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SECURITIES AND EXCHANGE COMMISSION

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

[Release No. 33-10762; 34-88307; File No. S7-19-18]

RIN 3235-AM12

Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and

Affiliates Whose Securities Collateralize a Registrant’s Securities

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting

amendments to the financial disclosure requirements for guarantors and issuers of guaranteed

securities registered or being registered, and issuers’ affiliates whose securities collateralize

securities registered or being registered in Regulation S-X to improve those requirements for

both investors and registrants. The changes are intended to provide investors with material

information given the specific facts and circumstances, make the disclosures easier to

understand, and reduce the costs and burdens to registrants. In addition, by reducing the costs

and burdens of compliance, issuers may be encouraged to offer guaranteed or collateralized

securities on a registered basis, thereby affording investors protection they may not be

provided in offerings conducted on an unregistered basis. Finally, by making it less

burdensome and less costly for issuers to include guarantees or pledges of affiliate securities

as collateral when they structure debt offerings, the revisions may increase the number of

registered offerings that include these credit enhancements, which could result in a lower cost

of capital and an increased level of investor protection.

DATES: Effective date: The final rules are effective on January 4, 2021.

Compliance dates: See Section VI for further information on transitioning to the final rules.

FOR FURTHER INFORMATION CONTACT: Jarrett Torno, Assistant Chief Accountant, at

(202) 551-3400, John Fieldsend, Special Counsel, or Sean Harrison, Special Counsel, at (202)

551-3430, in the Division of Corporation Finance, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is amending

Commission Reference

CFR Citation

(17 CFR)

Regulation S-X

[17 CFR 210.1-01 through 210.13-02]

Rule 3-10

Rule 3-16

Rule 8-01

Rule 8-03

Rule 10-01

Rule 13-01

Rule 13-02

§ 210.3-10

§ 210.3-16

§ 210.8-01

§ 210.8-03

§ 210.10-01

§ 210.13-01

§ 210.13-02

Item 504

Item 601

Item 1100

Item 1112

Item 1114

Item 1115

Securities Act of 1933 (Securities Act)

[15 U.S.C. 77a et seq.]

§ 229.504

§ 229.601

§ 229.1100

§ 229.1112

§ 229.1114

§ 229.1115

Rule 257

Form F-1

Form F-3

Form 1-A

Form 1-K

Form 1-SA

§ 230.257

§ 239.31

§ 239.33

§ 239.90

§ 239.91

§ 239.92

Regulation S-K

[17 CFR 229.10 through 229.1305]

Securities Exchange Act of 1934 (Exchange Act)

[15 U.S.C. 78a et seq.]

Rule 12h-5

Form 20-F

§ 240.12h-5

§ 249.220f

Table of Contents

Introduction ....................................................................................................................... 8

Background ....................................................................................................................... 8

Scope of Proposals............................................................................................................. 9

II.

Rule 3-10 of Regulation S-X ........................................................................................... 11

Background ..................................................................................................................... 11

Overview of the Existing Requirements ........................................................................ 13

III.

Amendments to Rule 3-10 and Partial Relocation to Rule 13-01 ............................... 15

Overarching Principle .................................................................................................... 15

Overview of the Proposed and Final Amendments ..................................................... 16

Conditions to Omit the Financial Statements of a Subsidiary Issuer or Guarantor 19

Eligibility Conditions ...................................................................................................... 20

Parent Company Financial Statements Condition ...................................................... 20

Consolidated Subsidiary Condition .............................................................................. 21

Debt or Debt-Like Securities Condition ....................................................................... 25

Eligible Issuer and Guarantor Structures Condition .................................................. 27

Disclosure Requirements ................................................................................................ 33

Financial Disclosures ...................................................................................................... 34

Level of Detail................................................................................................................... 34

ii.

Presentation on a Combined Basis ................................................................................. 43

iii.

Periods to Present ............................................................................................................ 53

Non-Financial Disclosures ............................................................................................... 56

When Disclosure is Required .......................................................................................... 60

Location of Revised Alternative Disclosures and Audit Requirement ....................... 72

Recently Acquired Subsidiary Issuers and Guarantors .............................................. 82

Continuous Reporting Obligation ................................................................................. 89

Application of Amendments to Certain Types of Issuers............................................ 96

Foreign Private Issuers ................................................................................................... 96

Smaller Reporting Companies ..................................................................................... 100

Offerings pursuant to Regulation A ............................................................................ 102

Issuers of Asset-backed Securities – Third Party Financial Statements ................. 105

IV.

Rule 3-16 of Regulation S-X ......................................................................................... 108

Amendments to Rule 3-16 and Partial Relocation to Rule 13-02 ............................. 109

Overarching Principle .................................................................................................. 109

Overview of the Proposed and Final Amendments ................................................... 110

Financial Disclosures .................................................................................................... 112

Level of Detail................................................................................................................ 112

Presentation on a Combined Basis .............................................................................. 118

Periods to Present ......................................................................................................... 124

Non-Financial Disclosures ............................................................................................ 127

When Disclosure is Required ....................................................................................... 130

Location of Disclosures and Audit Requirement ....................................................... 140

Recently Acquired Affiliates Whose Securities are Pledged as Collateral .............. 147

Application of Amendments to Certain Types of Issuers.......................................... 150

Foreign Private Issuers ................................................................................................. 150

Smaller Reporting Companies ..................................................................................... 152

Offerings pursuant to Regulation A ............................................................................ 154

VI.

Transition to Final Amendments and Rule 3-16 Collateral Release Provisions ..... 155

Transition to Final Amendments................................................................................. 155

Rule 3-16 Collateral Release Provisions ..................................................................... 157

VII.

Other Matters ................................................................................................................ 158

VIII. Economic Analysis ........................................................................................................ 159

Introduction ................................................................................................................... 159

Baseline and Affected Parties ...................................................................................... 160

Market Participants ...................................................................................................... 160

Market Conditions ........................................................................................................ 163

Anticipated Economic Effects ...................................................................................... 166

Amendments to Rule 3-10 and Partial Relocation to Rule 13-01 ............................. 167

Eligibility Conditions to Omit Financial Statements of Subsidiary Issuer or

Guarantor ...................................................................................................................... 170

Disclosure Requirements .............................................................................................. 172

Financial and Non-Financial Disclosures ................................................................... 173

ii.

When Disclosure is Required ....................................................................................... 178

iii.

Location of Alternative Disclosures and Audit Requirement ................................... 181

iv.

Recently Acquired Subsidiary Issuers and Guarantors ............................................ 185

Continuous Reporting Obligation ............................................................................... 187

Amendments to Rule 3-16 and Partial Relocation to Rule 13-02 ............................. 189

Financial Disclosures .................................................................................................... 190

Level of Detail ................................................................................................................ 190

ii.

Presentation on a Combined Basis .............................................................................. 191

iii.

Periods to Present ......................................................................................................... 192

Non-Financial Disclosures ............................................................................................ 193

When Disclosure is Required ....................................................................................... 194

Location of Disclosures and Audit Requirement ....................................................... 196

Recently Acquired Affiliates Whose Securities are Pledged as Collateral ............. 197

Anticipated Effects on Efficiency, Competition, and Capital Formation ................ 198

Consideration of Reasonable Alternatives.................................................................. 200

Alternative to Final Amendments to Existing Rule 3-10 ........................................... 200

Alternatives Common to Final Amendments to Existing Rule 3-10 and Existing Rule

3-16 ................................................................................................................................. 201

IX.

Paperwork Reduction Act ............................................................................................ 204

Background ................................................................................................................... 204

Summary of Comment Letters .................................................................................... 206

Summary of the Impact on Collections of Information ............................................ 206

Burden and Cost Estimates to the Amendments ....................................................... 209

Final Regulatory Flexibility Act Analysis ................................................................... 213

Need for, and Objectives of, the Amendments ........................................................... 214

Significant Issues Raised by Public Comments .......................................................... 214

Small Entities Subject to the Amendments ................................................................ 215

Projected Reporting, Recordkeeping, and Other Compliance Requirements ........ 216

Agency Action to Minimize Effect on Small Entities ................................................. 216

XI.

Statutory Authority ...................................................................................................... 218

Introduction

A. Background

On July 24, 2018, the Commission proposed changes to the disclosure requirements in

Rules 3-10 and 3-16 of Regulation S-X to better align those requirements with the needs of

investors and to simplify and streamline the disclosure obligations of registrants. 1 Rule 3-10

requires financial statements to be filed for all issuers and guarantors of securities that are

registered or being registered, but also provides several exceptions to that requirement. These

exceptions are typically available for individual subsidiaries of a parent company 2 when the

consolidated financial statements of that parent company are filed and certain conditions are met.

Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose

securities constitute a substantial portion of the collateral for any class of registered securities as

if the affiliate were a separate registrant. The changes the Commission proposed included

amending both rules and relocating part of Rule 3-10 and all of Rule 3-16 to new Rules 13-01

and 13-02 in Regulation S-X, respectively. 3 These proposed changes were intended to provide

investors with the information that is material given the specific facts and circumstances, make

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

proposal resulted from an ongoing, comprehensive evaluation of the Commission’s disclosure

See Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose

Securities Collateralize a Registrant’s Securities, Release No. 33-10526 (July 24, 2018) [83 FR 49630 (Oct. 2,

2018)] (“Proposing Release”).

The identity of the parent company depends on the particular corporate structure. See Section II.C of the

Proposing Release.

Proposed Rules 13-01 and 13-02 would contain financial and non-financial disclosure requirements for certain

types of securities registered or being registered that, while material to investors, need not be included in the

audited and unaudited financial statements in certain circumstances. See Sections III.C.2.c, “When Disclosure

is Required” and V.E, “When Disclosure is Required,” below.

requirements. 4

We received over 30 comment letters in response to the proposed amendments. 5 In

general, commenters supported the proposed amendments. In certain instances, commenters

opposed the proposed revisions and suggested modifications to the proposals.

We have reviewed and considered all of the comments that we received on the proposed

amendments. The final rules reflect changes made in response to many of these comments. We

discuss our revisions with respect to each proposed rule and amendment in more detail

throughout this release.

B. Scope of Proposals

The Commission proposed changes to the disclosure requirements contained in Rules 310 and 3-16. These rules represent a discrete, but important, subset of the Regulation S-X

disclosure requirements. Both rules affect disclosures made in connection with registered debt

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.

See, e.g., letters from American Bar Association, Federal Regulation of Securities Committee and the Law

Accounting Committee of the Business Law Section (“ABA”); Association of the Bar of the City of New York,

Securities Regulation Committee (“NYC Bar”); Ball Corporation (“Ball Corp.”); BDO USA, LLP (“BDO”);

Center for Audit Quality (“CAQ”); Comcast Corporation (“Comcast”); Council of Institutional Investors

(“CII”); Cravath, Swaine & Moore LLP (“Cravath”); The Credit Roundtable (“Credit Roundtable”); Davis Polk

& Wardwell LLP (“Davis Polk”); Debevoise & Plimpton LLP (“Debevoise”); Dell Technologies, Inc. (“Dell”);

Deloitte & Touche LLP (“Deloitte”); Eaton Corporation plc (“Eaton Corp.”); Edison Electric Institute and

American Gas Association (“EEI / AGA”); Ernst & Young LLP (“EY”); FedEx Corporation (“FedEx”);

Financial Executives International (“FEI”); Freeport-McMoRan Inc. (“Freeport”); Grant Thornton LLP (“Grant

Thornton”); KPMG LLP (“KPMG”); Medtronic plc (“Medtronic”); Nareit (“Nareit”); PricewaterhouseCoopers

LLP (“PWC”); Securities Industry and Financial Markets Association (“SIFMA”); Shearman & Sterling LLP

(“Shearman”); Simpson Thacher & Bartlett LLP (“Simpson Thacher”); Sullivan & Cromwell LLP (“Sullivan &

Cromwell”); T-Mobile US, Inc. (“T-Mobile”); Willis Towers Watson plc (“WTW”); Windstream Holdings, Inc.

(“Windstream”); and XBRL US, Inc. The public comments we received are available on our web site at

https://www.sec.gov/comments/s7-19-18/s71918.htm.

offerings 6 and subsequent periodic reporting. 7 In the Proposing Release, the Commission stated

its belief that revising these rules would reduce the cost of compliance for registrants and

encourage potential issuers to conduct registered debt offerings or private offerings with

registration rights. 8 The proposed amendments were intended to benefit investors by simplifying

and streamlining the disclosure provided to them about registered transactions and improving

transparency in the market to the extent more offerings are registered. 9 In addition, the

Commission noted that, if the proposed changes reduce the burden associated with providing

guarantees or pledges of affiliate securities as collateral, 10 investors could benefit from access to

more registered offerings that are structured to include such enhancements and, accordingly, the

additional protections that come with Section 11 liability for disclosures made in those

offerings. 11

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.

The proposed amendments would not have affected the presentation of registrants’ consolidated financial

statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) or

International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards

Board in registration statements and Exchange Act periodic reports, such as Form 10-K. The proposed

amendments were focused on the supplemental information about subsidiary issuers and guarantors as well as

affiliates whose securities are pledged as collateral.

See Section I of the Proposing Release.

Based on analysis performed by staff from the Commission’s Division of Economic and Risk Analysis, the

registered debt market was approximately $1.1 trillion in 2018. In 2018, debt offerings under Securities Act

Rule in 17 CFR 230.144A (“Rule 144A”) raised approximately $658 billion, based on staff analysis of data

from the Mergent database. The dollar volume of registered debt and Rule 144A offerings generally appears to

be higher in recent years (i.e., 2016, 2017, 2018) than in earlier years (i.e., 2013, 2014, 2015). See Section

VIII.B.2, “Market Conditions.”

Currently, registrants often structure debt agreements to release affiliate securities pledged as collateral if the

disclosure requirements of Rule 3-16 would be triggered, thereby depriving investors of that collateral

protection. See additional discussion in Section VI.B “Rule 3-16 Collateral Release Provisions” below. In the

Proposing Release, the Commission observed that registrants may cease structuring offerings to release such

collateral if disclosure burdens would be reduced by the proposed amendments, which would benefit investors.

See Section I.B of the Proposing Release.

15 U.S.C. 77k.

II.

Rule 3-10 of Regulation S-X

A. Background

A guarantee of a debt or debt-like security (“debt security”) 12 is a separate security under

the Securities Act 13 and, as a result, offers and sales of these guarantees 14 must be either

registered or exempt from registration. If the offer and sale is registered, the issuer of the debt

security and the guarantor 15 must each file its own audited annual and unaudited interim 16

financial statements required by Regulation S-X. Additionally, the offer and sale of the

securities pursuant to a Securities Act registration statement causes the issuer and guarantor to

become subject to reporting under Section 15(d) of the Exchange Act. 17 Reporting under

Section 15(d), among other things, requires filing periodic reports that must include audited

annual and unaudited interim financial statements, for at least the fiscal year in which the related

Securities Act registration statement became effective. 18

Rule 3-10 exceptions are available to issuers and guarantors of guaranteed securities that are “debt or debt-like.”

In connection with amendments to Rule 3-10 in 2000 the Commission stated “[t]he characteristics that identify

a guaranteed security as debt or debt-like for this purpose are: the issuer has a contractual obligation to pay a

fixed sum at a fixed time; and where the obligation to make such payments is cumulative, a set amount of

interest must be paid.” Financial Statements and Periodic Reports for Related Issuers and Guarantors, Release

No. 33-7878 (Aug. 4, 2000) [65 FR 51691 (Aug. 24, 2000)] (“2000 Release”) at Section III.A.4.b.i; see also

Section II.H of the Proposing Release.

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

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.

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.

A foreign private issuer need only provide interim period disclosure in certain registration statements.

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

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.

When the Commission amended Rule 3-10 in 2000, it recognized that “[t]here are

circumstances, however, where full Securities Act and Exchange Act disclosure by both the

issuer and the guarantors may not be useful to an investment decision and, therefore, may not be

necessary.” 19 Common examples are when: (1) a parent company offers its own securities that

its subsidiary guarantees; and (2) a subsidiary offers securities that its parent company fully and

unconditionally guarantees. In these and similar situations, in which a parent company and one

or more of its subsidiaries serve as issuers and/or guarantors of guaranteed securities, we believe

the disclosure requirements generally have been guided by an overarching principle: the

consolidated financial statements of the parent company are the principal source of information

for investors when evaluating the debt security and its guarantee together. 20 This principle is

grounded in the idea that the investment is in the consolidated enterprise when: (1) the parent

company is fully obligated as either issuer or full and unconditional guarantor of the security; 21

(2) the parent company controls each subsidiary issuer and guarantor, including having the

ability to direct all debt-paying activities; 22 and (3) the financial information of each subsidiary

issuer and guarantor is included as part of the consolidated financial statements of the parent

See Section I of the 2000 Release.

Parent company consolidated financial statements must be filed in all instances where the omission of financial

statements of subsidiary issuers and guarantors is permitted under existing Rule 3-10. See paragraph (4) in each

of Rules 3-10(b) through (f).

Typically, all of a parent company’s subsidiaries support the parent company’s debt-paying ability. However,

in the event of default, the holders of a debt security issued by a parent company are disadvantaged as compared

to the direct creditors of any subsidiary not providing a guarantee because the holders can only make claims for

payment directly against the issuer and any guarantors. In addition, in a bankruptcy proceeding, the assets of

non-guarantor subsidiaries that are not issuers typically would be accessible only by the holder indirectly

through the parent’s equity interest. In such a proceeding, without a direct guarantee, the claims of the holder

would be structurally subordinate to the claims of other creditors, including trade creditors of those subsidiaries.

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.

company. 23 In these circumstances, we believe full Securities Act and Exchange Act financial

disclosures for each subsidiary issuer and guarantor are generally not material for an investor to

make an informed investment decision about a guaranteed security. Instead, we believe

information included in the consolidated disclosures about the parent company, as supplemented

with details about the issuers and guarantors, is sufficient. These disclosures help an investor

understand how the consolidated entities within the enterprise support the obligation.

B. Overview of the Existing Requirements

Rule 3-10(a) states the general rule that every issuer of a registered security that is

guaranteed and every guarantor of a registered security must file the financial statements

required for a registrant by Regulation S-X. The rule also sets forth five exceptions to this

general rule. 24 Each exception specifies conditions that must be met, including, in each case,

that the parent company provide certain disclosures (“Alternative Disclosures”). 25 If the

conditions are met, separate financial statements of each qualifying subsidiary issuer and

guarantor may be omitted from the Securities Act registration statement and subsequent

Exchange Act reports. Only one of the five exceptions can apply to any particular offering and

the subsequent Exchange Act reporting.

Two primary conditions, included in each of the exceptions, must be satisfied for a

subsidiary issuer or guarantor to be eligible to omit its separate financial statements:

A parent company that prepares its financial statements in accordance with U.S. GAAP, would apply

Accounting Standards Codification (“ASC”) 810, Consolidation, in determining whether to consolidate a

subsidiary issuer or guarantor. A parent company that qualifies as a foreign private issuer and prepares its

financial statements in accordance with IFRS would apply IFRS 10, Consolidated Financial Statements.

See Rules 3-10(b) through (f) of Regulation S-X. See also Section II.F of the Proposing Release.

The Alternative Disclosures must be provided in the footnotes to the parent company’s consolidated financial

statements.

•

Each subsidiary issuer and guarantor must be “100%-owned” by the parent

company; 26 and

•

Each guarantee must be “full and unconditional.” 27

The form and content of the Alternative Disclosures are determined based on the facts

and circumstances and can range from a brief narrative 28 to highly detailed condensed

consolidating financial information (“Consolidating Information”). 29 Subsidiary issuers and

guarantors that are permitted to omit their separate financial statements under Rule 3-10 are also

automatically exempt from Exchange Act reporting under Exchange Act Rule 12h-5. The parent

company, however, must continue to provide the Alternative Disclosures for as long as the

guaranteed securities are outstanding. 30

Recently acquired subsidiary issuers and guarantors are addressed separately within Rule

3-10. Rule 3-10(g) 31 requires the Securities Act registration statement of a parent company filed

in connection with issuing guaranteed debt securities to include one year of audited, and, if

applicable, unaudited interim pre-acquisition financial statements for recently acquired

subsidiary issuers and guarantors that are significant and have not been reflected in the parent

company’s audited results for at least nine months of the most recent fiscal year.

The requirements of existing Rule 3-10 are discussed in further detail in Section II of the

Proposing Release.

See Section II.D of the Proposing Release.

See Section II.E of the Proposing Release.

See additional discussion of the brief narrative form of Alternative Disclosures in Section II.F of the Proposing

Release.

See additional discussion of Consolidating Information in Section II.G of the Proposing Release.

See Section III.C.1 of the 2000 Release and additional discussion in Section II.J of the Proposing Release.

Rule 3-10(g) of Regulation S-X. See additional discussion in Section II.I of the Proposing Release.

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

A. Overarching Principle

The Commission proposed amendments to address the challenges posed by the current

rules while continuing to adhere to the overarching principle upon which existing Rule 3-10 is

based, namely, that investors in guaranteed debt securities rely primarily on the consolidated

financial statements of the parent company and supplemental details about the subsidiary issuers

and guarantors when making investment decisions. 32 A number of commenters agreed with this

overarching principle. 33 Of these commenters, one asserted that this principle is particularly true

when the parent company is fully obligated as either issuer or full and unconditional guarantor of

the security; the parent company controls each subsidiary issuer and guarantor, including having

the ability to direct all debt paying activities; and the financial information of each subsidiary

issuer and guarantor is included as part of the consolidated financial statements of the parent

company. 34 Another of these commenters asserted investors in guaranteed securities rely

primarily on the consolidated financial statements of the parent company when making

investment decisions, and that these investors need only supplemental details about subsidiary

issuers and guarantors. 35 Other commenters noted that in addition to relying on the consolidated

financial statements of the parent company, the key disclosure for investors in guaranteed

securities is disclosure that enables them to evaluate the extent of their structural subordination

See discussion in Section II.A, “Background.”

See, e.g., letters from Ball Corp., Cravath, Davis Polk, Eaton Corp., EY, FEI, Freeport, Nareit, Shearman, and

T-Mobile.

See letter from Freeport.

See letter from Eaton Corp.

risk. 36 According to these commenters, the principal value of subsidiary guarantees to investors

is that the guarantees improve the investor’s claim on the assets of the subsidiaries in the event of

a default and therefore supplemental financial information for subsidiary guarantees should focus

on factors impacting structural subordination, not the financial ability of any individual

subsidiary guarantor to make payment under the guarantee. 37

B. Overview of the Proposed and Final Amendments

Under the proposed amendments, the rules would continue to permit the omission of

separate financial statements of subsidiary issuers and guarantors when certain conditions are

met and the parent company provides supplemental financial and non-financial disclosure about

the subsidiary issuers and/or guarantors and the guarantees (“Proposed Alternative Disclosures”).

Proposed Rule 3-10 would provide the conditions that must be met in order to omit separate

subsidiary issuer or guarantor financial statements. Proposed Rule 13-01 would specify the

disclosure requirements for the accompanying Proposed Alternative Disclosures. 38 The

proposed amendments would:

•

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;

See letters from Cravath, Davis Polk and Shearman.

See id.

The disclosures specified in proposed Rule 13-01(a) would be required “[f]or each class of guaranteed security

registered or being registered for which the registrant is the parent company (as that term is defined in § 210.310(b)(1))...” As a technical modification, final Rule 13-01(a) has been revised to require the disclosures

specified therein “[f]or each guaranteed security subject to Section 13(a) or 15(d) of the Securities Exchange

Act of 1934, and for each guaranteed security the offer and sale of which is being registered under the Securities

Act of 1933, for which the registrant is the parent company (as that term is defined in § 210.3-10(b)(1)) of one

or more subsidiaries that issue or guarantee the guaranteed security…”

•

Replace Consolidating Information with summarized financial information, as

defined in 17 CFR 210.1-02(bb)(1) 39 (“Summarized Financial Information”), of

the issuers and guarantors (together, “Obligor Group”), which may be presented

on a combined basis, and reduce the number of periods presented;

•

Expand the qualitative disclosures about the guarantees and the issuers and

guarantors;

•

Eliminate quantitative thresholds for disclosure and require disclosure of

additional information that would be material to making an investment decision

with respect to the guaranteed security;

•

Permit the Proposed Alternative Disclosures to be provided outside the footnotes

to the parent company’s audited annual and unaudited interim consolidated

financial statements in the registration statement covering the offer and sale of the

subject securities and any related prospectus, and in certain Exchange Act reports

filed thereafter;

•

Require that the Proposed Alternative Disclosures be included in the footnotes to

the parent company’s consolidated financial statements for annual and quarterly

reports beginning with the annual report for the fiscal year during which the first

bona fide sale of the subject securities is completed;

•

Eliminate the requirement to provide pre-acquisition financial statements of

recently acquired subsidiary issuers and guarantors; and

•

Require the Proposed Alternative Disclosures for as long as the issuers and

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

guarantors have an Exchange Act reporting obligation with respect to the

guaranteed securities rather than for so long as the guaranteed securities are

outstanding.

The proposed amendments were intended to simplify and streamline the rule structure in

several ways. Most significantly, under the proposed amendments there would be only a single

set of eligibility criteria that would apply to all issuer and guarantor structures instead of separate

sets of criteria in each of the five exceptions in existing Rules 3-10(b) through (f). Similarly, the

requirements for the Proposed Alternative Disclosures would be included in a single location

within proposed Rule 13-01, rather than spread among the multiple paragraphs of existing Rule

3-10. In the Proposing Release, the Commission expressed its belief that these changes would

simplify the rule structure and facilitate compliance. 40

After considering public comments, we are adopting these amendments substantially as

proposed with certain modifications. Specifically, the final rule:

•

Modifies the proposed requirement to disclose additional information that would

be material to holders of the guaranteed security to be more specific by requiring

disclosure of additional information about each guarantor that would be material

for investors to evaluate the sufficiency of the guarantee, consistent with existing

Rule 3-10;

•

Permits the amended supplemental financial and non-financial disclosure about

the subsidiary issuers and/or guarantors and the guarantees (“Revised Alternative

Disclosures”) to be provided outside the footnotes to the parent company’s

audited annual and unaudited interim consolidated financial statements in all

See Section III of the Proposing Release.

cases rather than only in the proposed circumstances;

•

Eliminates the requirement to provide pre-acquisition financial statements of

recently acquired subsidiary issuers and guarantors as proposed, but requires, in

certain instances, pre-acquisition Summarized Financial Information about

significant recently acquired subsidiary issuers and guarantors; and

•

Reflects other modifications from the proposed amendments as described below.

The proposed and final amendments, along with our consideration of public comments,

are discussed in detail below.

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

Guarantor

Under the proposed amendments, the financial statements of a subsidiary issuer or

guarantor could be omitted if the eligibility conditions contained in proposed Rules 3-10(a) and

3-10(a)(1) are met and the Proposed Alternative Disclosures specified in proposed Rule 13-01

are provided in the filing, as required by proposed Rule 3-10(a)(2). As proposed, the eligibility

conditions would be that:

•

The consolidated financial statements of the parent company have been filed;

•

The subsidiary issuer or guarantor is a consolidated subsidiary of the parent

company;

•

The guaranteed security is debt or debt-like; and

•

One of the following eligible issuer and guarantor structures is applicable:

o The parent company issues the security or co-issues the security, jointly

and severally, with one or more of its consolidated subsidiaries; or

o A consolidated subsidiary issues the security or co-issues the security with

one or more other consolidated subsidiaries of the parent company, and

the security is guaranteed fully and unconditionally by the parent

company.

The proposed amendments, comments received, and final amendments to the eligibility

conditions are described below.

1. Eligibility Conditions

a. Parent Company Financial Statements Condition

i. Proposed Amendments

Proposed Rule 3-10 would continue to require the filing of the parent company’s

consolidated financial statements. Additionally, under the proposed amendments, “parent

company” would be defined as in the 2000 Release, with one change. The first two conditions

would continue to be that the entity is: (1) an issuer or guarantor of the securities; and (2) an

Exchange Act reporting company, or will become one as a result of the subject Securities Act

registration statement. However, the third condition, that the entity owns, directly or indirectly,

100% of each subsidiary issuer and guarantor, would no longer be required for an entity to be

considered the parent company. 41 Instead, the third condition would be that the entity

consolidates each subsidiary issuer and guarantor in its consolidated financial statements. 42 For

clarity, the definition of “parent company” would be included in proposed Rule 3-10(b)(1),

stating that the parent company is the entity that meets the three aforementioned conditions.

The note to existing Rule 3-10(a)(2) states that “the financial statements of an entity that

is not an issuer or guarantor of the registered security cannot be substituted for those of the

parent company.” Because the definition of parent company was included in proposed Rule 3-

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

See discussion in Section III.C.1.b, “Consolidated Subsidiary.”

10(b)(1), which states that the parent company must be an issuer or guarantor of the guaranteed

security, the note to existing Rule 3-10(a)(2) was deemed unnecessary and excluded from the

proposed rule.

ii. Comments on the Proposed Amendments

We received one comment on this aspect of the proposed amendments, which was

supportive. The commenter specifically supported the proposed conforming revision to the

definition of “parent company,” stipulating that the entity must consolidate each subsidiary

issuer and guarantor in its consolidated financial statements. 43

iii. Final Amendments

We are adopting the amendments as proposed. The parent company’s financial

statements will continue to be required to be filed pursuant to amended Rule 3-10(a).

Previously, a definition of “parent company” was set forth in the 2000 Release but was not

included in existing Rule 3-10 itself. For clarity, and given the importance of appropriately

identifying the issuer or guarantor that is the “parent company,” the revised definition has been

included in amended Rule 3-10(b)(1). Due to the inclusion of this definition, as proposed, we

have eliminated the note to existing Rule 3-10(a)(2).

b. Consolidated Subsidiary Condition

i. Proposed Amendments

Proposed Rule 3-10(a) would require the subsidiary issuer or guarantor to be a

consolidated subsidiary of the parent company pursuant to the relevant accounting standards

already in use. 44 This proposed change would eliminate the distinction between subsidiaries in

See letter from FEI.

See supra note 23.

corporate form and those in other than corporate form, applying a consistent eligibility condition

across entities. Also, certain subsidiary issuers and guarantors that are currently not eligible to

omit their financial statements under existing Rule 3-10, such as consolidated subsidiary issuers

or guarantors that have issued securities convertible into their own voting shares, would be

eligible to omit their financial statements. The proposed amendments would instead require the

parent company to provide disclosures that address the material risks, if any, associated with

non-controlling interests in the subsidiary issuer or guarantor, including any risks arising from

securities issued by the subsidiary that may be convertible into voting shares and may cause the

percentage of non-controlling interest to increase, and to separately provide Summarized

Financial Information attributable to those subsidiaries.

Specifically, proposed Rule 13-01(a)(3) would require a description of any factors that

may affect payments to holders of the guaranteed security, such as the rights of a non-controlling

interest holder. 45 In addition, proposed Rule 13-01(a)(4) would require separate disclosure of

Summarized Financial Information for subsidiary issuers and guarantors affected by those

factors. 46 For example, if, through its ability to exercise significant influence 47 over a subsidiary

guarantor, a non-controlling interest holder could materially affect payments to holders of the

guaranteed security, the parent company would be required to disclose those factors and the

Summarized Financial Information attributable to that subsidiary guarantor.

See discussion in Section III.C.2.b, “Non-Financial Disclosures.”

See discussion in Section III.C.2.a.ii, “Presentation on a Combined Basis.”

See ASC 323, Investments – Equity Method and Joint Ventures. Representation on the board of directors,

participation in policy-making processes, and extent of ownership by an investor in relation to the concentration

of other shareholdings are among the ways listed in ASC 323-10-15-6 that may indicate the ability to exercise

significant influence over operating and financial policies of an investee.

ii. Comments on the Proposed Amendments

Comments were supportive of these proposals. Many commenters supported the

proposed revisions to Rule 3-10 to require the subsidiary issuer or guarantor to be a consolidated

subsidiary of the parent company pursuant to the relevant accounting standards already in use. 48

One commenter indicated that the proposed requirement to describe any factors that may affect

payments to holders of the guaranteed security would elicit the necessary material disclosures for

a consolidated subsidiary issuer or guarantor that is less than 100%-owned. 49

Several commenters asserted that the existing rule’s 100%-owned requirement was

overly restrictive 50 or burdensome. 51 One commenter indicated that the proposed condition that

each issuer and guarantor be a consolidated subsidiary of the parent company would provide

more flexibility to issuers. 52 Several commenters asserted that there is no practical difference

between whether a subsidiary is 100%-owned or is consolidated when making an evaluation of

the subsidiary’s creditworthiness 53 and noted that, in either case, the minority equity interests are

subordinated to the subsidiary’s debt obligation. 54

iii. Final Amendments

We are adopting the amendments as proposed. Amended Rule 3-10(a) requires the

subsidiary issuer or guarantor to be a consolidated subsidiary of the parent company as one

See, e.g., letters from Comcast, Cravath, Davis Polk, EEI / AGA, FedEx, FEI, Nareit, NYC Bar, and Sullivan &

Cromwell.

See letter from NYC Bar.

See letters from Comcast, Cravath, and Davis Polk.

See letter from Nareit.

See letter from NYC Bar.

See letters from Comcast, Cravath, Davis Polk, and FEI.

See letters from Cravath, Davis Polk, and Nareit.

condition of eligibility that must be met to omit the subsidiary issuer’s or guarantor’s financial

statements. Additionally, a description of any factors that may affect payments to holders of the

guaranteed security, such as the rights of a non-controlling interest holder, is required by Rule

13-01(a)(3), 55 and separate disclosure of Summarized Financial Information for the issuers and

guarantors to which those factors apply is required by Rule 13-01(a)(4)(iv). 56

Under the existing rule, we understand that a parent company with a consolidated but less

than 100%-owned subsidiary generally would avoid designating that subsidiary as a guarantor of

the debt in a registered offering, would issue registered debt without subsidiary guarantees, or

would avoid registering the offering altogether due to the requirement to provide that

subsidiary’s separate financial statements. These choices may lead to a higher cost of capital and

less protection for investors than if the subsidiary were designated as a guarantor. 57

Consistent with the view expressed in the Proposing Release, we note that the existence

of non-controlling interest holders generally does not alter the fundamental nature of the

investment such that it should be evaluated similar to multiple investments in different issuers. 58

Specifically, we believe that where a parent company is obligated as an issuer or a full and

unconditional guarantor of a guaranteed security and it controls and includes the subsidiary

issuer(s) and guarantor(s) in its consolidated financial statements, there is sufficient financial

unity between the parent company and the related subsidiary with respect to the guaranteed debt

See discussion in Section III.C.2.b, “Non-Financial Disclosures.”

See discussion in Section III.C.2.a.ii, “Presentation on a Combined Basis.” As described therein, in limited

circumstances, a brief narrative is permitted in lieu of separate Summarized Financial Information of the

affected issuers and guarantors.

For example, if an offering of guaranteed debt securities was conducted on a registered basis but the subsidiary

was not added as a guarantor, the claims of a holder against the non-guarantor subsidiary may be structurally

subordinate to the claims of other creditors. See supra note 21.

See Section III.C.1.b of the Proposing Release.

security such that the consolidated financial statements of that parent company and the Revised

Alternative Disclosures would enable investors to evaluate and sufficiently assess the risks

associated with an investment in such guaranteed debt security. We expect this change will

cause more subsidiary issuers and guarantors to be eligible to omit their financial statements,

while continuing to provide the information about subsidiary issuers and guarantors that

investors need to make informed investment decisions. This change may also result in parent

companies no longer omitting consolidated but less than 100%-owned subsidiaries as guarantors

in registered offerings, possibly reducing the cost of capital.

We also note that the final amendments will require specific disclosure about any

material factors that may affect payments to holders, including the rights of a non-controlling

interest holder. This disclosure should more directly provide insight into any competing

common equity interest in the assets or revenues of a subsidiary, in contrast to the indirect

disclosure in the form of separate financial statements of the consolidated subsidiary issuer or

guarantor that an investor receives under the existing rule. We also expect this change will

reduce costs and burdens for consolidated but less than 100%-owned subsidiary issuers and

guarantors, which are currently required to provide separate financial statements.

c. Debt or Debt-Like Securities Condition

i. Proposed Amendments

The exceptions in existing Rules 3-10(b) through (f) are available only to issuers and

guarantors of debt securities. 59 Similarly, the proposed rule would be available only for issuers

and guarantors of guaranteed debt and guaranteed preferred securities that have payment terms

that are substantially the same as debt. In order to provide clarity, proposed Rule 3-10(a)(1)

See Section II.H of the Proposing Release.

would state explicitly that the guaranteed security must be “debt or debt-like.”

For additional clarity, proposed Rule 3-10(b)(2) would specify when a guaranteed

security would be considered “debt or debt-like.” Consistent with the guidance provided in the

2000 Release, 60 a guaranteed security would be considered “debt or debt-like” under the

proposed rule if:

•

The issuer has a contractual obligation to pay a fixed sum at a fixed time; and

•

Where the obligation to make such payments is cumulative, a set amount of

interest must be paid.

As is currently the case, the substance of the security’s obligation would determine the

availability of relief under Rule 3-10 rather than the form or title of the security. Accordingly,

the proposed rule would clarify, consistent with the 2000 Release, 61 that:

•

Neither the form of the security nor its title will determine whether a security is

debt or debt-like. Instead, the substance of the obligation created by the security

will be determinative; and

•

The phrase “set amount of interest” is not intended to mean “fixed amount of

interest.” Floating and adjustable rate securities, as well as indexed securities,

may meet the criteria specified in paragraph (b)(2)(ii) as long as the 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.

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

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

ii. Comments on the Proposed Amendments

We received one comment supporting this aspect of the proposed amendments. The

commenter supported the “debt or debt-like” condition in proposed Rule 3-10, stating that the

proposed revision would be a useful modification to Rule 3-10. 62

iii. Final Amendments

We are adopting the amendments as proposed. Amended Rule 3-10(a)(1) requires that

the guaranteed security must be “debt or debt-like,” and amended Rule 3-10(b)(2) specifies when

a guaranteed security would be considered “debt or debt-like” as proposed.

d. Eligible Issuer and Guarantor Structures Condition

i. Proposed Amendments

The proposed amendments would simplify and streamline the existing rule by replacing

the specific issuer and guarantor structures permitted under the five exceptions in existing Rules

3-10(b) through (f) with a broader two-category framework. Under this framework, an issuer

and guarantor structure would be eligible if:

•

The parent company issues the security or co-issues the security, jointly and

severally, with one or more of its consolidated subsidiaries; 63 or

•

A consolidated subsidiary issues the security, or co-issues it with one or more

other consolidated subsidiaries of the parent company, and the security is

guaranteed fully and unconditionally by the parent company. 64

Under the proposed amendments, the ability to provide the Proposed Alternative

See letter from Sullivan & Cromwell.

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

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

Disclosures in lieu of separate subsidiary issuer and guarantor financial statements would only be

available when the parent company’s obligation is full and unconditional. Accordingly, under

the proposed rule, the parent company’s role as issuer, 65 co-issuer, 66 or full and unconditional

guarantor with respect to the guaranteed security 67 would determine whether the issuer and

guarantor structure is eligible. 68 In a change from the existing exceptions, the status of

subsidiary guarantors would not be specified in the proposed categories of eligible issuer and

guarantor structures, 69 and subsidiary guarantees would no longer be required to be full and

unconditional as a condition of eligibility. 70 Although one or more other subsidiaries of the

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.

When acting as a co-issuer with one or more of its consolidated subsidiaries, all co-issuers would be required to

be jointly and severally liable under the security. This would obligate each of the parent company and its

subsidiary co-issuers to all legal responsibilities of an issuer, including making scheduled payments on the

security in full when they come due. The parent company would control each consolidated co-issuer, the

financial information of the subsidiary co-issuer(s) would be reflected in the consolidated financial statements

of the parent company, and the parent company would be fully and unconditionally obligated to make payments

in full when due under the security.

Whether the parent company’s guarantee is “full and unconditional” would be determined in the same manner

as in existing Rule 3-10(h)(2) and section III.A.1.b of the 2000 Release, and would be included in proposed

Rule 3-10(b)(3). The parent company would control each consolidated subsidiary issuer, the financial

information of the subsidiary issuer(s) would be reflected in the consolidated financial statements of the parent

company, and the parent company would be fully and unconditionally obligated to make payments in full when

due under the guaranteed security.

Because the proposed amendments to Rule 3-10 do not focus on the role and nature of the subsidiary as a

condition to eligibility, the proposed amendments would no longer require a subsidiary issuer or guarantor to be

designated as a “finance subsidiary” in any particular circumstances. Likewise, the proposed amendments

would remove the definition of “finance subsidiary” from the existing rule, since it is not otherwise used in

Regulation S-X. Existing Rule 3-10(h)(8) defines an “operating subsidiary” to differentiate it from a “finance

subsidiary.” Since the proposed amendments would remove the “finance subsidiary” distinction and definition,

proposed Rule 3-10 likewise would no longer need to refer to or define “operating subsidiary.”

While not specified in the proposed eligible categories of issuer and guarantor structures, the role of subsidiary

guarantors and their guarantees would, however, affect the required disclosure under the proposed rule. For

example, the subsidiary guarantors would be required to be identified pursuant to proposed Rule 13-01(a)(1),

and if factors exist that may affect payments to holders, such as factors affecting guarantee enforceability,

disclosure of the factors would be required by proposed Rule 13-01(a)(3), to the extent material. Furthermore,

proposed Rule 13-01(a)(4) would require separate disclosure of Summarized Financial Information applicable

to subsidiary guarantors to which such factors apply, to the extent material.

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

parent company may, and the Commission expected often would, guarantee the security, in the

Proposing Release, the Commission stated its belief that the eligibility of an issuer and guarantor

structure should depend on the role of the parent company. 71 Accordingly, under the proposed

amendments separate financial statements of consolidated subsidiary guarantors may be omitted

for each eligible issuer and guarantor structure if the other conditions of proposed Rule 3-10 are

met.

ii.

Comments on the Proposed Amendments

Comments on the proposals were generally supportive. Commenters generally supported

the simplified and streamlined approach of the proposed amendments that replaced the specific

issuer and guarantor structures permitted under the five exceptions in existing Rules 3-10(b)

through (f) with a broader two-category framework of eligible issuer and guarantor structures. 72

One commenter suggested that an exemption to the required financial disclosures about

guarantors should be permitted if the issuer of the debt is the parent company. 73 This commenter

stated that, for registrants that issue securities only from the parent entity, the relevant financial

information could be derived from the parent’s consolidated financial statements.

at its inception except that there may be contractual provisions permitting the subsidiary to be released from that

guarantee under certain circumstances. Such release provisions could cause the subsidiary’s guarantee to fail to

meet the requirement that the guarantee be full and unconditional because the potential elimination of the

guarantee is a condition beyond the issuer’s failure to pay. Because the nature of the guarantee of a subsidiary

guarantor does not affect whether the issuer and guarantor structure is eligible under the proposed rule, a

subsidiary guarantee would no longer be required to be full and unconditional. As such, the existence of

subsidiary guarantee release provisions would not prevent that subsidiary guarantor from omitting its financial

statements. However, to the extent material, such release provisions would be required to be disclosed pursuant

to proposed Rule 13-01(a)(2) and separate disclosure of Summarized Financial Information applicable to that

subsidiary guarantor would be required by proposed Rule 13-01(a)(4).

See Section III.C.1.d of the Proposing Release.

See, e.g., letters from FEI and NYC Bar.

See letter from Ball Corp.

Two commenters supported the proposed requirement that only the parent company’s

guarantee need be full and unconditional, 74 of which one stated that “disclosure of the limitations

on the scope of the guarantee is more important to investors than providing separate financial

statements of the issuer of a limited guarantee.” 75 This same commenter indicated that local law

requirements in many foreign jurisdictions preclude the issuance of a guarantee that satisfies the

Commission’s definition of “full and unconditional,” and that historically, it was rare for foreign

subsidiaries to guarantee debt of domestic registrants due to potentially adverse tax

consequences. 76 Another commenter asserted that the proposed amendments contemplate

changing the definition of “full and unconditional” and recommended that, if such changes were

adopted, the Commission provide guidance around the definition akin to what was provided in

the 2000 Release. 77

iii.

Final Amendments

We are adopting the amendments substantially as proposed. Consistent with the

proposal, the specific issuer and guarantor structures permitted under the five exceptions in

existing Rules 3-10(b) through (f) will be replaced with the proposed two-category framework.

As shown in the table below, issuer and guarantor structures that currently fall under

existing Rules 3-10(b), (c), or (d) align with the eligible categories in amended Rules 310(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

See letters from Cravath and FEI.

See letter from Cravath.

See letter from Debevoise. The Proposing Release requested comment on the definition of “full and

unconditional,” but the proposed rules would not change the definition. The Proposing Release states, “[f]or

purposes of the proposed rule, whether the parent company’s guarantee is ‘full and unconditional’ would be

determined in the same manner as in existing Rule 3-10(h)(2) and the 2000 Release.”

fall under existing Rules 3-10(e) or (f), wherein the parent company is the sole issuer of the

guaranteed security, align with the first category in amended Rule 3-10(a)(1)(i).

Existing Rule

Rules 3-10(b), 3-10(c), and 3-10(d)

Amended Rule

Rule 3-10(a)(1)(i), if the subsidiary coissued the security, jointly and severally,

with its parent

Rule 3-10(a)(1)(ii), if the subsidiary issued

the security that is fully and

unconditionally guaranteed by its parent

Rule 3-10(a)(1)(i)

Rules 3-10(e) and 3-10(f)

Under the amended rules, the ability to provide the Revised Alternative Disclosures in

lieu of separate subsidiary issuer and guarantor financial statements is only available when the

parent company’s obligation is full and unconditional.

We are not adopting one commenter’s suggestion to permit the omission of the required

financial disclosures about guarantors if the issuer of the debt is the parent company. 78

Consistent with the rationale cited in our discussion of the overarching principle and overview of

the amendments above, 79 we believe the financial information about the Obligor Group included

in the Revised Alternative Disclosures is an important supplement to the consolidated financial

statements of the parent company for investors when making investment decisions about

guaranteed debt securities. Therefore, providing the Revised Alternative Disclosures is a

condition that must be met to permit the omission of a subsidiary issuer’s or guarantor’s financial

statements.

Consistent with the proposed rule, the status of subsidiary guarantors is not specified in

the categories of eligible issuer and guarantor structures in the final rule. Although one or more

See letter from Ball.

See discussion in Sections III.A “Overarching Principle” and “III.B, “Overview of the Proposed and Final

Amendments.”

other subsidiaries of the parent company may, and we expect often would, guarantee the

security, the eligibility of an issuer and guarantor structure depends on the role of the parent

company as issuer, co-issuer, or full and unconditional guarantor with respect to the guaranteed

security. Separate financial statements of consolidated subsidiary guarantors may be omitted for

each issuer and guarantor structure that is eligible if the other conditions of amended Rule 3-10

are met. Despite not affecting whether that issuer and guarantor structure is eligible, the role of

subsidiary guarantors in an issuer and guarantor structure and their guarantees do affect what

disclosure is required. In this regard, the subsidiary guarantors are required to be identified

pursuant to Rule 13-01(a)(1), and disclosure of the terms and conditions of the guarantees is

required by Rule 13-01(a)(2), 80 which includes but is not limited to any limitations and

conditions of a subsidiary’s guarantee, whether the guarantee is joint and several with other

guarantees, and any guarantee release provisions. Further, separate disclosure of Summarized

Financial Information applicable to subsidiary guarantors to which such disclosures apply is

required by Rule 13-01(a)(4)(iv). 81

As was proposed, an issuer and guarantor structure involving a finance subsidiary 82 used

to issue a debt security guaranteed by the parent company 83 will be addressed by amended Rule

3-10(a)(1)(ii) or, if the security were to be co-issued, jointly and severally, with its parent,

amended Rule 3-10(a)(1)(i) will apply. Also as proposed, the final rule will no longer require a

See discussion in Section III.C.2.b, “Non-Financial Disclosures.”

See discussion in Section III.C.2.ii, “Presentation on a Combined Basis.” In limited circumstances, a brief

narrative is permitted in lieu of separate Summarized Financial Information of the affected guarantors.

Under existing Rule 3-10(h)(7) of Regulation S-X, “[a] subsidiary is a finance subsidiary if it has no assets,

operations, revenues or cash flows other than those related to the issuance, administration and repayment of the

security being registered and any other securities guaranteed by its parent company.”

This issuer and guarantor structure is included in the exception in existing Rule 3-10(b) of Regulation S-X. See

Section II.F of the Proposing Release.

subsidiary issuer or guarantor to be designated as a “finance subsidiary” for purposes of

determining whether the issuer and guarantor structure is eligible. 84 Consistent with the

proposed amendments, the final rule also eliminates the “operating subsidiary” definition in

existing Rule 3-10(h)(8).

2. Disclosure Requirements

Under existing Rule 3-10, one of the conditions to omitting separate financial statements

of a subsidiary issuer or guarantor is providing the Alternative Disclosures in the footnotes to the

parent company’s consolidated financial statements. The Commission proposed to retain the

requirement to provide Alternative Disclosures, with modifications, as it believed the disclosures

are an important supplement to the consolidated parent company disclosures. If the eligibility

conditions in proposed Rule 3-10(a) introductory text and (a)(1) are satisfied, a parent company

would be required to include the Proposed Alternative Disclosures specified in proposed Rule

13-01 in the relevant filing, but could omit the separate financial statements of subsidiary issuers

and guarantors. 85 The proposed amendments would streamline and simplify the rule by

including the Proposed Alternative Disclosures in a single location within proposed Rule 13-01

rather than having such requirements in multiple paragraphs. The proposed amendments,

comments received, and final amendments to the disclosure requirements are described below.

As proposed, the “finance subsidiary” definition at existing Rule 3-10(h)(7) would have been eliminated.

However, as described below, the final rule specifies certain circumstances involving a “finance subsidiary”

when we believe the required supplemental financial information is not material to an investment decision and

may be omitted. As part of this change, an amended definition of “finance subsidiary” has been incorporated in

the note to new Rule 13-01(a)(4)(vi)(C) and (D). See Section III.C.2.c, “When Disclosure is Required.”

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

a. Financial Disclosures

As discussed below, 86 the financial disclosure requirements in proposed Rule 13-01 were

tailored to the type of material information, in addition to the parent company’s consolidated

financial statements, that the Commission believed investors in registered offerings need to make

informed investment decisions about guaranteed debt securities. Under the proposed revisions,

registrants would:

•

Be required to provide Summarized Financial Information rather than

Consolidating Information;

•

Be required to provide disclosure about the Obligor Group without financial

information of non-obligated entities (financial information of each issuer and

guarantor could generally be combined into a single column); and

•

Be permitted to reduce the number of periods presented.

As a result of the proposed revisions, the instructions for preparing Consolidating

Information in existing Rule 3-10(i) would be eliminated. 87

i. Level of Detail

(A) Proposed Amendments

Unless a brief narrative is permitted, existing Rule 3-10 requires Consolidating

Information, which includes all major captions of the balance sheet, income statement, and cash

flow statement that Article 10 (Rule 10-01) of Regulation S-X 88 requires to be shown separately

in interim financial statements. The proposed amendments were based on requiring

See discussion in Section III.C.2.a.i, “Level of Detail.”

As a result of the adoption of the proposed financial disclosures as described below, which replace

Consolidating Information, the final rule eliminates the instructions in existing Rule 3-10(i).

17 CFR 210.10-01.

supplemental financial information about issuers and guarantors that would be focused on the

information that the Commission believed is most likely to be material to an investment decision.

Proposed Rule 13-01(a)(4) would therefore require Summarized Financial Information, which

would include select balance sheet and income statement line items. Disclosure of additional

line items of financial information beyond what is specified in proposed Rule 13-01(a)(4) would

have been required by proposed Rule 13-01(a)(5), to the extent they are material to an

investment decision.

While investors are provided cash flow information at the parent company consolidated

level, supplemental cash flow information about subsidiary issuers and guarantors would not be a

required disclosure under the proposed rule.

(B) Comments on the Proposed Amendments

Comments on the proposed amendments were generally supportive. Many commenters

supported the proposal to replace Consolidating Information with Summarized Financial

Information, as defined in Rule 1-02(bb)(1) of Regulation S-X. 89 Some commenters asserted

that providing Summarized Financial Information rather than Consolidating Information would

reduce disclosure burdens 90 while continuing to provide investors with material information to

make an informed investment decision. 91

Some commenters noted that many issuers’ information systems are not normally

designed to provide the level of detail currently required by Rule 3-10, which, according to these

See, e.g., letters from Ball Corp., Comcast, Davis Polk, Dell, Eaton Corp., EEI / AGA, EY, FedEx, FEI,

Freeport, KPMG, Medtronic, Nareit, NYC Bar, Sullivan & Cromwell, T-Mobile, and WTW.

See, e.g., letters from Ball Corp., Eaton Corp., EY, FEI, Freeport, KPMG, NYC Bar, Sullivan & Cromwell, and

T-Mobile.

See, e.g., letters from Ball Corp., EY, FedEx, FEI, Freeport, and Sullivan & Cromwell.

commenters, makes complying with the rule burdensome. 92 Some commenters stated that

investors have expressed little interest in the detailed disclosures required by existing Rule 310. 93

A number of commenters stated that the proposal to require only Summarized Financial

Information rather than Consolidating Information was an improvement, but recommended that

the final rules should permit registrants to provide even less disclosure. 94 In this regard, a few

commenters noted that Rule 144A offerings 95 may include less disclosure than what is required

in Summarized Financial Information. 96 Some commenters suggested that registrants should be

allowed to provide only balance sheet information because balance sheet information should be

sufficient disclosure for investors to make an informed investment decision. 97 One commenter

contended that guarantor revenues, guarantor operating income (or a similar metric), and assets

and liabilities of the issuer and guarantors were the most useful disclosures for making an

investment decision and stated that these disclosures are what typically is provided in Rule 144A

offerings. 98

See letters from Dell, FEI, and Freeport.

See, e.g., letters from Ball Corp., Freeport, Windstream, and WTW.

See, e.g., letters from Comcast, Davis Polk, Eaton Corp., FEI, Medtronic, and NYC Bar.

The majority of private debt offerings are conducted using Rule 144A, and 99% of Rule 144A offerings are

debt offerings. Additionally, although most Regulation D offerings are equity offerings, a significant number

include debt securities. See U.S. Sec. & Exch. Comm’n, Div. of Econ. & Risk Analysis, Access to Capital and

Market Liquidity 96 (Aug. 2017) (“Access to Capital and Market Liquidity Report”), available at

https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf, at p. 38; Scott Bauguess et al.,

U.S. Sec. & Exch. Comm’n, Div. of Econ. & Risk Analysis, Capital Raising in the U.S.: An Analysis of the

Market for Unregistered Securities Offerings, 2009-2014 (Oct. 2015), available at

https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html.

See, e.g., letters from Davis Polk, Eaton Corp., and NYC Bar.

See, e.g., letters from Comcast, Eaton Corp., FEI, and Medtronic.

See letter from T-Mobile.

Several commenters recommended other modifications to the proposed amendments.

One commenter suggested that Summarized Financial Information may be too condensed and

asserted that users of financial statements would be better informed if balance sheet and income

statement information similar to the level of detail specified in Rule 10-01 of Regulation S-X

were provided. 99 Another commenter recommended requiring disclosure of investments held by

the Obligor Group in non-obligated subsidiaries; intercompany or related-party transactions

between the obligated and non-obligated groups; and whether the obligated group includes

variable interest entities, which should cross-reference the relevant disclosures in the

consolidated financial statements. 100 Another commenter stated that “related party transactions

with [other subsidiaries] is an example of additional information that may be material to investor

decisions, and thus may require disclosure.” 101 This commenter also stated that it would be even

more meaningful to simply exclude such balances and transactions altogether. One commenter

suggested that the Commission should consider whether requiring separate disclosure of the

amounts in each caption of the combined Summarized Financial Information related to the nonobligated entities would enhance the usefulness of the information. 102 This commenter also

suggested that the Commission consider whether using different measures, such as operating

income, instead of, or in addition to, net income would provide valuable information to investors.

See letter from PWC.

100

See letter from EY.

101

See letter from FEI.

102

See letter from Deloitte.

A few commenters suggested requiring certain financial information of the non-guarantor

subsidiaries, 103 stating that such disclosures would be consistent with information provided in

Rule 144A offerings or high yield Rule 144A offerings. 104 One of these commenters suggested

requiring disclosure of debt and other liabilities of the non-guarantor subsidiaries and that any

profitability metrics about the obligated entities (or non-obligated subsidiaries) should be capitalstructure neutral by excluding interest expense. 105 Another commenter suggested only requiring

disclosure of revenue, operating income, assets and liabilities of the non-guarantors as a

group. 106 This commenter suggested permitting the financial disclosures to be of the nonguarantors as a group, rather than requiring such disclosure of the Obligor Group. Yet another

commenter suggested that the Commission require disclosure of a metric of earnings of the nonguarantors, which the issuer should be able to choose, as well as the assets and liabilities of the

non-guarantors as a single group. 107 One commenter recommended that the Commission

consider requiring registrants to evaluate and disclose information in their Management

Discussion and Analysis (“MD&A”) section with respect to known trends and uncertainties that

have had or are reasonably expected to have a material impact on the results and operations or

103

See in Section III.C.2.a.ii, “Presentation on a Combined Basis” regarding presentation of non-guarantor

information.

104

See letters from Davis Polk, NYC Bar, and Shearman. Two of these commenters stated that their

recommendations for required disclosures were based on the information they believe allows investors to

evaluate structural subordination. See letters from Davis Polk and Shearman.

105

See letter from Shearman. This commenter asserted that, in default, the levered equity value of the obligors is

irrelevant because the capital structure will be readjusted through a reorganization or liquidation, and that where

profitability metrics are included in Rule 144A offering documents, they generally consist of operating income

or earnings before interest, taxes, depreciation, and amortization (“EBITDA”), each excluding interest expense.

This commenter further stated that in contrast with these measures, the proposed Summarized Financial

Information would consist of income from continuing operations and net income, both of which include interest

expense allocated within the corporate group under the pre-default capital structure.

106

See letter from NYC Bar.

107

See letter from Davis Polk.

capital resources of the Obligor Group and other issuers and guarantors whose information is

required to be presented separately. 108

One commenter contended that holders of debt securities are expected to be interested in

debt service and may need cash flow information for the Obligor Group and recommended that

the Commission consider input from investors with respect to the need for summarized cash flow

information. 109 Other commenters, however, stated that supplemental cash flow information

should not be required. 110 Some of these commenters asserted such information would not be

meaningful information as investors look primarily to the parent company’s consolidated cash

flow 111 and that preparing this disclosure would be costly. 112

One commenter advocated that the Commission consider replacing the parent companyonly condensed financial statements required by 17 CFR 210.5-04 (“Rule 5-04 of Regulation SX”) and 210.12-04 (“Rule 12-04 of Regulation S-X”) with parent-only summarized financial

information when there is a specified level of restriction on an issuer’s subsidiaries’ ability to

transfer funds to the parent. 113

We are adopting the amendments in substantially the form proposed, but with

modifications in response to comments received. As adopted, Rule 13-01(a)(4) will require

disclosure of Summarized Financial Information for each issuer and guarantor. As described

108

See letter from Grant Thornton.

109

See letter from Grant Thornton.

110

See, e.g., letters from Eaton Corp., Sullivan & Cromwell, T-Mobile, and Windstream.

111

See letters from Sullivan & Cromwell and T-Mobile.

112

See letter from Eaton Corp.

113

See letter from BDO. This recommendation would affect situations beyond disclosures about issuers and

guarantors of guaranteed securities and is beyond the scope of the amendments considered herein.

above, some commenters suggested requiring different or more limited information than what is

required by Summarized Financial Information, or balance sheet only information, whereas one

commenter recommended more detailed information. However, many other commenters

supported the use of Summarized Financial Information, and we believe the select balance sheet

and income statement line items it requires are focused on the information that is most likely to

be material to an investment decision. Under the final amendments, disclosure of additional line

items of financial information beyond the line items specified in Summarized Financial

Information is required if necessary to comply with Rule 13-01(a)(6) and (7). 114 For example, if

substantially all of the obligated entities’ non-current assets consisted of goodwill, separate

presentation of goodwill from non-current assets would be required if the parent company

concludes such disclosure would be material for investors to evaluate the sufficiency of the

guarantee. We agree with several commenters that requiring Summarized Financial Information

would simplify compliance and reduce costs for preparers, while providing investors with more

streamlined and easier to understand financial information that is material to an investment

decision. We recognize that some of this information may go beyond what some commenters

assert is typically provided in Rule 144A debt offerings, but we believe this is appropriate in

light of the broader range of potential investors that may participate in a registered offering.

The Proposing Release included an example of when incremental disclosure of related

114

Proposed Rule 13-01(a)(1) through (4) set forth proposed requirements to disclose specific financial and nonfinancial information. Proposed Rule 13-01(a)(5), which would have required disclosure of “any other

quantitative or qualitative information that would be material to making an investment decision with respect to

the guaranteed security,” was included to require disclosure about the obligated entities and the guarantees that

would be material but was not otherwise already required by the specified proposed financial and non-financial

disclosures. Instead of proposed Rule 13-01(a)(5), the final amendments include Rules 13-01(a)(6) and (7),

which require disclosure of “[a]ny financial and narrative information about each guarantor if the information

would be material for investors to evaluate the sufficiency of the guarantee,” and “[s]ufficient information so as

to make the financial and non-financial information presented not misleading,” respectively. See discussion in

Section III.C.2.c, “When Disclosure is Required.”

party revenues would be required under the proposed rule. 115 Specifically, if a material amount

of reported revenues of the obligated entities were derived from transactions with related parties,

such as non-issuer and non-guarantor subsidiaries of the parent company, separate disclosure of

those amounts would be necessary. Instead of including this as an example of when disclosure

would be required under Rule 13-01(a)(6) and (7), we agree with those commenters that

recommended including a requirement to separately disclose an issuer’s or guarantor’s balance

sheet and income statement amounts related to non-obligated subsidiaries. 116 Accordingly, as

adopted, Rule 13-01(a)(4)(iii) requires an issuer’s or guarantor’s amounts due from, amounts due

to, and transactions with non-obligated subsidiaries and related parties to be presented in separate

line items, to the extent material. 117 We believe that clearly establishing this expectation as a

stated requirement will assist in the preparation of the disclosures and provide material

information to investors, and agree with one commenter that such separate disclosure enhances

the transparency of the Summarized Financial Information presented. 118

Unlike Consolidating Information, Summarized Financial Information does not include

cash flow statement information. As described above, of the commenters that specifically

discussed supplemental cash flow information, several supported not requiring such

115

See Section III.C.2.a.i of the Proposing Release. Such disclosure would have been required by proposed Rule

13-01(a)(5).

116

In recommending separate disclosure of these amounts, one commenter cited enhancement of the transparency

of Summarized Financial Information related to the Obligor Group (See letter from EY), and another cited

enhanced usefulness (See letter from Deloitte). Given that a guarantor’s transactions with a related party may

not be conducted on an arm’s length basis, we agree it could be useful to highlight such transactions for

investors by requiring presentation of such information in a separate line item.

117

One commenter suggested flexibility to provide these disclosures as either explanatory notes or separate line

items. See letter from EY. Based on the nature of these items, and to drive consistency in the disclosures

between parent companies, Rule 13-01(a)(4)(iii) requires the amounts to be in separate line items.

118

See letter from EY.

information, 119 while one suggested considering input from investors. 120 Similar to some

commenters, we believe investors in a registered offering look primarily to a parent company’s

consolidated cash flow information to assess creditworthiness where the parent is the primary

obligor or its guarantor obligation is full and unconditional, 121 and we heard no feedback from

investors suggesting otherwise. As such, final Rule 13-01 does not require supplemental cash

flow information of the obligated entities.

Lastly, certain of the proposed amendments would have each required additional

disclosure regarding their basis of presentation. 122 Rather than including multiple separate

requirements to explain the basis of presentation for individual disclosure requirements, final

Rule 13-01(a)(4) includes a requirement to briefly describe the basis of presentation applicable to

each of the required financial disclosures therein. In addition to simplifying the final rule, we

believe this requirement will better inform users about the form and content of the disclosures

provided pursuant to final Rule 13-01(a)(4). 123 We believe such disclosure enhances the

understandability of the financial information provided.

119

See, e.g., letters from Eaton, Sullivan, T-Mobile, Willis, and Windstream.

120

See letter from Grant. No investor commenters provided feedback specific to supplemental cash flow

information.

121

See, e.g., letters from Eaton and T-Mobile.

122

For example, proposed Rule 13-01(a)(4) would have required disclosure of “[t]he method selected to present

investments in subsidiaries that are not issuers or guarantors…” to inform investors about the basis of

presentation of the financial information of the Obligor Group. Two commenters supported this disclosure

requirement. See letters from CAQ and Deloitte. Instead of this proposed requirement, final Rule 1301(a)(4)(iii) requires the financial information of non-issuer and non-guarantor subsidiaries to be completely

excluded. See discussion in Section III.2.a.ii.(C), “Presentation on a Combined Basis,” below. Rather than

including a separate requirement within final Rule 13-01(a)(4)(iii) to disclose that financial information of nonissuer and non-guarantor subsidiaries was excluded, such disclosure will be required pursuant to the new

requirement to describe the basis of presentation of the financial information presented under final Rule 1301(a)(4).

123

Such disclosure could state, for example, that the financial information presented is that of the issuers and

guarantors of the guaranteed security, and that the financial information of non-issuer and non-guarantor

subsidiaries has been excluded. If applicable, the disclosure could also state, for example: that the financial

ii. Presentation on a Combined Basis

(A) Proposed Amendments

The proposed rule would permit the parent company to present the Summarized Financial

Information of the parent company issuer or guarantor, each consolidated subsidiary issuer, and

each consolidated subsidiary guarantor, on a combined basis. Proposed Rule 13-01(a)(4) would

require intercompany transactions between issuers and guarantors presented on a combined basis

to be eliminated.

The proposed rule took into consideration that there may be circumstances in which

separate financial information about certain issuers and guarantors is material to an investment

decision. Accordingly, when information provided in response to proposed Rule 13-01 is

applicable to one or more, but not all, issuers and guarantors, proposed Rule 13-01(a)(4) would

require, to the extent it is material, separate disclosure of Summarized Financial Information for

the issuers and guarantors to which the information applies. For example, if a subsidiary’s

guarantee were limited to a particular dollar amount, disclosure of that limitation would be

required by proposed Rule 13-01(a)(2). In that case, separate disclosure of the Summarized

Financial Information specified in proposed Rule 13-01(a)(4) would be required for that

subsidiary guarantor.

The proposed rule would no longer require separate disclosure of the financial

information of non-guarantor subsidiaries. Because non-guarantor subsidiaries are not obligated

to make payments as either issuer or guarantor, the proposed rule assumed separate supplemental

information of issuers and guarantors is presented on a combined basis; intercompany balances and transactions

between issuers and guarantors have been eliminated; that the issuer’s or guarantor’s amounts due from,

amounts due to, and transactions with non-issuer and non-guarantor subsidiaries and related parties have been

presented in separate line items; and that financial information of certain identified subsidiary issuers and

guarantors has been presented separately due to disclosed facts and circumstances applicable to those

subsidiaries (as required by Rule 13-01(a)(4)(iv)).

disclosure of their financial information as required under the existing rule is not likely to be

material to an investment decision.

In order to present the assets, liabilities, and operations of the Obligor Group accurately,

it is necessary to exclude the financial information of subsidiaries not obligated under the

guaranteed security. Proposed Rule 13-01(a)(4) would continue to exclude the financial

information of non-issuer and non-guarantor subsidiaries from the Summarized Financial

Information of the Obligor Group, even if those non-issuer and non-guarantor subsidiaries would

be consolidated by an issuer or guarantor. However, the proposed rule would have allowed the

parent company to determine which method best meets the objective of excluding the financial

information of non-issuer and non-guarantor subsidiaries from the Proposed Alternative

Disclosures, so long as the selected method was disclosed and was used for all non-issuer and

non-guarantor subsidiaries for all classes of guaranteed securities for which the disclosure was

required, and was reasonable in the circumstances. 124 For example, the parent company could

have excluded the assets, liabilities, and operations of non-issuer and non-guarantor subsidiaries

by using the equity method of accounting for those subsidiaries.

(B) Comments on the Proposed Amendments

Comments were supportive of this aspect of the proposal. Many commenters generally

supported permitting Summarized Financial Information of each issuer and guarantor that is

124

This proposed amendment might have resulted in decreased comparability in the combined Summarized

Financial Information of the Obligor Group between parent companies that elect to use different methods of

excluding the financial information of their non-issuer and non-guarantor subsidiaries. In proposing this

change, the Commission considered the costs to the parent company of requiring the use of a specific method of

accounting for non-issuer and non-guarantor subsidiaries to remove their financial information from the

combined Obligor Group, particularly if that parent company’s systems are not designed to readily produce

such information. The Commission expected any decrease of comparability to be limited, as most line items

required to be disclosed in Summarized Financial Information would be unaffected by the use of different

methods for this purpose (e.g., current assets, current liabilities, net sales or gross revenues and gross profit).

consolidated in the parent company’s consolidated financial statements to be presented on a

combined basis with the parent company’s Summarized Financial Information. 125 Some of these

commenters indicated that providing this information on a combined basis would continue to

provide investors with material information for making an informed investment decision, 126

while also reducing a burdensome requirement for issuers. 127 One commenter supported

streamlining the disclosures, but asserted that the proposed amendments would likely only

benefit a small number of issuers. 128 This commenter noted that the proposed amendments could

lead to complexities and unintended consequences in presenting the Summarized Financial

Information as proposed, regardless of the method of accounting selected. 129 Another

commenter noted that, although such a combined presentation might provide some useful

information when the guarantors are single-tiered operating companies with no subsidiaries, the

accounting presentation becomes less meaningful when the guarantors are holding companies. 130

A few commenters recommended requiring disclosure only of the non-guarantor

subsidiaries, 131 and another commenter recommended requiring certain balance sheet

information about the non-guarantor subsidiaries and profitability metrics about the Obligor

125

See, e.g., letters from ABA, Davis Polk, Dell, Eaton Corp., FedEx, FEI, KPMG, Medtronic, Nareit, NYC Bar,

PWC, and Sullivan & Cromwell.

126

See letters from Dell, FedEx, and Sullivan & Cromwell.

127

See letters from Davis Polk, KPMG, and Sullivan & Cromwell.

128

See letter from KPMG.

129

See letter from KPMG. This commenter stated, as an example, that registrants may not experience a reduction

in burdens in preparing guarantor disclosures that exclude the non-obligor group either using the equity method,

cost method, or excluding the non-obligated subsidiaries entirely, when a registrant must account for the nonobligor subsidiaries for consolidation purposes.

130

See letter from Comcast.

131

See letters from Davis Polk and NYC Bar.

Group or the non-guarantor subsidiaries. 132 These commenters stated that such disclosures 133

would be consistent with the information provided in Rule 144A offerings 134 or high yield Rule

144A offerings. 135

In response to the Commission’s request for comment on whether the proposed

amendments should specify an accounting method (e.g., the equity method) that must be used to

exclude the financial information of non-obligated subsidiaries from the Summarized Financial

Information of the Obligor Group, some commenters recommended that the Commission specify

acceptable accounting methods in the rule. 136

Some commenters agreed with the proposed rule permitting the parent company to

determine which method to use in excluding the financial information of non-issuer and nonguarantor subsidiaries. 137 A few commenters supported the requirement to disclose and/or apply

consistently the selected method. 138

Several commenters recommended modifications to the proposed amendments. A few

commenters recommended that the Commission allow issuers to use only certain prescribed

132

See letter from Shearman.

133

Two of these commenters stated their recommendations for required disclosures were based on the information

they believe allows investors to evaluate structural subordination. See letters from Davis Polk and Shearman.

134

See letters from Davis Polk and NYC Bar.

135

See letter from Shearman.

136

See, e.g., letters from BDO, Deloitte and PWC. One of these commenters stated that questions may arise from

the proposed flexibility in the method of excluding non-issuer and non-guarantor information, as the proposed

amendments do not address the option to fully exclude investments in non-issuer and non-guarantor subsidiaries

from the summarized financial information of the Obligor Group, and that providing a list of acceptable

methods would indicate whether complete exclusion is an acceptable option. See letter from BDO. Another

commenter stated that the Commission should consider specifically identifying and describing the acceptable

methods of exclusion if the final rule permits the use of methods other than those based on existing U.S. GAAP

principles. See letter from Deloitte.

137

See, e.g., letters from ABA, Dell, Eaton Corp., EY, Grant, and PWC.

138

See letters from CAQ and Deloitte.

accounting methods, including those consistent with U.S. GAAP 139 or IFRS, 140 those permitted

under the accounting framework used to prepare their financial statements or otherwise specified

in Regulation S-X, 141 the equity method, 142 the fair value method, 143 and the cost method (or the

fair value practical expedient for equity securities without a readily determinable fair value

model as contemplated in U.S. GAAP 144). 145 One commenter stated that, if the Commission

decides to require the financial information to be audited, any acceptable method should be

objectively auditable. 146 One commenter contended that the proposed requirement that the

parent company disclose its basis for the accounting method it applied to exclude the financial

information of non-issuer and non-guarantor subsidiaries from the Proposed Alternative

Disclosures added an unnecessary element of complexity. 147 Alternatively, a few commenters

suggested the Commission consider completely excluding the financial information of non-issuer

and non-guarantor subsidiaries. 148 One of these commenters stated that the Summarized

Financial Information is more meaningful if it excludes the financial information of non-issuer

and non-guarantor subsidiaries, 149 and another stated that excluding balances related to

investments in non-obligated subsidiaries altogether would eliminate the possible confusion over

139

See letters from CAQ, Deloitte, and EY.

140

See letters from CAQ and EY.

141

Letter from Grant Thornton.

142

See letters from Deloitte, KPMG, and PWC.

143

See letters from Deloitte and PWC.

144

ASC 321-10-35-2, Investments - Equity Securities.

145

See letters from Deloitte, KPMG, and PWC.

146

See letter from Deloitte.

147

See letter from ABA.

148

See, e.g., letters from BDO, KPMG, and PWC.

149

See letter from BDO.

including amounts attributable to the non-obligated subsidiary investments within the Obligor

Group financial information.

Two commenters asserted that the proposed amendments would require parent companies

to present the Summarized Financial Information separately if the required qualitative

disclosures differed within the group of subsidiary issuers or guarantors, which these

commenters maintained was overly prescriptive. 150 These commenters recommended permitting

greater flexibility in such instances, such as allowing the parent company to present Summarized

Financial Information for the aggregate group with supplemental qualitative or quantitative

disclosure regarding material differences within the group.

After considering the public comments, we are adopting the amendments substantially as

proposed with modifications, including separating certain requirements within proposed Rule 1301(a)(4) into distinct subparagraphs for clarity. As supported by several commenters, we are

adopting the amendment that permits the supplemental financial disclosures of issuers and

guarantors specified in Rule 13-01(a)(4) to be provided on a combined basis. Specifically, final

Rule 13-01(a)(4)(i) permits the Summarized Financial Information of each issuer and guarantor

consolidated in the parent company’s consolidated financial statements to be presented on a

combined basis with the Summarized Financial Information of the parent company, and Rule 1301(a)(4)(ii) requires intercompany balances and transactions between issuers and guarantors

whose information is presented on a combined basis to be eliminated. 151 We agree with those

150

See letter from EY and Grant Thornton.

151

Proposed Rule 13-01(a)(4) would have required, in part, that “[i]ntercompany transactions between issuers and

guarantors whose summarized financial information is presented on a combined basis shall be eliminated.”

commenters that said providing this information on a combined basis would provide investors

with material information in making an investment decision 152 while also reducing the burden on

issuers. 153

The proposed rule would have permitted the parent company to determine the method of

excluding the financial information of non-issuer and non-guarantor subsidiaries from the

Proposed Alternative Disclosures. Although most line items required to be disclosed under

Summarized Financial Information would be unaffected, under the proposed approach, the effect

on the financial information of the Obligor Group could have varied depending on the method

used to exclude non-issuer and non-guarantor subsidiary financial information. For example,

under the equity method, the investments in those subsidiaries would have continued to be

included within the Obligor Group’s non-current assets, and earnings or losses from those

subsidiaries would have continued to be included in income or loss of the Obligor Group. A

similar effect would likely exist under certain other methods described above that were

suggested by commenters, such as the fair value method or the cost method as previously

contemplated by U.S. GAAP.

Instead of adopting the proposed approach, or specifying certain methods of accounting

that should be used, we agree with those commenters that recommended completely excluding

the financial information of non-issuer and non-guarantor subsidiaries. In particular, we agree

with one commenter that said excluding balances related to investments in non-obligated

subsidiaries altogether would eliminate the possible confusion over including amounts

While we are adopting the amendments substantially as proposed, final Rule 13-01(a)(4)(ii) clarifies that

intercompany “balances” must also be eliminated in this regard.

152

See, e.g., letters from Dell, FedEx, and Sullivan & Cromwell.

153

See, e.g., letters from Davis Polk, KPMG, and Sullivan & Cromwell.

attributable to the non-issuer and non-guarantor subsidiaries within the financial information of

the Obligor Group. 154 In this regard, amounts attributable to non-issuer and non-guarantor

subsidiaries are not generally available for payment of debt or useful for evaluating debt-paying

ability. As such, we believe excluding non-issuer and non-guarantor subsidiary information will

enhance the Revised Alternative Disclosures for investors.

Accordingly, under the final amendments, Rule 13-01(a)(4)(iii) requires subsidiaries that

are not issuers or guarantors to be excluded from the Summarized Financial Information.

Pursuant to this requirement, all non-issuer and non-guarantor subsidiary financial information

must be entirely removed from the financial information of the Obligor Group, even if an issuer

or guarantor would otherwise consolidate such non-issuer and non-guarantor subsidiaries. An

issuer or guarantor would not present its investments in non-issuer and non-guarantor

subsidiaries in the Summarized Financial Information. While we continue to expect that most

line items required by Summarized Financial Information would have been unaffected by the

particular method selected by a parent company to exclude non-issuer and non-guarantor

subsidiary information under the proposed rule, after considering the comments received, we

now believe that requiring complete exclusion of the financial information of such non-issuer

and non-guarantor subsidiaries in all cases will avoid potential confusion on the part of both

issuers and investors about the appropriate method of exclusion. We note that a parent company

may have experienced lower costs under the proposed amendments by being able to select the

method of excluding non-issuer and non-guarantor subsidiary information that its systems were

already designed to produce. However, under the final amendments, a parent company is not

required to justify that its selected method was reasonable under the circumstances as was

154

See letter from PWC.

proposed, and we expect in most circumstances that requiring complete exclusion of non-issuer

and non-guarantor subsidiary financial information will be a less costly presentation than

methods that would have required the disclosure of such financial information.

We are also adopting, substantially as proposed, the requirement that when information

provided in response to Rule 13-01 is applicable to one or more, but not all, issuers and

guarantors, separate disclosure of Summarized Financial Information for the issuers and

guarantors to which the information applies is required. This requirement is stated in Rule 1301(a)(4)(iv). For clarity, the final rule includes an example of disclosure required by Rule 13-01

that would trigger separate disclosure for the affected issuers and guarantors. 155 The example is

disclosure that is required by Rule 13-01(a)(3): “factors that may affect payments to holders of

the guaranteed security.”

One commenter suggested that the Commission provide a framework for presenting

Summarized Financial Information for the affected issuers and guarantors in aggregate based on

the nature of disclosures. 156 We believe a parent company should consider materiality 157 and

exercise judgement in determining the appropriate level of aggregation of issuers and guarantors

based on the nature of the disclosure. In this regard, it may be useful to consider quantitative

factors, such as the financial significance of the affected issuers and guarantors, and qualitative

factors, such as the nature of the facts and circumstances applicable to the issuers and guarantors.

155

This example is being included to clarify one situation requiring separate presentation of the Summarized

Financial Information applicable to some but not all issuers and guarantors.

156

See letter from Grant.

157

The disclosures specified in Rule 13-01(a) are required to the extent material. Rules 13-01(a)(6) and (7) require

disclosure of “[a]ny financial and narrative information about each guarantor if the information would be

material for investors to evaluate the sufficiency of the guarantee,” and “[s]ufficient information so as to make

the financial and non-financial information presented not misleading,” respectively. See discussion within

Section III.C.2.c, “When Disclosure is Required.”

For example, if the same contractual or statutory restrictions affect some but not all subsidiary

guarantors, and such subsidiary guarantors represent a substantial portion of the Obligor Group,

aggregation of the Summarized Financial Information of such subsidiary guarantors may be

appropriate. Conversely, it may not be appropriate to aggregate the Summarized Financial

Information of such subsidiary guarantors where the contractual or statutory restrictions are

different.

Another commenter stated its belief that requiring separate presentation of the

Summarized Financial Information applicable to affected issuers and guarantors under proposed

Rule 13-01(a)(4) is overly prescriptive. 158 While we continue to believe that separate disclosure

of Summarized Financial Information for the affected issuers and guarantors is appropriate in

most cases, we also agree with this commenter’s suggestion that it could be acceptable to present

Summarized Financial Information for the aggregate Obligor Group with supplemental

qualitative or quantitative disclosure to inform investors about the disclosures affecting one or

more, but not all issuers and guarantors. Accordingly, final Rule 13-01(a)(4)(iv) permits, in

limited circumstances, narrative disclosure to be provided in lieu of the separate Summarized

Financial Information of the affected issuers and guarantors which the paragraph otherwise

requires. The limited circumstances when a narrative may be provided are when such separate

financial information applicable to the affected issuers and guarantors can be easily explained

and understood. For example, if contractual or statutory restrictions are applicable to one

subsidiary guarantor, and that subsidiary guarantor constitutes a similar percentage of the

Obligor Group’s assets, liabilities, and operations, narrative disclosure may be permissible

depending on the facts and circumstances. In other circumstances, such as if the subsidiary

158

See letter from EY.

guarantor’s financial significance to the Obligor Group is not easily explained (e.g., the

subsidiary guarantor constitutes varying proportions of each line item within the Obligor Group’s

Summarized Financial Information), narrative disclosure is unlikely to be sufficient.

Although a few commenters recommended that the required financial disclosures depict

non-guarantor subsidiaries, 159 the final amendments continue to focus on issuers and guarantors

because those are the entities a holder can make claims against in the event of default. While the

final rules do not require financial information to be disclosed about subsidiaries not obligated

under the guarantee or guaranteed debt security, a parent company may separately provide

supplemental information about non-issuer and non-guarantor subsidiaries.

iii. Periods to Present

(A) Proposed Amendments

Instead of the periods specified in 17 CFR 210.3-01 and 210.3-02 160 required by the

existing rule, the proposed rule would require Summarized Financial Information only as of, and

for, the most recently ended fiscal year and year-to-date interim period, if applicable.

In addition, because Item 1 of Part I of Form 10-Q 161 requires a registrant to provide the

information required by Rule 10-01 of Regulation S-X, the Commission proposed adding Rule

10-01(b)(9) to require compliance with Rules 3-10 and 13-01.

(B) Comments on the Proposed Amendments

Comments on the proposed amendments were mixed. A number of commenters agreed

with the proposed amendments, which would limit the periods for which Summarized Financial

159

See letters from Davis Polk and Shearman.

160

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

161

17 CFR 249.308a.

Information is required to the most recently ended fiscal year and the year-to-date interim

period. 162 One commenter stated that the periods in the proposed rules were consistent with

disclosures that are typically provided in Rule 144A and 17 CFR 230.901 through 230.905 163

debt offerings. 164 Some commenters suggested that only the current period of the Summarized

Financial Information, either annual or interim, should be required because it is the most relevant

for an investment decision, especially because many issuers experience legal-entity structure

changes. 165

Other commenters, however, disagreed with the proposed requirement to include the

interim period of Summarized Financial Information in all cases. 166 Some commenters

suggested not requiring interim disclosures unless there has been a material change since the

most recent annual period, 167 which certain commenters noted is consistent with Article 10 of

Regulation S-X. 168 Some of these commenters indicated that the costs of providing interim

information when no material change has occurred would be overly burdensome 169 and, without

that disclosure, investors would still receive information necessary to make an informed

investment decision. 170

162

See, e.g., letters from Cravath, Davis Polk, EEI / AGA, FEI, Freeport, Grant Thornton, Nareit, NYC Bar, and

Sullivan & Cromwell.

163

Regulation S.

164

See letter from Cravath.

165

See, e.g., letters from Eaton Corp., FEI, and Medtronic.

166

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

167

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

168

See, e.g., letters from Deloitte, FEI, and PWC

169

See, e.g., letters from Ball Corp. and FedEx.

170

See letter from FedEx.

After considering the comments received, we are adopting the amendments as proposed,

with one clarification. As adopted, Rule 13-01(a)(4)(v) requires the financial disclosures to be

provided as of and for the most recently ended fiscal year and year-to-date interim period

included in the parent company’s consolidated financial statements, which as described above

many commenters supported. When used in conjunction with the parent company’s consolidated

financial statements, we continue to believe the most recent full fiscal year and year-to-date

interim period should provide investors the additional information about the Obligor Group

necessary for an informed investment decision and eliminate unnecessary compliance costs for

registrants.

We are not adopting the approach some commenters recommended, which would have

required the most recent interim period in limited circumstances, such as when there had been a

material change since the most recent annual period. We continue to believe, as stated in the

Proposing Release, that the most recent interim period should be provided so that investors can

make decisions based on the most recent information available. 171 We also are not adopting an

approach suggested by some commenters that would require only the most recent interim or

annual period. 172 We believe that investors should be provided with the most recent annual

period of financial information about issuers and guarantors as a supplement to the parent

company consolidated financial statements in all cases, and the most recent interim period, if

applicable. While we acknowledge the concerns about the burden to provide interim information

in all cases, we note that the final amendments already significantly reduce the burdens on parent

171

See Section III.C.2.iii of the Proposing Release.

172

See, e.g., letters from Eaton and Medtronic.

companies by eliminating the earliest two years of required Summarized Financial Information

and, in filings on Form 10-Q, by eliminating both the quarter-to-date interim period requirement

in filings covering more than one fiscal quarter and comparable prior year interim period(s), as

applicable. Under the final rules, investors will continue to receive the most recent interim and

annual period information, and we continue to believe this is the most appropriate approach to

reducing burdens for parent companies while providing investors with the information they need

to make informed investment decisions.

Proposed Rule 13-01(a)(4) did not specify that the required interim period was only for

the most recent year-to-date period. In certain filings, such as a parent company’s Form 10-Q for

its second and third fiscal quarters, both year-to-date and quarter-to-date interim financial

statements are required to be presented for the parent company. To avoid any confusion, and

consistent with the proposed rule’s intent and suggestions from certain commenters, 173 the final

rule’s interim period requirement has been revised to clarify that only the most recent year-todate interim period is required.

Finally, as proposed, we are adopting Rule 10-01(b)(9) to require compliance with Rules

3-10 and 13-01 in quarterly reports on Form 10-Q.

b. Non-Financial Disclosures

Proposed Amendments

When Consolidating Information is presented, the existing rule requires limited nonfinancial disclosures about the issuers and guarantors and the guarantees, 174 restricted net

173

See, e.g., letters from EY and PWC.

174

Existing Rules 3-10(i)(8)(i) through (iii) require disclosure, if true, that each subsidiary issuer or subsidiary

guarantor is 100%-owned by the parent company, that all guarantees are full and unconditional, and where there

is more than one guarantor, that all guarantees are joint and several.

assets, 175 and certain types of restrictions on the ability of the parent company or any guarantor

to obtain funds from their subsidiaries. 176 In addition to proposing amendments to existing Rule

3-10 for financial disclosures, the Commission also proposed amendments to require specific

non-financial disclosures. These amendments were proposed to enhance the information

provided about subsidiary issuers and guarantors, particularly in light of the proposal to require

Summarized Financial Information for those subsidiaries. Proposed Rules 13-01(a)(1) through

(3) would require certain disclosures about the issuers and guarantors, the terms and conditions

of the guarantees, and how the issuer and guarantor structure and other factors may affect

payments to holders of the guaranteed securities. Disclosure of additional non-financial

disclosures beyond what is specified in proposed Rules 13-01(a)(1) through (3) would have been

required by proposed Rule 13-01(a)(5), to the extent they are material to an investment decision.

ii.

Comments on the Proposed Amendments

Some commenters expressed general support for the proposed requirements regarding

non-financial disclosures. 177 One commenter noted that the proposed amendments would be less

burdensome on registrants than existing requirements under Rule 3-10. 178 Another commenter

did not discuss the specific proposed non-financial disclosures, but stated its belief that

qualitative disclosures are important to the debt holder’s understanding of the overall picture of

credit quality and suggested that, in certain instances, qualitative disclosures alone may be

sufficient information for investors. 179 One commenter stated that, outside of the registration

175

Rule 3-10(i)(10) of Regulation S-X.

176

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

177

See, e.g., letters from Davis Polk, Freeport, and NYC Bar.

178

See letter from Davis Polk.

179

See letter from Comcast.

statement and/or the related prospectus that would identify the issuers and guarantors of the

security, it was not clear why identification and disclosure of such entities would be meaningful

to an investor in the context of financial disclosures. 180 The commenter recommended that the

issuer and guarantors of the guaranteed security should be identified in the registration statement,

but not in other filings, such as periodic reports. This commenter also suggested that, if the

Commission believes this information should be presented in connection with an annual report,

the disclosure should be included as an exhibit to such filing.

iii.

Final Amendments

After considering the comments received, we are adopting the amendments largely as

proposed with certain modifications based on comments received. Final Rules 13-01(a)(1)

through (3) will require certain disclosures about the issuers and guarantors, the terms and

conditions of the guarantees, and how the issuer and guarantor structure and other factors may

affect payments to holders of the guaranteed securities. Consistent with the proposal, we believe

these requirements will result in enhanced narrative disclosures that will improve investor

understanding of the issuers, guarantors, and guarantees, and make the financial disclosures they

accompany easier to understand. While the adopted non-financial disclosures are composed of

the items we believe are most likely to be material to an investor, disclosure of additional facts

and circumstances is required if necessary to comply with Rule 13-01(a)(6) and (7). 181

Additionally, when a non-financial disclosure is applicable to one or more, but not all, issuers

and guarantors, Rule 13-01(a)(4)(iv) requires, to the extent it is material, separate disclosure of

Summarized Financial Information for the issuers and guarantors to which the non-financial

180

See letter from PWC.

181

Supra note 114.

disclosure applies. 182

We are not adopting one commenter’s suggestion that disclosure of the identity of the

issuers and guarantors should be required only at the time of registration of the offer and sale of

guaranteed securities. 183 These entities are legally obligated under the guaranteed security along

with the parent company, and we believe such information is material to investors in ongoing

periodic reports. However, we are adopting the commenter’s alternative suggestion that the

disclosures be included in an exhibit to the subject filing. 184 After considering this commenter’s

suggestion, we believe that the nature of this information is better suited for disclosure in an

exhibit as it can efficiently be provided in list form, and, depending on the number of subsidiary

issuers and guarantors, this information could distract investor focus from the other financial and

non-financial disclosures required by final Rule 13-01 if presented alongside them. Furthermore,

if the entities required to be disclosed do not change from period to period, the parent company

could refer to an earlier filing’s exhibit rather than filing the exhibit again. Because registrants

are required to hyperlink to each exhibit filed with, or incorporated by reference to a filing, 185

this information will be easily accessible to investors. Due to this change, we have revised Rule

13-01(a)(1) to require a description of the issuers and guarantors of the guaranteed security,

182

See discussion in Section III.C.2.ii, “Presentation on a Combined Basis.”

183

See letter from PWC.

184

See amended Item 601(a) and new Item 601(b)(22) of Regulation S-K. A parent company will be required to

list, under an appropriately captioned heading that identifies the associated securities, each of its subsidiaries

that is a guarantor, issuer, or co-issuer of each guaranteed security registered or being registered that the parent

company issues or guarantees. A subsidiary need not be listed more than once so long as its role as issuer, coissuer, or guarantor of a guaranteed security is clearly indicated with respect to each applicable security. This

exhibit will be required in Forms S-1 [17 CFR 239.11], S-3 [17 CFR 239.13], S-4 [17 CFR 239.25], SF-1 [17

CFR 239.44], SF-3 [17 CFR 239.45], S-11 [17 CFR 239.18], F-1 [17 CFR 239.31], F-3 [17 CFR 239.33], F-4

[17 CFR 239.34], 10 [17 CFR 249.210], 10-Q [17 CFR 249.308a], and 10-K [17 CFR 249.310]. In addition, we

are making corresponding revisions to the exhibit requirements of Form 20-F by creating new Exhibit 17 within

Item 19, and Form 1-A by creating new Exhibit 17 within Item 17. This exhibit will also be required in Forms

1-K and 1-SA. See discussion in Section V.H.3.c, “Offerings pursuant to Regulation A”.

185

See 17 CFR 232.102(d) [Rule 102(d) of Regulation S-T].

instead of their identification, in Securities Act registration statements and Exchange Act

registration statements and periodic reports. We believe this approach will provide the

information to investors in a more efficient manner and make the accompanying financial and

non-financial disclosures easier to understand.

c. When Disclosure is Required

Proposed Amendments

One of the conditions that must be met under existing Rule 3-10 to be eligible to omit the

financial statements of a subsidiary issuer and guarantor is providing the Alternative Disclosures.

If certain numerical thresholds are met, including that the parent company has “no independent

assets or operations” and that all non-issuer and non-guarantor subsidiaries are “minor,” 186 the

Alternative Disclosures may take the form of a brief narrative in lieu of detailed Consolidating

Information, but some type of the Alternative Disclosures is always required. 187 Under these

thresholds, minor changes in circumstances can result in dramatically different disclosures being

required. Existing Rules 3-10(i)(11)(i) and (ii) provide that Rule 3-10 disclosure may not omit

any financial and narrative information about each guarantor if it would be material for investors

to evaluate the sufficiency of the guarantee, and shall include sufficient information so as to

make the financial information presented not misleading. This disclosure is required when

Consolidating Information is disclosed.

The proposed amendments would eliminate the “no independent assets or operations”

and “minor” thresholds, as well as the brief narrative form of Alternative Disclosures, and

186

Rules 3-10(h)(5) and (6) specify the numerical thresholds that must not be exceeded for a parent company to

have “no independent assets or operations,” and for a subsidiary to be “minor,” respectively. See discussion in

Section II.F of the Proposing Release.

187

See discussion of existing requirements in Section II.F of the Proposing Release.

instead require financial and non-financial disclosures to the extent material to holders of the

guaranteed security. For example, under the proposed rule, the Summarized Financial

Information of the Obligor Group could be omitted if the parent company’s consolidated

financial statements do not differ in any material respects from the Obligor Group. While the

disclosures specified in proposed Rule 13-01(a)(1) through (4) could have been omitted if not

material to holders of the guaranteed security, for clarity, proposed Rule 13-01(a)(4) would have

required the registrant to include a statement that those financial disclosures have been omitted

and disclose the reason(s) why the disclosures are not considered to be material.

While the proposed rules include specific financial and non-financial disclosures, there

may be other information about the guarantees, issuers, and guarantors that could be material to

holders of the guaranteed security. Accordingly, proposed Rule 13-01(a)(5) would have required

disclosure of any information that would be material to making an investment decision with

respect to the guaranteed security, rather than the sufficiency of the guarantee as stated in the

existing rule. This requirement would have applied in all cases, including when the proposed

Summarized Financial Information is omitted in accordance with the proposed rule.

ii.

Comments on the Proposed Amendments

Comments were mixed on these proposals. A number of commenters generally supported

the proposed elimination of existing Rule 3-10’s numerical thresholds in favor of allowing

issuers to provide the specified disclosures based on what information the issuer believes is

material to investors. 188 However, a few commenters supported some type of numerical

threshold for establishing whether financial information of an obligor group should be deemed

188

See, e.g., letters from CII, FedEx, FEI, Nareit, and Sullivan & Cromwell.

material. 189 One commenter suggested establishing a 50% threshold as a non-exclusive safe

harbor for guarantee significance. 190 This commenter stated that if the significance is at or below

50%, the alternative disclosures should be deemed not material and not required to be disclosed;

while if it is above 50%, issuers should still be able to conclude that the Proposed Alternative

Disclosures are not required if they would not provide material information. Another commenter

recommended that the Commission establish a quantitative test that would allow issuers to

evaluate whether Summarized Financial Information of an Obligor Group may be omitted. 191

Some commenters opposed the requirement in proposed Rule 13-01(a)(4) that would

require a registrant to disclose, if the required financial disclosures were omitted because they

were not material, a statement to that effect and the reasons therefore. 192 Some commenters

asserted that such disclosure would not be useful to investors, 193 could possibly result in an

increase in liability, 194 and was counter to the Commission’s objective of focusing on material

disclosures and providing a principles-based framework. 195 One commenter suggested that, if

the proposal were adopted, the Commission should make clear that issuers would only need to

189

See letters from SIFMA and T-Mobile.

190

See letter from SIFMA. This commenter said that significance under this suggestion would be measured in a

manner consistent with the existing rule’s determination of a “minor” subsidiary specified in Rule 3-10(h)(6),

except that 50% would be substituted for the existing rule’s 3% threshold. See additional discussion in Section

II.F of the Proposing Release.

191

See letter from T-Mobile. This commenter did not provide a specific figure for a quantitative threshold, but

noted that the threshold should be higher than existing Rule 3-10’s thresholds for minor subsidiaries. The

commenter asserted that using the criteria for being considered a “significant subsidiary” specified in § 210.102(w) would better reflect materiality to investors compared to the existing definition of minor subsidiaries.

192

See, e.g., letters from Debevoise, EY, KPMG, and SIFMA.

193

See letters from Debevoise and KPMG.

194

See letters from Debevoise and SIFMA.

195

See letter from Debevoise.

make a simple statement that management does not believe the information is material. 196 In

contrast, one commenter specifically supported this part of proposed Rule 13-01(a)(4), asserting

that the requirement would provide clarity about which disclosures were omitted and why. 197

A number of commenters opposed proposed Rule 13-01(a)(5), which would have

required disclosure of any information that would be material to making an investment decision

with respect to the guaranteed security. 198 Several of these commenters contended that the

proposed requirement is overly broad. Some commenters asserted that the proposed requirement

would cause uncertainty for issuers and auditors as they seek to apply and assess the adequacy of

the disclosures. 199 One commenter asserted that the proposed requirement would override all

other relevant disclosure obligations; 200 another commenter questioned whether the Commission

is proposing to modify the overall materiality assessment in its disclosure framework; 201 and a

third commenter stated its belief that in addition to creating litigation risk, the proposed rule

could extend the duty to disclose material information beyond information specific to the

guarantee, such as pending merger negotiations and other potential transactions. 202 However,

one commenter supported this proposed requirement “because it would provide relevant

196

See letter from SIFMA.

197

See letter from CII.

198

See, e.g., letters from ABA, BDO, CAQ, Comcast, Cravath, Davis Polk, Deloitte, EY, Freeport, KPMG, PWC,

Shearman, and Sullivan & Cromwell.

199

See, e.g., letters from BDO, CAQ, EY, and PWC.

200

See letter from Cravath.

201

See letter from Deloitte.

202

See letter from Shearman.

information, not otherwise explicitly required by the [p]roposed [r]ule, which would likely

render the disclosures taken as a whole to be more useful for investment decisions.” 203

In response to the Commission’s request for comment on whether the proposed

amendments were sufficiently clear about the disclosures that should be provided and when, one

commenter recommended that the final rules should provide explicit objectives related to

assessing the guarantee, which would help issuers to prepare their disclosures. 204 Some

commenters suggested that it would be helpful for the final rules to provide additional guidance

or examples of information that may be material to investors. 205 One commenter recommended

that the rules expressly provide that the Alternative Disclosures need not be included in a

registration statement at the time of effectiveness so long as they are provided prior to an

offering of the securities in respect of which the Alternative Disclosures are required. 206 Another

commenter asserted that a parent company could conclude that disclosure is not material if no

investor owns (or is currently being offered) the specific guaranteed or collateralized security

and therefore the disclosure could be excluded based on proposed Rule 13-01. 207

iii.

Final Amendments

We are adopting the amendments largely as proposed with modifications based on

comments received.

203

See letter from CII.

204

See letter from EY.

205

See, e.g., letters from KPMG and Shearman.

206

See letter from Cravath.

207

See letter from PWC.

As supported by several commenters, 208 the existing “no independent assets or

operations” and “minor” numerical thresholds used to determine the form and content of

disclosure have been replaced with a requirement to provide all disclosures specified in the final

rule, unless such information is not material. 209 Whereas proposed Rule 13-01(a) required the

proposed financial and non-financial disclosures “to the extent material to holders of the

guaranteed security,” the final rule has been revised to require the financial and non-financial

disclosures “to the extent material,” which is discussed in further detail below.

A few commenters suggested including numerical thresholds in the rule for determining

whether financial information may be omitted, 210 while others requested that we provide

additional guidance or examples of what information may be material. 211 While we appreciate

the desire for certainty about when disclosure is required, determinations of what information is

material are highly dependent on the applicable facts and circumstances, and we are concerned

that specifying numerical thresholds or providing detailed guidance could undermine the

principles-based nature of this provision, to the detriment of both investors and issuers. We are

therefore not adopting these suggestions. Instead, akin to the suggestion of one commenter, 212

the final rule identifies four non-exclusive scenarios in which the required information could be

208

See, e.g., letters from CII, FedEx, FEI, Nareit, and Sullivan & Cromwell.

209

This requirement is specified in new Rule 13-01(a). Whether a disclosure specified in new Rule 13-01 may be

omitted depends on whether the disclosure would be material to a reasonable investor. The Supreme Court in

TSC v. Northway held that a fact is material if there is “a substantial likelihood that the disclosure of the omitted

fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of

information made available.” See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

210

See letters from SIFMA and T-Mobile.

211

See, e.g., letters from KPMG and Shearman.

212

See letter from SIFMA. This commenter recommended the Commission establish, as a non-exclusive safe

harbor, “a numerical threshold of guarantee significance at or below which [the required disclosures] would be

deemed immaterial and thus not required and above which registrants would still be able to conclude that [the

required disclosures] are not required because they would not provide material information.” We are not

adopting the commenter’s suggestion of a numerical threshold of significance, but we have identified four nonexclusive scenarios in which the required information could be omitted as discussed below.

omitted on the basis that it is not material, provided the applicable scenario is disclosed to

investors. We discuss these four scenarios in further detail below.

The proposed rule sets forth financial and non-financial disclosures that were focused on

the information the Commission expected was most likely to be material. It also included

proposed Rule 13-01(a)(5), which would have required disclosure of “any other quantitative or

qualitative information that would be material to making an investment decision with respect to

the guaranteed security.” The intent of this proposed requirement was to elicit disclosure about

the obligated entities and the guarantees that would be material but was not otherwise

specifically required by the proposed financial and non-financial disclosures. While one

commenter supported this proposed requirement, many others did not.

Instead of proposed Rule 13-01(a)(5), we are adopting new Rules 13-01(a)(6) and (7),

which retain the requirements in existing Rules 3-10(i)(11)(i) and (ii), 213 respectively, as

suggested by several commenters. 214 However, we are aligning the wording of existing Rules 310(i)(11)(i) and (ii) to the structure of Rule 13-01. We are also modifying the requirement in

existing Rule 3-10(i)(11)(ii) to make reference to non-financial information, in addition to

financial information, because we see no reason to limit such disclosure to financial information.

Parent companies are already required to comply with existing Rule 3-10(i)(11)(i) and (ii), and

we are not aware of any issues surrounding their application. We believe these existing

requirements capture the disclosures the proposed rule was intended to elicit while addressing

the concerns raised by commenters as discussed above. Notwithstanding these requirements in

213

See Section III.C.2.c.i, “When Disclosure is Required,” for a discussion of the requirements in existing Rules 310(i)(11)(i) and (ii).

214

See, e.g., letters from BDO, PWC, and Shearman.

the final rule, in 17 CFR 230.408(a) 215 and 17 CFR 240.12b-20 216 require a parent company to

disclose, in addition to the information expressly required to be included, such further material

information, if any, as may be necessary to make the required statements, in the light of the

circumstances under which they are made not misleading. While some commenters indicated

these requirements provide sufficient investor protections, 217 we believe retaining the

requirements in existing Rule 3-10(i)(11)(i) and (ii), in addition to those other requirements, will

help to ensure that material information is provided to investors.

Based on comments received on proposed Rule 13-01(a)(5), we have also revised Rule

13-01(a) for clarity. Proposed Rule 13-01(a) would have required disclosures “to the extent

material to holders of the guaranteed security” and was not intended to introduce a nuanced or

different materiality analysis specific to these disclosure requirements. A parent company’s

responsibility to determine whether the disclosures specified in Rule 13-01 are material is not

different from how it assesses materiality in connection with other information it files with the

Commission. Accordingly, we have revised final Rule 13-01 to require the financial and nonfinancial disclosures “to the extent material.”

Proposed Rule 13-01(a)(4) would have required, if the financial disclosures specified in

proposed Rule 13-01(a)(4) were omitted because they are not material, disclosure of a statement

to that effect and the reasons therefore. Most of the commenters that discussed this proposed

requirement did not support it. 218 The intent of the proposed rule was not to require a parent

215

Securities Act Rule 408(a).

216

Exchange Act Rule 12b-20.

217

See, e.g., letters from Deloitte and EY.

218

See, e.g., letters from Debevoise, EY, KPMG, and SIFMA.

company to disclose the analysis supporting its conclusion that the financial disclosures were not

material. Rather, it was to inform an investor that financial information about issuers and

guarantors was not being provided and the basic reason(s) for the omission, similar to the

narrative forms of Alternative Disclosures in existing Rule 3-10. 219 In response to these

comments, we are not adopting this requirement as proposed. Instead, we are adopting an

approach that should help address concerns 220 about the need for greater certainty as to the

circumstances when the omission of financial disclosures may be appropriate while continuing to

provide investors with the basic reasons as to why the financial information was omitted in a

manner similar to existing Rule 3-10’s narrative exceptions. As adopted, Rule 13-01(a)(4)(vi)

includes four scenarios, which we believe are the most common situations under which the

financial information would not be material. 221 If the scenario is applicable and disclosed, the

parent company could then omit the financial disclosures. The four scenarios are:

1) The assets, liabilities and results of operations of the combined issuers and

guarantors of the guaranteed security are not materially different than

corresponding amounts presented in the consolidated financial statements of the

parent company; 222

2) The combined issuers and guarantors, excluding investments in subsidiaries that

219

The content of the brief narratives is specified within each of the exceptions of existing Rules 3-10(b) through

(f) based on the applicable facts and circumstances. For example, if the conditions are met, existing Rule 310(b)(4) of Regulation S-X specifies that the narrative disclosure to be included in a footnote to the parent

company’s consolidated financial statements must state, if true, “that the issuer is a 100%-owned finance

subsidiary of the parent company and the parent company has fully and unconditionally guaranteed the

securities.” It also requires the footnote to include “the narrative disclosures specified in paragraphs (i)(9) and

(i)(10) of this section.”

220

See, e.g., letter from Shearman.

221

These scenarios were discussed in the Proposing Release. See Section III.C.2.c of the Proposing Release.

222

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

are not issuers or guarantors, have no material assets, liabilities or results of

operations; 223

3) The issuer is a finance subsidiary of the parent company, the parent company has

fully and unconditionally guaranteed the security, and no other subsidiary of the

parent company guarantees the security; 224 and

4) The issuer is a finance subsidiary that co-issued the security, jointly and severally,

with the parent company, and no other subsidiary of the parent company

guarantees the security. 225

While we believe these scenarios encompass most of the situations under which the required

financial information would not be material, these scenarios are not intended to be exclusive. As

discussed below, there may be other circumstances in which it would be appropriate to omit the

required financial information on the basis that it is not material.

In the first scenario, we believe financial information of the combined Obligor Group

would not be material to an investor as it is not materially different than that of the consolidated

parent company. 226 If the related scenario was disclosed, investors would not need supplemental

financial information as it would largely duplicate the corresponding information in the parent

company’s consolidated financial statements. In the second scenario, we believe disclosure that

the combined Obligor Group has no material assets, liabilities or results of operations obviates

the need for supplemental disclosures as an investor would know such information would not be

223

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

224

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

225

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

226

Rule 13-01(a)(4)(vi) clarifies that this scenario does not apply where separate disclosure of the Summarized

Financial Information of one or more, but not all issuers and/or guarantors, is required by Rule 13-01(a)(4)(iv).

material. The third and fourth scenarios involve finance subsidiary issuers or finance

subsidiaries that co-issue securities with the parent company. These last two scenarios, which

are generally consistent with existing Rule 3-10(b) narrative disclosures involving finance

subsidiaries, 227 inform investors that the finance subsidiary issuer or co-issuer has no

independent material debt-paying ability and has no material assets or operations other than

those related to the issuance, administration, and repayment of the guaranteed security such that

supplemental financial disclosures are not material.

Rule 13-01(a)(4)(vi)(C) applies to a finance subsidiary issuer of a security that the parent

company has fully and unconditionally guaranteed, and Rule 13-01(a)(4)(vi)(D) applies to a

finance subsidiary that co-issues a security, jointly and severally, with the parent company. No

other subsidiaries of the parent company may guarantee the security under either of these

scenarios. Rule 13-01(a)(4)(vi) defines when a subsidiary is a “finance subsidiary” for the

purposes of the rule. This definition is consistent with the definition in existing Rule 3-10(h)(7)

except that the amended definition does not make reference to revenues, which we believe are

subsumed by the reference to “operations,” and does not make reference to “cash flows,” as cash

flow information is not a required financial disclosure under the amended rule.

While we believe these scenarios generally capture the situations under which the

financial information would not be material and may be omitted, there may be other scenarios

under which the parent company may conclude Summarized Financial Information is not

227

See discussion above in Section III.C.1.d.iii. As one of the conditions to omit the financial statements of the

finance subsidiary issuer under existing Rule 3-10(b), the parent company must provide the narrative disclosure

in paragraph (4) of existing Rule 3-10(b), which is that “the issuer is a 100%-owned finance subsidiary of the

parent company and the parent company has fully and unconditionally guaranteed the securities. The footnote

also must include the narrative disclosures specified in paragraphs (i)(9) and (i)(10) of this section.” The Note

to existing Rule 3-10(b) states that “[p]aragraph (b) is available if a subsidiary issuer satisfies the requirements

of this paragraph but for the fact that, instead of the parent company guaranteeing the security, the subsidiary

issuer co-issued the security, jointly and severally, with the parent company. In this situation, the narrative

information required by paragraph (b)(4) must be modified accordingly.”

necessary. These scenarios would be evaluated under the general materiality provision of Rule

13-01(a). Based on this analysis, if a parent company determines that not all of the required

financial information is material, the information that is not material may be omitted without

additional disclosure or explanation. Thus, under the final rule, the parent company could either

rely on one of the identified scenarios, if applicable, to omit information that is not material, or

make its own assessment based upon a consideration of other relevant facts and

circumstances. 228 We believe this approach will preserve the principles-based nature of Rule 1301 while providing greater certainty for issuers, and appropriate transparency for investors,

regarding the information required to be disclosed.

Two commenters encouraged the Commission to expressly provide that the Proposed

Alternative Disclosures need not be provided at the time of effectiveness so long as they are

provided prior to an offering of the guaranteed securities, 229 with one of these commenters

suggesting that we amend 17 CFR 230.430B(a) 230 to cover information required by proposed

Rule 13-01. 231 We are not amending Rule 430B as suggested. Issuers meeting the definition of

Well-Known Seasoned Issuer (“WKSI”) are currently afforded significant flexibility under Rule

430B(a), which would include the flexibility to omit the information specified in Proposed Rule

13-01 at effectiveness so long as the information is added when the shelf registration statement is

amended to identify subsidiary issuers and guarantors. 232 We acknowledge that non-WKSI

228

To provide clarity to an issuer that its ability to omit the Summarized Financial Information required by final

Rule 13-01(a)(4) is not limited to the four scenarios discussed herein, final Rule 13-01(a)(4)(vi) states:

“Notwithstanding that a parent company may omit this summarized financial information if not material…”

229

See letters from Cravath and PWC.

230

Securities Act Rule 430B(a).

231

See letter from Cravath.

232

See Securities Act Rule 430B(a) and Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [ 70 FR

44722 (Aug. 3, 2005)] (“Securities Offering Reform”) at text accompanying note 520.

issuers are not similarly able to omit this information but note that WKSIs are afforded

substantially greater latitude in registering and marketing securities. 233

d. Location of Revised Alternative Disclosures and Audit

Requirement

i. Proposed Amendments

The primary source of financial information provided to investors—the consolidated

financial statements of the parent company—is required to be audited as specified in Regulation

S-X. 234 The Proposed Alternative Disclosures would provide incremental detail as a supplement

to the parent company’s audited annual and unaudited interim consolidated financial statements

to facilitate an analysis of the parts of the consolidated enterprise that are obligated to make

payments as issuers or guarantors. The proposed rule would provide parent companies with the

flexibility to provide the Proposed Alternative Disclosures inside or outside of the consolidated

financial statements in registration statements covering the offer and sale of the guaranteed debt

securities and any related prospectus, as well as annual and quarterly Exchange Act periodic

reports required to be filed during the fiscal year in which the first bona fide sale of the subject

securities is completed. If a parent company elects to provide the Proposed Alternative

Disclosures outside its audited financial statements, the disclosures would be required in

specified prominent locations in its offering documents and periodic reports.

Accordingly, the note to proposed Rule 13-01(a) would have allowed the parent company

to provide the Proposed Alternative Disclosures in a footnote to its consolidated financial

statements or, alternatively, in MD&A, 235 in the registration statement covering the offer and

233

See Securities Offering Reform at note 220.

234

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

235

See 17 CFR 229.303 (Item 303 of Regulation S-K).

sale of the subject securities and any related prospectus, and in Exchange Act reports on Forms

10-K and 10-Q 236 required to be filed during the fiscal year in which the first bona fide sale of

the subject securities is completed. If a parent company were to elect to provide the disclosures

in its audited financial statements, the Proposed Alternative Disclosures would be required to be

audited. 237 If not otherwise included in the consolidated financial statements or in the MD&A,

the parent company would be required to include the Proposed Alternative Disclosures in its

prospectus immediately following “Risk Factors,” if any, or otherwise, immediately following

pricing information described in 17 CFR 229.503(c) (“Item 503(c) of Regulation S-K”). 238

Beginning with the parent company’s annual report filed on Form 10-K for the fiscal year during

which the first bona fide sale of the subject securities is completed, however, the parent company

would have been required to provide the Proposed Alternative Disclosures in a footnote to its

consolidated financial statements in its annual and quarterly reports. These proposed

amendments would also apply to foreign private issuers and issuers offering securities pursuant

to Regulation A and the forms applicable to such entities. 239

ii.

Comments on the Proposed Amendments

Comments on the proposed amendments were mixed. A few commenters generally

supported the flexibility under the proposed amendments for the parent company to provide the

236

These proposed amendments also would apply to foreign private issuers and issuers offering securities pursuant

to 17 CFR 230.251 through 230.263 (“Regulation A”) and the forms applicable to such entities. See Section

III.D, “Application of Proposed Amendments to Certain Types of Issuers,” below.

237

Regardless of where the Proposed Alternative Disclosures are presented in the filing, U.S. GAAP requires

disclosure in the financial statements of the pertinent rights and privileges of the various securities outstanding.

See ASC 470-10-50-5 and ASC 505-10-50-3.

238

Subsequent to the issuance of the Proposing Release, the Commission amended and relocated the requirements

previously contained in Item 503(c) to 17 CFR 229.105 [new Item 105 of Regulation S-K]. See FAST Act

Modernization and Simplification of Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674

(Apr. 2, 2019)].

239

See Section III.D, “Application of Amendments to Certain Types of Issuers,” below.

Proposed Alternative Disclosures in specified locations outside its consolidated financial

statements in the subject registration statement and Forms 10-K and 10-Q required to be filed

during the fiscal year in which the first bona fide sale of the debt securities is completed, but

would have required the parent company to provide the disclosures in a footnote to its

consolidated financial statements in its annual and quarterly reports starting with its annual

report filed on Form 10-K for the fiscal year during which the first bona fide sale of the debt

securities is completed. 240

A number of commenters stated that the Proposed Alternative Disclosures should be

permitted to be presented outside of the parent company’s consolidated financial statements in

all cases, not just in the registration statement and Forms 10-K and 10-Q required to be filed

during the fiscal year in which the first bona fide sale of the subject securities is completed. 241

One commenter suggested that the existing rule’s requirement that the disclosures be included in

the audited financial statements has driven would-be registered debt issuers to the Rule 144A

debt market, 242 an effect other commenters asserted would continue if the Proposed Alternative

Disclosures were required to be included in the consolidated financial statements in subsequent

Exchange Act reports. 243 Several commenters asserted that not requiring these disclosures to be

240

See letters from Ball Corp., Nareit, and WTW. While one commenter expressed support for the proposed

amendment that would allow locating the disclosures outside the footnotes of the financial statements in certain

instances, the commenter stated its belief that having a requirement for the disclosures to be audited creates

additional cost over an area of accounting and disclosure where there is limited focus from the investment

community. See letter from WTW.

241

See, e.g., letters from ABA, Cravath, Davis Polk, Dell, Freeport, SIFMA, Simpson Thacher and Sullivan &

Cromwell.

242

See letter from Cravath.

243

See letters from Dell and Sullivan & Cromwell.

audited would reduce costs 244 and possibly allow issuers to more quickly register guaranteed

debt securities and access capital markets. 245 A few commenters stated that requiring an audit of

the Proposed Alternative Disclosures would provide little marginal benefit to investors. 246

Other commenters, however, asserted that the flexibility to determine the location of the

Proposed Alternative Disclosures under the proposed amendments could lead to investor

confusion about the location of the disclosures, 247 and uncertainty as to the level of audit

assurance that applied to the disclosures. 248 One commenter contended that the Proposed

Alternative Disclosures should be required to be presented in a single location to avoid

inconsistencies in the location and varied reliance by investors. 249 Another commenter stated

that companies should not have the option to choose where their disclosures will appear, and that

reported disclosures should be consistently reported in the same location. 250

One commenter did not support locating the Proposed Alternative Disclosures outside the

financial statements, 251 and another suggested either requiring the Proposed Alternative

Disclosures to be audited or limiting unaudited disclosures to underwritten offerings. 252 One of

these commenters argued that many investors place significant value on having required

disclosures subject to annual audit and/or interim review, internal control over financial

244

See, e.g., letters from ABA, Ball Corp., Cravath, Davis Polk, Dell, Freeport, SIFMA, Simpson Thacher,

Sullivan & Cromwell, and WTW.

245

See, e.g., letters ABA, BDO, Cravath, Davis Polk, Dell, and Simpson Thacher.

246

See, e.g., letters from Davis Polk, Dell, Freeport, and Sullivan & Cromwell.

247

See letters from Deloitte, FedEx, and PWC.

248

See letters from Deloitte and KPMG.

249

See letter from KPMG.

250

See letter from XBRL US, Inc.

251

See letter from CII.

252

See letter from BDO.

reporting, and XBRL tagging requirements, and not being subject to the forward-looking

statements safe harbor. 253 Another commenter did not express a view on where the disclosures

should be located, but indicated that investors may benefit from having the disclosures in the

financial statements because they would be subject to audit and interim review requirements. 254

Other commenters, however, recommended the disclosures be located outside the

financial statements in all cases. 255 One of these commenters argued presentation outside the

financial statements in all cases was appropriate as the Proposed Alternative Disclosures are

supplementary to the financial statements. 256 This commenter asserted that this change would

reduce costs of preparing the disclosures by allowing the information to be unaudited, and noted

that the disclosures would still be subject to the parent company’s disclosure controls and

procedures and required

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