial reporting. Because 
this requirement would be consistent with existing location 
requirements, we do not anticipate economic effects from this 
requirement as compared to the current state except, as discussed above 
that there may be decreases in costs attributable to the more 
simplified and streamlined proposed disclosures.
iv. Recently Acquired Subsidiary Issuers and Guarantors
    We are proposing to delete the requirement to provide pre-
acquisition audited financial statements of a recently acquired 
subsidiary issuer or guarantors. The existing requirement for pre-
acquisition financial statements of recently-acquired subsidiary 
issuers or guarantors calls for far greater detail than what is 
required for any other subsidiary issuer and guarantor.\259\ As 
discussed in Section III.C.2.e, ``Recently-Acquired Subsidiary Issuers 
and Guarantors,'' we believe Rule 3-05 of Regulation S-X, which 
requires audited pre-acquisition financial statements of an acquired 
business to be provided if the acquired subsidiary exceeds specified 
thresholds of significance, provides sufficient information in this 
context such that the pre-acquisition financial statements of recently-
acquired subsidiary issuers and guarantors required by existing Rule 3-
10(g) are unnecessary.
---------------------------------------------------------------------------

    \259\ Some commenters also noted the inconsistency in that 
information required for recently acquired subsidiary issuers and 
guarantors is more detailed than information required for other 
subsidiary issuers and guarantors. See, e.g., letters from DT and 
PwC.
---------------------------------------------------------------------------

    In addition, the trigger for pre-acquisition financial statements 
of a recently-acquired subsidiary issuer or guarantor under existing 
Rule 3-10(g) is based on the significance of the acquired subsidiary 
compared to the size of the offering. This may lead issuers to provide 
audited financial statements of a recently-acquired subsidiary that is 
small relative to its consolidated parent company. The proposed changes 
would address these circumstances.
    We believe the proposed amendment would reduce the compliance 
burden for preparers without reducing material information for 
investors, since material information about recently acquired 
subsidiaries would be required by Rule 3-05 of Regulation S-X and 
proposed Rule 13-01(a)(5). Furthermore, to the extent that investors 
find the information provided under the existing requirement redundant, 
as it overlaps with Rule 3-05 of Regulation S-X, eliminating the 
existing requirement would streamline disclosures. Academic research 
suggests that individuals invest more in firms with more concise 
financial disclosures.\260\ Thus, to the extent that the proposed 
amendments alleviate duplication and do not affect the completeness of 
financial disclosures, the resulting disclosures could result in 
improved price discovery, enhance the allocative efficiency of the 
market, and facilitate capital formation.
---------------------------------------------------------------------------

    \260\ See Lawrence, note 250 above.
---------------------------------------------------------------------------

v. Continuous Reporting Obligation
    As discussed in Section III.C.2.f, ``Continuous Reporting 
Obligation,'' we are proposing that a parent company be permitted to 
cease providing the Proposed Alternative Disclosures in its ongoing 
reporting if the corresponding subsidiary issuer's or guarantor's 
reporting obligation under Section 13 and/or Section 15(d) of the 
Exchange Act with respect to the guaranteed securities is terminated or 
suspended. This amendment would reduce compliance costs without loss of 
material information for investors. To the extent that the existing 
requirements impose unnecessary burdens by requiring a parent company 
to continue providing the Alternative Disclosures beyond when the 
subsidiary would have to report with respect to the guaranteed 
securities,\261\ or otherwise deter issuers and guarantors from 
engaging in public debt offerings to avoid such reporting 
obligations,\262\ this amendment would remove such inefficiencies. 
Commenters generally supported the proposed amendment, noting 
inconsistencies between the existing requirement and other reporting 
rules,\263\ and suggesting that it likely deters registration of debt 
offerings.\264\
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    \261\ See letters from DT and Simpson.
    \262\ See letter from Simpson.
    \263\ See letters from ABA-Committees, DT, EY, PwC, SIFMA, and 
Simpson.
    \264\ See letters from DT and Simpson.
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2. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
    As discussed in detail in Section V.B, ``Overview of the Proposed 
Changes,'' although affiliates whose securities are pledged as 
collateral are not registrants with respect to the collateralized 
security, Rule 3-16, when triggered, requires financial statements as 
if such affiliates were registrants. We are proposing to replace the 
existing requirement to provide separate financial statements for each 
affiliate whose securities are pledged as collateral with financial and 
non-financial disclosures about the affiliate(s) and the collateral 
arrangement, where material, as a supplement to the consolidated 
financial statements of the registrant that issues the collateralized 
security.
    Debt agreements are often structured to avoid the requirements of 
Rule 3-16 by either structuring the debt agreement to release any 
pledge of affiliate securities as collateral if and when such pledge 
triggers the requirements under Rule 3-16, or by not including pledges 
of affiliate securities as collateral altogether.\265\ In such 
circumstances, investors may demand a higher interest rate from issuers 
to compensate for the absence of collateral, potentially increasing the 
cost of capital to issuers. The proposed amendments would reduce the 
burden of having to provide separate financial statements of affiliates 
under the existing rule and provide issuers with the flexibility to 
structure their debt agreements with pledges of affiliate securities. 
If, as a result of the proposed amendments, debt agreements are no 
longer structured to avoid Rule 3-16 requirements, investors would 
obtain the benefit of both the collateral and the related disclosures, 
all of which would be subject to Section 11 liability. This flexibility 
may also permit issuers

[[Page 49666]]

to attract investors that prefer to invest in obligations where 
collateral is fully available and not subject to the release mechanisms 
designed to avoid Rule 3-16 requirements. By appealing to a broader 
range of investors and providing more attractive collateral 
arrangements, registrants may be able to obtain a lower cost of 
capital.
---------------------------------------------------------------------------

    \265\ See letters from ABA-Committees, Cahill, Chamber, 
Covenant, Davis, DT, and EY.
---------------------------------------------------------------------------

    As discussed above for the Proposed Amendments to Rule 3-10, 
Proposed Rule 13-02 would provide flexibility to place the proposed 
disclosures within the notes to the financial statements or in 
specified prominent locations outside the financial statements in 
registration statements covering the offer and sale of the 
collateralized debt securities and any related prospectus, as well as 
annual and quarterly Exchange Act periodic reports required to be filed 
during the fiscal year in which the first bona fide sale of the subject 
securities is completed. For registrants that include the proposed 
disclosures in their financial statements, such information would be 
subject to applicable annual audit, interim review, and internal 
control over financial reporting requirements. Investors may perceive 
this choice of placement as making the disclosure more reliable than if 
it were placed outside of the financial statements. To the extent that 
investors prefer these disclosures to be located in the registrant's 
financial statements, this choice may influence their willingness to 
invest. Registrants could attempt to influence such willingness by 
including the proposed disclosures in their financial statements. Also 
consistent with the proposed amendments to Rule 3-10, the registrant 
would, however, be required to provide the proposed disclosures in a 
footnote to its consolidated financial statements in its annual and 
quarterly reports beginning with its annual report filed for the fiscal 
year during which the first bona fide sale of the subject securities is 
completed. This requirement would be consistent with existing location 
requirements, and we do not anticipate economic effects as compared to 
the current state.
    Finally, as with any change to reporting format and presentation of 
information, the proposed amendments may lead companies and investors 
to incur costs to adjust to the new disclosures, as further discussed 
below.
a. Financial Disclosures
i. Level of Detail
    As discussed in Section V.C.1, ``Level of Detail,'' affiliates 
whose securities are pledged as collateral are almost always 
consolidated subsidiaries of the registrant,\266\ and their financial 
information is thus already reflected in the registrant's consolidated 
financial statements. We propose to require Summarized Financial 
Information for each such affiliate and disclosure of additional 
financial information if material to holders of the collateralized 
security. For registrants, this would reduce compliance costs by 
reducing the amount of information needed to be prepared and 
disclosed.\267\ For investors, we do not anticipate significant costs 
since material information would still be required to be provided. The 
simplified disclosures would highlight material information needed to 
make informed investment decisions and therefore would enable investors 
to process information more efficiently and make more informed 
investment decisions.
---------------------------------------------------------------------------

    \266\ In the rare circumstances where the affiliate is not a 
consolidated subsidiary of the registrant, proposed Rule 13-02(a)(5) 
would require the registrant to provide any other quantitative or 
qualitative information that would be material to making an 
investment decision with respect to the collateralized security. In 
this regard, separate financial statements of the unconsolidated 
affiliate may be necessary if material to an investment decision. 
See additional discussion in Section V.C.1, ``Level of Detail.''
    \267\ For purposes of the PRA, we estimate that the proposed 
amendments to Rule 3-16 would result in an overall reduction of 30 
burden hours for each form (other than Form 10-Q) affected by the 
proposed amendments. See Section VIII.B.2, ``Rule 3-16,'' below.
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ii. Presentation on a Combined Basis
    We are proposing to permit a registrant to provide the Summarized 
Financial Information of consolidated affiliates that are pledged as 
collateral on a combined rather than individual basis. Additional 
disclosure specific to an affiliate would be required, if material. As 
with the effects of the proposed amendments to Rule 3-10 discussed 
above, we believe the simplified disclosures in the proposed amendments 
to Rule 3-16 would both lower compliance costs for issuers and provide 
investors with more streamlined and concise disclosures that would 
promote more efficient decision-making by investors. We do not 
anticipate significant costs to investors since material information 
would still be required to be provided.
iii. Periods to Present
    The proposed amendments would require the disclosure of Summarized 
Financial Information for the most recently ended fiscal year and year-
to-date interim period included in the registrant's consolidated 
financial statements. Rule 3-16 financial statements are not currently 
required in quarterly reports, and as such, registrants would incur 
costs to provide this additional interim disclosure.\268\ We believe 
the proposed amendments would benefit investors by providing them with 
the most recent information to ensure informed investment decisions.
---------------------------------------------------------------------------

    \268\ For purposes of the PRA, we estimate that the proposed 
amendments to Rule 3-16 would result in an increase of 70 burden 
hours per Form 10-Q filing. See Section VIII.B.2, ``Rule 3-16,'' 
below.
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b. Non-Financial Disclosures
    We are proposing to require non-financial information about 
affiliates whose securities are pledged as collateral and the 
collateral arrangements, to the extent material. While we did not 
receive comments on non-financial disclosures, we do not believe this 
proposed amendment would impose undue costs for issuers, as the 
majority of the information required to be disclosed under the proposed 
amendments should be readily available or attainable.\269\ We believe 
investors would benefit because the proposed amendment would supplement 
the financial disclosures with additional, material information, 
thereby rendering the combined financial and non-financial disclosures 
more informative for investment decisions.
---------------------------------------------------------------------------

    \269\ The content of the proposed non-financial disclosures 
consists of basic information about the collateral arrangement and 
the entities involved. We do not expect such information, which is 
generally available from debt agreements, would impose a significant 
burden on a registrant to prepare.
---------------------------------------------------------------------------

c. When Disclosure Is Required
    Rather than utilizing existing numerical thresholds, disclosure of 
the proposed financial and non-financial disclosures would be required 
if material to holders of the collateralized security. To the extent 
the numerical thresholds under the existing rule result in disclosure 
of unnecessary or immaterial information, investors may benefit from 
reduced search costs and the facilitation of more efficient information 
processing.\270\ Further, we believe that, compared to existing rule 
requirements, the proposed amendments to Rule 3-16 would reduce 
compliance costs for issuers and increase the likelihood of 
registration.
---------------------------------------------------------------------------

    \270\ See David Hirschleifer & Siew Hong Teoh, Limited 
Attention, Information Disclosure, and Financial Reporting, 36 J. of 
Acct. and Econ. 337 (2003) (developing a theoretical model where 
investors have limited attention and processing power). The authors 
show that with partially attentive investors, means of presenting 
information may have an impact on stock price reactions, 
misvaluation, long-run abnormal returns, and corporate decisions.

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[[Page 49667]]

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

    Several commenters noted that the need to comply with existing 
disclosure requirements often makes issuers structure registered 
offerings to avoid triggering Rules 3-10 or 3-16, or avoid registration 
altogether.\271\ As discussed above, and as a general matter, we 
believe the proposed amendments would improve the content, format, and 
focus of required registrant disclosures. This should both reduce the 
compliance cost for issuers and allow more efficient decision-making by 
investors. This may be true particularly to the extent that the 
proposed amendments result in more efficient and effective 
dissemination of material information to investors and increase the 
efficiency of investor processing and usage of this information. 
Further, the proposed rule amendments may affect issuers' registration 
choices. This, in turn, could broaden the investment opportunities 
available for different types of investors and may allow for more 
efficient matching of investors with assets that meet their investment 
objectives and preferences. Retail investors could additionally be 
indirectly affected through their investments managed by institutional 
investors, who would have greater access to a broader range of 
investment opportunities in the registered debt market. To the extent 
that the proposed amendments ease registration burdens for issuers, 
there could be an increase in the number of registered offerings. If 
such issuers would not have otherwise issued debt securities under Rule 
144A, this would result in an increase in capital formation. If such 
issuers would have otherwise issued debt under Rule 144A, it is 
possible that a switch to a registered offering would lower the 
issuers' cost of capital while also providing investors with the 
enhanced protections afforded by registered offerings.
---------------------------------------------------------------------------

    \271\ See, e.g., letters from BDO, Cahill, Covenant, and PwC.
---------------------------------------------------------------------------

    Finally, rather than be 100% owned by the parent company, the 
proposed amendments allow for the subsidiary issuer or guarantor to be 
consolidated in the parent company's consolidated financial statements 
as one of the conditions that must be met in order to be eligible to 
omit separate subsidiary issuer and guarantor financial statements. To 
the extent that the proposed amendments expand the scope of subsidiary 
issuers and guarantors that meet Rule 3-10 eligibility requirements, 
the proposed amendments may promote greater competition among issuers 
and guarantors of guaranteed debt securities. This may enable more 
registrants, especially those on the margins, to compete on better 
terms. However, we do not anticipate the overall impact on competition 
to be substantial.

E. Consideration of Reasonable Alternatives

    We discuss below potential alternatives to the proposed amendments 
to existing Rules 3-10 and 3-16.
1. Alternative to Proposed Amendments to Existing Rule 3-10
    An alternative to the proposed amendments to Rule 3-10 would be to 
permit the Proposed Alternative Disclosures be provided if the 
subsidiary issuers and/or guarantors were ``wholly owned'' by the 
parent company, as defined in Rule 1-02(aa) of Regulation S-X.\272\ 
Using ``wholly owned'' as the parent company ownership threshold, 
rather than the existing 100% ownership requirement, would likely 
permit more subsidiary issuers and guarantors to use the Alternative 
Disclosures as compared to the existing rule, but would be less 
flexible than the proposed amendments, as detailed above. As a result, 
we believe the proposed amendments would better serve to enhance 
efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \272\ Rule 1-02(aa) of Regulation S-X (''The term wholly owned 
subsidiary means a subsidiary substantially all of whose outstanding 
voting shares are owned by its parent and/or the parent's other 
wholly owned subsidiaries.'' (Emphasis in original.)).
---------------------------------------------------------------------------

2. Alternatives Common to Proposed Amendments to Existing Rule 3-10 and 
Existing Rule 3-16
    One alternative to each set of proposed amendments would be to 
require that the Proposed Alternative Disclosures, or the disclosures 
specified in proposed Rule 13-02, as applicable, be located in the 
audited annual and unaudited interim financial statement footnotes of 
the parent company, or registrant, as applicable, in all filings. Under 
this alternative, the parent company or registrant would not have a 
choice of whether to locate the proposed disclosures outside its 
consolidated financial statements in registration statements covering 
the offer and sale of the guaranteed or collateralized debt securities 
and any related prospectus, or in annual and quarterly Exchange Act 
periodic reports required to be filed during the fiscal year in which 
the first bona fide sale of the subject securities is completed. On the 
one hand, this could increase investor confidence in the disclosed 
information and provide the benefits of XBRL tagging. On the other 
hand, the cost to a parent company or registrant associated with 
preparing registration statements and certain periodic reports would be 
higher with this alternative than if the disclosures were provided 
outside of the financial statements. Furthermore, the flexibility of 
going to market more quickly would not be available under this 
alternative. This could limit the incentives to pursue registered 
offerings compared to the proposed amendments, and those registrants 
that do pursue registered offerings may be less likely to issue 
guarantees, or pledge affiliate securities as collateral, given the 
additional cost associated with including the proposed disclosures in 
the financial statements. Additionally, a parent company or registrant 
may be less likely to voluntarily supplement the disclosures with 
forward-looking information because the safe harbor for forward-looking 
information under PSLRA is not available for disclosures provided in 
the financial statements. As discussed above,\273\ guarantees and 
pledges of affiliate securities as collateral serve, in part, to reduce 
investor risk of structural subordination. Overall, we believe the 
benefits to investors of enhanced access to registered offerings with 
guarantees and pledges of affiliate securities as collateral, together 
with the benefits of reduced compliance burdens for issuers, justify 
forgoing the benefits of requiring these disclosures to be located in 
the financial statements of the parent company, or registrant, as 
applicable, included in registration statements covering the offer and 
sale of the guaranteed or collateralized debt securities and any 
related prospectus, as well as annual and quarterly Exchange Act 
periodic reports required to be filed during the fiscal year in which 
the first bona fide sale of the subject securities is completed. 
However, we solicit comment on this point and the potential benefits 
and concerns for registrants and investors of requiring the proposed 
disclosures to be located in the notes to the financial statements in 
all filings.
---------------------------------------------------------------------------

    \273\ See Section VII.C.1, ``Proposed Amendments to Rule 3-10 
and Partial Relocation to Rule 13-01.''
---------------------------------------------------------------------------

    A second related alternative to each set of the proposed rules 
would be to allow the parent company or registrant to provide the 
Proposed Alternative Disclosures, or the disclosures specified in 
proposed Rule 13-02, as applicable, outside the financial statement 
footnotes in all filings. On the one hand, if the

[[Page 49668]]

parent company or registrant opts to disclose the information outside 
the financial statements, the cost to a parent company or registrant 
associated with preparing the information would be lower with this 
alternative than if the disclosures were provided in the financial 
statements. This could incentivize the pursuit of registered offerings 
with guarantees or collateral, given the flexibility and associated 
reduced costs. While we generally would expect lower compliance costs, 
disclosures outside the financial statements may result in certain 
costs to parent companies and registrants, such as legal costs or due 
diligence activities (e.g., comfort letters). Additionally, a parent 
company or registrant may be more likely to voluntarily supplement the 
disclosures with forward-looking information because the safe harbor 
for forward-looking information under PSLRA is not available for 
disclosures provided in the financial statements. On the other hand, 
allowing the parent company or registrant the flexibility of disclosing 
outside the financial statements may reduce investor confidence in the 
disclosed information, as this information would not be subject to 
annual audit, interim review, and internal control over financial 
reporting requirements. As a result, this alternative could reduce 
investor confidence in the disclosed information and may affect their 
willingness to invest.
    While we acknowledge that providing additional flexibility to the 
parent company or registrant in the location of the disclosures would 
likely further reduce the compliance burdens associated with registered 
offerings with guarantees or collateral, investors may demand a higher 
expected return if they perceive reduced reliability of the Proposed 
Alternative Disclosure. The potential for higher borrowing costs may 
encourage issuers to voluntarily include the Proposed Alternative 
Disclosures or proposed disclosures, as applicable, in the financial 
statements of the parent company, or registrant, as applicable. We 
solicit comment on this point and the potential benefits and concerns 
for registrants and investors of providing flexibility to locate the 
Proposed Alternative Disclosures outside the financial statements in 
all filings.
    Finally, a third alternative relevant to each set of proposed 
amendments would be to require Summarized Financial Information to be 
provided for the same periods as the parent company or registrant, as 
applicable, instead of the most recent annual and interim period as 
proposed. While this alternative would increase the amount of 
information available to investors, the additional information may not 
be material in making informed investment decisions. As discussed 
above,\274\ prior studies have suggested that simpler disclosures may 
benefit investors by reducing search costs and facilitating more 
efficient information processing. Moreover, including additional 
historical periods would result in higher costs to registrants when 
preparing registration information and ongoing reporting. We do not 
believe the potential benefit to investors of this additional 
historical information justifies the potential cost to the registrants.
---------------------------------------------------------------------------

    \274\ See note 249 and accompanying text.
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F. Request for Comment

    We request comment on all aspects of our economic analysis, 
including the potential costs and benefits of the proposed amendments 
and alternatives thereto, and whether the rules, if adopted, would 
promote efficiency, competition, and capital formation or have an 
impact on investor protection. Commenters are requested to provide 
empirical data, estimation methodologies, and other factual support for 
their views, in particular, on costs and benefits estimates.

VIII. Paperwork Reduction Act

A. Background

    Certain provisions of our rules and forms that would be affected by 
the proposed amendments contain ``collection of information'' 
requirements within the meaning of the PRA.\275\ The Commission is 
submitting the proposal to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\276\ The hours and 
costs associated with preparing and filing the forms and reports 
constitute reporting and cost burdens imposed by each collection of 
information. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information requirement unless 
it displays a currently valid OMB control number. Compliance with the 
information collections is mandatory. Responses to the information 
collections are not kept confidential and there is no mandatory 
retention period for the information disclosed. The titles for the 
affected collections of information are: \277\
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    \275\ See note 244 above.
    \276\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \277\ As noted above, while the proposed amendments would apply 
to registered investment companies, and could thereby affect 
registered investment advisers, based on staff experience, we 
believe registered investment companies are unlikely to engage in 
the activities addressed by the proposed amendments. Accordingly, we 
are not revising the burden estimates for the forms and reports 
filed by these types of entities.
---------------------------------------------------------------------------

     ``Regulation S-K'' (OMB Control No. 3235-0071); \278\
---------------------------------------------------------------------------

    \278\ The paperwork burdens for Regulation S-K and Regulation S-
X are imposed through the forms that are subject to the requirements 
in these regulations and are reflected in the analysis of those 
forms. To avoid a PRA inventory reflecting duplicative burdens, and 
for administrative convenience, we estimate that the proposed 
amendments would not impose an incremental burden for these 
regulations.
---------------------------------------------------------------------------

     ``Regulation S-X'' (OMB Control No. 3235-0009);
     ``Form S-1'' \279\ (OMB Control No. 3235-0065);
---------------------------------------------------------------------------

    \279\ 17 CFR 239.11.
---------------------------------------------------------------------------

     ``Form S-3'' \280\ (OMB Control No. 3235-0073); \281\
---------------------------------------------------------------------------

    \280\ 17 CFR 239.13.
    \281\ The paperwork burdens for Form S-3 and Form F-3 are 
imposed through the forms from which they incorporate by reference 
and are reflected in the analysis of those forms. To avoid a PRA 
inventory reflecting duplicative burdens and for administrative 
convenience, we assign a one-hour burden to each of these forms.
---------------------------------------------------------------------------

     ``Form S-4'' \282\ (OMB Control No. 3235-0324);
---------------------------------------------------------------------------

    \282\ 17 CFR 239.25.
---------------------------------------------------------------------------

     ``Form S-11'' \283\ (OBM Control No. 3235-0067);
---------------------------------------------------------------------------

    \283\ 17 CFR 239.18.
---------------------------------------------------------------------------

     ``Form F-1'' (OMB Control No. 3235-0258);
     ``Form F-3'' (OMB Control No. 3235-0256);
     ``Form F-4'' \284\ (OMB Control No. 3235-0325);
---------------------------------------------------------------------------

    \284\ 17 CFR 239.34.
---------------------------------------------------------------------------

     ``Form 10'' \285\ (OMB Control No. 3235-0064);
---------------------------------------------------------------------------

    \285\ 17 CFR 249.210.
---------------------------------------------------------------------------

     ``Form 20-F'' (OMB Control No. 3235-0288);
     ``Form 40-F'' \286\ (OMB Control No. 3235-0381);
---------------------------------------------------------------------------

    \286\ 17 CFR 249.240f.
---------------------------------------------------------------------------

     ``Form 10-K'' \287\ (OMB Control No. 3235-0063);
---------------------------------------------------------------------------

    \287\ 17 CFR 249.310.
---------------------------------------------------------------------------

     ``Form 8-K'' \288\ (OMB Control No. 3235-0060); \289\
---------------------------------------------------------------------------

    \288\ 17 CFR 249.308.
    \289\ The paperwork burdens for Form 8-K is imposed through the 
forms from which they incorporate by reference and are reflected in 
the analysis of those forms. To avoid a PRA inventory reflecting 
duplicative burdens and for administrative convenience, we estimate 
that the proposed amendments would not impose an incremental burden 
for this form.
---------------------------------------------------------------------------

     ``Regulation 14A'' \290\ and ``Schedule 14A'' \291\ (OMB 
Control No. 3235-0059); \292\
---------------------------------------------------------------------------

    \290\ 17 CFR 240.14a-1 through 240.14a-104.
    \291\ 17 CFR 240.14a-101.
    \292\ As described below, our estimates for Form 10-K take into 
account the burden that would be incurred by including the proposed 
disclosure in the annual report directly or incorporating by 
reference from a proxy or information statement. To avoid a PRA 
inventory reflecting duplicative burdens, we estimate that the 
proposed disclosure would not impose an incremental burden for proxy 
statements on Schedule 14A.

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

[[Page 49669]]

     ``Regulation 14C'' \293\ and ``Schedule 14C'' \294\ (OMB 
Control No. 3235-0057); \295\
---------------------------------------------------------------------------

    \293\ 17 CFR 240.14c-1 through 240. 14c-7.
    \294\ 17 CFR 240.14c-101.
    \295\ As described below, our estimates for Form 10-K take into 
account the burden that would be incurred by including the proposed 
disclosure in the annual report directly or incorporating by 
reference from a proxy or information statement. To avoid a PRA 
inventory reflecting duplicative burdens, we estimate that the 
proposed disclosure would not impose an incremental burden for 
information statements on 14C.
---------------------------------------------------------------------------

     ``Form 10-Q'' (OMB Control No. 3235-0070);
     ``Form SF-1'' \296\ (OMB Control No. 3235-0707);
---------------------------------------------------------------------------

    \296\ 17 CFR 239.44.
---------------------------------------------------------------------------

     ``Form SF-3'' \297\ (OMB Control No. 3235-0690);
---------------------------------------------------------------------------

    \297\ 17 CFR 239.45.
---------------------------------------------------------------------------

     ``Form 1-A'' \298\ (OMB Control No. 3235-0286);
---------------------------------------------------------------------------

    \298\ 17 CFR 239.90.
---------------------------------------------------------------------------

     ``Form 1-K'' \299\ (OMB Control No. 3235-0720); and
---------------------------------------------------------------------------

    \299\ 17 CFR 239.91.
---------------------------------------------------------------------------

     ``Form 1-SA'' \300\ (OMB Control No. 3235-0721).
---------------------------------------------------------------------------

    \300\ 17 CFR 239.92.
---------------------------------------------------------------------------

    The regulations, schedules, and forms listed above were adopted 
under the Securities Act and/or the Exchange Act. These regulations, 
schedules, and forms set forth the disclosure requirements for 
registration statements, periodic and current reports, distribution 
reports, and proxy and information statements filed by registrants to 
help investors make informed investment and voting decisions.
    We are proposing amendments to the disclosure requirements in Rules 
3-10 and 3-16 of Regulation S-X to better align those requirements with 
the needs of investors and to simplify and streamline the disclosure 
obligations of registrants. We are proposing to amend both rules and 
relocate part of Rule 3-10 and all of Rule 3-16 to proposed Rules 13-01 
and 13-02, respectively. We also are proposing to make conforming 
amendments to Items 504, 1100, 1112, 1114, and 1115 of Regulation S-K; 
Forms F-1, F-3, 1-A, 1-K, and 1-SA under the Securities Act; and Rule 
12h-5 and Form 20-F under the Exchange Act. These amendments are 
intended to provide investors with the information that is important 
given the specific facts and circumstances, make the disclosures easier 
to understand, and reduce the costs and burdens to registrants.

B. Summary of the Proposed Amendments Impact on Collection of 
Information

    In this section, we summarize the proposed amendments and their 
general impact on the paperwork burdens associated with the forms 
listed above. In the subsequent section below, we provide the revised 
burden estimates of each affected form.
1. Rule 3-10
    The proposed amendments to Rule 3-10 would replace the 
Consolidating Information required by existing Rule 3-10 with 
Summarized Financial Information of the Obligor Group. Several 
commenters noted that preparing and providing Consolidated Information 
is particularly challenging, complex, and costly.\301\ Among other 
things, the Proposed Alternative Disclosures would permit a parent 
company to: (1) Exclude the financial information of non-obligated 
entities; (2) reduce the number of periods to be presented; and (3) 
provide the information of each issuer and guarantor on a combined, 
rather than disaggregated, basis. These changes would reduce a parent 
company's paperwork burden by permitting the parent company to exclude 
information unnecessary to an investment decision as compared to the 
existing rule. In certain circumstances, the paperwork burden could be 
reduced even further because registrants would not be required to 
recast prior period information, which commenters noted can be 
particularly challenging.\302\
---------------------------------------------------------------------------

    \301\ See, e.g., letters from ABA-Committees, Anuradha, BDO, 
Cahill, CAQ, DT, EY, FedEx, GM, Grant, Headwaters, KPMG, Medtronic, 
and Noble-UK.
    \302\ See, e.g., letters from Medtronic and PwC.
---------------------------------------------------------------------------

    Existing Rule 3-10 requires the Alternative Disclosures to be 
included in the notes to the parent company's consolidated financial 
statements, thereby requiring the Alternative Disclosures to be audited 
for the same periods. The proposed amendments would revise this 
requirement so that parent companies may provide the Proposed 
Alternative Disclosures outside their financial statement footnotes in 
a registration statement covering the offer and sale of the subject 
securities and any related prospectus, and in Exchange Act annual and 
quarterly reports required to be filed during the fiscal year in which 
the first bona fide sale of the subject securities is completed, but 
require the Proposed Alternative Disclosures to be included in the 
footnotes to the parent company's consolidated financial statements for 
annual and quarterly reports beginning with the annual report for the 
fiscal year during which the first bona fide sale of the subject 
securities is completed. This amendment could reduce the burdens 
associated with preparing the Proposed Alternative Disclosures because 
the information would not need to be immediately audited or tagged. 
However, this amendment could result in certain legal and due diligence 
costs (e.g., comfort letters).
    Whether a parent company would elect to provide the Proposed 
Alternative Disclosures outside its financial statement footnotes 
likely would depend on the company's specific facts and circumstances 
and, as discussed above,\303\ we believe there could be reasons for 
companies to elect either option. In addition, any reduction in 
paperwork burden associated with such an election would be incremental, 
as the parent company would still incur expenses to prepare audited 
financial information. Given these considerations, and to avoid 
overestimating the overall paperwork burden reduction associated with 
the proposed amendments, we are not estimating a specific burden 
reduction for this aspect of the proposed amendments. However, we 
solicit comment on whether it would be appropriate to do so, and, if 
so, how we might estimate such a reduction.
---------------------------------------------------------------------------

    \303\ See Sections III.C.2.d, ``Location of Proposed Alternative 
Disclosures and Audit Requirement,'' and VII.C.1.b.iii, ``Location 
of Proposed Alternative Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

    The existing rule also requires a parent company to provide the 
Alternative Disclosures as a condition to omitting the separate 
financial statements of a subsidiary issuer or guarantor. In most 
cases, the Alternative Disclosures consist of Consolidating 
Information, but the Alternative Disclosures may consist of a brief 
narrative if certain numerical thresholds are met. The proposed 
amendments would eliminate these separate categories of Alternative 
Disclosures. Instead, the proposed amendments would require a parent 
company to provide all financial and non-financial disclosures 
specified in proposed Rule 13-01 to the extent they are material to a 
holder of the guaranteed security. The proposed amendments would also 
require disclosure of any additional information that would be material 
to a holder of the guaranteed security.
    While the proposed amendments would eliminate some disclosure that 
may be required by the existing rule, they would also require other 
disclosure that may not be required by the existing rule. For example, 
if a numerical

[[Page 49670]]

threshold is met under the existing rule, disclosure is required even 
if that disclosure is immaterial to an investment decision. The 
proposed amendments would not require that disclosure if it was not 
material, which would reduce the parent company's paperwork burden. 
Conversely, if a numerical threshold is not met under the existing 
rule, disclosure is not required unless that information is necessary 
to make the disclosure provided not misleading.\304\ The proposed 
amendments would require that disclosure in all cases, to the extent 
material, which could increase the parent company's paperwork burden.
---------------------------------------------------------------------------

    \304\ See 17 CFR 230.408(a), 240.12b-20.
---------------------------------------------------------------------------

    We have estimated the number of filings that include Consolidating 
Information under Rule 3-10, but we are unable to identify accurately 
the issuers providing narrative disclosures under Rule 3-10 because the 
language of those disclosures varies based on facts and 
circumstances.\305\ However, we do not believe that the proposed 
amendments would affect the paperwork burden for filings that include 
the narrative disclosures under existing Rule 3-10 because registrants 
that provide these narrative disclosures would be permitted to provide 
similar information under the proposed amendments.
---------------------------------------------------------------------------

    \305\ See Section VII.B.2, ``Baseline and Affected Parties--
Market Conditions.''
---------------------------------------------------------------------------

    Further, under the proposed amendments, parent companies would no 
longer be required to provide the pre-acquisition financial statements 
of recently-acquired subsidiary issuers and guarantors, as is currently 
required by existing Rule 3-10(g). Disclosure may be required under the 
proposed rule, however, if it is material to an investment decision in 
the guaranteed security. This aspect of the proposed amendments would 
decrease the overall paperwork burden of the affected forms. This 
reduction would be mitigated somewhat, however, because parent 
companies would still be required to provide information about any 
recently-acquired subsidiaries when it is material.
    Finally, we are proposing amendments to require specific non-
financial disclosures, where material, about the issuers and 
guarantors, the terms and conditions of the guarantees, and how the 
issuer and guarantor structure and other factors may affect payments to 
holders of the guaranteed securities. These disclosures would enhance 
the information provided about subsidiary issuers and guarantors and 
would be more comprehensive than the similar disclosures a parent 
company must provide under existing Rule 3-10. These additional 
disclosures, therefore, could incrementally increase a parent company's 
existing paperwork burden.
    Considering the various impacts to the existing collection of 
information requirements outlined above, we estimate that the proposed 
amendments to Rule 3-10 would reduce the overall paperwork burden for 
registrants. Moreover, some aspects of the proposed amendments could 
reduce the paperwork burden significantly. For example, Consolidating 
Information, which includes multiple columns and typically occupies 
several pages of a parent company's filing, would be replaced with the 
Proposed Alternative Disclosures, which we expect in most cases would 
consist of one or two pages of disclosure in a parent company's filing. 
Overall, therefore, we estimate that the proposed amendments would 
reduce the paperwork burden for registrants by approximately 30 hours 
for each filing that includes the Proposed Alternative Disclosures in 
lieu of the existing Alternative Disclosures.
    Although the proposed amendments would reduce the paperwork burden 
for any particular filing on an affected form that includes the 
existing Alternative Disclosures, not all filings on the affected forms 
include these disclosures because they are provided only in certain 
instances.\306\ Therefore, to estimate the overall paperwork burden 
reduction from the proposed amendments, we estimated the number of 
filings that include the Alternative Disclosures. To do so, we used a 
number of methods that varied based on the affected form.
---------------------------------------------------------------------------

    \306\ We were not able to determine the number of filings that 
included the Alternative Disclosures with certainty because 
registrants are not required to state explicitly that the 
disclosures they are providing are meant to satisfy the requirements 
of Rule 3-10.
---------------------------------------------------------------------------

    As an initial step, we examined the XBRL tags most commonly 
associated with Consolidating Information. Not all filings include XBRL 
tags, so we estimated the number of all the affected forms that 
included XBRL tags and extrapolated the number of affected forms based 
on the percentage of filings that include XBRL tags. For example, in 
Section VII.B.2, ``Market Conditions,'' using XBRL tags, we estimated 
that registrants filed 1,223 Form 10-Ks with the Alternative 
Disclosures in the last three calendar years from 2015 to 2017, which 
averages approximately 407.67 filings per year. However, over those 
three years, only approximately 86 percent of Forms 10-K included XBRL 
tags. For PRA purposes, therefore, we divided 407.67 by 0.86 to 
estimate that 474 filings per year included Alternative Disclosures 
over the last three years.
    We were able to use this extrapolation method for Forms 10-K, 10-Q, 
S-1, 20-F, and 40-F, because the percentage of filings made on those 
forms that included XBRL tags was sufficient to make the extrapolation 
meaningful. The table below sets forth our estimates of the number of 
filings on these forms that included the Alternative Disclosures based 
on the XBRL tagging extrapolation method.

          Table 4--Calculation of the Number of Filings on Affected Forms With the Alternative Disclosures Based on XBRL Tagging Extrapolation
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Number of
                                                             responses over    Annual  average     Percentage  of   Annual average of      Estimated
                                                           three-year period    of  responses    responses  tagged       responses       average annual
                                                             using XBRL data   using  XBRL data     using  XBRL                            responses
                                                                         (A)                (B)                (C)    (D) = (B) / (C)                (E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K.....................................................              1,223             407.67                .86             474.03                474
10-Q.....................................................              3,530           1,176.67                .94           1,251.77              1,252
S-1......................................................                  7               2.33                .24               9.71                 10
20-F.....................................................                 17               5.67                .41              12.82                 14
40-F.....................................................                  1                .33                .16               8.31                  8
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 49671]]

    We also searched Forms S-4, S-11, 10, F-1, F-4, SF-1, SF-3, 1-A, 1-
K, and 1-SA using XBRL tags most commonly associated with Consolidating 
Information. However, this extrapolation method did not provide 
meaningful results because registrants rarely include XBRL tags for 
these affected forms. For example, only one percent of Form S-4 filings 
include XBRL tags.\307\ Therefore, to provide a more meaningful 
estimate of the number of these forms that include the Alternative 
Disclosures, we conducted separate database searches for filings of 
those forms over the last three calendar years using search terms 
similar to those used by a commenter.\308\
---------------------------------------------------------------------------

    \307\ Similarly, only six percent of Form S-11, three percent of 
Form F-1, and three percent of Form 10 filings include XBRL tags.
    \308\ See letter from EY.
---------------------------------------------------------------------------

    Based on these searches, we estimate that, over the last three 
calendar years from 2015 to 2017, there were on average 300 filings on 
Form S-4, 15 filings on Form S-11, 20 filings on Form 10, 15 filings on 
Form F-1, and 20 filings on Form F-4 that included the Alternative 
Disclosures. We were unable to find any filings on the remaining 
affected forms that included the Alternative Disclosures. Therefore, we 
estimate that no filings on those forms included the Alternative 
Disclosures. The table below sets forth our estimates of the number of 
filings on these forms that included the Alternative Disclosures based 
on the other database searches.

    Table 5--Calculation of the Number of Filings on Affected Forms With the Alternative Disclosures Based on
                                                Database Searches
----------------------------------------------------------------------------------------------------------------
                                                             Number of
                                                           responses over   Annual average of      Estimated
                                                         three-year period   responses using     average annual
                                                           using database   database searches      responses
                                                              searches
                                                                       (A)      (B) = (A) / 3                (C)
----------------------------------------------------------------------------------------------------------------
S-4....................................................                300                100                100
S-11...................................................                 15                  5                  5
10.....................................................                 20               6.67                  7
F-1....................................................                 15                  5                  5
F-4....................................................                 20               6.67                  7
1-A....................................................                  0                  0                  0
1-K....................................................                  0                  0                  0
1-SA...................................................                  0                  0                  0
SF-1...................................................                  0                  0                  0
SF-3...................................................                  0                  0                  0
----------------------------------------------------------------------------------------------------------------

    Although the proposed amendments to Rule 3-10 would reduce the 
paperwork burden for each individual affected form, the proposed 
amendments could cause the number of affected forms filed to change 
over a period of time. One commenter \309\ stated that the high 
compliance costs associated with preparing the Rule 3-10 financial 
information leads many companies to issue debt securities privately. 
Again, we believe that the proposed amendments would encourage 
potential issuers to conduct registered debt offerings or private 
offerings with registration rights. Therefore, we believe that the 
number of registration statements and periodic reports filed on 
affected forms that include the Proposed Alternative Disclosures would 
increase.
---------------------------------------------------------------------------

    \309\ Letter from Cahill.
---------------------------------------------------------------------------

    For example, we believe the number of issuers and guarantors 
eligible to provide the Proposed Alternative Disclosures would increase 
in lieu of providing separate financial statements of each subsidiary 
issuer and guarantor because the proposed amendments would replace the 
100%-owned condition with one requiring that the subsidiary issuer/
guarantor be a consolidated subsidiary of the parent company pursuant 
to the relevant accounting standards it already uses and eliminate the 
requirement that guarantees of subsidiary guarantors be full and 
unconditional. If some of those eligible issuers and guarantors conduct 
registered debt offerings or private offerings with registration rights 
instead of conducting offerings privately and without registration 
rights, the number of registration statements and associated periodic 
reports filed on affected forms would necessarily increase when 
measured over a period of time.
    Conversely, other aspects of the proposed amendments would lead to 
a decrease in the number of periodic reports filed on affected forms 
when measured over time. For example, under existing Rule 3-10, if a 
parent company conducts a registered debt offering or private offering 
with registration rights and the subsidiary issuer or guarantor is not 
100%-owned, but is instead consolidated into the parent company's 
financial statements, or if the subsidiary guarantor's guarantee is not 
full and unconditional, the subsidiary must file its own periodic 
reports. The subsidiary is required to file a registration statement 
for the transaction, which is usually combined with its parent's 
registration statement, so the number of registration statements filed 
with the Proposed Alternative Disclosures would not decrease as a 
result of this aspect of the proposed amendments. However, under the 
proposed amendments, if that parent company provides the Proposed 
Alternative Disclosures, and meets the other conditions of proposed 
Rule 3-10, its subsidiaries would be exempt from periodic reporting 
under Rule 12h-5. Therefore, fewer periodic reports on affected forms 
would be filed, which would decrease those forms' paperwork burden when 
measured over a period of time.
    As another example, existing Rule 3-10 requires a parent company to 
include the Alternative Disclosures of its subsidiary issuers and 
guarantors in its periodic reports for so long as the guaranteed 
securities are outstanding. The proposed amendments would permit the 
parent company to cease providing the Proposed Alternative Disclosures 
in its periodic reports if the corresponding Section 15(d) obligations 
of its subsidiary issuers and guarantors are suspended. Therefore, we 
expect that parent companies would provide

[[Page 49672]]

the Proposed Alternative Disclosures in fewer filings, which would 
reduce the paperwork burden for periodic reports on affected forms when 
measured over a period of time.
    Overall, we believe that the decrease in the number of periodic 
reports filed on affected forms due to the change in ongoing reporting 
requirements would be largely mitigated, and perhaps offset, by the 
number of periodic reports that would increase due to the filing of new 
registration statements. Consequently, to avoid overestimating the 
paperwork reduction associated with the proposed amendments, we are not 
adjusting our existing estimate for the number of periodic reports 
filed on affected forms. However, we solicit comment on whether and, if 
so, how we should make an adjustment to this estimate in light of the 
proposed amendments.
    Although we believe the number of periodic reports filed on 
affected forms would remain steady, we estimate that the number of 
registration statements that include the Proposed Alternative 
Disclosures, as opposed to those that presently include the existing 
Alternative Disclosures, would increase. As discussed in Section 
VII.B.2, ``Market Conditions,'' we note that issuers have conducted 
approximately half as many Rule 144A debt offerings as registered debt 
offerings. We do not believe that all the issuers that conducted Rule 
144A would conduct registered debt offerings as a result of the 
proposed amendments, but we estimate that there would be a 33 percent 
increase in registration statements filed based on the proposed 
amendments. Therefore, we estimate that there would be an additional 
three filings on Form S-1,\310\ 33 filings on Form S-4,\311\ two 
filings on Form S-11,\312\ two filings on Form 10,\313\ two filings on 
Form F-1,\314\ and two filings on Form F-4 per year.\315\ Further, we 
estimated above that 14 filings on Form 20-F included the existing 
Alternative Disclosures. We estimate that half of those filings were 
registration statements. Therefore, we estimate there would be an 
additional two registration statements filed on Form 20-F per 
year.\316\
---------------------------------------------------------------------------

    \310\ Ten current filings on Form S-1 x 0.33 = 3.3 filings, 
which rounds to 3 filings.
    \311\ One hundred current filings on Form S-4 x 0.33 = 33 
filings.
    \312\ Five current filings on Form S-11 x 0.33 = 1.65 filings, 
which rounds to two filings.
    \313\ Seven current filings on Form 10 x 0.33 = 2.31 filings, 
which rounds to two filings.
    \314\ Five current filings on Form F-1 x 0.33 = 1.65 filings, 
which rounds to two filings.
    \315\ Seven current filings on Form F-4 x 0.33 = 2.31 filings, 
which rounds to two filings.
    \316\ Seven current fillings on Form 20-F x .033 = 2.31 filings, 
which rounds to two filings.
---------------------------------------------------------------------------

    Finally, to determine the paperwork burden for an issuer to file a 
registration statement with the Proposed Alternative Disclosures, we 
first estimated the number of burden hours required for an issuer to 
provide the existing Alternative Disclosures. A number of commenters 
provided examples of the burdens required to prepare and process the 
existing Alternative Disclosures,\317\ but only one commenter 
quantified the number of hours.\318\ This commenter indicated that it 
required 280 hours per year to prepare and review its Alternative 
Disclosures.\319\ We note that this commenter is relatively large and 
not necessarily representative of the size of all reporting companies. 
Therefore, for PRA purposes, we estimate that the existing Alternative 
Disclosures require an average of 100 burden hours to prepare and 
process. However, we solicit comment on the number of burden hours 
required to prepare the Alternative Disclosures. If the Proposed 
Alternative Disclosures would reduce an issuer's burden by 30 hours, as 
compared to the issuer providing the existing Alternative Disclosures, 
we estimate that the Proposed Alternative Disclosures would require 70 
hours to prepare and process.
---------------------------------------------------------------------------

    \317\ See, e.g., letters from EY, FedEx, Medtronic, and Noble-
UK.
    \318\ Letter from FedEx.
    \319\ Id. The commenter noted that it would require 280 hours to 
prepare and review its Consolidating Information. As discussed 
above, the existing Alternative Disclosures may include either 
Consolidating Information or brief narrative disclosure, and we do 
not believe that the proposed amendments would affect the paperwork 
burden for filings that include the narrative disclosure under 
existing Rule 3-10 because registrants that provide these narrative 
disclosures would be permitted to provide similar information under 
the proposed amendments.
---------------------------------------------------------------------------

2. Rule 3-16
    Existing Rule 3-16 requires separate Rule 3-16 Financial Statements 
for each affiliate whose securities constitute a ``substantial 
portion'' of the collateral for any class of registered securities as 
if the affiliate were a separate registrant. The proposed amendments 
related to Rule 3-16 would replace this requirement with a requirement 
for a registrant to provide Summarized Financial Information of those 
affiliates on a combined basis, pursuant to proposed Rule 13-02, if the 
affiliates are consolidated subsidiaries of the registrant. If 
additional line items of financial information are material to an 
investment decision, the registrant would be required to disclose that 
information as well. In addition, the proposed amendments would 
require, to the extent material, certain non-financial disclosures 
about the securities pledged as collateral, each affiliate whose 
securities are pledged, the terms and conditions of the collateral 
arrangement, and whether a trading market exists for the pledged 
securities.
    We believe that these amendments would reduce the paperwork burden 
for the affected forms because Summarized Financial Information is less 
detailed than separate financial statements and, therefore, is less 
costly and burdensome to prepare. Further, we believe the registrant's 
ability to present Summarized Financial Information on a combined basis 
with its consolidated affiliates would reduce the registrant's 
paperwork burden because the registrant would not be required to 
prepare and disclose each of its affiliates' financial statements 
separately. However, because proposed Rule 13-02 requires certain 
financial information that may not otherwise be required in the 
Summarized Financial Information and additional non-financial 
disclosures, when material, the expected paperwork burden reduction may 
be somewhat mitigated.
    Existing Rule 3-16 requires the Rule 3-16 Financial Statements of 
an affiliate to be audited for the periods required by Rules 3-01 and 
3-02 of Regulation S-X. Similar to the proposed amendments to Rule 3-
10, the proposed amendments related to Rule 3-16 would permit a 
registrant to provide the disclosures in proposed Rule 13-02 outside 
its financial statements in a registration statement covering the offer 
and sale of the subject securities and any related prospectus, and in 
Exchange Act annual and quarterly reports required to be filed during 
the fiscal year in which the first sale of the subject securities is 
completed, but require the proposed disclosures to be included in the 
footnotes to the registrant's consolidated financial statements for 
annual and quarterly reports beginning with the annual report for the 
fiscal year during which the first bona fide sale of the subject 
securities is completed. Therefore, if provided outside the 
registrant's financial statements, the proposed Rule 13-02 disclosures 
would not be audited or tagged, which could reduce the burdens 
associated with preparing this information. Whether a registrant would 
elect to provide the disclosures outside its financial statement 
footnotes likely would depend on the company's specific facts and 
circumstances and, as discussed

[[Page 49673]]

above,\320\ we believe there could be reasons for companies to elect 
either option. In addition, any reduction in paperwork burden 
associated with such an election would be incremental, as the 
registrant would still incur expenses to prepare audited financial 
information. Given these considerations, and to avoid overestimating 
the overall paperwork burden reduction associated with the proposed 
amendments, we are not estimating a specific additional burden 
reduction for this aspect of the proposed amendments. However, we 
solicit comment on whether it would be appropriate to do so and, if so, 
how we might estimate such a reduction.
---------------------------------------------------------------------------

    \320\ Sections V.B., ``Overview of the Proposed Changes,'' and 
VII.C.2 ``Proposed Amendments to Rule 3-16 and Relocation to Rule 
13-02.''
---------------------------------------------------------------------------

    The proposed amendments would require registrants to provide 
Summarized Financial Information of affiliates as of, and for, the most 
recently-ended fiscal year and interim period included in their 
consolidated financial statements. Under existing Rule 3-16, financial 
statements of affiliates are required for the periods specified in 
Rules 3-01 and 3-02 of Regulation S-X. This aspect of the proposed 
amendments, therefore, would reduce the paperwork burden for 
registrants by reducing the number of periods required to be presented.
    Overall, we estimate that the proposed amendments related to Rule 
3-16 would reduce the current paperwork burden by approximately 30 
hours for each affected form except for quarterly reports on Form 10-Q. 
Existing Rule 3-16 requires registrants to include interim period Rule 
3-16 Financial Statements when the financial statements are presented 
in registration statements, but it does not require Rule 3-16 Financial 
Statements in quarterly reports on Form 10-Q. The proposed amendments 
related to Rule 3-16 would require financial information in quarterly 
reports on Form 10-Q, which would increase registrants' paperwork 
burden for that form. We estimate that the proposed amendments related 
to Rule 3-16 would increase the current paperwork burden by 
approximately 70 hours \321\ for each affected quarterly report on Form 
10-Q.
---------------------------------------------------------------------------

    \321\ This figure corresponds to the 70 burden hours we estimate 
will be required to prepare and process the proposed Rule 13-02 
information in connection with the filing of a registration 
statement. See discussion below.
---------------------------------------------------------------------------

    As with the proposed amendments to Rule 3-10, although the proposed 
amendments related to Rule 3-16 would reduce the paperwork burden for 
each individual affected form, except for Form 10-Q, the proposed 
amendments could cause the number of affected forms filed over a period 
of time to change. A number of commenters stated that, due to the costs 
and burdens associated with preparing the information, collateralized 
debt offerings are often unregistered or structured to avoid or limit 
Rule 3-16 disclosures.\322\ We believe that the proposed amendments 
would encourage potential issuers to conduct additional registered 
collateralized debt offerings because the costs of complying with 
proposed Rule 13-02 could be less than the costs required to comply 
with existing Rule 3-16. As the number of these registered offerings 
increases, the number of affected forms filed would also increase over 
a period of time.
---------------------------------------------------------------------------

    \322\ See, e.g., letters from ABA-Committees, Cahill, Chamber, 
Covenant, Davis Polk, DT, KPMG, EY, and PwC.
---------------------------------------------------------------------------

    As discussed in Section VII.B.2, ``Market Conditions,'' over the 
last three calendar years from 2015 to 2017, approximately seven 
filings per year have included Rule 3-16 Financial Statements, with six 
of those filings on Form 10-K and one on Form 20-F. However, a number 
of filings on affected forms include references to Rule 3-16 even 
though they do not include Rule 3-16 Financial Statements.\323\ As 
commenters indicated, indenture agreements frequently include 
provisions that release collateral requirements if their inclusion 
would trigger Rule 3-16 Financial Statements.\324\
---------------------------------------------------------------------------

    \323\ We estimate that, over the last three calendar years, 
approximately 21 filings on Form 10-K included Rule 3-16 Financial 
Statements and an additional 15 filings on that form referenced Rule 
3-16 but did not include Rule 3-16 Financial Statements. Also, three 
filings on Form 20-F included Rule 3-16 Financial Statements and no 
other filings on that form referenced Form 3-16. Further, 25 filings 
on Form 10-Q, 11 filings on Form S-1, 35 filings on Form S-4, one 
filing on Form S-11, one filing on Form 10, and one filing on Form 
1-A referred to Rule 3-16 but did not include Rule 3-16 Financial 
Statements. No filings on the other affected forms referenced the 
rule.
    \324\ See, e.g., letters from Davis, KPMG, and PwC.
---------------------------------------------------------------------------

    We do not believe that all the filings on affected forms that 
reference Rule 3-16 but do not include Rule 3-16 Financial Statements 
would include the proposed Rule 13-02 information, but we believe many 
would include this information. For PRA purposes, we estimate that the 
proposed amendments would result in approximately 33 percent of the 
registration statements that reference Rule 3-16 but do not include 
Rule 3-16 Financial Statements providing the proposed Rule 13-02 
information. As such, we estimate that approximately ten additional 
registration statements would include the proposed Rule 13-02 
information, with four of those filings on Form S-4 \325\ and one each 
on Forms S-1,\326\ S-11, 10, 1-A, F-1, and F-4.\327\
---------------------------------------------------------------------------

    \325\ We estimated this figure by multiplying the average number 
of filings per year from the last three calendar years on Form S-4 
that referenced Rule 3-16 but did not include the Rule 3-16 
Financial Statements (12 filings) by 0.33. The average annual number 
of filings on Form S-4 that referenced Rule 3-16 but did not include 
the Rule 3-16 Financial Statements is 11.67, which rounds to 12.
    \326\ We estimated this figure by multiplying the average number 
of filings per year from the last three calendar years on Form S-1 
that referenced Rule 3-16 but did not include the Rule 3-16 
Financial Statements (four filings) by 0.33. The average annual 
number of filings on Form S-1 that referenced Rule 3-16 but did not 
include the Rule 3-16 Financial Statements is 1.33, which rounds to 
one.
    \327\ Over the last three calendar years, one filing on Form S-
11, one filing on Form 10, and one filing on Form 1-A referred to 
Rule 3-16 but did not include Rule 3-16 Financial Statements. 
Therefore, we estimate that one additional filing on each of these 
forms would include the proposed Rule 13-02 information. Also, 
although there were no filings on Forms F-1 and F-4 that referenced 
Rule 3-16 in the last three calendar years, one filing on Form F-1 
and two filings on Form F-4 referenced Rule 3-16 in calendar years 
2013 and 2014, so we estimated that one additional filing on each of 
these forms would include the proposed Rule 13-02 information.
---------------------------------------------------------------------------

    Further, we do not believe that all registrants that file 
additional registration statements with the proposed Rule 13-02 
information would be new registrants, so we do not believe there would 
be an additional ten filings on Form 10-K. We estimate that 33 percent 
of the registrants that file additional registration statements with 
the proposed Rule 13-02 information would be new registrants, so an 
additional three filings on Form 10-K would include the proposed Rule 
13-02 information.\328\ Also, we estimate that two additional filings 
on Form 20-F, one registration statement and one annual report, would 
include the proposed Rule 13-02 information.
---------------------------------------------------------------------------

    \328\ Thirty-three percent of ten is 3.33, which rounds to 
three.
---------------------------------------------------------------------------

    Estimating the number of additional filings on Form 10-Q requires a 
separate determination because the proposed amendments would require 
that proposed Rule 13-02 information be included in quarterly reports 
on Form 10-Q. Rule 3-16 Financial Statements are not required in 
quarterly reports on Form 10-Q under existing Rule 3-16. To estimate 
the number of additional filings on Form 10-Q that would include the 
proposed Rule 13-02 information, we look to the estimated number of 
filings on Form 10-K. For every Form 10-K, a registrant would be 
required to file three quarterly reports on Form 10-Q. Assuming that 
six filings on Form 10-K would be made each year with the proposed Rule 
13-02

[[Page 49674]]

information,\329\ we estimate that 18 quarterly reports on Form 10-Q 
per year would be filed with the proposed Rule 13-02 information.
---------------------------------------------------------------------------

    \329\ This figure was determined by adding the two current 
filings on Form 10-K that include Rule 3-16 Financial Statements 
with the estimated four additional filings on Form 10-K that would 
include proposed Rule 13-02 information.
---------------------------------------------------------------------------

    Finally, to determine the paperwork burden for a registrant to file 
a registration statement with the proposed Rule 13-02 information, we 
estimated the number of burden hours required for an issuer to provide 
the existing Rule 3-16 Financial Statements. Unlike for Rule 3-10, no 
commenter provided an estimate for the cost of Rule 3-16 Financial 
Statements. For PRA purposes, we estimate that the Rule 3-16 Financial 
Statements require an average of 100 burden hours, which is the same 
estimate we use for the hours required to prepare and process the 
Alternative Disclosures under existing Rule 3-10. However, we solicit 
comment on the number of burden hours required to prepare the Rule 3-16 
Financial Statements. If proposed Rule 13-02 would reduce a 
registrant's burden by 30 hours, as compared to the registrant 
providing the existing Rule 3-16 Financial Statements, we estimate that 
the proposed Rule 13-02 information would require 70 hours to prepare 
and process.

C. Burden and Cost Estimates for the Proposed Amendments

    Below we estimate the aggregate change in paperwork burden as a 
result of the proposed amendments, both in terms of the change to 
existing responses as well as the effect of additional responses. These 
estimates represent the average burden for all registrants, both large 
and small. In deriving our estimates, we recognize that the burdens 
will likely vary among individual registrants based on a number of 
factors, including the nature of their business. The burden estimates 
were calculated by multiplying the estimated number of responses by the 
estimated average amount of time it would take a registrant to prepare 
and review disclosure required under the proposed amendments. The 
portion of the burden carried by outside professionals is reflected as 
a cost, while the portion of the burden carried by the registrant 
internally is reflected in hours.
    For purposes of the PRA, we estimate that 75% of the burden of 
preparation of Forms 10-K, 10-Q, 1-A, and 1-K is carried by the 
registrant internally and that 25% of the burden of preparation is 
carried by outside professionals retained by the company at an average 
cost of $400 per hour.\330\ Additionally, we estimate that 25% of the 
burden of preparation for Forms 10, S-1, S-3, S-4, S-11, SF-3, F-1, F-
3, F-4, 20-F, and 40-F and is carried by the registrant internally and 
that 75% of the burden of preparation is carried by outside 
professionals retained by the company at an average cost of $400 per 
hour. Finally, we estimate that 85% of the burden of preparation of 
Form 1-SA is carried by the registrant internally and that 15% of the 
burden of preparation is carried by outside professionals retained by 
the company at an average cost of $400 per hour.
---------------------------------------------------------------------------

    \330\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This estimate is 
based on consultations with several registrants, law firms and other 
persons who regularly assist registrants in preparing and filing 
reports with the Commission.
---------------------------------------------------------------------------

    The tables below illustrate the change to the total annual 
compliance burden of affected forms, in hours and in costs, as a result 
of the proposed amendments.

                    Table 6--Calculations of Change in Burden Estimates of Current Responses Due to Proposed Amendments to Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Change in        Change in
                                                         Number of      Burden hour      Change in        Change in       professional     professional
                                                          current       change per      burden hours    company  hours     hours for        costs for
                                                         affected         current       for current      for  current       current          current
                                                         responses       affected         affected         affected         affected         affected
                                                                         response        responses        responses        responses        responses
                                                                 (A)             (B)  (C) = (A) x (B)      (D) = (C) x      (E) = (C) x      (F) = (E) x
                                                                                                        0.75, 0.25, or   0.25, 0.75, or             $400
                                                                                                                  0.85             0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................             474            (30)         (14,220)         (10,665)          (3,555)     ($1,422,000)
10-Q................................................           1,252            (30)         (37,560)         (28,170)          (9,390)      (3,756,000)
S-1.................................................              10            (30)            (300)             (75)            (225)         (90,000)
20-F................................................              14            (30)            (420)            (105)            (315)        (126,000)
40-F................................................               8            (30)            (240)             (60)            (180)         (72,000)
S-4.................................................             100            (30)          (3,000)            (750)          (2,250)        (900,000)
S-11................................................               5            (30)            (150)           (37.5)          (112.5)         (45,000)
10..................................................               7            (30)            (210)           (52.5)          (157.5)         (63,000)
F-1.................................................               5            (30)            (150)           (37.5)          (112.5)         (45,000)
F-4.................................................               7            (30)            (210)           (52.5)          (157.5)         (63,000)
1-A.................................................               0  ..............  ...............  ...............  ...............  ...............
1-K.................................................               0  ..............  ...............  ...............  ...............  ...............
1-SA................................................               0  ..............  ...............  ...............  ...............  ...............
SF-1................................................               0  ..............  ...............  ...............  ...............  ...............
SF-3................................................               0  ..............  ...............  ...............  ...............  ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 49675]]

                   Table 7--Calculations of Change in Burden Estimates of Additional Responses Due to Proposed Amendments to Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Change in        Change in
                                                         Number of      Burden hour      Change in        Change in       professional     professional
                                                        additional      change per      burden hours    company  hours     hours for        costs for
                                                         affected       additional     for additional  for  additional     additional       additional
                                                         responses       affected         affected         affected         affected         affected
                                                                         response        responses        responses        responses        responses
                                                                 (A)             (B)  (C) = (A) x (B)      (D) = (C) x      (E) = (C) x      (F) = (E) x
                                                                                                        0.75, 0.25, or   0.25, 0.75, or             $400
                                                                                                                  0.85             0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................               0  ..............  ...............  ...............  ...............  ...............
10-Q................................................               0  ..............  ...............  ...............  ...............  ...............
S-1.................................................               3              70              210             52.5            157.5          $63,000
20-F................................................               2              70              140               35              105           42,000
40-F................................................               0  ..............  ...............  ...............  ...............  ...............
S-4.................................................              33              70            2,310            577.5          1,732.5          693,000
S-11................................................               2              70              140               35              105           42,000
10..................................................               2              70              140               35              105           42,000
F-1.................................................               2              70              140               35              105           42,000
F-4.................................................               2              70              140               35              105           42,000
1-A.................................................               0  ..............  ...............  ...............  ...............  ...............
1-K.................................................               0  ..............  ...............  ...............  ...............  ...............
1-SA................................................               0  ..............  ...............  ...............  ...............  ...............
SF-1................................................               0  ..............  ...............  ...............  ...............  ...............
SF-3................................................               0  ..............  ...............  ...............  ...............  ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------

                    Table 8--Calculations of Change in Burden Estimates of Current Responses Due to Proposed Amendments to Rule 3-16
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Change in        Change in
                                                         Number of      Burden hour      Change in        Change in       professional     professional
                                                          current       change per      burden hours    company  hours     hours for        costs for
                                                         affected         current       for current      for  current       current          current
                                                         responses       affected         affected         affected         affected         affected
                                                                         response        responses        responses        responses        responses
                                                                 (A)             (B)  (C) = (A) x (B)      (D) = (C) x      (E) = (C) x      (F) = (E) x
                                                                                                        0.75, 0.25, or   0.25, 0.75, or             $400
                                                                                                                  0.85             0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................               7            (30)            (210)          (157.5)           (52.5)        ($21,000)
10-Q................................................               0  ..............  ...............  ...............  ...............  ...............
S-1.................................................               0  ..............  ...............  ...............  ...............  ...............
20-F................................................               1            (30)             (30)            (7.5)           (22.5)          (9,000)
40-F................................................               0  ..............  ...............  ...............  ...............  ...............
S-4.................................................               0  ..............  ...............  ...............  ...............  ...............
S-11................................................               0  ..............  ...............  ...............  ...............  ...............
10..................................................               0  ..............  ...............  ...............  ...............  ...............
F-1.................................................               0  ..............  ...............  ...............  ...............  ...............
F-4.................................................               0  ..............  ...............  ...............  ...............  ...............
1-A.................................................               0  ..............  ...............  ...............  ...............  ...............
1-K.................................................               0  ..............  ...............  ...............  ...............  ...............
1-SA................................................               0  ..............  ...............  ...............  ...............  ...............
SF-1................................................               0  ..............  ...............  ...............  ...............  ...............
SF-3................................................               0  ..............  ...............  ...............  ...............  ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------

                   Table 9--Calculations of Change in Burden Estimates of Additional Responses Due to Proposed Amendments to Rule 3-16
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           Change in        Change in
                                                         Number of      Burden hour      Change in        Change in       professional     professional
                                                        additional      change per      burden hours    company hours      hours for        costs for
                                                         affected       additional     for additional   for additional     additional       additional
                                                         responses       affected         affected         affected         affected         affected
                                                                         response        responses        responses        responses        responses
                                                                 (A)             (B)  (C) = (A) x (B)      (D) = (C) x      (E) = (C) x      (F) = (E) x
                                                                                                        0.75, 0.25, or   0.25, 0.75, or             $400
                                                                                                                  0.85             0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................               3              70              210            157.5             52.5          $21,000
10-Q................................................              18              70            1,260              945              315          126,000

[[Page 49676]]

 
S-1.................................................               1              70               70             17.5             52.5           21,000
20-F................................................               2              70              140               35              105           42,000
40-F................................................               0  ..............  ...............  ...............  ...............  ...............
S-4.................................................               4              70              280               70              210           84,000
S-11................................................               1              70               70             17.5             52.5           21,000
10..................................................               1              70               70             17.5             52.5           21,000
F-1.................................................               1              70               70             17.5             52.5           21,000
F-4.................................................               1              70               70             17.5             52.5           21,000
1-A.................................................               1              70               70             52.5             17.5            7,000
1-K.................................................               0  ..............  ...............  ...............  ...............  ...............
1-SA................................................               0  ..............  ...............  ...............  ...............  ...............
SF-1................................................               0  ..............  ...............  ...............  ...............  ...............
SF-3................................................               0  ..............  ...............  ...............  ...............  ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                          Table 10--Calculations for Incremental Paperwork Burden Under the Proposed Amendments to Rules 3-10 and 3-16
                                                                           [Current Responses + Additional Responses]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                     Change in       Change in
                                                                     Change in       Change in       Change in       Change in     professional    professional      Change in       Change in
                                     Number of       Number of     burden hours    burden hours    company hours   company hours     hours for       hours for     professional    professional
                                  total affected  total affected     for total       for total       for total       for total         total           total         costs for       costs for
                                     responses       responses       affected        affected        affected        affected        affected        affected          total           total
                                       under           under         responses       responses       responses       responses       responses       responses       affected        affected
                                  Proposed  Rule  Proposed  Rule       under           under           under           under           under           under         responses       responses
                                       3-10            3-16       Proposed  Rule  Proposed  Rule  Proposed  Rule  Proposed  Rule  Proposed  Rule  Proposed  Rule  under  Rule 3-  under  Rule 3-
                                                                       3-10            3-16            3-10            3-16            3-10            3-16             10              16
                                       (A) \331\       (B) \332\       (C) \333\       (D) \334\       (E) \335\       (F) \336\       (G) \337\       (H) \338\       (I) \339\       (J) \340\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10-K............................             474              10        (14,220)               0        (10,665)               0         (3,555)               0    ($1,422,000)              $0
10-Q............................           1,252              18        (37,560)           1,260        (28,170)             945         (9,390)             315     (3,756,000)         126,000
S-1.............................              13               1            (90)              70          (22.5)            17.5          (67.5)            52.5        (27,000)          21,000
20-F............................              16               3           (280)             110            (70)            27.5           (210)            82.5        (84,000)          33,000
40-F............................               8               0           (240)  ..............            (60)  ..............           (180)  ..............        (72,000)  ..............
S-4.............................             133               4           (690)             280         (172.5)              70         (517.5)             210       (207,000)          84,000
S-11............................               7               1            (10)              70           (2.5)            17.5           (7.5)            52.5         (3,000)          21,000
10..............................               9               1            (70)              70          (17.5)            17.5          (52.5)            52.5        (21,000)          21,000
F-1.............................               7               1            (10)              70           (2.5)            17.5           (7.5)            52.5         (3,000)          21,000
F-4.............................               9               1            (70)              70          (17.5)            17.5          (52.5)            52.5        (21,000)          21,000
1-A.............................               0               1  ..............              70  ..............            52.5  ..............            17.5  ..............           7,000
1-K.............................               0               0  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............
1-SA............................               0               0  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............
SF-1............................               0               0  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............
SF-3............................               0               0  ..............  ..............  ..............  ..............  ..............  ..............  ..............  ..............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

    \331\ Table 6, Column (A) + Table 7, Column (A).
    \332\ Table 8, Column (A) + Table 9, Column (A).
    \333\ Table 6, Column (C) + Table 6, Column (C).
    \334\ Table 8, Column (C) + Table 9, Column (C).
    \335\ Table 6, Column (D) + Table 7, Column (D).
    \336\ Table 8, Column (D) + Table 9, Column (D).
    \337\ Table 6, Column (E) + Table 7, Column (E).
    \338\ Table 8, Column (E) + Table 9, Column (E).
    \339\ Table 6, Column (F) + Table 7, Column (F).
    \340\ Table 8, Column (F) + Table 9, Column (F).

           Table 11--Incremental Paperwork Burden Under the Proposed Amendments to Rules 3-10 and 3-16
----------------------------------------------------------------------------------------------------------------
                                                     Change in
                                     Number of     burden hours      Change in       Change in       Change in
                                     affected       of affected    company hours   professional    professional
                                     responses       response                          hours           costs
                                       (A) \341\       (B) \342\       (C) \343\       (D) \344\       (E) \345\
----------------------------------------------------------------------------------------------------------------
10-K............................             484        (14,220)        (10,665)         (3,555)    ($1,422,000)
10-Q............................           1,270        (36,300)        (27,225)         (9,075)     (3,630,000)
S-1.............................              14            (20)             (5)            (15)         (6,000)
20-F............................              19           (170)          (42.5)         (127.5)        (51,000)
40-F............................               8           (240)            (60)           (180)        (72,000)

[[Page 49677]]

 
S-4.............................             137           (410)         (102.5)         (307.5)       (123,000)
S-11............................               8              60              15              45          18,000
10..............................              10               0               0               0               0
F-1.............................               8              60              15              45          18,000
F-4.............................              10               0               0               0               0
1-A.............................               1              70            52.5            17.5           7,000
1-K.............................               0  ..............  ..............  ..............  ..............
1-SA............................               0  ..............  ..............  ..............  ..............
SF-1............................               0  ..............  ..............  ..............  ..............
SF-3............................               0  ..............  ..............  ..............  ..............
----------------------------------------------------------------------------------------------------------------

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

    \341\ Table 10, Columns (A) + (B).
    \342\ Table 10, Columns (C) + (D).
    \343\ Table 10, Columns (E) + (F).
    \344\ Table 10, Columns (G) + (H).
    \345\ Table 10, Columns (I) + (J).

                                                 Table 12--Requested Paperwork Burden Under the Proposed Amendments to Rules 3-10 and 3-16 \346\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Current burden                                    Program change                             Requested change in burden
                                             ---------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Number of                       Change in
                                              Current annual  Current burden    Current cost       affected        Change in      professional       Annual       Burden hours     Cost burden
                                                 responses         hours           burden          responses     company hours       costs          responses
                                                         (A)             (B)              (C)        (D) \347\       (E) \348\       (F) \349\      (G) = (A) +     (H) = (B) +  (I) = (C) + (F)
                                                                                                                                                            (D)             (E)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10-K........................................           8,137      14,596,183   $1,950,114,190              484        (10,665)    ($1,422,000)            8,621      14,585,518   $1,948,692,190
10-Q........................................          22,907       3,271,578      436,240,908            1,270        (27,225)     (3,630,000)           24,117       3,244,353      432,610,908
S-1.........................................             901         151,143      181,371,300               14             (5)         (6,000)              915         151,138      181,365,300
20-F........................................             725         480,226      576,270,600               19          (42.5)        (51,000)              744         480,184      576,219,600
40-F........................................             160          17,197       20,636,800                8            (60)        (72,000)              168          17,137       20,564,800
S-4.........................................             551         565,282      678,338,304              137         (102.5)       (123,000)              688         565,180      678,215,304
S-11........................................              64          12,529       15,034,368                8              15          18,000               72          12,544       15,052,368
10..........................................             216          11,783       14,140,051               10               0               0              226          11,783       14,140,051
F-1.........................................              63          26,980       32,375,700                8              15          18,000               71          26,995       32,393,700
F-4.........................................              39          14,245       17,093,700               10               0               0               49          14,245       17,093,700
1-A.........................................             250         140,813       18,775,200                1            52.5           7,000              251         140,866       18,782,200
1-K.........................................             188          84,600       11,280,000                0  ..............  ...............             188          84,600       11,280,000
1-SA........................................             188          29,952        2,113,872                0  ..............  ...............             188          29,952        2,113,872
SF-1........................................               6           2,076        2,491,200                0  ..............  ...............               6           2,076        2,491,200
SF-3........................................              71          24,548       29,457,900                0  ..............  ...............              71          24,548       29,457,900
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

D. Request for Comment
---------------------------------------------------------------------------

    \346\ The figures in Table 12, Columns (G), (H), and (I) have 
been rounded to the nearest whole number.
    \347\ From Table 11, Column (A).
    \348\ From Table 11, Column (C).
    \349\ From Table 11, Column (F).
---------------------------------------------------------------------------

    Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order 
to:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility;
     Evaluate the accuracy of our assumptions and estimates of 
the burden of the proposed collection of information;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
     Evaluate whether there are ways to minimize the burden of 
the collection of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
     Evaluate whether the proposed amendments would have any 
effects on any other collection of information not previously 
identified in this section.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct their comments to the Office of 
Management and Budget, Attention: Desk Officer for the U.S. Securities 
and Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and send a copy to, Brent J. Fields, Secretary, 
U.S. Securities and Exchange Commission, 100 F Street NE, Washington, 
DC 20549, with reference to File No. S7-19-18. Requests for materials 
submitted to OMB by the Commission with regard to the collection of 
information requirements should be in writing, refer to File No. S7-19-
18 and be submitted to the U.S. Securities and Exchange Commission, 
Office of FOIA Services, 100 F Street NE, Washington, DC 20549. OMB is 
required to make a decision concerning the collection of information 
requirements between 30 and 60 days after publication of the proposed 
amendments. Consequently, a comment to OMB is best assured of having 
its full effect if the OMB receives it within 30 days of publication.

IX. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of

[[Page 49678]]

1996 (``SBREFA''),\350\ we solicit data to determine whether the 
proposed amendments constitute a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results or is likely to 
result in:
---------------------------------------------------------------------------

    \350\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment, or 
innovation.
    Commenters should provide comment and empirical data on (a) the 
potential annual effect on the U.S. economy; (b) any increase in costs 
or prices for consumers or individual industries; and (c) any potential 
effect on competition, investment, or innovation.

X. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Act Analysis has been prepared 
in accordance with the Regulatory Flexibility Act.\351\ It relates to 
the proposed amendments to the financial disclosure requirements in 
Rules 3-10 and 3-16 of Regulation S-X to improve those requirements for 
both investors and registrants.
---------------------------------------------------------------------------

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

A. Reasons for, and Objectives of, the Proposing Action

    The purpose of the proposed amendments to Rules 3-10 and 3-16 is to 
better align those requirements with the needs of investors and to 
simplify and streamline the disclosure obligations of registrants. The 
proposed changes would include amending both rules and relocating part 
of Rule 3-10 and all of Rule 3-16 to proposed Rules 13-01 and 13-02 in 
Regulation S-X, respectively. These changes are intended to provide 
investors with the information that is important given the specific 
facts and circumstances, make the disclosures easier to understand, and 
reduce the costs and burdens to registrants. The reasons for, and 
objectives of, the proposed amendments are discussed in more detail in 
Sections I through III above.

B. Legal Basis

    We are proposing the rule and form amendments contained in this 
release under the authority set forth in Sections 3, 6, 7, 8, 9, 10, 
19(a), and 28 of the Securities Act of 1933, as amended and Sections 
3(b), 12, 13, 15(d), 23(a), and 36 of the Securities Exchange Act of 
1934, as amended.

C. Small Entities Subject to the Proposed Rules

    The proposed changes would affect some registrants that are small 
entities. The Regulatory Flexibility Act defines ``small entity'' to 
mean ``small business,'' ``small organization,'' or ``small 
governmental jurisdiction.'' \352\ For purposes of the Regulatory 
Flexibility Act, under our rules, an issuer, other than an investment 
company or an investment adviser, is a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year and is engaged or proposing to 
engage in an offering of securities that does not exceed $5 
million.\353\ We estimate that there are 1,196 issuers that file with 
the Commission, other than investment companies and investment 
advisers, that may be considered small entities and are potentially 
subject to the proposed amendments.\354\
---------------------------------------------------------------------------

    \352\ 5 U.S.C. 601(6).
    \353\ See 17 CFR 230.157 under the Securities Act and 17 CFR 
240.0-10(a) under the Exchange Act.
    \354\ This estimate is based on staff analysis of XBRL data 
submitted by filers, other than co-registrants, with EDGAR filings 
of Forms 10-K, 20-F, and 40-F and amendments filed during the 
calendar year 2017 and a staff analysis of Forms 1-A and 1-K filed 
during the calendar year 2017.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    As noted above, the purpose of the proposed amendments to Rules 3-
10 and 3-16 is to better align those requirements with the needs of 
investors and to simplify and streamline the disclosure obligations of 
registrants. Proposed Rule 3-10 would continue to permit the omission 
of separate financial statements of subsidiary issuers and guarantors 
when certain conditions are met and the parent company provides the 
Proposed Alternative Disclosures. While the conditions that must be met 
to omit separate subsidiary issuer or guarantor financial statements 
would continue to be located in proposed Rule 3-10, the disclosure 
requirements would be relocated to proposed Rule 13-01. The proposed 
amendments would:
     Replace the condition that a subsidiary issuer or 
guarantor be 100% owned by the parent company with a condition that it 
be consolidated in the parent company's consolidated financial 
statements;
     replace Consolidating Information with Summarized 
Financial Information of the Obligor Group, which may be presented on a 
combined basis, and reduce the number of periods presented;
     expand the qualitative disclosures about the guarantees 
and the issuers and guarantors;
     eliminate quantitative thresholds for disclosure and 
require disclosure of additional information that would be material to 
a holder of the guaranteed security;
     permit the Proposed Alternative Disclosures to be provided 
outside the footnotes to the parent company's audited annual and 
unaudited interim consolidated financial statements in a registration 
statement covering the offer and sale of the subject securities and any 
related prospectus, and in certain Exchange Act reports filed shortly 
thereafter;
     require that the Proposed Alternative Disclosures be 
included in the footnotes to the parent company's consolidated 
financial statements for annual and quarterly reports beginning with 
the annual report for the fiscal year during which the first bona fide 
sale of the subject securities is completed;
     eliminate the requirement to provide pre-acquisition 
financial statements of recently-acquired subsidiary issuers and 
guarantors; and
     require the Proposed Alternative Disclosures for as long 
as the issuers and guarantors have an Exchange Act reporting obligation 
with respect to the guaranteed securities rather than for so long as 
the guaranteed securities are outstanding.
    The proposed amendments to Rule 3-10 would simplify and streamline 
the rule structure in several ways. Most significantly, under proposed 
Rules 3-10(a) and 3-10(a)(1) there would be only a single set of 
eligibility criteria that would apply to all issuer and guarantor 
structures instead of having separate sets of criteria contained in 
each of the five exceptions in existing Rules 3-10(b) through (f). 
Similarly, the requirements for the Proposed Alternative Disclosures 
would be included in a single location within proposed Rule 13-01, 
rather than spread among the multiple paragraphs of existing Rule 3-10.
    Proposed Rule 3-16 would replace the rule's existing requirement to 
provide separate financial statements for each affiliate whose 
securities are pledged as collateral with financial and non-financial 
disclosures about the affiliate(s) and the collateral arrangement as a 
supplement to the consolidated financial statements of the registrant 
that issues the collateralized security. Similar to the proposed 
disclosures for issuers and guarantors of guaranteed securities under 
Rule 3-10, the disclosure requirements in Rule 3-16 would be amended 
and relocated to proposed Rule 13-02.

[[Page 49679]]

    Additionally, instead of requiring disclosure only when the pledged 
securities meet or exceed a numerical threshold relative to the 
securities registered or being registered under the existing rule's 
``substantial portion'' test, the proposed amendments would require 
disclosure to the extent material to a holder of the collateralized 
security. Further, the proposed amendments would require disclosure of 
any additional information about the collateral arrangement and each 
affiliate whose security is pledged as collateral that would be 
material to a holder of the collateralized securities. We believe these 
proposed disclosures would enable an investor to evaluate the potential 
outcomes in the event of foreclosure, would reduce costs and burdens on 
registrants, and may facilitate the use of debt structures that include 
pledges of affiliate securities, resulting in improved collateral 
packages being available to investors.
    Many of the proposed changes would simplify and streamline existing 
disclosure requirements in ways that are expected to reduce compliance 
burdens for all registrants, including small entities. Some of the 
proposed changes would incrementally increase compliance costs for 
registrants, although we do not expect these additional costs to be 
significant. In addition, compliance with the proposed amendments would 
require the use of professional skills, including accounting and legal 
skills. The proposed amendments are discussed in detail in Sections II 
and III above. We discuss the economic impact including the estimated 
costs and burdens, of the proposed amendments to all registrants, 
including small entities, in Sections VII and VIII above.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We believe that the proposed amendments would not duplicate, 
overlap, or conflict with other federal rules.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposed amendments, we considered the following alternatives:
     Establishing different compliance or reporting 
requirements that take into account the resources available to small 
entities;
     Clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    We believe the proposed amendments would simplify and streamline 
disclosure requirements in ways that are expected to reduce compliance 
burdens for all registrants, including small entities. We do not 
believe that the proposed amendments would impose any significant new 
compliance obligations. Accordingly, we do not believe it is necessary 
to exempt small entities from all or part of the proposed amendments. 
We note in this regard that the Commission's existing disclosure 
requirements provide for scaled disclosure requirements and other 
accommodations for small entities, and the proposed amendments would 
not alter these existing accommodations. We are, however, soliciting 
comment on whether the amendments should permit additional or different 
flexibility for SRCs and other types of issuers to locate the Proposed 
Alternative Disclosures outside the financial statements in light of 
the burdens associated with annual audit, interim review, and internal 
control over financial reporting requirements.
    Finally, with respect to using performance rather than design 
standards, the proposed amendments generally contain elements similar 
to performance standards, which we believe is appropriate because it 
would allow registrants to omit financial information that is not 
necessary for an investment decision based on facts and circumstances 
applicable to that registrant and offering. For example, under the 
proposed amendments, the Summarized Financial Information of the 
Obligor Group that generally would be required could be omitted if it 
is not materially different from corresponding amounts in the parent 
company's consolidated financial statements. This and other performance 
standards included in the proposed amendments would reduce compliance 
burdens for all registrants, including small entities.

Request for Comment

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding:
     How the proposed rule and form amendments can achieve 
their objective while lowering the burden on small entities;
     the number of small entity companies that may be affected 
by the proposed rule and form amendments;
     the existence or nature of the potential effects of the 
proposed amendments on small entity companies discussed in the 
analysis; and
     how to quantify the effects of the proposed amendments.
    Commenters are asked to describe the nature of any effect and 
provide empirical data supporting the extent of that effect. Comments 
will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed rules are adopted, and will be 
placed in the same public file as comments on the proposed rules 
themselves.

XI. Statutory Authority

    The amendments contained in this release are being proposed under 
the authority set forth in Sections 3, 6, 7, 8, 10, 19(a), and 28 of 
the Securities Act, as amended, and Sections 3(b), 12, 13, 15(d), 
23(a), and 36 of the Exchange Act.

List of Subjects in 17 CFR Parts 210, 229, 239, 240 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule and Form Amendments

    For the reasons set out in the preamble, the Commission is 
proposing to amend title 17, chapter II of the Code of Federal 
Regulations as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to reads as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n, 
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c), 
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.

0
2. Revise Sec.  210.3-10 to read as follows:

Sec.  210.3-10   Financial statements of guarantors and issuers of 
guaranteed securities registered or being registered.

    (a) If an issuer or guarantor of a guaranteed security that is 
registered or being registered is required to file financial statements 
required by Regulation S-X with respect to the

[[Page 49680]]

guarantee or guaranteed security, such financial statements may be 
omitted if the issuer or guarantor is a consolidated subsidiary of the 
parent company, the parent company's consolidated financial statements 
have been filed, and the conditions in paragraphs (a)(1) and (2) of 
this section have been met:
    (1) The guaranteed security is debt or debt-like; and
    (i) The parent company issues the security or co-issues the 
security, jointly and severally, with one or more of its consolidated 
subsidiaries; or
    (ii) A consolidated subsidiary issues the security or co-issues the 
security with one or more other consolidated subsidiaries of the parent 
company, and the security is guaranteed fully and unconditionally by 
the parent company.
    (2) The parent company provides the disclosures specified in Sec.  
210.13-01.
    (b) For the purposes of this section and Sec.  210.13-01:
    (1) The ``parent company'' is the entity that:
    (i) Is an issuer or guarantor of the guaranteed security;
    (ii) Is, or as a result of the subject Securities Act registration 
statement will be, an Exchange Act reporting company; and
    (iii) Consolidates each subsidiary issuer and/or subsidiary 
guarantor of the guaranteed security in its consolidated financial 
statements.
    (2) A security is ``debt or debt-like'' if it has the following 
characteristics:
    (i) The issuer has a contractual obligation to pay a fixed sum at a 
fixed time; and
    (ii) Where the obligation to make such payments is cumulative, a 
set amount of interest must be paid.

    Note 1 to paragraph (b)(2). Neither the form of the security nor 
its title will determine whether a security is debt or debt like. 
Instead, the substance of the obligation created by the security 
will be determinative.

    Note 2 to paragraph (b)(2). The phrase ``set amount of 
interest'' is not intended to mean ``fixed amount of interest.'' 
Floating and adjustable rate securities, as well as indexed 
securities, may meet the criteria specified in paragraph (b)(2)(ii) 
of this section as long as the payment obligation is set in the debt 
instrument and can be determined from objective indices or other 
factors that are outside the discretion of the obligor.

    (3) A guarantee is ``full and unconditional,'' if, when an issuer 
of a guaranteed security has failed to make a scheduled payment, the 
guarantor is obligated to make the scheduled payment immediately and, 
if it does not, any holder of the guaranteed security may immediately 
bring suit directly against the guarantor for payment of all amounts 
due and payable.

Sec.  210.3-16  [Removed and Reserved]

0
3. Remove and reserve Sec.  210.3-16.
0
4. Amend Sec.  210.8-01 by revising Note 3 and Note 4 to read as 
follows:

Sec.  210.8-01  Preliminary Notes to Article 8.

* * * * *

    Note 3 to Sec.  210.8.  The requirements of Sec.  210.3-10 are 
applicable to financial statements for a subsidiary of a smaller 
reporting company that issues securities guaranteed by the smaller 
reporting company or guarantees securities issued by the smaller 
reporting company. Disclosures about guarantors and issuers of 
guaranteed securities registered or being registered must be 
presented as required by Sec.  210.13-01.

    Note 4 to Sec.  210.8.  Disclosures about a smaller reporting 
company's affiliates whose securities collateralize any class of 
securities registered or being registered and the related collateral 
arrangement must be presented as required by Sec.  210.13-02.

* * * * *
0
5. Amend Sec.  210.8-03 by adding paragraphs (b)(7) and (8) to read as 
follows:

Sec.  210.8-03   Interim financial statements.

* * * * *
    (b) * * *
    (7) Financial statements of and disclosures about guarantors and 
issuers of guaranteed securities. The requirements of Sec.  210.3-10 
are applicable to financial statements for a subsidiary of a smaller 
reporting company that issues securities guaranteed by the smaller 
reporting company or guarantees securities issued by the smaller 
reporting company. Disclosures about guarantors and issuers of 
guaranteed securities registered or being registered must be presented 
as required by Sec.  210.13-01.
    (8) Disclosures about affiliates whose securities collateralize an 
issuance. Disclosures about a smaller reporting company's affiliates 
whose securities collateralize any class of securities registered or 
being registered and the related collateral arrangement must be 
presented as required by Sec.  210.13-02.
* * * * *
0
6. Amend Sec.  210.10-01 by adding paragraphs (b)(9) and (10) to read 
as follows:

Sec.  210.10-01   Interim financial statements.

* * * * *
    (b) * * *
    (9) The requirements of Sec.  210.3-10 are applicable to financial 
statements for a subsidiary of the registrant that issues securities 
guaranteed by the registrant or guarantees securities issued by the 
registrant. Disclosures about guarantors and issuers of guaranteed 
securities registered or being registered must be presented as required 
by Sec.  210.13-01.
    (10) Disclosures about a registrant's affiliates whose securities 
collateralize any class of securities registered or being registered 
and the related collateral arrangement must be presented as required by 
Sec.  210.13-02.
* * * * *
0
7. Add an undesignated center heading and Sec. Sec.  210.13-01 and 
210.13-02 to read as follows:

Financial and Non-Financial Disclosures for Certain Securities 
Registered or Being Registered

Sec.  210.13-01  Guarantors and issuers of guaranteed securities 
registered or being registered.

    (a) For each class of guaranteed security registered or being 
registered for which the registrant is the parent company (as that term 
is defined in Sec.  210.3-10(b)(1)), provide the following disclosures 
to the extent material to holders of the guaranteed security:
    (1) Identification of the issuers and guarantors of the guaranteed 
security;
    (2) A description of the terms and conditions of the guarantees, 
and how payments to holders of the guaranteed security may be affected 
by the composition of and relationships among the issuers, guarantors, 
and subsidiaries of the parent company that are not issuers or 
guarantors of the guaranteed security;
    (3) A description of other factors that may affect payments to 
holders of the guaranteed security, such as contractual or statutory 
restrictions on dividends, guarantee enforceability, or the rights of a 
noncontrolling interest holder;
    (4) Summarized financial information as specified in Sec.  210.1-
02(bb)(1) of each issuer and guarantor of the guaranteed security. The 
summarized financial information of each such issuer and guarantor 
consolidated in the parent company's consolidated financial statements 
may be presented on a combined basis with the summarized financial 
information of the parent company. Intercompany transactions between 
issuers and guarantors whose summarized financial information is 
presented on a combined basis shall be eliminated. If the information 
provided in response to the requirements of this section is applicable 
to one or more, but not all, issuers and/or guarantors, separately 
disclose the summarized financial information applicable to those 
issuers and/or guarantors. The financial information of subsidiaries 
that are not issuers or guarantors shall not be combined with that of 
issuers and guarantors. The method selected to

[[Page 49681]]

present investments in subsidiaries that are not issuers or guarantors 
shall be disclosed and used for all such subsidiaries for all of the 
classes of guaranteed securities for which disclosure is required by 
this section, and shall be reasonable in the circumstances. Disclose 
this summarized financial information as of and for the most recently 
ended fiscal year and interim period included in the parent company's 
consolidated financial statements. If the disclosure required by this 
paragraph (a)(4) is omitted because it is not material to holders of 
the guaranteed security, disclose a statement to that effect and the 
reasons therefore; and
    (5) Any other quantitative or qualitative information that would be 
material to making an investment decision with respect to the 
guaranteed security.

    Note 1 to paragraph (a). The parent company may elect to provide 
the disclosures required by this section in a footnote to its 
consolidated financial statements or alternatively, in management's 
discussion and analysis of financial condition and results of 
operations described in Sec.  229.303 (Item 303 of Regulation S-K) 
of this chapter in its registration statement covering the offer and 
sale of the subject securities and any related prospectus, and in 
Exchange Act reports on the forms described in Sec. Sec.  249.310 
(Form 10-K), 249.220f (Form 20-F), and 249.308a (Form 10-Q) of this 
chapter required to be filed during the fiscal year in which the 
first bona fide sale of the subject securities is completed. If not 
otherwise included in the consolidated financial statements or in 
management's discussion and analysis of financial condition and 
results of operations, the parent company must include the 
disclosures in its prospectus immediately following ``Risk 
Factors,'' if any, or otherwise, immediately following pricing 
information described in Sec.  229.503(c) (Item 503(c) of Regulation 
S-K) of this chapter. However, the parent company must provide the 
disclosures in a footnote to its consolidated financial statements 
in its annual and quarterly reports beginning with its annual report 
filed on the forms described in Sec. Sec.  249.310 (Form 10-K) and 
249.220f (Form 20-F) of this chapter for the fiscal year during 
which the first bona fide sale of the subject securities is 
completed.

    (b) [Reserved]

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

    (a) For each class of security registered or being registered that 
is collateralized by a security of the registrant's affiliate or 
affiliates, provide the following disclosures to the extent material to 
holders of the collateralized security:
    (1) A description of the security pledged as collateral and each 
affiliate whose security is pledged as collateral;
    (2) A description of the terms and conditions of the collateral 
arrangement, including the events or circumstances that would require 
delivery of the collateral;
    (3) A description of the trading market for the affiliate's 
security pledged as collateral or a statement that there is no market;
    (4) Summarized financial information as specified in Sec.  210.1-
02(bb)(1) of each affiliate whose securities are pledged as collateral. 
The summarized financial information of each such affiliate 
consolidated in the registrant's financial statements may be presented 
on a combined basis. Intercompany transactions between affiliates whose 
summarized financial information is presented on a combined basis shall 
be eliminated. If the information provided in response to the 
requirements of this section is applicable to one or more, but not all, 
affiliates, separately disclose the summarized financial information 
applicable to those affiliates. Disclose this summarized financial 
information as of and for the most recently ended fiscal year and 
interim period included in the registrant's consolidated financial 
statements. If the disclosure required by this paragraph (a)(4) is 
omitted because it is not material to holders of the collateralized 
security, disclose a statement to that effect and the reasons 
therefore; and
    (5) Any other quantitative or qualitative information that would be 
material to making an investment decision with respect to the 
collateralized security.

    Note 1 to paragraph (a).  The registrant may elect to provide 
the disclosures required by this section in a footnote to its 
consolidated financial statements or alternatively, in management's 
discussion and analysis of financial condition and results of 
operations described in Sec.  229.303 (Item 303 of Regulation S-K) 
of this chapter in its registration statement covering the offer and 
sale of the subject securities and any related prospectus, and in 
Exchange Act reports on the forms described in Sec. Sec.  249.310 
(Form 10-K), 249.220f (Form 20-F), and 249.308a (Form 10-Q) of this 
chapter required to be filed during the fiscal year in which the 
first bona fide sale of the subject securities is completed. If not 
otherwise included in the consolidated financial statements or in 
management's discussion and analysis of financial condition and 
results of operations, the registrant must include the disclosures 
in its prospectus immediately following ``Risk Factors,'' if any, or 
otherwise, immediately following pricing information described in 
Sec.  229.503(c) (Item 503(c) of Regulation S-K) of this chapter. 
However, the registrant must provide the disclosures in a footnote 
to its consolidated financial statements in its annual and quarterly 
reports beginning with its annual report filed on the forms 
described in Sec. Sec.  249.310 (Form 10-K) and 249.220f (Form 20-F) 
of this chapter for the fiscal year during which the first bona fide 
sale of the subject securities is completed.

    (b) [Reserved]

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
8. The authority citation for part 229 reads as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).

0
9. Amend Sec.  229.504 by revising Instruction 6 to read as follows:

Sec.  229.504  (Item 504) Use of proceeds.

* * * * *
    6. Where the registrant indicates that the proceeds may, or will, 
be used to finance acquisitions of other businesses, the identity of 
such businesses, if known, or, if not known, the nature of the 
businesses to be sought, the status of any negotiations with respect to 
the acquisition, and a brief description of such business shall be 
included. Where, however, pro forma financial statements reflecting 
such acquisition are not required by Sec. Sec.  210.1-01 through 
210.13-02 (Regulation S-X) of this chapter, including Sec.  210.8-05 
(Rule 8-05 of Regulation S-X) of this chapter for smaller reporting 
companies, to be included in the registration statement, the possible 
terms of any transaction, the identification of the parties thereto or 
the nature of the business sought need not be disclosed, to the extent 
that the registrant reasonably determines that public disclosure of 
such information would jeopardize the acquisition. Where Sec. Sec.  
210.1-01 through 210.13-02 (Regulation S-X) of this chapter, including 
Sec.  210.8-04 (Rule 8-04 of Regulation S-X) of this chapter for 
smaller reporting companies, as applicable, would require financial 
statements of the business to be acquired to be included, the 
description of the business to be acquired shall be more detailed.
* * * * *

[[Page 49682]]

0
10. Amend Sec.  229.1100 by revising paragraphs (c)(2)(ii)(C), (D), and 
(F) to read as follows:

Sec.  229.1100  (Item 1100) General.

* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (C) If the third party does not meet the conditions of paragraph 
(c)(2)(ii)(A) or (B) of this section and the pool assets relating to 
the third party are fully and unconditionally guaranteed by a direct or 
indirect parent of the third party, General Instruction I.C.3 of the 
form described in Sec.  239.13 (Form S-3) of this chapter or General 
Instruction I.A.5(iii) of the form described in Sec.  239.33 (Form F-3) 
of this chapter is met with respect to the pool assets relating to such 
third party and the disclosures specified in Sec.  210.13-01 (Rule 13-
01 of Regulation S-X) of this chapter have been provided in the reports 
to be referenced. Financial statements of the third party may be 
omitted if the requirements of Sec.  210.3-10 (Rule 3-10 of Regulation 
S-X) of this chapter are satisfied.
    (D) If the pool assets relating to the third party are guaranteed 
by a wholly owned subsidiary of the third party and the subsidiary does 
not meet the conditions of paragraph (c)(2)(ii)(A) or (B) of this 
section, the criteria in either paragraph (c)(2)(ii)(A) or (B) of this 
section are met with respect to the third party and the disclosures 
specified in Rule 13-01 of Regulation S-X have been provided in the 
reports to be referenced. Financial statements of the subsidiary 
guarantor may be omitted if the requirements of Rule 3-10 of Regulation 
S-X are satisfied.
* * * * *
    (F) The third party is a U.S. government-sponsored enterprise, has 
outstanding securities held by non-affiliates with an aggregate market 
value of $75 million or more, and makes information publicly available 
on an annual and quarterly basis, including audited financial 
statements prepared in accordance with generally accepted accounting 
principles covering the same periods that would be required for audited 
financial statements under Sec. Sec.  210.1-01 through 210.13-02 
(Regulation S-X) of this chapter and non-financial information 
consistent with that required by Sec. Sec.  229.10 through 229.1208 
(Regulation S-K).
* * * * *
0
11. Amend Sec.  229.1112 by revising paragraph (b)(2) to read as 
follows:

Sec.  229.1112  (Item 1112) Significant obligors of pool assets.

* * * * *
    (b) * * *
    (2) If pool assets relating to a significant obligor represent 20% 
or more of the asset pool, provide financial statements meeting the 
requirements of Sec. Sec.  210.1-01 through 210.13-02 (Regulation S-X) 
of this chapter, except Sec. Sec.  210.3-05 (Rule 3-05) and 210.11-01 
through 210.11-03 (Article 11 of Regulation S-X) of this chapter, of 
the significant obligor. Financial statements of such obligor and its 
subsidiaries consolidated (as required by Sec.  240.14a-3(b) of this 
chapter) shall be filed under this item.
* * * * *
0
12. Amend Sec.  229.1114 by revising paragraph (b)(2)(ii) to read as 
follows:

Sec.  229.1114  (Item 1114) Credit enhancement and other support, 
except for certain derivatives instruments.

* * * * *
    (b) * * *
    (2) * * *
    (ii) If any entity or group of affiliated entities providing 
enhancement or other support described in paragraph (a) of this section 
is liable or contingently liable to provide payments representing 20% 
or more of the cash flow supporting any offered class of the asset-
backed securities, provide financial statements meeting the 
requirements of Sec. Sec.  210.1-01 through 210.13-02 (Regulation S-X) 
of this chapter, except Sec. Sec.  210.3-05 (Rule 3-05) and 210.11-01 
through 210.11-03 (Article 11 of Regulation S-X) of this chapter, of 
such entity or group of affiliated entities. Financial statements of 
such enhancement provider and its subsidiaries consolidated (as 
required by Sec.  240.14a-3(b) of this chapter) shall be filed under 
this item.
* * * * *
0
13. Amend Sec.  229.1115 by revising paragraph (b)(2) to read as 
follows:

Sec.  229.1115  (Item 1115) Certain derivatives instruments.

* * * * *
    (b) * * *
    (2) If the aggregate significance percentage related to any entity 
or group of affiliated entities providing derivative instruments 
contemplated by this section is 20% or more, provide financial 
statements meeting the requirements of Sec. Sec.  210.1-01 through 
210.13-02 (Regulation S-X) of this chapter, except Sec. Sec.  210.3-05 
(Rule 3-05) and 210.11-01 through 210.11-03 (Article 11 of Regulation 
S-X) of this chapter, of such entity or group of affiliated entities. 
Financial statements of such entity and its subsidiaries consolidated 
(as required by Sec.  240.14a-3(b) of this chapter) shall be filed 
under this item.
* * * * *

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

0
14. The authority citation for part 239 is revised to read as follows:

    Authority:  15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 
312, unless otherwise noted.

0
15. Amend Sec.  239.31 by revising paragraph (b) to read as follows:

Sec.  239.31  Form F-1, registration statement under the Securities Act 
of 1933 for securities of certain foreign private issuers.

* * * * *
    (b) If a registrant is a majority-owned subsidiary, which does not 
itself meet the conditions of these eligibility requirements, it shall 
nevertheless be deemed to have met such conditions if its parent meets 
the conditions and if the parent fully guarantees the securities being 
registered as to principal and interest. In such an instance the 
parent-guarantor is the issuer of a separate security consisting of the 
guarantee which must be concurrently registered but may be registered 
on the same registration statement as are the guaranteed securities. 
Both the parent-guarantor and the subsidiary shall each disclose the 
information required by this Form as if each were the only registrant 
except that if the subsidiary will not be eligible to file annual 
reports on the form described in Sec.  249.229f (Form 20-F) of this 
chapter after the effective date of the registration statement, then it 
shall disclose the information specified in the form described in Sec.  
239.11 (Form S-1) of this chapter. The requirements of Sec.  210.3-10 
(Rule 3-10 of Regulation S-X) of this chapter are applicable to 
financial statements for a subsidiary of a parent company that issues 
securities guaranteed by the parent company.
0
16. Amend Form F-1 (referenced in Sec.  239.31) by revising Instruction 
I.B under ``General Instructions'' to read as follows:

    Note:  The text of Form F-1 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

[[Page 49683]]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

* * * * *

GENERAL INSTRUCTIONS

I. Eligibility Requirements for Use of Form F-1

* * * * *
    B. If a registrant is a majority-owned subsidiary, which does not 
itself meet the conditions of these eligibility requirements, it shall 
nevertheless be deemed to have met such conditions if its parent meets 
the conditions and if the parent fully guarantees the securities being 
registered as to principal and interest. Note: In such an instance the 
parent-guarantor is the issuer of a separate security consisting of the 
guarantee which must be concurrently registered but may be registered 
on the same registration statement as are the guaranteed securities. 
Both the parent-guarantor and the subsidiary shall each disclose the 
information required by this Form as if each were the only registrant 
except that if the subsidiary will not be eligible to file annual 
reports on Form 20-F after the effective date of the registration 
statement, then it shall disclose the information specified in Forms S-
1 (Sec.  239.11 of this chapter). The requirements of Rule 3-10 of 
Regulation S-X (Sec.  210.3-10 of this chapter) are applicable to 
financial statements for a subsidiary of a parent company that issues 
securities guaranteed by the parent company.
* * * * *
0
17. Amend Sec.  239.33 by revising Note to paragraph (a)(5) to read as 
follows:

Sec.  239.33  Form F-3, for registration under the Securities Act of 
1933 of securities of certain foreign private issuers offered pursuant 
to certain types of transactions.

* * * * *

    Note to paragraph (a)(5).  In the situations described in 
paragraphs (a)(5)(iii), (iv), and (v) of this section, the parent or 
majority-owned subsidiary guarantor is the issuer of a separate 
security consisting of the guarantee, which must be concurrently 
registered, but may be registered on the same registration statement 
as are the guaranteed non-convertible securities. Both the parent 
and majority-owned subsidiary shall each disclose the information 
required by this Form as if each were the only registrant except 
that if the majority-owned subsidiary will not be eligible to file 
annual reports on the forms described in Sec.  249.220f (Form 20-F) 
or Sec.  249.240f (Form 40-F) of this chapter after the effective 
date of the registration statement, then it shall disclose the 
information specified in the form described in Sec.  239.13 (Form S-
3) of this chapter. The requirements of Sec.  210.3-10 (Rule 3-10 of 
Regulation S-X) of this chapter are applicable to financial 
statements of a subsidiary of a parent company that issues 
securities guaranteed by the parent company or guarantees securities 
issued by the parent company.

* * * * *
0
18. Amend Form F-3 (referenced in Sec.  239.33) by revising the note to 
Instruction I.A.5 under ``General Instructions'' to read as follows:

    Note:  The text of Form F-3 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM F-3

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

* * * * *
GENERAL INSTRUCTIONS
* * * * *
I. Eligibility Requirements for Use of Form F-3
* * * * *
A. Registration Requirements
* * * * *
    5. Majority-owned Subsidiaries. If a registrant is a majority-owned 
subsidiary, security offerings may be registered on this Form if:
* * * * *

    Note:  In the situation described in paragraphs I.A.5(iii), 
I.A.5(iv), and I.A.5(v) above, the parent or majority-owned 
subsidiary guarantor is the issuer of a separate security consisting 
of the guarantee, which must be concurrently registered, but may be 
registered on the same registration statement as are the guaranteed 
non-convertible securities. Both the parent or majority-owned 
subsidiary shall each disclose the information required by this Form 
as if each were the only registrant except that if the majority-
owned subsidiary will not be eligible to file annual reports on Form 
20-F or Form 40-F after the effective date of the registration 
statement, then it shall disclose the information specified in Form 
S-3. The requirements of Rule 3-10 of Regulation S-X are applicable 
to financial statements for a subsidiary of a parent company that 
issues securities guaranteed by the parent company or guarantees 
securities issued by the parent company.

* * * * *
0
19. Amend Form 1-A (referenced in Sec.  239.90) by revising paragraph 
(b)(7) of Part F/S to read as follows:

    Note:  The text of Form 1-A does not, and this amendment will 
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-A

REGULATION A OFFERING STATEMENT UNDER THE SECURITIES ACT OF 1933

* * * * *

Part F/S

* * * * *

(b) Financial Statements for Tier 1 Offerings

* * * * *
    (7) Financial Statements of and Disclosures About Other Entities. 
The circumstances described below may require you to file financial 
statements of, or provide disclosures about, other entities in the 
offering statement. The financial statements of other entities must be 
presented for the same periods as if the other entity was the issuer as 
described above in paragraphs (b)(3) and (b)(4) unless a shorter period 
is specified by the rules below. The financial statements of other 
entities shall follow the same audit requirement as paragraph (b)(2) of 
this Part F/S:
    (i) Financial Statements of and Disclosures About Guarantors and 
Issuers of Guaranteed Securities. The requirements of Rule 3-10 of 
Regulation S-X are applicable to financial statements of a subsidiary 
that issues securities guaranteed by the ``parent company,'' as that 
term is defined in Rule 3-10 of Regulation S-X, or guarantees 
securities issued by the parent company. However, the reference in Rule 
3-10(a) of Regulation S-X to ``an issuer or guarantor of a guaranteed 
security that is registered or being registered is required to file 
financial statements required by Regulation S-X with respect to the 
guarantee or guaranteed security'' instead refers to ``an issuer or 
guarantor of a guaranteed security that is qualified or being qualified 
pursuant to Regulation A is required to file financial statements 
required by Part F/S of Form 1-A with respect to the guarantee or 
guaranteed security.'' The parent company must also provide the 
disclosures required by Rule 13-01 of Regulation S-X. The parent 
company may elect to provide these disclosures in a footnote to its 
consolidated financial statements or alternatively, in management's 
discussion and analysis of financial condition and results of 
operations described in Item 9 of Form 1-A in its

[[Page 49684]]

offering statement on Form 1-A filed in connection with the offer and 
sale of the subject securities.
    (ii) Disclosures About Affiliates Whose Securities Collateralize an 
Issuance. Disclosures about an issuer's affiliates whose securities 
collateralize any class of securities being offered must be provided as 
required by Rule 13-02 of Regulation S-X. The issuer may elect to 
provide these disclosures in a footnote to its consolidated financial 
statements or alternatively, in management's discussion and analysis of 
financial condition and results of operations described in Item 9 of 
Form 1-A in its offering statement on Form 1-A filed in connection with 
the offer and sale of the subject securities.
* * * * *
0
20. Amend Form 1-K (referenced in Sec.  239.91) by revising paragraph 
Item 7(g) of Part II to read as follows:

    Note: The text of Form 1-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-K

* * * * *

PART II

* * * * *

Item 7. Financial Statements

* * * * *
    (g) Financial Statements of and Disclosures About Other Entities. 
The circumstances described below may require you to file financial 
statements of, or provide disclosures about, other entities. The 
financial statements of other entities must be presented for the same 
periods as the issuer's financial statements described above in 
paragraphs (d) and (e) unless a shorter period is specified by the 
rules below.
    (1) Financial Statements of and Disclosures About Guarantors and 
Issuers of Guaranteed Securities. The requirements of Rule 3-10 of 
Regulation S-X are applicable to financial statements of a subsidiary 
that issues securities guaranteed by the ``parent company,'' as that 
term is defined in Rule 3-10 of Regulation S-X, or guarantees 
securities issued by the parent company. However, the reference in Rule 
3-10(a) of Regulation S-X to ``an issuer or guarantor of a guaranteed 
security that is registered or being registered is required to file 
financial statements required by Regulation S-X with respect to the 
guarantee or guaranteed security'' instead refers to ``an issuer or 
guarantor of a guaranteed security that is qualified or being qualified 
pursuant to Regulation A is required to file financial statements 
required by Item 7 of Part II of Form 1-K with respect to the guarantee 
or guaranteed security.'' The parent company must also provide the 
disclosures required by Rule 13-01 of Regulation S-X. The parent 
company may elect to provide these disclosures in a footnote to its 
consolidated financial statements or alternatively, in management's 
discussion and analysis of financial condition and results of 
operations described in Item 9 of Form 1-A in reports on Form 1-K and 
Form 1-SA required to be filed during the fiscal year in which the 
first bona fide sale of the subject securities is completed. However, 
the parent company must provide the disclosures in a footnote to its 
consolidated financial statements in its annual and semiannual reports 
beginning with its annual report filed on Form 1-K for the fiscal year 
during which the first bona fide sale of the subject securities is 
completed.
    (2) Disclosures About Affiliates Whose Securities Collateralize an 
Issuance. Disclosures about an issuer's affiliates whose securities 
collateralize any class of securities being offered must be provided as 
required by Rule 13-02 of Regulation S-X. The issuer may elect to 
provide these disclosures in a footnote to its consolidated financial 
statements or alternatively, in management's discussion and analysis of 
financial condition and results of operations described in Item 9 of 
Form 1-A in reports on Form 1-K and Form 1-SA required to be filed 
during the fiscal year in which the first bona fide sale of the subject 
securities is completed. However, the issuer must provide the 
disclosures in a footnote to its consolidated financial statements in 
its annual and semiannual reports beginning with its annual report 
filed on Form 1-K for the fiscal year during which the first bona fide 
sale of the subject securities is completed.
* * * * *
0
21. Amend Form 1-SA (referenced in Sec.  239.92) by revising Item 3(e) 
to read as follows:

    Note:  The text of Form 1-SA does not, and this amendment will 
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 1-SA

* * * * *

INFORMATION TO BE INCLUDED IN REPORT

* * * * *

Item 3. Financial Statements

* * * * *
    (e) Financial Statements of and Disclosures About Other Entities. 
The circumstances described below may require you to file financial 
statements of, or provide disclosures about, other entities. These 
financial statements and disclosures may be unaudited.
    (1) Financial Statements of and Disclosures About Guarantors and 
Issuers of Guaranteed Securities. The requirements of Rule 3-10 of 
Regulation S-X are applicable to financial statements of a subsidiary 
that issues securities guaranteed by the ``parent company,'' as that 
term is defined in Rule 3-10 of Regulation S-X, or guarantees 
securities issued by the parent company. However, the reference in Rule 
3-10(a) of Regulation S-X to ``an issuer or guarantor of a guaranteed 
security that is registered or being registered is required to file 
financial statements required by Regulation S-X with respect to the 
guarantee or guaranteed security'' instead refers to ``an issuer or 
guarantor of a guaranteed security that is qualified or being qualified 
pursuant to Regulation A is required to file financial statements 
required by Item 3 of Form 1-SA with respect to the guarantee or 
guaranteed security.'' The parent company must also provide the 
disclosures required by Rule 13-01 of Regulation S-X. The parent 
company may elect to provide these disclosures in a footnote to its 
consolidated financial statements or alternatively, in management's 
discussion and analysis of financial condition and results of 
operations described in Item 9 of Form 1-A in reports on Form 1-K and 
Form 1-SA required to be filed during the fiscal year in which the 
first bona fide sale of the subject securities is completed. However, 
the parent company must provide the disclosures in a footnote to its 
consolidated financial statements in its annual and semiannual reports 
beginning with its annual report filed on Form 1-K for the fiscal year 
during which the first bona fide sale of the subject securities is 
completed.
    (2) Disclosures About Affiliates Whose Securities Collateralize an 
Issuance. Disclosures about an issuer's affiliates whose securities 
collateralize any class of securities being offered must be provided as 
required by Rule 13-02 of Regulation S-X. The issuer may elect to 
provide these disclosures in a footnote to its consolidated

[[Page 49685]]

financial statements or alternatively, in management's discussion and 
analysis of financial condition and results of operations described in 
Item 9 of Form 1-A in reports on Form 1-K and Form 1-SA required to be 
filed during the fiscal year in which the first bona fide sale of the 
subject securities is completed. However, the issuer must provide the 
disclosures in a footnote to its consolidated financial statements in 
its annual and semiannual reports beginning with its annual report 
filed on Form 1-K for the fiscal year during which the first bona fide 
sale of the subject securities is completed.

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

0
22. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-3, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 8302; 
7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Pub. 
L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. 
L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
23. Revise Sec.  240.12h-5 to read as follows:

Sec.  240.12h-5  Exemption for subsidiary issuers of guaranteed 
securities and subsidiary guarantors.

    Any issuer of a guaranteed security, or guarantor of a security, 
that is permitted to omit financial statements by Sec.  210.3-10 (Rule 
3-10 of Regulation S-X) of this chapter is exempt from the requirements 
of 15 U.S.C. 78m(a) (Section 13(a) of the Act) or 78o(d) (Section 15(d) 
of the Act).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
24. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); 
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001, 
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
0
25. Amend Form 20-F (referenced in Sec.  249.220f) by revising 
Instruction 1 to Item 8 to read as follows:

    Note: The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

* * * * *

Instructions to Item 8:

    1. This item refers to the company, but note that under Rules 3-05, 
3-09, 3-10, 3-14, 13-01, and 13-02 of Regulation S-X, you also may have 
to provide financial statements or financial information for entities 
other than the issuer. In some cases, you may have to provide financial 
statements for a predecessor. See the definition of ``predecessor'' in 
Exchange Act Rule 12b-2 and Securities Act Rule 405.
* * * * *

    By the Commission.

    Dated: July 24, 2018.
Brent J. Fields,
Secretary.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix

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

    For ease of reference, set forth below is a table summarizing 
the main features of existing Rule 3-10 and Rule 3-16 and the 
proposed rules. This is only a summary of certain requirements 
contained in the Commission's rules and regulations, as well as a 
summary of certain proposed rules; it is not a substitute for the 
rules and regulations or for the proposed rules. Registrants should 
refer to the existing rules and to the proposed rule text for the 
full requirements and the description of those requirements in the 
release. The changes we are proposing include amending both rules 
and relocating part of Rule 3-10 and all of Rule 3-16 to proposed 
Rules 13-01 and 13-02, respectively.

------------------------------------------------------------------------
                               Summary of existing Rule     Summary of
                                         3-10             proposed rules
------------------------------------------------------------------------
Financial Statement           Rule 3-10(a) states that   Each issuer of
 Requirement & Omission of     every issuer of a          a registered
 Subsidiary Issuer and         registered security that   security that
 Guarantor Financial           is guaranteed and every    is guaranteed
 Statements.                   guarantor of a             and each
                               registered security must   guarantor of a
                               file the financial         registered
                               statements required for    security must
                               a registrant by            file the
                               Regulation S-X.            financial
                              Rules 3-10(b)-(f) set       statements
                               forth five exceptions to   required for a
                               this general rule, which   registrant by
                               permit the omission of     Regulation S-
                               separate financial         X; however,
                               statements of subsidiary   proposed Rule
                               issuers and guarantors     3-10(a) would
                               when certain conditions    no longer
                               are met, including that    contain this
                               the parent company         express
                               provides the Alternative   statement.
                               Disclosures.              Proposed Rule 3-
                                                          10(a) would
                                                          continue to
                                                          permit the
                                                          omission of
                                                          separate
                                                          financial
                                                          statements of
                                                          subsidiary
                                                          issuers and
                                                          guarantors
                                                          when certain
                                                          conditions are
                                                          met, including
                                                          that the
                                                          parent company
                                                          provides the
                                                          Proposed
                                                          Alternative
                                                          Disclosures.
Rule Structure & Eligible     Rules 3-10(b) through (f)  The proposed
 Issuer and Guarantor          set forth the five         rules would
 Structures.                   exceptions. Each           replace the
                               exception specifies the    exceptions in
                               eligible structures to     existing Rule
                               which it applies, and      3-10(b)
                               the conditions that must   through (f).
                               be met. In each case,      Proposed Rule
                               the parent company must    3-10(a) would
                               provide the Alternative    permit the
                               Disclosures.               separate
                              Eligible issuer and         financial
                               guarantor structures:      statements of
                               A finance          a subsidiary
                               subsidiary issues          issuer or
                               securities that its        guarantor to
                               parent company             be omitted if
                               guarantees (Rule 3-        the
                               10(b));                    eligibility
                               an operating       conditions in
                               subsidiary issues          proposed Rules
                               securities that its        3-10(a) and 3-
                               parent company             10(a)(1) are
                               guarantees (Rule 3-        met and the
                               10(c));                    Proposed
                               a subsidiary       Alternative
                               issues securities that     Disclosures
                               its parent company and     specified in
                               one or more other          proposed Rule
                               subsidiaries of its        13-01 are
                               parent company guarantee   provided in
                               (Rule 3-10(d));            the filing, as
                               a parent company   required by
                               issues securities that     proposed Rule
                               one of its subsidiaries    3-10(a)(2).
                               guarantees (Rule 3-        Proposed Rule
                               10(e)); or                 3-10(a)(1)
                               a parent company   sets forth the
                               issues securities that     eligible
                               more than one of its       structures.
                               subsidiaries guarantees   Eligible issuer
                               (Rule 3-10(f)).            and guarantor
                                                          structures:
                                                          The
                                                          parent company
                                                          issues the
                                                          security or co-
                                                          issues the
                                                          security,
                                                          jointly and
                                                          severally,
                                                          with one or
                                                          more of its
                                                          consolidated
                                                          subsidiaries
                                                          (Proposed Rule
                                                          3-10(a)(1)(i))
                                                          ; or
                                                          a
                                                          consolidated
                                                          subsidiary
                                                          issues the
                                                          security, or
                                                          co-issues it
                                                          with one or
                                                          more other
                                                          consolidated
                                                          subsidiaries
                                                          of the parent
                                                          company, and
                                                          the security
                                                          is guaranteed
                                                          fully and
                                                          unconditionall
                                                          y by the
                                                          parent company
                                                          (Proposed Rule
                                                          3-10(a)(1)(ii)
                                                          ).
                                                         The role of
                                                          subsidiary
                                                          guarantors
                                                          would not be
                                                          specified in
                                                          the proposed
                                                          categories of
                                                          structures;
                                                          however, the
                                                          proposed rules
                                                          are intended
                                                          to cover the
                                                          structures
                                                          permitted in
                                                          existing Rules
                                                          3-10(b)
                                                          through (f).

[[Page 49686]]

 
Conditions to Omit Separate   If an issuer and           The applicable
 Subsidiary Issuer and         guarantor structure        conditions,
 Guarantor Financial           matches one of the         set forth in
 Statements.                   exceptions in Rules 3-     proposed Rule
                               10(b) through (f), the     3-10, include:
                               conditions in the         
                               applicable exception       Consolidated
                               paragraph must be met,     financial
                               including:                 statements of
                               Consolidated       the parent
                               financial statements of    company have
                               the parent company have    been filed
                               been filed;                (proposed Rule
                               each subsidiary    3-10(a));
                               issuer and guarantor is    the
                               ``100% owned'' by the      subsidiary
                               parent company;            issuer or
                               each guarantee     guarantor is a
                               is ``full and              consolidated
                               unconditional'' and,       subsidiary of
                               where there are multiple   the parent
                               guarantees, joint and      company
                               several; and               (proposed Rule
                               the parent         3-10(a));
                               company provides the       the
                               Alternative Disclosures    guaranteed
                               in its financial           security is
                               statement footnotes.       debt or debt-
                              Additionally, the 2000      like (proposed
                               Release states the         Rule 3-
                               guaranteed security must   10(a)(1));
                               be debt or debt-like.      the
                                                          issuer and
                                                          guarantor
                                                          structure must
                                                          match one of
                                                          the eligible
                                                          issuer and
                                                          guarantor
                                                          structures
                                                          (proposed Rule
                                                          3-10(a)(1)(i)
                                                          or (ii)); and
                                                          the
                                                          parent company
                                                          provides the
                                                          Proposed
                                                          Alternative
                                                          Disclosures
                                                          (proposed Rule
                                                          3-10(a)(2)).
Parent Company Financial      The identity of the        ``Parent
 Statements Condition.         parent company will vary   company''
                               based on the particular    would be
                               corporate structure;       defined in
                               however, the 2000          proposed Rule
                               Release stated three       3-10(b)(1) and
                               conditions must be met     require that
                               before an entity can be    the entity:
                               considered a ``parent      Is an
                               company,'' including       issuer or
                               that the entity:           guarantor of
                               Is an issuer or    the guaranteed
                               guarantor of the subject   security;
                               securities;                is an
                               is an Exchange     Exchange Act
                               Act reporting company,     reporting
                               or will be one as a        company, or
                               result of the subject      will become
                               Securities Act             one as a
                               registration statement;    result of the
                               and                        subject
                               owns 100% of       Securities Act
                               each subsidiary issuer     registration
                               or guarantor directly or   statement; and
                               indirectly.               
                                                          consolidates
                                                          each
                                                          subsidiary
                                                          issuer and/or
                                                          guarantor in
                                                          its
                                                          consolidated
                                                          financial
                                                          statements.
Ownership Condition.........  The exceptions in Rules 3- Proposed Rule 3-
                               10(b) through (f)          10(a) would
                               require that each          require that
                               subsidiary issuer or       the subsidiary
                               guarantor must be 100%     issuer or
                               owned by the parent        guarantor be a
                               company to omit its        consolidated
                               separate financial         subsidiary of
                               statements.                the parent
                                                          company
                                                          pursuant to
                                                          the relevant
                                                          accounting
                                                          standards
                                                          already in
                                                          use.
                              .........................  Proposed Rule
                                                          13-01(a)(3)
                                                          would require,
                                                          to the extent
                                                          material, a
                                                          description of
                                                          any factors
                                                          that may
                                                          affect
                                                          payments to
                                                          holders of the
                                                          guaranteed
                                                          security, such
                                                          as the rights
                                                          of a non-
                                                          controlling
                                                          interest
                                                          holder.
                                                          Proposed Rule
                                                          13-01(a)(4)
                                                          would require
                                                          separate
                                                          disclosure of
                                                          Summarized
                                                          Financial
                                                          Information
                                                          for subsidiary
                                                          issuers and
                                                          guarantors
                                                          affected by
                                                          those factors.
Debt or Debt-Like Security    Rule 3-10 does not define  Proposed Rule 3-
 Definition:                   when a security is         10(a)(1) would
                               ``debt or debt-like;''     state
                               however, the 2000          explicitly
                               Release described          that the
                               characteristics of a       guaranteed
                               debt or debt-like          security must
                               security, including:       be ``debt or
                               The issuer has a   debt-like''
                               contractual obligation     and proposed
                               to pay a fixed sum at a    Rule 3-
                               fixed time; and            10(b)(2) would
                               where the          state that a
                               obligation to make such    guaranteed
                               payments is cumulative,    security would
                               a set amount of interest   be considered
                               must be paid.              ``debt or debt-
                                                          like'' if:
                                                          The
                                                          issuer has a
                                                          contractual
                                                          obligation to
                                                          pay a fixed
                                                          sum at a fixed
                                                          time; and
                                                          where
                                                          the obligation
                                                          to make such
                                                          payments is
                                                          cumulative, a
                                                          set amount of
                                                          interest must
                                                          be paid.
Subsidiary Guarantee          The exceptions in Rule 3-  The parent
 Eligibility Requirements.     10(b) through (f)          company's role
                               specify that a guarantee   with respect
                               be full and                to the
                               unconditional and, when    guaranteed
                               there are multiple         security would
                               guarantees, be joint and   determine
                               several. The               whether the
                               requirements are imposed   structure is
                               on the guarantee           eligible to
                               regardless of whether      provide the
                               the guarantor is the       Proposed
                               parent company or a        Alternative
                               subsidiary.                Disclosures.
                                                          The parent
                                                          company must
                                                          be the issuer
                                                          or full and
                                                          unconditional
                                                          guarantor of
                                                          the guaranteed
                                                          security
                                                          (proposed
                                                          Rules 3-
                                                          10(a)(1)(i)
                                                          and (ii)).
                              .........................  If a subsidiary
                                                          guarantee is
                                                          not full and
                                                          unconditional,
                                                          or where there
                                                          are multiple
                                                          guarantees,
                                                          not joint and
                                                          several,
                                                          disclosure of
                                                          such terms and
                                                          conditions
                                                          would be
                                                          required by
                                                          proposed Rule
                                                          13-01(a)(2),
                                                          to the extent
                                                          material.
                                                          Proposed Rule
                                                          13-01(a)(4)
                                                          would require
                                                          separate
                                                          disclosure of
                                                          the Summarized
                                                          Financial
                                                          Information
                                                          for subsidiary
                                                          guarantor(s)
                                                          to which such
                                                          terms and
                                                          conditions
                                                          apply, to the
                                                          extent
                                                          material.
Alternative Disclosures &     To be eligible to omit     The proposed
 Proposed Alternative          the separate financial     rule would
 Disclosures.                  statements of a            replace the
                               subsidiary issuer or       brief
                               guarantor, each            narrative form
                               exception in Rules 3-      and
                               10(b) through (f)          Consolidating
                               requires that the parent   Information
                               company must provide the   form of
                               Alternative Disclosures    Alternative
                               in the footnotes to its    Disclosure
                               consolidated financial     with the
                               statements. The form and   Proposed
                               content of the             Alternative
                               Alternative Disclosures    Disclosures
                               are determined based on    specified in
                               the facts and              proposed Rule
                               circumstances and are      13-01.
                               either a brief narrative   Specific
                               or Consolidating           elements of
                               Information. Specific      the Proposed
                               elements of                Alternative
                               Consolidating              Disclosures
                               Information are            are discussed
                               discussed below.           below.
                              Alternative Disclosures    The Proposed
                               may consist of a brief     Alternative
                               narrative instead of       Disclosures
                               Consolidating              would be
                               Information when:          required in
                               The subsidiary     all cases, to
                               is a finance subsidiary,   the extent
                               and the parent company     material to
                               is the only guarantor of   holders of the
                               the securities;            guaranteed
                                                          security
                                                          (proposed Rule
                                                          13-01(a)).
                                                          Additionally,
                                                          proposed Rule
                                                          13-01(a)(5)
                                                          would require
                                                          disclosure of
                                                          any
                                                          quantitative
                                                          or qualitative
                                                          information
                                                          that would be
                                                          material to
                                                          making an
                                                          investment
                                                          decision with
                                                          respect to the
                                                          guaranteed
                                                          security.
                                  the parent
                                  company of the
                                  subsidiary issuer has
                                  no independent assets
                                  or operations, the
                                  parent company
                                  guarantees the
                                  securities, no
                                  subsidiary of the
                                  parent company
                                  guarantees the
                                  securities, and any
                                  subsidiaries of the
                                  parent company other
                                  than the issuer are
                                  minor; and
                                  the parent
                                  company issuer has no
                                  independent assets or
                                  operations and all of
                                  the parent company's
                                  subsidiaries, other
                                  than minor
                                  subsidiaries,
                                  guarantee the
                                  securities.
Consolidating Information     The instructions for       The proposed
 and Proposed Alternative      preparing Consolidating    rule would
 Disclosures--Level of         Information are            require the
 Detail.                       specified in Rule 3-       Proposed
                               10(i). Consolidating       Alternative
                               Information includes all   Disclosures
                               major captions of the      specified in
                               balance sheet, income      proposed Rule
                               statement, and cash flow   13-01.
                               statement that are         Proposed Rule
                               required to be shown       13-01(a)(4)
                               separately in interim      would require,
                               financial statements       for each
                               prepared under Article     issuer and
                               10 of Regulation S-X.      guarantor,
                               Rules 3-10(i)(11)(i) and   Summarized
                               (ii), respectively,        Financial
                               require disclosure of      Information,
                               any financial and          as specified
                               narrative information      in Rule 1-
                               about each guarantor if    02(bb) of
                               it would be material for   Regulation S-
                               investors to evaluate      X, which would
                               the sufficiency of the     include select
                               guarantee, and             balance sheet
                               disclosure of sufficient   and income
                               information to make the    statement line
                               financial information      items.
                               presented not              Disclosure of
                               misleading.                additional
                                                          line items of
                                                          financial
                                                          information
                                                          beyond what is
                                                          specified in
                                                          proposed Rule
                                                          13-01(a)(4)
                                                          would be
                                                          required by
                                                          proposed Rule
                                                          13-01(a)(5),
                                                          to the extent
                                                          material. If
                                                          the
                                                          disclosures
                                                          required by
                                                          proposed Rule
                                                          13-01(a)(4)
                                                          are omitted
                                                          because they
                                                          are
                                                          immaterial,
                                                          proposed Rule
                                                          13-01(a)(4)
                                                          requires
                                                          disclosure to
                                                          that effect
                                                          and the
                                                          reasons.

[[Page 49687]]

 
Consolidating Information     The applicable exception   Proposed Rule
 and Proposed Alternative      in Rule 3-10(c) through    13-01(a)(4)
 Disclosures--Combined Basis.  (f) specifies the          would permit
                               columns of information     the Summarized
                               that must be presented,    Financial
                               and Rule 3-10(i)(6)        Information of
                               describes circumstances    each issuer
                               when additional columns    and guarantor
                               are required.              consolidated
                              To distinguish the          in the parent
                               assets, liabilities,       company's
                               operations, and cash       consolidated
                               flows of the entities      financial
                               that are legally           statements to
                               obligated to make          be presented
                               payments under the         on a combined
                               guarantee from those       basis with the
                               that are not, the          Summarized
                               columnar presentation      Financial
                               must show:                 Information of
                               A parent           the parent
                               company's investments in   company.
                               all consolidated           However, if
                               subsidiaries based upon    information
                               its proportionate share    provided in
                               of their net assets        response to
                               (Rule 3-10(i)(3)); and     disclosures
                               subsidiary         specified in
                               issuer and guarantor       proposed Rule
                               investments in certain     13-01 is
                               consolidated               applicable to
                               subsidiaries using the     one or more,
                               equity method of           but not all,
                               accounting (Rule 3-        issuers and
                               10(i)(5).                  guarantors,
                                                          proposed Rule
                                                          13-01(a)(4)
                                                          would require,
                                                          to the extent
                                                          it is
                                                          material,
                                                          separate
                                                          disclosure of
                                                          Summarized
                                                          Financial
                                                          Information
                                                          for the
                                                          issuers and
                                                          guarantors to
                                                          which the
                                                          information
                                                          applies.
                                                         The proposed
                                                          rule would no
                                                          longer require
                                                          separate
                                                          disclosure of
                                                          the financial
                                                          information of
                                                          non-guarantor
                                                          subsidiaries.
                                                         Proposed Rule
                                                          13-01(a)(4)
                                                          would allow
                                                          the parent
                                                          company to
                                                          determine
                                                          which method
                                                          best meets the
                                                          objective of
                                                          excluding the
                                                          financial
                                                          information of
                                                          non-issuer and
                                                          non-guarantor
                                                          subsidiaries
                                                          from the
                                                          Proposed
                                                          Alternative
                                                          Disclosures,
                                                          so long as the
                                                          selected
                                                          method is
                                                          disclosed and
                                                          used for all
                                                          non-issuer and
                                                          non-guarantor
                                                          subsidiaries
                                                          for all
                                                          classes of
                                                          guaranteed
                                                          securities for
                                                          which the
                                                          disclosure is
                                                          required, and
                                                          is reasonable
                                                          in the
                                                          circumstances.
Consolidating Information     Consolidating Information  Proposed Rule
 and Proposed Alternative      must be provided as of,    13-01(a)(4)
 Disclosures--Periods to       and for, the same          would require
 Present.                      periods as the parent      Summarized
                               company's consolidated     Financial
                               financial statements       Information to
                               (Rule 3-10(i)(2)).         be provided as
                                                          of, and for,
                                                          the most
                                                          recently ended
                                                          fiscal year
                                                          and year-to-
                                                          date interim
                                                          period, if
                                                          applicable,
                                                          included in
                                                          the parent
                                                          company's
                                                          consolidated
                                                          financial
                                                          statements.
Consolidating Information     Rule 3-10 requires         Proposed Rules
 and Proposed Alternative      certain non-financial      13-01(a)(1)
 Disclosures--Non-Financial    disclosures, including:    through (3)
 Disclosures.                  Disclosure, if     would require
                               true, that each            disclosures,
                               subsidiary issuer or       to the extent
                               subsidiary guarantor is    material,
                               100% owned by the parent   about the
                               company, that all          issuers and
                               guarantees are full and    guarantors,
                               unconditional, and where   the terms and
                               there is more than one     conditions of
                               guarantor, that all        the
                               guarantees are joint and   guarantees,
                               several (Rules 3-          and how the
                               10(i)(8)(i)-(iii);         issuer and
                               restricted net     guarantor
                               assets (Rule 3-            structure and
                               10(i)(10); and             other factors
                               certain types of   may affect
                               restrictions on the        payments to
                               ability of the parent      holder of the
                               company or any guarantor   guaranteed
                               to obtain funds from       securities.
                               their subsidiaries (Rule   Additionally,
                               3-10(i)(9).                proposed Rule
                                                          13-01(a)(5)
                                                          would require
                                                          disclosure of
                                                          any facts and
                                                          circumstances
                                                          specific to
                                                          particular
                                                          issuers and
                                                          guarantors
                                                          that would be
                                                          material to
                                                          holders of the
                                                          guaranteed
                                                          security that
                                                          are not
                                                          specifically
                                                          required by
                                                          proposed Rules
                                                          13-01(a)(1)
                                                          through (3).
                              Rules 3-10(i)(11)(i) and
                               (ii), respectively,
                               require disclosure of
                               any financial and
                               narrative information
                               about each guarantor if
                               it would be material for
                               investors to evaluate
                               the sufficiency of the
                               guarantee, and
                               disclosure of sufficient
                               information to make the
                               financial information
                               presented not
                               misleading.
Location and Audit            The exceptions in Rules 3- The note to
 Requirement of Alternative    10(b) through (f)          proposed Rule
 Disclosures and Proposed      require the Alternative    13-01(a) would
 Alternative Disclosure.       Disclosures to be          allow the
                               included in the notes to   parent company
                               the parent company's       to provide the
                               consolidated financial     Proposed
                               statements. Rule 3-        Alternative
                               10(i)(2) requires          Disclosures in
                               Consolidating              a footnote to
                               Information to be          its
                               audited for the same       consolidated
                               periods that the parent    financial
                               company financial          statements or
                               statements are required    alternatively,
                               to be audited.             in MD&A in its
                                                          registration
                                                          statement
                                                          covering the
                                                          offer and sale
                                                          of the subject
                                                          securities and
                                                          any related
                                                          prospectus,
                                                          and in
                                                          Exchange Act
                                                          reports on
                                                          Form 10-K,
                                                          Form 20-F, and
                                                          Form 10-Q
                                                          required to be
                                                          filed during
                                                          the fiscal
                                                          year in which
                                                          the first bona
                                                          fide sale of
                                                          the subject
                                                          securities is
                                                          completed. If
                                                          a parent
                                                          company elects
                                                          to provide the
                                                          disclosures in
                                                          its audited
                                                          financial
                                                          statements,
                                                          the Proposed
                                                          Alternative
                                                          Disclosures
                                                          would be
                                                          required to be
                                                          audited. If
                                                          not otherwise
                                                          included in
                                                          the
                                                          consolidated
                                                          financial
                                                          statements or
                                                          in MD&A, the
                                                          parent company
                                                          would be
                                                          required to
                                                          include the
                                                          Proposed
                                                          Alternative
                                                          Disclosures in
                                                          its prospectus
                                                          immediately
                                                          following
                                                          ``Risk
                                                          Factors,'' if
                                                          any, or
                                                          otherwise,
                                                          immediately
                                                          following
                                                          pricing
                                                          information
                                                          described in
                                                          Item 503(c) of
                                                          Regulation S-
                                                          K. The parent
                                                          company would
                                                          be required to
                                                          provide the
                                                          Proposed
                                                          Alternative
                                                          Disclosures in
                                                          a footnote to
                                                          its
                                                          consolidated
                                                          financial
                                                          statements in
                                                          its annual and
                                                          quarterly
                                                          reports
                                                          beginning with
                                                          its annual
                                                          report filed
                                                          on Form 10-K
                                                          or Form 20-F
                                                          for the fiscal
                                                          year during
                                                          which the
                                                          first bona
                                                          fide sale of
                                                          the subject
                                                          securities is
                                                          completed.
Recently-Acquired Subsidiary  If a parent company        The proposed
 Issuers and Guarantors.       acquires a new             rule would not
                               subsidiary issuer or       include this
                               guarantor, Rule 3-10(g)    requirement.
                               requires the parent        Proposed Rule
                               company to provide one     13-01(a)(5)
                               year of audited pre-       would require
                               acquisition financial      information
                               statements of the newly-   about recently-
                               acquired issuer or         acquired
                               guarantor (and, if         subsidiary
                               applicable, unaudited      issuers and
                               interim financial          guarantors if
                               statements) when the:      it would be
                               Parent company     material to an
                               acquires the new           investment
                               subsidiary during or       decision in
                               subsequent to one of the   the guaranteed
                               periods for which          security.
                               financial statements are
                               presented in a
                               Securities Act
                               registration statement
                               filed in connection with
                               the offer and sale of
                               the debt securities;
                                  subsidiary is
                                  deemed
                                  ``significant'' (Rule
                                  3-10(g)(1)(ii); and
                                  subsidiary is
                                  not reflected in the
                                  audited consolidated
                                  results of the parent
                                  company for at least
                                  nine months of the
                                  most recent fiscal
                                  year (Rule 3-
                                  10(g)(1)).

[[Page 49688]]

 
Exchange Act Reporting and    Subsidiary issuers and     Subsidiary
 Continuous Reporting          guarantors that avail      issuers and
 Obligation.                   themselves of an           guarantors
                               exception that allows      that are
                               for the Alternative        permitted to
                               Disclosures in lieu of     omit their
                               separate financial         financial
                               statements are exempt      statements
                               from Exchange Act          under proposed
                               reporting by Rule 12h-5.   Rule 3-10
                               The parent company,        would continue
                               however, must continue     to be exempt
                               to provide the             from Exchange
                               Alternative Disclosures    Act reporting
                               for as long as the         under Rule 12h-
                               guaranteed securities      5. The
                               are outstanding. This      proposed rule
                               obligation continues       would permit a
                               even if the subsidiary     parent company
                               issuers and guarantors     to cease
                               could have suspended       providing the
                               their reporting            Proposed
                               obligations under          Alternative
                               Exchange Act Rule 12h-3    Disclosures if
                               or Section 15(d) of the    the
                               Exchange Act, had they     corresponding
                               chosen not to avail        subsidiary
                               themselves of a Rule 3-    issuer's or
                               10 exception and           guarantor's
                               reported separately from   Section 15(d)
                               the parent company.        obligation is
                                                          suspended
                                                          automatically
                                                          by operation
                                                          of Section
                                                          15(d)(1) or
                                                          through
                                                          compliance
                                                          with Rule 12h-
                                                          3. As a
                                                          continued
                                                          condition of
                                                          eligibility to
                                                          omit the
                                                          financial
                                                          statements of
                                                          a subsidiary
                                                          issuer or
                                                          guarantor, a
                                                          parent company
                                                          must continue
                                                          providing the
                                                          Proposed
                                                          Alternative
                                                          Disclosures
                                                          for so long as
                                                          the subsidiary
                                                          issuer or
                                                          guarantor has
                                                          a Section
                                                          12(b)
                                                          reporting
                                                          obligation
                                                          with respect
                                                          to the
                                                          guarantee or
                                                          guaranteed
                                                          security.
------------------------------------------------------------------------

 
                               Summary of existing Rule     Summary of
                                         3-16             proposed rules
------------------------------------------------------------------------
Rule 3-16 Financial           Rule 3-16(a) requires a    Under the
 Statements and Proposed       registrant to provide      proposed
 Disclosures.                  separate annual and        amendments,
                               interim financial          Rule 3-16
                               statements for each        Financial
                               affiliate whose            Statements
                               securities constitute a    would be
                               ``substantial portion''    replaced with
                               of the collateral for      a requirement
                               any class of securities    that a
                               registered or being        registrant
                               registered as if the       provide the
                               affiliate were a           financial and
                               separate registrant.       non-financial
                                                          disclosures
                                                          about the
                                                          affiliate(s)
                                                          and the
                                                          collateral
                                                          arrangement
                                                          specified in
                                                          proposed Rule
                                                          13-02(a).
When Disclosure is Required.  Rule 3-16 Financial        Proposed Rule
                               Statements are required    13-02(a) would
                               when an affiliate's        require the
                               securities constitute a    disclosures
                               ``substantial portion''    specified in
                               of the collateral for      proposed Rule
                               the securities             13-02(a)(1)
                               registered or being        through (4) in
                               registered. An             all cases, to
                               affiliate's securities     the extent
                               shall be deemed to         material to
                               constitute a               holders of the
                               ``substantial portion''    collateralized
                               if the aggregate           security.
                               principal amount, par      Additionally,
                               value, or book value of    proposed Rule
                               the securities as          13-02(a)(5)
                               carried by the             would require
                               registrant, or the         disclosure of
                               market value of such       any
                               securities, whichever is   quantitative
                               the greatest, equals 20    or qualitative
                               percent or more of the     information
                               principal amount of the    that would be
                               secured class of           material to
                               securities (Rule 3-        making an
                               16(b)).                    investment
                                                          decision with
                                                          respect to the
                                                          collateralized
                                                          security.
Financial and Non-Financial   Rule 3-16 Financial        Proposed Rule
 Disclosures.                  Statements are those       13-02(a)(4)
                               that would be required     would require,
                               if the affiliate were a    for each
                               separate registrant.       affiliate
                                                          whose
                                                          securities are
                                                          pledged as
                                                          collateral,
                                                          Summarized
                                                          Financial
                                                          Information,
                                                          as specified
                                                          in Rule 1-
                                                          02(bb) of
                                                          Regulation S-
                                                          X, which would
                                                          include select
                                                          balance sheet
                                                          and income
                                                          statement line
                                                          items.
                                                          Disclosure of
                                                          additional
                                                          line items of
                                                          financial
                                                          information
                                                          beyond what is
                                                          specified in
                                                          proposed Rule
                                                          13-02(a)(4)
                                                          would be
                                                          required by
                                                          proposed Rule
                                                          13-02(a)(5),
                                                          to the extent
                                                          material. If
                                                          the
                                                          disclosures
                                                          required by
                                                          proposed Rule
                                                          13-02(a)(4)
                                                          are omitted
                                                          because they
                                                          are
                                                          immaterial,
                                                          proposed Rule
                                                          13-02(a)(4)
                                                          requires
                                                          disclosure to
                                                          that effect
                                                          and the
                                                          reasons
                                                          therefore.
                              .........................  Proposed Rules
                                                          13-02(a)(1)
                                                          through (3)
                                                          would require
                                                          certain non-
                                                          financial
                                                          disclosures,
                                                          to the extent
                                                          material,
                                                          about the
                                                          securities
                                                          pledged as
                                                          collateral,
                                                          each affiliate
                                                          whose
                                                          securities are
                                                          pledged, the
                                                          terms and
                                                          conditions of
                                                          the collateral
                                                          arrangement,
                                                          and whether a
                                                          trading market
                                                          exists for the
                                                          pledged
                                                          securities.
                                                          Additionally,
                                                          proposed Rule
                                                          13-02(a)(5)
                                                          would require
                                                          disclosure of
                                                          any other
                                                          quantitative
                                                          or qualitative
                                                          information
                                                          that would be
                                                          material to
                                                          making an
                                                          investment
                                                          decision with
                                                          respect to the
                                                          collateralized
                                                          security.
Combined Basis..............  Separate Rule 3-16         Proposed Rule
                               Financial Statements are   13-02(a)(4)
                               required for each          would permit
                               affiliate whose            the Summarized
                               securities constitute a    Financial
                               ``substantial portion''    Information of
                               of the collateral for      each affiliate
                               securities registered or   consolidated
                               being registered.          in the
                                                          registrant's
                                                          consolidated
                                                          financial
                                                          statements to
                                                          be presented
                                                          on a combined
                                                          basis.
                                                          However, if
                                                          information
                                                          provided in
                                                          response to
                                                          disclosures
                                                          specified in
                                                          proposed Rule
                                                          13-02 is
                                                          applicable to
                                                          one or more,
                                                          but not all,
                                                          affiliates,
                                                          proposed Rule
                                                          13-02(a)(4)
                                                          would require,
                                                          to the extent
                                                          it is
                                                          material,
                                                          separate
                                                          disclosure of
                                                          Summarized
                                                          Financial
                                                          Information
                                                          for the
                                                          affiliates to
                                                          which the
                                                          information
                                                          applies.
Periods Presented...........  Rule 3-16 Financial        Proposed Rule
                               Statements are required    13-02(a)(4)
                               for the same annual and    would require
                               interim periods as if      disclosure as
                               the affiliate were a       of and for the
                               separate registrant. As    most recently
                               such, the financial        ended fiscal
                               statements are required    year and
                               to be provided for the     interim period
                               periods required by        included in
                               Rules 3-01 and 3-02 of     the
                               Regulation S-X. However,   registrant's
                               Rule 3-16 Financial        consolidated
                               Statements are not         financial
                               required in quarterly      statements.
                               reports, such as Form 10-  Disclosure
                               Q.                         would be
                                                          required in
                                                          quarterly
                                                          reports, such
                                                          as Form 10-Q
                                                          (proposed Rule
                                                          10-01(b)(10)).
Location and Audit            Rule 3-16 Financial        The note to
 Requirement of the            Statements are required    proposed Rule
 Disclosure.                   to be audited for the      13-02(a) would
                               periods required by        allow the
                               Rules 3-01 and 3-02 of     registrant to
                               Regulation S-X.            provide the
                                                          disclosures
                                                          required by
                                                          this section
                                                          in a footnote
                                                          to its
                                                          consolidated
                                                          financial
                                                          statements or
                                                          alternatively,
                                                          in MD&A in its
                                                          registration
                                                          statement
                                                          covering the
                                                          offer and sale
                                                          of the subject
                                                          securities and
                                                          any related
                                                          prospectus,
                                                          and in
                                                          Exchange Act
                                                          reports on
                                                          Form 10-K,
                                                          Form 20-F, and
                                                          Form 10-Q
                                                          required to be
                                                          filed during
                                                          the fiscal
                                                          year in which
                                                          the first bona
                                                          fide sale of
                                                          the subject
                                                          securities is
                                                          completed. If
                                                          a registrant
                                                          elects to
                                                          provide the
                                                          disclosures in
                                                          its audited
                                                          financial
                                                          statements,
                                                          the proposed
                                                          disclosures
                                                          would be
                                                          required to be
                                                          audited. If
                                                          not otherwise
                                                          included in
                                                          the
                                                          consolidated
                                                          financial
                                                          statements or
                                                          in MD&A, the
                                                          registrant
                                                          would be
                                                          required to
                                                          include the
                                                          disclosures in
                                                          its prospectus
                                                          immediately
                                                          following
                                                          ``Risk
                                                          Factors,'' if
                                                          any, or
                                                          otherwise,
                                                          immediately
                                                          following
                                                          pricing
                                                          information
                                                          described in
                                                          Item 503(c) of
                                                          Regulation S-
                                                          K. The
                                                          registrant
                                                          would be
                                                          required to
                                                          provide the
                                                          disclosures in
                                                          a footnote to
                                                          its
                                                          consolidated
                                                          financial
                                                          statements in
                                                          its annual and
                                                          quarterly
                                                          reports
                                                          beginning with
                                                          its annual
                                                          report filed
                                                          on Form 10-K
                                                          or Form 20-F
                                                          for the fiscal
                                                          year during
                                                          which the
                                                          first bona
                                                          fide sale of
                                                          the subject
                                                          securities is
                                                          completed.
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[[Page 49689]]

[FR Doc. 2018-19456 Filed 10-1-18; 8:45 am]
 BILLING CODE 8011-01-P