Disclosure Update and Simplification

Federal RegisterAug 4, 2016

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 239, 240, 249, and 274

[Release No. 33-10110; 34-78310; IC-32175; File No. S7-15-16]

RIN 3235-AL82

Disclosure Update and Simplification

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing amendments to certain of our disclosure requirements that may have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), International Financial Reporting Standards (“IFRS”), or changes in the information environment. We are also soliciting comment on certain Commission disclosure requirements that overlap with, but require information incremental to, U.S. GAAP to determine whether to retain, modify, eliminate, or refer them to the Financial Accounting Standards Board (“FASB”) for potential incorporation into U.S. GAAP. The proposed amendments are intended to facilitate the disclosure of information to investors, while simplifying compliance efforts, without significantly altering the total mix of information provided to investors. These proposals are part of an initiative by the Division of Corporation Finance to review disclosure requirements applicable to issuers to consider ways to improve the requirements for the benefit of investors and issuers. We are also issuing these proposals as part of our efforts to implement title LXXII, section 72002(2) of the Fixing America's Surface Transportation Act.

DATES:

Comments should be received on or before October 3, 2016.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-15-16 on the subject line; or

• Use the Federal eRulemaking Portal (

http://www.regulations.gov

). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-15-16. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Web site (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Nili Shah, Deputy Chief Accountant, at (202) 551-3255, Division of Corporation Finance; Duc Dang, Senior Special Counsel, at (202) 551-3386, Office of the Chief Accountant; Matt Giordano, Chief Accountant, at (202) 551-6918, Division of Investment Management; Valentina Minak Deng, Special Counsel, at (202) 551-5778 and Tim White, Special Counsel, at (202) 551-5777, Division of Trading and Markets; Harriet Orol, Branch Chief, at (212) 336-0554, Office of Credit Ratings; Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing amendments to, or soliciting comment on potential FASB referrals of, Rules 1-02, 2-01, 2-02, 3-01, 3-02, 3-03, 3-04, 3-05, 3-12, 3-14, 3-15, 3-17, 3-20, 3A-01, 3A-02, 3A-03, 3A-04, 4-01, 4-07, 4-08, 4-10, 5-02, 5-03, 5-04, 6-03, 6-04, 6-07, 6-09, 6A-04, 6A-05, 7-02, 7-03, 7-04, 7-05, 8-01, 8-02, 8-03, 8-04, 8-05, 8-06, 9-03, 9-04, 9-05, 9-06, 10-01, 11-02, 11-03, 12-16, 12-17, 12-18, 12-28, and 12-29 of Regulation S-X under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), Items 10, 101, 103, 201, 302, 303, 503, 512, and 601 of Regulation S-K under the Securities Act and the Exchange Act, Item 1010 of Regulation M-A under the Securities Act and the Exchange Act, and Item 1118 of Regulation AB under the Securities Act and the Exchange Act, Rule 158 of the Securities Act, Rules 405 and 436 of Regulation C under the Securities Act, Forms S-1, S-3, S-11, S-4, F-1, F-3, F-4, F-6, F-7, F-8, F-10, F-80, SF-1, SF-3, 1-A, 1-K, and 1-SA under the Securities Act, Rules 3a51-1, 10A-1, 12b-2, 13a-10, 13b2-2, 14a-101, 15c3-1g, 15d-2, 15d-10, 17a-5, 17a-12, 17g-3, and 17h-1T of the Exchange Act, Forms 20-F, 40-F, 10-K, 11-K, 10-D, and X-17A-5 under the Exchange Act, Forms N-5, N-1A, N-2, N-3, N-4, and N-6 under the Securities Act and the Investment Company Act of 1940 (the “Investment Company Act”), and Form N-8B-2 under the Investment Company Act.

Table of Contents

I. Introduction

A. Objective

B. Scope of Proposals

1. Issuers with Offerings Registered Under the Securities Act and Securities Registered Under the Exchange Act

2. Issuers Offering Securities under Regulation A

3. Issuers Regulated under the Investment Company Act

4. Other Entities

C. FASB-Related Considerations

1. Role of the FASB

2. Interaction of Commission Disclosure Requirements and U.S. GAAP

3. Current FASB Projects Concerning the Application of U.S. GAAP

II. Redundant or Duplicative Requirements

A. Background

B. Proposed Amendments

1. Foreign Currency

2. Consolidation

3. Obligations

4. Income Tax Disclosures

5. Warrants, Rights, and Convertible Instruments

6. Related Parties

7. Contingencies

8. Earnings per Share

9. Insurance Companies

10. Bank Holding Companies

11. Changes in Accounting Principles

12. Interim Adjustments

13. Interim Financial Statements—Common Control Transactions

14. Interim Financial Statements—Dispositions

15. Report Furnished to Security Holders

C. Request for Comment

III. Overlapping Requirements

A. Background

B. Broad Considerations

1. Disclosure Location Considerations

2. Bright Line Disclosure Threshold Considerations

C. Overlapping Requirements—Proposed Deletions

1. REIT Disclosures

2. Consolidation

3. Repurchase and Reverse Repurchase Agreements

4. Derivative Accounting Policies

5. Distributable Earnings for Registered Investment Companies

6. Insurance Companies

7. Interim Financial Statements—Material Events Subsequent to the End of the Most Recent Fiscal Year

8. Interim Financial Statements—Changes in Accounting Principles

9. Interim Financial Statements—Pro Forma Business Combination Information

10. Interim Financial Statements—Dispositions

11. Segments

12. Geographic Areas

13. Seasonality

14. Research and Development Activities

15. Warrants, Rights, and Convertible Instruments

16. Dividends

17. Equity Compensation Plans

18. Ratio of Earnings to Fixed Charges

19. Invitations for Competitive Bids

20. Request for Comment

D. Overlapping Requirements—Proposed Integrations

1. Foreign Currency Restrictions

2. Restrictions on Dividends and Related Items

3. Geographic Areas

4. Request for Comment

E. Overlapping Requirements—Potential Modifications, Eliminations, or FASB Referrals

1. REIT Disclosures—Tax Status of Distributions

2. Consolidation

3. Discount on Shares

4. Assets Subject to Lien

5. Obligations

6. Preferred Shares

7. Income Tax Disclosures

8. Related Parties

9. Repurchase and Reverse Repurchase Agreements

10. Interim Financial Statements—Computation of Earnings Per Share

11. Interim Financial Statements—Retroactive Prior Period Adjustments

12. Interim Financial Statements—Common Control Transactions

13. Products and Services

14. Major Customers

15. Legal Proceedings

16. Oil and Gas Producing Activities

17. Request for Comment

IV. Outdated Requirements

A. Background

B. Proposed Amendments

1. Stale Transition Dates

2. Income Tax Disclosures

3. Available Information

4. Market Price Disclosure

5. Exchange Rate Data

6. Foreign Private Issuer Initial Public Offering—Age of Financial Statements

C. Request for Comment

V. Superseded Requirements

A. Background

B. Proposed Amendments

1. Auditing Standards

2. Statement of Cash Flows

3. Gain or Loss on Sale of Properties by REITs

4. Consolidation

5. Development Stage Entities

6. Insurance Companies

7. Bank Holding Companies

8. Discontinued Operations

9. Pooling-of-Interests

10. Statement of Comprehensive Income

11. Extraordinary Items

12. Cumulative Effect of Changes in Accounting Principles

13. Published Report Regarding Matters Submitted to Vote of Security Holders

14. Selected Financial Data for Foreign Private Issuers that Report under IFRS

15. Canadian Regulation A Issuers

16. Non-Existent or Incorrect References

C. Request for Comment

VI. General Request for Comment

VII. Economic Analysis

A. Baseline and Affected Parties

B. Potential Costs and Benefits

1. Redundant or Duplicative Requirements

2. Overlapping Requirements

3. Outdated Requirements

4. Superseded Requirements

C. Anticipated Effects on Efficiency, Competition and Capital Formation

D. Request for Comments

VIII. Paperwork Reduction Act

A. Background

B. Summary of the Proposed Amendments' Impacts on Collection of Information

C. Estimate of Burdens

1. Forms 10, 10-K, 10-Q, 20-F, and 1-SA

2. Forms S-1, S-3, S-4, S-11, SF-1, SF-3, F-1, F-3, F-4, and 1-A

D. Request for Comment

IX. Initial Regulatory Flexibility Act Analysis

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

B. Legal Basis

C. Small Entities Subject to the Proposed Amendments

D. Duplicative, Overlapping, or Conflicting Federal Rules

E. Reporting, Recordkeeping, and Other Compliance Requirements

F. Significant Alternatives

G. Solicitation of Comments

X. Small Business Regulatory Enforcement Fairness Act

XI. Statutory Authority

I. Introduction

A. Objective

We are proposing amendments to certain of our disclosure requirements that may have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, IFRS, or changes in the information environment. As discussed further below, the proposed amendments are a result of the Division of Corporation Finance's Disclosure Effectiveness Initiative and part of our efforts to implement title LXXII, section 72002(2) of the Fixing America's Surface Transportation Act

(the “FAST Act”). We are also soliciting comment on certain Commission disclosure requirements that overlap with, but require information incremental to, U.S. GAAP

to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP.

The proposals are intended to facilitate the disclosure of information to investors, while simplifying compliance efforts, without significantly altering the total mix of information provided to investors.

Public Law 114-94.

In this release, we refer to such requirements as “incremental” Commission disclosure requirements.

We refer to the proposed amendments and this additional comment solicitation collectively as “proposals.”

The Supreme Court in

TSC

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 Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).

This release is part of a comprehensive evaluation of the Commission's disclosure requirements recommended in the staff's

Report on Review of Disclosure Requirements in Regulation S-K

(“S-K Study”),

which was mandated by section 108 of the Jumpstart Our Business Startups Act.

Based on the S-K Study's recommendation and at the request of the Commission Chair, the Commission staff initiated a comprehensive evaluation of the type of information our rules require issuers to disclose, how this information is presented, where and how this information is disclosed, and how we can better leverage technology as part of these efforts (“Disclosure Effectiveness Initiative”). The overall objective of the Disclosure Effectiveness Initiative is to improve our disclosure regime for both investors and issuers. This initiative

may result in the addition,

revision,

or elimination

of certain disclosure requirements and seeks input on how potential changes might affect investors, issuers, efficiency, competition, and capital formation.

Report on Review of Disclosure Requirements in Regulation S-K

(Dec. 2013), available at

http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf

. Comment letters are available at

http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml

Jumpstart Our Business Startups Act, Public Law 112-106, 126 Stat. 306 (2012).

For example, in this release, we propose to require disclosure of changes in stockholders' equity and dividends per share for each class of shares, rather than only for common stock in interim periods (please refer to sections III.C.16 and V.B.5), an issuer's Web site address (please refer to section IV.B.3), and the ticker symbol of their common equity that is publicly traded (please refer to section IV.B.4). We also propose to change the threshold at which disclosures on dividend restrictions are provided in the audited financial statements, which may result in additional disclosures subject to audit, internal control over financial reporting, and XBRL tagging (please refer to section III.D.2).

For example, in this release, please refer to our proposals in section III.D. on overlapping requirements proposed for integration, section IV on outdated requirements, and section V on superseded requirements.

For example, in this release, please refer to our proposals in section II on redundant or duplicative requirements, section III.C on overlapping requirements proposed for deletion, section IV on outdated requirements, and section V on superseded requirements.

In connection with the Disclosure Effectiveness Initiative, the Commission staff requested public input.

In a separate concept release,

we are seeking public comment on modernizing certain business and financial disclosure requirements in Regulation S-K. We have also separately requested comment

on the financial disclosure requirements in Regulation S-X for certain entities other than the issuer. In addition, we have requested comment on the proposed rules to modernize the disclosure requirements for mining properties.

See

Request for Public Comment at

http://www.sec.gov/spotlight/disclosure-effectiveness.shtml

and comment letters at

http://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml

Business and Financial Disclosure Required by Regulation S-K,

Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915] (“S-K Concept Release”).

See

comment letters at

http://www.sec.gov/comments/s7-06-16/s70616.htm

Request for Comment on the Effectiveness of Financial Disclosures About Entities Other than the Registrant,

Release No. 33-9929 (Sept. 25, 2015) [80 FR 59083] (“Regulation S-X Request for Comment”).

See

comment letters at

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

Modernization of Property Disclosures for Mining Registrants,

Release No. 33-10098 (June 16, 2016) [81 FR 41651].

We are also issuing this release as part of our effort to implement title LXXII, section 72002(2) of the FAST Act, which, among other things, requires the Commission to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary.

B. Scope of Proposals

The proposals, if adopted, would affect a variety of entities we regulate in different ways, as discussed below. For ease of discussion, throughout this release, we refer to the affected entities as issuers. The requirements under discussion may apply to entities other than issuers or to subsets of issuers and, thus, should be referenced for their specific scope. Entities other than issuers include significant acquirees for which financial statements are required under Rule 3-05 of Regulation S-X,

significant equity method investments for which financial statements are required under Rule 3-09 of Regulation S-X,

broker-dealers, and nationally recognized statistical rating organizations (“NRSROs”).

17 CFR 210.3-05.

17 CFR 210.3-09.

1. Issuers With Offerings Registered Under the Securities Act and Securities Registered Under the Exchange Act

Because the proposals affect issuers filing forms prescribed under the Securities Act and the Exchange Act differently, our discussion is tailored accordingly. Our references to domestic issuers encompass large accelerated filers,

accelerated filers,

and non-accelerated filers,

as well as emerging growth companies

(“EGCs”) and smaller reporting companies

(“SRCs”). In this release, we have highlighted the Commission disclosure requirements that affect SRCs differently from non-SRCs. Our references to foreign private issuers

encompass large accelerated filers, accelerated filers, and non-accelerated filers, as well as EGCs.

More specifically:

Under Exchange Act Rule 12b-2 [17 CFR 240.12b-2], a large accelerated filer is an issuer with an aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of its most recently completed second fiscal quarter. In addition, the issuer needs to have been subject to reporting requirements for at least twelve calendar months, have filed at least one annual report, and not be eligible to use the requirements for smaller reporting companies for its annual and quarterly reports.

Under Exchange Act Rule 12b-2, an accelerated filer is an issuer with an aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates of $75 million or more, but less than $700 million, as of the last business day of its most recently completed second fiscal quarter. In addition, the issuer needs to have been subject to reporting requirements for at least twelve calendar months, have filed at least one annual report, and not be eligible to use the requirements for smaller reporting companies for its annual and quarterly reports.

Although the term “non-accelerated filer” is not defined in Commission rules, we use it throughout this release to refer to a reporting company that does not meet the definition of either an “accelerated filer” or a “large accelerated filer” under Exchange Act Rule 12b-2.

An EGC is defined in section 2(a)(19) of the Securities Act [15 U.S.C. 77b(a)(19)] and section 3(a)(80) of the Exchange Act [15 U.S.C. 78c(a)(80)] to mean an issuer with less than $1 billion in total annual gross revenues during its most recently completed fiscal year. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of (1) the last day of the fiscal year of the issuer during which it has total annual gross revenues of $1 billion or more; (2) the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; (3) the date on which the issuer has, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or (4) the date on which the issuer is deemed to be a “large accelerated filer” (as defined in Exchange Act Rule 12b-2).

SRC is defined to mean an issuer that had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter or had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.

See

Rule 405 of Regulation C [17 CFR 230.405], Rule 12b-2 of the Exchange Act, and Item 10(f) of Regulation S-K [17 CFR 229.10(f)].

The Commission has proposed to amend this definition. Under the proposed amendments, the $75 million public float threshold would be increased to $250 million and the $50 million revenue threshold would be increased to $100 million.

See Amendments to Smaller Reporting Company Definition,

Release No. 33-10107 (Jun. 27, 2016) [81 FR 43130].

See

Rule 405 of Regulation C and Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that has more than 50 percent of its outstanding voting securities held of record by U.S. residents and any of the following: A majority of its officers or directors are citizens or residents of the United States; more than 50 percent of its assets are located in the United States; or its business is principally administered in the United States.

Foreign private issuers may only use the scaled rules available to SRCs if they file on domestic forms under U.S. GAAP.

See

Rule 8-01 of Regulation S-X [17 CFR 210.8-01]. The proposals affect these SRCs in the same ways as domestic SRC issuers.

• Proposals involving Regulation S-K relate only to domestic issuers

and foreign private issuers that elect to file on forms used by domestic issuers.

Domestic issuers include foreign issuers that do not meet the definition of foreign private issuer.

• Proposals involving Regulation S-X generally relate only to domestic issuers and foreign private issuers that report under U.S. GAAP or a comprehensive body of accounting principles other than U.S. GAAP or IFRS as issued by the International Accounting Standards Board (“IASB”)

with a reconciliation to U.S. GAAP.

Throughout this release, we refer to a comprehensive body of accounting principles other than U.S. GAAP or IFRS as “Another Comprehensive Body of Accounting Principles.”

Foreign private issuers that report under IFRS must comply with the IFRS requirements for the form and content of financial statements, rather than with the specific presentation and disclosure provisions in Articles 3A, 4, 5, 6, 6A, 7, 8, 9, 10, and certain parts of Article 3 of Regulation S-X. Where a proposal on Regulation S-X also affects foreign private issuers that report under IFRS, we discuss both U.S. GAAP and IFRS.

• Proposals involving Commission forms relate to either domestic issuers or

foreign private issuers, depending on the form under discussion. For example, proposed amendments to the “F” series of forms

only affect foreign private issuers. Because foreign private issuers may report under U.S. GAAP, Another Comprehensive Body of Accounting Principles with a reconciliation to U.S. GAAP, or IFRS, discussion of proposals involving F-forms includes consideration of both U.S. GAAP and IFRS, where applicable.

For example, these forms include Forms F-1 [17 CFR 239.31], F-3 [17 CFR 239.33], F-4 [17 CFR 239.34], and 20-F [17 CFR 249.220f].

Some of the proposals also affect asset-backed issuers.

“Asset-backed issuer” is defined in Item 1101(b) of Regulation AB [17 CFR 229.1101(b)].

See

the proposals regarding: (1) Invitations for competitive bids discussed in section III.C.19, (2) available information discussed in section IV.B.3, (3) matters submitted to a vote of security holders discussed in section V.B.15, and (4) incorrect references in General Instruction J(1)(e) to Form 10-K discussed in section V.B.18.

2. Issuers Offering Securities Under Regulation A

Some of our proposals affect Regulation A issuers, as follows:

See

Rules 251-263 of Regulation A [17 CFR 230.251-230.263]. A Tier 1 offering under Regulation A limits the sum of the aggregate offering price and the aggregate sales within 12 months before the start of the offering to $20 million. Rule 251(a)(1) of Regulation A. A Tier 1 offering also limits sales by affiliated selling security holders to $6 million. A Tier 2 offering under Regulation A limits the sum of the aggregate offering price and the aggregate sales to $50 million and limits the amount offered by affiliated selling security holders to $15 million. Rule 251(a)(2) of Regulation A.

• Proposals involving Regulation S-K would affect Regulation A issuers that provide narrative disclosure that follows Part I of Form S-1

or Part I of Form S-11

in Part II of Form 1-A.

17 CFR 239.11.

17 CFR 239.18.

17 CFR 239.90.

• Proposals involving Rule 4-10,

Rule 8-04,

Rule 8-05,

and Rule 8-06

of Regulation S-X would affect all Regulation A issuers. Proposals involving Rule 8-03(a)

of Regulation S-X would affect all Regulation A issuers that report under U.S. GAAP. Proposals involving the remaining rules in Article 8 of Regulation S-X would affect only Regulation A issuers in a Tier 2 offering that report under U.S. GAAP. No other proposals involving Regulation S-X would affect Regulation A issuers.

17 CFR 210.4-10.

17 CFR 210.8-04.

17 CFR 210.8-05.

17 CFR 210.8-06.

17 CFR 210.8-03(a).

• Proposals involving Regulation A forms may affect issuers that report under U.S. GAAP or Canadian issuers that report under IFRS.

For this reason, discussion of proposals affecting these forms includes consideration of both U.S. GAAP and IFRS, where applicable.

Only U.S. and Canadian issuers may rely on Regulation A and use Form 1-A.

See

Rule 251(b)(1) of Regulation A [17 CFR 230.251(b)(1)]. U.S. issuers must report under U.S. GAAP. Canadian issuers may report under U.S. GAAP or IFRS.

See

paragraph (a)(2) of Part F/S of Form 1-A [17 CFR 239.90], Item 7(b) of Form 1-K [17 CFR 239.91], and Item 3 of Form 1-SA [17 CFR 239.92].

In this release, we have highlighted the Commission disclosure requirements that affect Regulation A issuers.

Statements about the effect of a proposal on Regulation A issuers throughout this release reflect that the form and content requirements in Regulation S-X do not apply to Canadian Regulation A issuers that report under IFRS. Please refer to section V.B.17.

We are also soliciting comment on certain Commission disclosure requirements that overlap with, but require information incremental to, U.S. GAAP. As discussed in section III.E, we are not proposing amendments to this category of disclosure requirements in this release. Rather, the comments received in response to this release may inform both potential future Commission rulemaking and FASB standard-setting activities. One potential outcome of this feedback is a referral of these incremental requirements to the FASB for potential incorporation into U.S. GAAP.

A referral alone would have no effect on issuers. Any changes to U.S. GAAP that may result from such a referral would be subject to FASB's standard-setting process, as discussed below, and would potentially affect all entities that report under U.S. GAAP, including crowdfunding issuers and those outside the scope of our regulatory authority.

The IASB, which is subject to oversight by the IFRS Foundation, is responsible for IFRS and establishes its own standard-setting agenda. For further information, see

http://www.ifrs.org/About-us/Pages/IFRS-Foundation-and-IASB.aspx.

3. Issuers Regulated Under the Investment Company Act

Certain proposals affect requirements applicable to issuers regulated under the Investment Company Act, as follows:

• Proposals involving Regulation S-K would affect business development companies to which the regulation applies.

• Proposals involving Regulation S-X would affect investment companies to which the regulation applies.

• Proposals involving Investment Company Act forms may affect investment companies, depending on the form in question.

4. Other Entities

Certain proposals also affect requirements applicable to registered broker-dealers, investment advisors, and NRSROs.

C. FASB-Related Considerations

1. Role of the FASB

The federal securities laws set forth the Commission's broad authority and responsibility to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under those laws,

as well as its responsibility to ensure that investors are furnished with other information necessary for investment decisions.

To assist it in meeting this responsibility, the Commission historically has looked to private-sector standard-setting bodies designated by the accounting profession to develop accounting principles and standards.

At the time of the FASB's formation in 1973, the Commission reexamined its policy and formally recognized pronouncements of the FASB that establish and amend accounting principles and standards as “authoritative” in the absence of any contrary determination by the Commission.

The Commission concluded at that time that the expertise and resources that the private sector could offer to the process of setting accounting standards would be beneficial to investors.

See, e.g.,

sections 7 [15 U.S.C. 77g], 19(a) [15 U.S.C. 77s(a)] and Schedule A, Items (25) and (26) of the Securities Act [15 U.S.C. 77aa(25) and (26)]; sections 3(b) [15 U.S.C. 78c(b)], 12(b) [17 CFR 78l(b)] and 13(b) [17 CFR 78m(b)] of the Exchange Act; and sections 8 [15 U.S.C. 80a-8], 30(e) [15 U.S.C. 80a-29(e)], 31 [15 U.S.C. 80a-30], and 38(a) [15 U.S.C. 80a-37(a)] of the Investment Company Act.

See Policy Statement: Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter,

Release No. 33-8221 (Apr. 25, 2003) [68 FR 23333], available at

http://www.sec.gov/rules/policy/33-8221.htm

(“2003 FASB Policy Statement”).

Id.

See

Accounting Series Release No. 150 (Dec. 20, 1973).

The Sarbanes-Oxley Act of 2002

(“Sarbanes-Oxley Act”) established criteria that must be met in order for the work product of an accounting standard-setting body to be recognized as “generally accepted.”

In accordance with these criteria, the Commission has designated the FASB as the private-sector accounting standard setter for U.S. financial reporting

purposes.

As required under the securities laws, including the Sarbanes-Oxley Act, the Commission monitors the FASB's ongoing compliance with the expectations and views expressed in the 2003 FASB Policy Statement.

Pub. L. 107-204, 116 Stat. 745 (2002)

See

section 19 of the Securities Act [15 U.S.C. 77s].

Section 108 of the Sarbanes-Oxley Act amended section 19 of the Securities Act to provide that the Commission “may recognize, as `generally accepted' for purposes of the securities laws, any accounting principles established by a standard setting body that met certain criteria.” The Commission has determined that the FASB satisfies the criteria in section 19 and, accordingly, the FASB's financial accounting and reporting standards are recognized as “generally accepted” for purposes of the federal securities laws.

See

2003 FASB Policy Statement.

As the designated private-sector accounting standard setter in the United States, the FASB seeks to undertake a transparent, public standard-setting process.

See http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1351027215692. See

also pages 2 and 5 of the FASB Rules of Procedures, available at

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176162391050.

2. Interaction of Commission Disclosure Requirements and U.S. GAAP

Although the FASB functions as the designated private-sector accounting standard setter in the United States, some Commission rules contain accounting and disclosure requirements. In some cases, these Commission requirements mandate disclosures which the FASB later added to U.S. GAAP.

Other Commission disclosure requirements include concepts that have been superseded by U.S. GAAP.

From time to time, the Commission has reviewed and amended its disclosure requirements to eliminate rules that became redundant, duplicative, or overlapping as the FASB updated U.S. GAAP.

In keeping with this historical practice, many of the proposed amendments revise or eliminate Commission disclosure requirements related to information that is addressed by more recently updated U.S. GAAP requirements.

See, e.g.,

Rule 4-08(h) of Regulation S-X [17 CFR 210.4-08(h)], parts of which were subsequently incorporated into U.S. GAAP.

See, e.g.,

Rule 10-01(a)(7) of Regulation S-X [17 CFR 210.10-01(a)(7)], which refers to the disclosures required by ASC 915 on development stage entities, which the FASB has since eliminated.

See, e.g., General Revision of Regulation S-X,

Release No. 33-6233 (Sept. 2, 1980) [45 FR 63660],

Phase One Recommendations of Task Force on Disclosure Simplification

Release No. 33-7300 (May 31, 1996) [61 FR 30397], and

Technical Amendments to Rules, Forms, Schedules, and Codification of Financial Reporting Policies,

Release No. 33-9026, (Apr. 15, 2009) [74 FR 18612].

In addition, a number of Commission disclosure requirements are related, but require information that is incremental, to U.S. GAAP. In this release, we solicit comment on certain of those incremental Commission disclosure requirements to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP.

The comments received in response to this release may inform both potential future Commission rulemaking and FASB standard-setting activities. Future amendments to these Commission disclosure requirements may depend on the outcome of any FASB's standard-setting activities to address the disclosure requirements. Our staff has discussed these requirements with the FASB staff.

The incorporation of incremental Commission disclosure requirements into U.S. GAAP may streamline disclosures for investors and simplify requirements for issuers.

3. Current FASB Projects Concerning the Application of U.S. GAAP

The FASB maintains U.S. GAAP by updating it from time to time through its standard-setting projects. Among a number of projects on the FASB's agenda, there are two current standard-setting projects that we invite commenters to consider when evaluating the proposals and providing feedback.

In one project,

the FASB has proposed amendments, which, among other things,

would clarify that with respect to disclosures in the notes to the financial statements an omission of immaterial information is not an accounting error.

The FASB also has other standard-setting projects underway that may affect specific topics within this release. Those projects are identified in the discussion of the specific topics they affect.

FASB Exposure Draft,

Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material

(Sept. 24, 2015), available at:

http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176166402325&acceptedDisclaimer=true.

Among the other proposed amendments is an amendment related to the legal concept of materiality. Commenters have expressed a range of views on the proposed amendments and their potential impact on the volume of financial disclosures. The comment letters are available at:

http://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=2015-310.

In 2014, the IASB amended IFRS to clarify that an entity does not have to disclose information required by IFRS if that information would not be material.

See Disclosure Initiative (Amendments to IAS 1).

In the other project, the FASB is addressing disclosures in interim reports. The FASB has reached a tentative decision that disclosures about matters required to be provided in annual financial statements should be updated in the interim report if there is a substantial likelihood that the updated information would be viewed by a reasonable investor as significantly altering the total mix of information available to the investor.

See

Minutes from FASB Board Meeting (May 29, 2014), available at:

http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176164227056.

Both projects are subject to further stakeholder comment and FASB deliberation. If we ultimately decide to eliminate or revise certain of our disclosure requirements on the basis that U.S. GAAP requires the same or similar disclosure, these projects, if finalized, may impact certain disclosures currently provided under Commission disclosure requirements that we propose to eliminate or amend. In particular, for information currently provided under Commission rules that do not contain a specified disclosure threshold, investors may receive less information if such information is only required by U.S. GAAP and the issuer determines that the information is not material. Throughout this release, we identify those Commission disclosure requirements that contemplate a disclosure threshold in some manner, for example, through the use of terms such as “material” or “significant” or through the use of bright line disclosure thresholds.

Request for Comment

1. Would the FASB's projects discussed above affect our: (1) Proposed amendments to eliminate certain Commission disclosure requirements due to a U.S. GAAP requirement or (2) potential referrals to the FASB of certain Commission disclosure requirements? If so, how?

2. Would the information provided to investors in the notes to the financial statements change if the source of the disclosure requirement (

i.e.,

Commission rule or U.S. GAAP) changed? If so, how and why?

3. Do the other proposed amendments within the FASB Exposure Draft related to notes to the financial statements

impact the proposals made in this release? If so, how?

See supra

note 53 and 54.

II. Redundant or Duplicative Requirements

A. Background

In reviewing our disclosure requirements, we have preliminarily identified a number of requirements that require substantially the same disclosures as U.S. GAAP, IFRS, or other Commission disclosure requirements. We propose to eliminate these redundant or duplicative Commission disclosure requirements to

simplify issuer compliance efforts while providing substantially the same information to investors.

Some proposed amendments, however, may be affected by certain FASB projects, as discussed in section I.C.3.

The table in section II.B below describes each redundant or duplicative requirement that we propose to eliminate and identifies the corresponding U.S. GAAP, IFRS, or Commission disclosure requirement that requires substantially the same information.

B. Proposed

Amendments

Where a Commission disclosure requirement proposed for elimination does not apply to foreign private issuers that report under IFRS, the proposed change would not result in a change to the requirements for foreign private issuers and we do not identify a corresponding IFRS requirement.

See supra

note 25.

17 CFR 210.3-20(d).

17 CFR 249.220f.

Please refer to the related discussions in sections III.C.2, III.E.2, and V.B.4.

17 CFR 210.4.08(a).

17 CFR 210.3A-01 through 210.3A-04.

17 CFR 210.3A-01.

17 CFR 210.3A-02(b)(1).

ASC 810-10-45-12 uses the phrase “about three months.”

17 CFR 210.3A-02(d).

Rule 3A-02(d) requires due consideration of the propriety of consolidation in the presence of political, economic, or currency restrictions. ASC 810-10-15-10 states that subsidiaries shall not be consolidated in the presence of foreign exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary.

17 CFR 210.3A-02.

17 CFR 210.3A-03(a).

Rule 3A-02 states that the accounting policy disclosure should also include the circumstances associated with any departure from the normal practice of consolidating majority owned subsidiaries and not consolidating entities that are not majority owned. ASC 235-10-50-1 states that the accounting disclosure shall encompass important judgments about the appropriateness of accounting principles and unusual or innovative applications of U.S. GAAP.

17 CFR 210.3A-04.

Please refer to the related discussion in section III.E.5.

17 CFR 210.4-08(f).

ASC 855-10-50-2 requires disclosure of events subsequent to the balance sheet date that are of such a nature that non-disclosure would render the financial statements misleading. ASC 855-10-55-55-2a provides that the sale of a bond subsequent to the balance sheet date is an example of such a subsequent event.

Please refer to the related discussions in sections III.E.7 and IV.B.2.

17 CFR 210.4-08(h)(2).

Commission disclosure requirement proposed for elimination

Description of Commission disclosure

requirement proposed for elimination

Corresponding U.S. GAAP, IFRS,

Commission disclosure requirement

1. Foreign Currency

Third sentence of Rule 3-20(d) of Regulation S-X.

Defines: (1) The currency of an operation's primary economic environment and (2) a hyperinflationary environment

Accounting Standards Codification (“ASC”) 830-10-45-2, ASC 830-10-45-12, and ASC 830-10-55-10.

Last sentence of Rule 3-20(d) of Regulation S-X

States that foreign private issuers must comply with Item 17(c)(2) of Form 20-F,

which requires disclosure and quantification of departures from the methodology of this rule if their financial statements are prepared on a basis other than U.S. GAAP or IFRS

Item 17(c)(2) of Form 20-F. Also Item 4 of Form F-1, General Instructions I.B of Form F-3, and Items 11, 12, and 13 of Form F-4, which indirectly refer to Item 17 of Form 20-F.

2. Consolidation

Rule 4-08(a) of Regulation S-X

Requires compliance with Article 3A

Article 3A

itself requires compliance. The requirement is repeated in Rule 4-08(a).

Rule 3A-01 of Regulation S-X

States subject matter of Article 3A

The same information is set forth in the title of Article 3A.

All except fourth sentence of Rule 3A-02(b)(1) of Regulation S-X.

Permits consolidation of an entity's financial statements for its fiscal period if the period does not differ from that of the issuer by more than 93 days

and requires recognition by disclosure or otherwise of material intervening events

ASC 810-10-45-12.

First sentence of Rule 3A-02(d) of Regulation S-X.

Requires consideration of the propriety of consolidation under certain restrictions.

ASC 810-10-15-10.

Last two sentences of first paragraph of Rule 3A-02 of Regulation S-X

and 3A-03(a) of Regulation S-X

Requires disclosure of the accounting policies followed in consolidation or combination

ASC 235-10-50-1 and ASC 810-10-50-1.

First sentence of Rule 3A-04 of Regulation S-X.

Requires elimination of intercompany transactions

ASC 323-10-35-5a and ASC 810-10-45.

3. Obligations

Reference to issuances in Rule 4-08(f) of Regulation S-X.

Requires disclosure of significant changes

in issued amounts of debt subsequent to the latest balance sheet date

ASC 855-10-50-2 and 855-10-55-2a.

4. Income Tax Disclosures

First sentence of Rule 4-08(h)(2) of Regulation S-X.

Requires an income tax rate reconciliation

ASC 740-10-50-12.

Fourth sentence of Rule 4-08(h)(2) of Regulation S-X

Permits the income tax rate reconciliation to be presented in either percentages or dollars

ASC 740-10-50-12.

5. Warrants, Rights, and Convertible Instruments

Rule 4-08(i) of Regulation S-X

Requires disclosure of the title and amount of securities subject to warrants or rights, the exercise price, and the exercise period.

Non-compensatory warrants or rights: ASC 505-10-50-3 and ASC 815-40-50-5.

Compensatory warrants or rights: ASC 505-10-50-3, ASC 718-10-50-1, and ASC 718-10-50-2.

6. Related Parties

Reference to identification of related party transactions in Rule 4-08(k)(1) of Regulation S-X

Requires identification of related party transactions

ASC 850-10-50-1.

7. Contingencies

References to “material contingencies” in Rule 8-03(b)(2)

and the second sentence of Rule 10-01(a)(5) of Regulation S-X and the entire last sentence of Rule 10-01(a)(5) of Regulation S-X

Require disclosure of material contingencies in interim financial statements, notwithstanding disclosure in the annual financial statements

ASC 270-10-50-6.

8. Earnings per Share

Reference to “earnings per share” in first sentence of Rule 10-01(b)(2) of Regulation S-X

Requires presentation of earnings per share on interim income statement

ASC 270-10-50-1b.

Item 601(b)(11) of Regulation S-K

and Instruction 6 to “Instructions as to Exhibits” of Form 20-F

Require disclosure of the computation of earnings per share in annual filings

ASC 260-10-50-1a, Rule 10-01(b)(2) of Regulation S-X, and IAS 33, paragraph 70.

9. Insurance Companies

Last sentence of Rule 7-03(a)(11) of Regulation S-X

Requires a description of the activities being reported in the separate accounts

ASC 944-80-50-1a.

Rule 7-04.3(c) of Regulation S-X

Requires disclosure of the method followed in determining the cost of investments sold

ASC 235-10-50-1 and ASC 320-10-50-9b.

10. Bank Holding Companies

Rule 9-03.6(a) of Regulation S-X

Requires disclosure of the carrying and market values of (1) securities of the U.S. Treasury and other U.S. Government agencies and corporations, (2) securities of states of the U.S. and political subdivisions, and (3) other securities

ASC 320-10-50-1B, ASC 320-10-50-2, ASC 320-10-50-5, and ASC 942-320-50-2.

Rule 9-03.7(d) of Regulation S-X

Requires disclosure of changes in the allowance for loan losses

ASC 310-10-50-11B(c).

First part of Rule 9-04.13(h) of Regulation S-X

Requires disclosure of the method followed in determining the cost of investment securities sold

ASC 235-10-50-1 and ASC 320-10-50-9b.

11. Changes in Accounting Principles

Requirement to disclose reason for change in accounting principle in Rule 8-03(b)(5)

and Rule 10-01(b)(6) of Regulation S-X

100

Requires disclosure of the reasons for making material accounting changes in an interim period

ASC 250-10-45-12 to 16, ASC 250-10-50-1a, and ASC 270-10-50-1g.

12. Interim Adjustments

Third sentence of Rule 3-03(d)

101

and third sentence of Rule 10-01(b)(8)

102

of Regulation S-X

Provide examples of adjustments in order for interim financial statements to be fairly stated

ASC 270-10-45-10.

13. Interim Financial Statements—Common Control Transactions

103

Part of first sentence of Rule 10-01(b)(3) of Regulation S-X

104

Requires that common control transactions be reflected in current and prior comparative period's interim financial statements

ASC 805-50-45-1 to 5.

14. Interim Financial Statements—Dispositions

105

Rule 10-01(b)(5) of Regulation S-X

106

Requires disclosure of the effect of discontinued operations on interim revenues, net income, and earnings per share for all periods presented

ASC 205-20-50-5B, ASC 205-20-50-5C, ASC 260-10-45-3, and ASC 270-10-50-7.

15. Report Furnished to Security Holders

Item 601(b)(19) of Regulation S-K

107

Provides specific instructions to address the incorporation by reference into Form 10-Q

108

of information that is separately made available to security holders

General Instruction D(3) to Form 10-Q, which refers to Item 601(b)(13) of Regulation S-K.

109

C. Request for Comment

4. We solicit comment on

the foregoing proposed amendments to eliminate redundant or duplicative requirements.

Please refer to the related discussion in section III.C.15.

17 CFR 210.4-08(i).

For compensatory warrants or rights, U.S. GAAP requires disclosure of the nature and terms of such arrangements, the number and weighted-average exercise price, and the weighted-average contractual term.

Please refer to the related discussion in section III.E.8.

17 CFR 4-08(k)(1).

17 CFR 210.8-03(b)(2). This rule specifically applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP.

17 CFR 210.10-01(a)(5). This rule specifically applies to companies other than SRCs (“non-SRCs”).

Please refer to the related discussion in section III.E.10.

17 CFR 210.10-01(b)(2).

17 CFR 229.601(b)(11). We also propose conforming revisions to delete references to Item 601(b)(11) of Regulation S-K in the Exhibit Table and in Rule 10-01(b)(2) of Regulation S-X.

Please refer to the related discussions in sections III.C.6 and V.B.8.

17 CFR 210.7-03(a)(11).

ASC 944-80-50-1a requires disclosure of the nature of the contracts reported in separate accounts.

17 CFR 210.7-04.3(c).

ASC 320-10-50-9b refers to the “cost of a security sold.”

Please refer to the related discussion in section V.B.9.

17 CFR 210.9-03.6(a).

17 CFR 210.9-03.7(d).

17 CFR 210.9-04.13(h).

Please refer to the related discussions in section III.C.8 and V.B.14.

17 CFR 210.8-03(b)(5). This rule specifically applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP.

100

17 CFR 210.10-01(b)(6). This rule specifically applies to non-SRCs.

101

17 CFR 210.3-03(d).

102

17 CFR 210.10-01(b)(8).

103

Please refer to the related discussion in section III.E.12.

104

17 CFR 210.10-01(b)(3).

105

Please refer to the related discussion in section III.C.10.

106

17 CFR 210.10-01(b)(5).

107

17 CFR 229.601(b)(19). We also propose conforming revisions to delete the reference to Item 601(b)(19) of Regulation S-K in the Exhibit Table.

108

17 CFR 249.308a.

109

17 CFR 229.601(b)(13). We also propose to amend the Exhibit Table within Item 601 of Regulation S-K to clarify that Item 601(b)(13) applies to Form 10-Q.

a. Do the requirements proposed for elimination require substantially the same disclosures as U.S. GAAP, IFRS, or other Commission disclosure requirements? If eliminated, would investors continue to receive substantially the same information? If not, which redundant or duplicative requirements preliminarily identified above do not require substantially the same disclosures and why?

b. Should any proposed amendments not be made? Should any proposed amendments be modified? If so, which ones and why? Please be as specific as possible for each of the proposals on which you provide comments.

5. Are there other Commission disclosure requirements that are redundant or duplicative with U.S. GAAP, IFRS, or other Commission disclosure requirements that we should consider eliminating? If so, which requirements should be eliminated and how are they redundant or duplicative?

III. Overlapping Requirements

A. Background

We also have preliminarily identified Commission disclosure requirements that are related to, but not the same as, U.S. GAAP, IFRS, or other Commission disclosure requirements, which we refer to in this release as overlapping requirements. In this section, we:

• Propose to delete Commission disclosure requirements that, as discussed further in section III.C below, we believe: (1) Require disclosures that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements or (2) require disclosures incremental to the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements and may no longer be useful to investors.

• Propose to integrate Commission disclosure requirements that overlap with, but require information incremental to, other Commission disclosure requirements, as discussed further in section III.D below, or

• Solicit comment on certain Commission disclosure requirements that overlap with, but require information incremental to, U.S. GAAP to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP, as discussed further in section III.E below.

110

One commenter to the Regulation S-X Request for Comment recommended that we “[c]oordinate with and encourage the FASB to complete a disclosure project that would eliminate the need for SEC-specific footnote disclosure requirements (

e.g.,

S-X 4-08 and 5-02) and financial statement schedules and incorporate them within the US GAAP required disclosures if necessary. This commenter also noted that “US GAAP and SEC disclosure requirements often overlap. Slight differences in requirements cause confusion about whether there are different disclosure objectives and often result in redundancies.”

See

letter from Ernst & Young LLP (Nov. 20, 2015).

B. Broad Considerations

Our objective with these proposals is to streamline disclosures for investors and simplify requirements for issuers. In some cases, the proposed streamlining of overlapping disclosure requirements would give rise to the considerations discussed below.

111

Some proposals may also be affected by certain FASB projects, as discussed in section I.C.3.

1. Disclosure Location Considerations

In some cases, the streamlining of disclosure requirements would result in the relocation of disclosures within a filing,

112

with the following consequences:

112

For example, as discussed in section III.C.1, our proposed amendments would result in the

elimination of disclosures about an issuer's status as a real estate investment trust (“REIT”) in the audited notes to the financial statements, in reliance on disclosures within the same filing, but outside the audited financial statements. As another example, as discussed in section III.D.2, our proposed amendments would result in the relocation of disclosures about material restrictions on the payment of dividends in a filing from outside to within the audited notes to the financial statements. For equity compensation plans, the proposed amendments would result in the need to reference a different filing, as discussed in section III.C.17.

• Prominence Considerations—the current location of some disclosures may provide a certain level of prominence and/or context to other disclosures located with them. The relocation of these disclosures may affect investors by changing the prominence and/or context of both the relocated disclosures and the remaining disclosures. Throughout this release, we collectively refer to these consequences as “Disclosure Location—Prominence Considerations.”

• Financial Statement Considerations—the proposals related to some topics would result in the relocation of disclosures from outside to inside the financial statements, subjecting this information to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, as applicable. The safe harbor under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) would not be available for such disclosures.

113

Conversely, relocation of disclosures from inside to outside the financial statements would have the opposite effect—namely, this information would not be subject to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, as applicable, while the safe harbor under the PSLRA would be available. These topics would also be subject to Disclosure Location—Prominence Considerations. Throughout this release, we collectively refer to these consequences as “Disclosure Location—Financial Statement Considerations.”

113

Pub. L. 104-67, 109 Stat. 737 (1995).

We refer to the foregoing considerations collectively as “Disclosure Location Considerations.”

Request for Comment

6. For each of the disclosures subject to Disclosure Location—Prominence Considerations discussed below:

a. Do investors benefit from the prominence of this information in its current location or from the context these disclosures provide to other disclosures located with them?

b. Would the proposed changes to the disclosure location either benefit or adversely affect investors or issuers? If so, how? Please be specific.

c. Should we mandate a cross-reference in the prior location of the disclosures to assist investors in navigating the issuer's disclosures and help maintain the prominence and/or context of the disclosures?

d. Do electronic data analysis tools affect the importance of the disclosure location?

7. For disclosures subject to Disclosure Location—Financial Statement Considerations, in addition to the above questions about prominence, what are the benefits and costs of the inclusion/exclusion of these disclosures in the financial statements for investors and issuers? How important are these benefits and costs to investors and issuers? Please quantify the benefits and costs, to the extent practicable.

2. Bright Line Disclosure Threshold Considerations

Some overlapping requirements, while similar, are not redundant or duplicative because one set of requirements includes a bright line disclosure threshold, while the other set of requirements does not.

114

Where a requirement contains a bright line disclosure threshold, matters involving amounts below that threshold are not required to be disclosed. With the exception of disclosure requirements about major customers, as discussed in section III.E.14, the Commission disclosure requirements we discuss contain bright line disclosure thresholds, while the corresponding requirement does not. For these topics, the elimination of the bright line threshold would potentially change the disclosure provided to investors. Throughout this release, we refer to these considerations as “Bright Line Disclosure Threshold Considerations.”

114

For example, Regulation S-K requires, as discussed in section III.E.13, disclosure of the amount of revenue from products and services which account for 10 percent or more of consolidated revenue and, as discussed in section III.E.15, disclosure of legal proceedings involving environmental matters that exceed 10 percent of the issuer's consolidated current assets. The corresponding U.S. GAAP requirements do not contain such bright line thresholds above which disclosures would be required.

Request for Comment

8. For each of the disclosures subject to Bright Line Disclosure Threshold Considerations discussed below, should there continue to be a bright line below which the disclosures would not be required? Should the Commission modify the threshold? Why or why not?

a. Are there any aspects to these disclosures that warrant bright line disclosure thresholds, as compared to other disclosures?

b. Does the bright line disclosure threshold help to ensure disclosure at an appropriate level of detail for investors? Alternatively, does the bright line disclosure threshold result in too much or too little detail for investors? Why or why not?

c. Are there alternative disclosure thresholds, in lieu of bright lines, that we should consider? Would the alternative disclosure threshold change the level of information provided to investors and the burdens and costs associated with the preparation of these disclosures for issuers?

C. Overlapping Requirements—Proposed Deletions

This section discusses Commission disclosure requirements that we believe: (1) Require disclosures that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements or (2) require disclosures incremental to the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements and may no longer be useful to investors. In these cases, we propose to delete the specified Commission disclosure requirement.

1. REIT Disclosures

115

Please refer to the related discussions in sections III.E.1 and V.B.3.

a. Undistributed Gains or Losses on the Sale of Properties

Regulation S-X

116

and U.S. GAAP

117

both set forth requirements for the presentation of components of stockholders' equity on the face of the financial statements. Regulation S-X incrementally requires REITs to present undistributed gains or losses on the sale of properties separately from other distributable earnings on their balance sheet.

118

This amount is presented on a book basis,

119

which we do not believe is useful to investors because of the unique tax status of REITs, as discussed below.

116

See, e.g.,

Rule 3-15(a)(2) [17 CFR 210.3-15(a)(2)] and Rule 5-02.30 [17 CFR 210.5-02.30] of Regulation S-X.

117

See, e.g.,

ASC 505-10-45.

118

See

Rule 3-15(a)(2) of Regulation S-X.

119

Amounts presented on a “book” basis refer to amounts determined in accordance with accounting for financial reporting purposes (

e.g.,

U.S. GAAP or IFRS), rather than amounts determined in accordance with federal statutory tax law.

Specifically, REITs are not subject to entity-level taxation on the amounts

distributed to their investors. Rather, their investors are liable for taxes on these distributions, depending on the character of the dividends (

i.e.,

ordinary income, capital gains, or return of capital) the REIT distributes to them. Because the amount of undistributed gains or losses required by Rule 3-15(a)(2) of Regulation S-X is not presented on a tax basis, this disclosure does not provide investors with insight into the tax implications of the REIT's distributions. Instead, the disclosures required by Rule 3-15(c) of Regulation S-X of the tax status of distributions provide this insight.

120

17 CFR 210.3-15(c).

In addition, the Commission staff has observed that, in practice, because REITs are required to distribute 90 percent of their taxable income in order to maintain their REIT status and often distribute more, REITs generally do not have undistributed amounts to disclose under this requirement.

Based on the foregoing, we propose to delete Rule 3-15(a)(2).

Request for Comment

9. Has the requirement to provide incremental disclosure about undistributed gains or losses on the sale of properties on a book basis resulted in the disclosure of useful information?

What would the impact to investors and issuers be of a deletion of this requirement?

b. Status as a REIT

Regulation S-K and Regulation S-X both require certain disclosures about an issuer's status as a REIT. Regulation S-K requires disclosure of the issuer's form of organization,

121

significant risk factors

122

and a description of known uncertainties that are reasonably expected to have a material effect on income.

123

Regulation S-X similarly requires disclosure in the notes to the financial statements of the issuer's status as a REIT.

124

121

Item 101(a)(1) of Regulation S-K [17 CFR 229.101(a)(1)].

122

Item 503(c) of Regulation S-K [17 CFR 229.503(c)].

123

Item 303(a)(3)(ii) of Regulation S-K [17 CFR 229.303(a)(3)(ii)].

124

Rule 3-15(b) of Regulation S-X [17 CFR 210.3-15(b)].

Regulation S-X also requires REITs to disclose in the notes to the financial statements their assumptions in making or not making federal income tax provisions.

125

As stated above, REITs are not subject to entity-level taxation on the amounts distributed to their investors, so long as they maintain their REIT status. As such, for REITs, the primary assumption in making or not making federal income tax provisions is the issuer's continued REIT status and its consideration of the risks affecting its continued REIT status. We believe that the disclosure provided in response to the requirement in Regulation S-X to disclose assumptions in making or not making federal income tax provisions is encompassed by the disclosures provided to comply with Regulation S-K's requirement to disclose significant risk factors and a description of known uncertainties that are reasonably expected to have a material effect on income. In fact, because of the overlap, issuers often repeat or expand on the note disclosures in their risk factor disclosures, by discussing matters such as the applicable tax regulations and the consequence of a loss in REIT status.

125

Rule 3-15(b) of Regulation S-X.

Based on the foregoing, we propose to delete Rule 3-15(b) of Regulation S-X. We note that because disclosures under Regulation S-K, unlike those required by Regulation S-X, may be provided outside of the audited financial statements, the proposed amendments give rise to Disclosure Location—Financial Statement Considerations.

Request for Comment

10. Does Rule 3-15(b) require disclosures that are encompassed by disclosures that result from compliance with the overlapping provisions, as discussed above? Why or why not?

11. Would deletion of Rule 3-15(b) as described above affect, in any material respect, the usefulness of information that investors receive? If so, how?

2. Consolidation

126

Please refer to the related discussions in sections II.B.2, III.E.2, and V.B.4.

a. Difference in Fiscal Periods

Regulation S-X

127

and U.S. GAAP

128

both set forth requirements about the presentation of consolidated financial statements when the issuer and its subsidiaries have different fiscal periods. Regulation S-X incrementally requires disclosure of the subsidiary's fiscal year closing date and an explanation of the necessity for using different closing dates. However, when there is a difference in the fiscal periods of the issuer and its subsidiaries, U.S. GAAP also requires, as stated in section II.B.2, recognition by disclosure or otherwise of the effect of intervening events that materially affect the financial position or results of operations.

129

Because this U.S. GAAP requirement effectively eliminates the effect of differences in the fiscal periods of the issuer and its subsidiaries, we believe that disclosure of the subsidiary's fiscal year closing date and an explanation of the necessity for using different closing dates is no longer useful for investors. We, therefore, propose to delete Rule 3A-02(b)(1) of Regulation S-X.

127

See

Rule 3A-02(b)(1) of Regulation S-X.

128

See

ASC 810-10-45-12.

129

See

ASC 810-10-45-12.

Request for Comment

12. Do disclosures of the subsidiary's fiscal year closing date and the explanation of the necessity for using different closing dates provide useful information to investors? What would the impact to investors and issuers be of a deletion of this requirement?

b. Changes in Fiscal Periods

Regulation S-X requires disclosure in the notes to the financial statements of: (1) Material changes in the fiscal periods of an issuer's subsidiaries and (2) the manner in which the material changes are reflected in the financial statements.

130

The corresponding requirements in U.S. GAAP are narrower than Regulation S-X in three respects.

130

See

Rule 3A-03(b) of Regulation S-X [17 CFR 210.3A-03(b)].

First, U.S. GAAP limits changes in the difference between an issuer and its subsidiary's fiscal periods to situations where the change is preferable.

131

Second, U.S. GAAP only sets forth requirements related to a change or elimination of a previously existing difference in fiscal periods, for example, when an issuer is able to obtain financial information of a subsidiary with fiscal periods that are more consistent with, or the same as, that of the issuer.

132

Regulation S-X is broader than U.S. GAAP in that it refers to all changes in fiscal periods, rather than only changes to pre-existing differences in fiscal periods. Third, U.S. GAAP, unlike Regulation S-X, specifies the manner of treatment of a change in fiscal period by requiring that the change be reflected in the financial statements on a retrospective basis, if practicable.

133

We believe that U.S. GAAP, in limiting potential changes, provides for more consistency in issuer financial statements and results in better

financial reporting. Thus, we propose to delete the last sentence of Rule 3A-03(b) of Regulation S-X.

131

ASC 810-10-45-13 states that a change in a difference in fiscal periods is a change in accounting policy, which requires that the issuer and its auditor assert that the new accounting policy is preferable to the old one. See ASC 250-10-45-12, Rule 8-03(b)(5) of Regulation S-X for SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP, Rule 10-01(b)(6) of Regulation S-X for non-SRCs, and Item 601(b)(16) of Regulation S-K.

132

See

ASC 810-10-45-13.

133

See

ASC 810-10-45-13.

Request for Comment

13. Do issuers rely on the broader language in Rule 3A-03(b) as a basis to change their subsidiaries' fiscal periods where differences did not previously exist? Are issuers and their auditors able to assert preferability of these changes?

14. Does the broader language in Rule 3A-03(b) affect, in any material respect, the usefulness of information that investors receive? If so, how?

3. Repurchase and Reverse Repurchase Agreements

134

Please refer to the related discussion in section III.E.9.

The requirements in Regulation S-X governing repurchase and reverse repurchase agreements were adopted in 1986, following developments at that time in the government securities market.

135

Their primary objective was to require disclosure about the nature and extent of registrants' repurchase and reverse repurchase agreements and the degree of risk involved in these transactions.

136

The FASB has more recently considered requirements in this area in response to constituent concerns in the wake of the global financial crisis. Most recently, in 2014, the FASB issued amendments to the accounting and disclosures for repurchase agreements and similar transactions.

137

These revisions to U.S. GAAP have resulted in overlapping disclosure requirements, as discussed further below.

135

See Disclosure Amendments to Regulation S-X Regarding Repurchase and Reverse Repurchase Agreements,

Release No. 33-6621 (Jan. 30, 1986) [51 FR 3765].

136

Id.

137

See also

Accounting Standards Update (“ASU”) No. 2014-11,

Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.

Based on the foregoing, we propose to delete Rule 4-08(m)(1)(ii), with the exception of the requirement in Rule 4-08(m)(1)(ii)(A)(ii) to disclose the interest rate on repurchase liabilities, which we would retain. We note that, because Regulation S-X, unlike U.S. GAAP, sets forth a 10 percent threshold for the

disaggregated disclosures,

152

the proposed amendments give rise to Bright Line Disclosure Threshold Considerations.

152

Specifically, Regulation S-X requires the tabular disclosures if the carrying amount (or market value, if higher than the carrying amount) of the securities or other assets sold under repurchase agreements, other than securities or other assets for which for which unrealized changes in market value are reported in current income or have been obtained under reverse repurchase agreements, in the aggregate, exceeds 10 percent of total assets.

Request for Comment

15. Do disclosures required by Rule 4-08(m) convey reasonably similar information as the disclosures that result from compliance with the overlapping provisions discussed above? Why or why not?

16. As described above, the form and content of the disclosures required under U.S. GAAP differ in certain respects from Rule 4-08(m). Should we refer any of the disclosure requirements in Rule 4-08(m) to the FASB for potential incorporation into U.S. GAAP? If so, which ones and why?

17. Would revision of Rule 4-08(m) as described above affect, in any material respect, the usefulness of information that investors receive? If so, how?

c. Collateral Policy

Regulation S-X

153

requires disclosure of the issuer's policy with regard to taking possession of assets purchased under reverse repurchase agreements. U.S. GAAP requires disclosure of the issuer's policy for requiring collateral or other security.

154

Although U.S. GAAP is not as specific as Regulation S-X about taking possession of collateral, we believe Regulation S-X requires disclosures that are encompassed by the disclosures that result from compliance with U.S. GAAP. Accordingly, we propose to delete this requirement in Rule 4-08(m)(2)(i)(B)(1).

153

See

Rule 4-08(m)(2)(i)(B)(1) of Regulation S-X [17 CFR 210.4-08(m)(2)(i)(B)(1)].

154

See

ASC 860-30-50-1Aa.

Regulation S-X, unlike U.S. GAAP, requires these disclosures when the aggregate carrying amount of reverse repurchase agreements exceeds 10 percent of total assets. As such, these differences also give rise to Bright Line Disclosure Threshold Considerations.

Request for Comment

18. Does Rule 4-08(m)(2)(i)(B)(1) require disclosures that are encompassed by disclosures that result from compliance with the overlapping provisions discussed above? Why or why not?

19. As described above, U.S. GAAP is not as specific as Regulation S-X about taking possession of collateral. Would elimination of Rule 4-08(m)(2)(i)(B)(1) affect, in any material respect, the usefulness of information that investors receive? If so, how?

4. Derivative Accounting Policies

Regulation S-X

155

and U.S. GAAP

156

both require disclosure in the notes to the financial statements of accounting policies for certain derivative instruments. Regulation S-X applies to: (1) Derivative financial instruments, as defined under U.S. GAAP, and (2) derivative commodity instruments such as commodity futures, swaps, and options that are permitted to be settled in cash or with another financial instrument, to the extent such instruments are not within the definition of derivative financial instruments. For both types of instruments, Regulation S-X requires, where material, disclosure of the accounting policies; the criteria required to be met for each accounting method used; the accounting method used if those criteria are not met; the method used to account for terminations of derivatives designated as hedges or derivatives used to affect the terms, fair values, or cash flows of a designated item; the method used to account for derivatives when the designated item matures, is sold, is extinguished, or is terminated; and how the derivative instruments are reported in the financial statements.

155

See

Rule 4-08(n) of Regulation S-X [17 CFR 210.4-08(n)] and Note 2(b) to Rule 8-01 of Regulation S-X [17 CFR 210.8-01]. Rule 4-08(n) applies to non-SRCs and Note 2(b) to Rule 8-01 applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP.

156

See

ASC 815-10-50.

U.S. GAAP requires disclosure of accounting principles and methods that materially affect the financial statements, including those involving a selection from existing acceptable alternatives, and important judgments about the appropriateness of the principles.

157

We believe that these U.S. GAAP principles call for reasonably similar information as the corresponding requirements in Regulation S-X, as they require disclosure of the accounting method applied to each aspect of a material derivative transaction from inception to termination.

157

See

ASC 235-10-50-1 and ASC 235-10-50-3.

In addition, for derivative financial instruments, as defined under U.S. GAAP, U.S. GAAP requires disclosure of how and why the issuer uses derivative instruments, how the derivative instruments and related hedged items are accounted for, and how they affect the financial statements.

158

Although Regulation S-X is more detailed than U.S. GAAP, the specificity in Regulation S-X stemmed, in part, from the absence of a comprehensive accounting model for derivatives when the Commission adopted these disclosure requirements.

159

Since that time, the FASB has adopted an accounting model for derivative financial instruments, as defined under U.S. GAAP.

160

Because U.S. GAAP limits the options for accounting for derivatives, we believe that the additional specific disclosure requirements in Rule 4-08(n) are no longer applicable.

158

See

ASC 815-10-50.

159

See Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity

Instruments, Release No. 33-7386, Financial Reporting Release No. 48, (Jan. 31, 1997).

In this adopting release, the Commission stated that in the absence of comprehensive accounting literature, registrants have developed accounting practices for options and complex derivatives by analogy to the limited amount of literature that does exist. The Commission also noted that those analogies are complicated because under existing accounting literature, there are at least three distinctively different methods of accounting for derivatives (

e.g.

fair value accounting, deferral accounting and accrual accounting). The Commission further observed that the underlying concepts and criteria used in determining the applicability of those accounting methods is not consistent.

160

See

SFAS No. 133,

Accounting for Derivative Instruments and Hedging Activities,

codified in ASC 815.

Based on the foregoing, we propose to delete Rule 4-08(n) and Note 2(b) to Rule 8-01.

Request for Comment

20. Is the U.S. GAAP requirement to disclose accounting principles and methods that materially affect the financial statements reasonably similar to the corresponding requirements in Regulation S-X?

21. Are the specific disclosure requirements in Rule 4-08(n) applicable or necessary in light of the U.S. GAAP requirement? If so, which ones and why?

22. Would deletion of Rule 4-08(n) affect, in any material respect, the usefulness of information that investors receive about derivative financial instruments, as defined under U.S. GAAP? If so, how?

23. Would deletion of Rule 4-08(n) affect, in any material respect, the usefulness of information that investors receive about derivative commodity instruments that are not within the

definition of derivative financial instruments? If so, how?

24. Are the requirements in Rule 4-08(n) used by analogy for contracts that derive their value from an underlying price, index, rate, condition, or event, but do not meet the FASB ASC Master Glossary definition of “derivative financial instrument?” Would deletion of Rule 4-08(n) affect, in any material respect, the usefulness of information that investors receive about accounting policy disclosures for these instruments? If so, how?

5. Distributable Earnings for Registered Investment Companies

Regulation S-X

161

and U.S. GAAP

162

both require registered investment companies to present certain components of capital on their balance sheet. Regulation S-X incrementally specifies that, as part of this presentation, three components of distributable earnings must be separately presented on the balance sheet: (1) Net investment income, (2) net realized gains (losses) on investment transactions, and (3) net unrealized appreciation (depreciation) in value of investments.

163

Regulation S-X requires these amounts to be presented on a book basis, which we do not believe is useful to investors of registered investment companies. Similar to REITs, as discussed in section III.C.1, registered investment companies are generally structured such that they are not subject to entity-level taxation on the amounts distributed to their investors. As such, the book basis amounts required to be presented under Regulation S-X do not provide investors with insight into the tax implications of registered investment company distributions. Rather, the requirement in U.S. GAAP to disclose the components of distributable earnings on a tax basis in the notes to the financial statements

164

provides this insight.

161

See

Rule 6-04.17 of Regulation S-X [17 CFR 210.6-04.17].

162

See

ASC 946-20-50-11.

163

See

Rule 6-04.17 of Regulation S-X.

164

See

ASC 946-20-50-11.

Based on the foregoing, we propose to amend Rule 6-04.17 to require presentation of the total, rather than the components, of distributable earnings on the balance sheet. We also propose to delete the requirement in Rule 6-09.7 for parenthetical disclosure of undistributed net investment income, one of the components of distributable earnings, on a book basis, on the statement of changes in net assets.

165

See

Rule 6-09.7 of Regulation S-X [17 CFR 210.6-09.7].

Request for Comment

25. Do investors use the information about the three components (net investment income, net realized gains (losses) on investment transactions, and net unrealized appreciation (depreciation) in value of investments) of distributable earnings separately presented on registered investment company balance sheets? If so, how?

26. Would amendment of Rule 6-04.17 to require presentation of the total, rather than the components, of distributable earnings on the balance sheet affect, in any material respect, the usefulness of information that investors receive? If so, how?

27. Would deletion of the requirement in Rule 6-09.7 for parenthetical disclosure of undistributed net investment income on the statement of changes in net assets affect, in any material respect, the usefulness of information that investors receive? If so, how?

6. Insurance Companies

166

Please refer to the related discussions in sections II.B.9 and V.B.8.

a. Liability Assumptions

Regulation S-X

167

and U.S. GAAP

168

both require disclosure in the notes to the financial statements of assumptions for insurance liabilities stated at present value. Regulation S-X, unlike U.S. GAAP, specifically identifies three assumptions (interest rates, mortality, and withdrawals) for disclosure about the liability for future policy benefits. U.S. GAAP, however, does not limit its disclosures to these three assumptions but, rather, provides additional examples of assumptions.

169

Accordingly, we propose to delete Rule 7-03(a)(13)(b).

167

See

Rule 7-03(a)(13)(b) of Regulation S-X [17 CFR 210.7-03(a)(13)(b)].

168

See

ASC 944-40-50.

169

See

ASC 944-40-30-7 for examples of assumptions made in estimating the liability.

Request for Comment

28. Would deletion of the requirement in Rule 7-03(a)(13)(b) for disclosures of the above three assumptions affect, in any material respect, the usefulness of information that investors receive? If so, how?

b. Reinsurance Transactions

Regulation S-X

170

and U.S. GAAP

171

both require disclosures in the notes to the financial statements about the nature of reinsurance contracts. Regulation S-X specifically requires disclosure of the nature and effect of material nonrecurring reinsurance transactions.

172

We believe this provision requires disclosures that are encompassed by the disclosures that result from compliance U.S. GAAP and Regulation S-K. Specifically, although U.S. GAAP does not explicitly refer to nonrecurring reinsurance transactions, it requires disclosure of all reinsurance transactions, meaning that nonrecurring and recurring transactions would be included in the disclosures. In addition, Item 303(a)(3)(i) of Regulation S-K requires disclosure of any unusual or infrequent events or changes, which may include the nature and effect of material nonrecurring reinsurance transactions.

170

See

Rule 7-03(a)(13)(c) of Regulation S-X [17 CFR 210.7-03(a)(13)(c)].

171

See

ASC 944-20-50-3 and ASC 944-20-50-4.

172

See

Rule 7-03(a)(13)(c)(2) [17 CFR 210.7-03(a)(13)(c)(2)].

Based on the foregoing, we propose to delete Rule 7-03(a)(13)(c). We note that because disclosures required by Item 303(a)(3)(i), unlike those required by Regulation S-X, may be provided outside of the audited financial statements, the proposed amendments give rise to Disclosure Location—Financial Statement Considerations.

Request for Comment

29. Does Rule 7-03(a)(13)(c) require disclosures that are encompassed by disclosures that result from compliance with the overlapping provisions discussed above? Why or why not?

30. Would deletion of the requirement in Rule 7-03(a)(13)(c) affect, in any material respect, the usefulness of information that investors receive? If so, how?

31. As stated above, U.S. GAAP does not require separate disclosure of nonrecurring transactions. Should we refer disclosure requirements specifically about the nature and effect of material nonrecurring reinsurance to the FASB for potential incorporation into U.S. GAAP?

7. Interim Financial Statements—Material Events Subsequent to the End of the Most Recent Fiscal Year

Regulation S-X requires disclosure, in interim financial statements, of material events subsequent to the end of the most recent fiscal year.

173

As discussed below, we believe that these provisions require disclosures that are encompassed by the disclosures that result from compliance with U.S. GAAP and Item 303(b) of Regulation S-K (or

Item 9 of Form 1-A and Item 1 of Form 1-SA for Regulation A issuers), in combination.

173

See

Rule 8-03(b)(2) [17 CFR 210.8-03(b)(2)] and Rule 10-01(a)(5) [17 CFR 210.10-01(a)(5)] of Regulation S-X. Rule 8-03(b)(2) applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP and Rule 10-01(a)(5) applies to non-SRCs.

Specifically, U.S. GAAP requires disclosure of a number of items occurring in the interim periods after the end of the most recent fiscal periods, including changes in accounting principles, changes in estimates, disposals, business combinations, and disclosures about segments, fair value, and pensions.

174

Item 303(b) of Regulation S-K (or Item 9 of Form 1-A and Item 1 of Form 1-SA for Regulation A issuers) require disclosure of: (1) Material changes in the issuer's financial condition and results of operations, (2) unusual or infrequent events that materially affect income and any other significant components of revenues or expenses that, in the issuer's judgment, should be described in order to understand its interim results of operations, and (3) known trends that are reasonably expected to have a material effect on the financial statements.

175

174

See

ASC 270-10-50-1 and 7.

175

Item 303(b) of Regulation S-K explicitly requires interim disclosure of changes in financial condition and results of operations and, through its reference to Item 303(a), requires disclosure of unusual and infrequent events and trends.

Rule 10-01(a)(5) incrementally requires disclosure of the status of long-term contracts and changes in capitalization, including significant new borrowings or modification of existing financing arrangements. Although Regulation S-K does not specify these two items, they would be required under Item 303(b) of Regulation S-K (or Item 9 of Form 1-A and Item 1 of Form 1-SA for Regulation A issuers), if material, as discussed above.

Based on the foregoing, we propose to delete the requirements to disclose material events subsequent to the end of the most recent fiscal year in Rule 8-03(b)(2) and Rule 10-01(a)(5). We note that because disclosures required by Item 303(b) (or Item 9 of Form 1-A and Item 1 of Form 1-SA for Regulation A issuers), unlike those required by Regulation S-X, may be provided outside of the interim financial statements, the proposed amendments give rise to Disclosure Location—Financial Statement Considerations.

Request for Comment

32. Do the provisions in Rule 8-03(b)(2) and Rule 10-01(a)(5) to disclose material events subsequent to the end of the most recent fiscal year require disclosures that are encompassed by disclosures that result from compliance with the overlapping provisions discussed above? Why or why not?

33. Rule 10-01(a)(5) specifies disclosure of the status of long-term contracts and changes in capitalization subsequent to the most recent fiscal year. Would deletion of this requirement affect, in any material respect, the usefulness of information that investors receive? If so, how?

8. Interim Financial Statements—Changes in Accounting Principles

176

Please refer to the related discussions in section II.B.11 and V.B.14.

Regulation S-X requires disclosure in the notes to the interim financial statements of the date of any material accounting change.

177

We believe this information is unnecessary because U.S. GAAP requires disclosure of the accounting change in the period of the change.

178

We, therefore, propose to delete these requirements in Rule 8-03(b)(5) and Rule 10-01(b)(6).

177

See

Rule 8-03(b)(5) and Rule 10-01(b)(6) [17 CFR 210.10-01(b)(6)] of Regulation S-X. Rule 8-03(b)(5) specifically applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP, while 10-01(b)(6) applies to non-SRCs.

178

See

ASC 250-10-50-1 and ASC 270-10-50-1g.

Request for Comment

34. Is disclosure of the date of any material accounting change unnecessary in light of the U.S. GAAP requirements discussed above? Why or why not?

9. Interim Financial Statements—Pro Forma Business Combination Information

179

Please refer to the related discussion in section V.B.6.

Regulation S-X

180

and U.S. GAAP

181

both require supplemental pro forma information about business combinations in the notes to interim financial statements. These disclosure requirements differ in two ways: (1) Scope and (2) the line items required to be disclosed. Notwithstanding these differences, we believe that U.S. GAAP and Item 9.01 of Form 8-K result in reasonably similar disclosures as the corresponding requirements in Regulation S-X.

180

See

Rule 8-03(b)(4) [17 CFR 210.8-03(b)(4)] and Rule 10-01(b)(4) [17 CFR 210.10-01(b)(4)] of Regulation S-X. Rule 8-03(b)(4) specifically applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP, while 10-01(b)(4) applies to non-SRCs.

181

See

ASC 270-10-50-7, which refers to ASC 805-10-50-2h.3 for purposes of interim disclosures.

First, with respect to scope, Regulation S-X requires disclosure of pro forma information for significant business combinations for SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP and material business combinations for non-SRCs. U.S. GAAP, on the other hand, does not qualify the size of the business combinations to which pro forma information requirements apply. Accordingly, the requirements in U.S. GAAP would apply to the same or a greater number of business combinations and, thus, subsume the scope of the corresponding requirements in Regulation S-X.

Second, with respect to the line items required to be disclosed, Regulation S-X requires disclosure of pro forma revenue, net income, net income attributable to the issuer, and net income per share. Regulation S-X also requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose pro forma income from continuing operations. U.S. GAAP only requires disclosure of pro forma revenue and earnings. This difference resulted from changes to U.S. GAAP for which Regulation S-X was not conformed, as discussed below.

The Commission originally adopted Rule 8-03(b)(4) and Rule 10-01(b)(4) to require in interim financial statements the same pro forma business combination disclosures provided in annual financial statements under Accounting Principles Board (“APB”) Opinion No. 16,

Business Combinations

182

In 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141,

Business Combinations

(“SFAS No. 141”), which required these pro forma disclosures in interim financial statements and superseded APB Opinion No. 16; however, Regulation S-X was not updated at that time to eliminate the duplication with U.S. GAAP. In 2007, the FASB issued SFAS No. 141R (revised 2007),

Business Combinations

(“SFAS No. 141R”), which required fewer pro forma line items—namely, only revenue and earnings—than previously required under SFAS No. 141, in part to converge with IFRS.

183

182

In the proposing release, the Commission noted that the proposed rule would require disclosure of pro forma data in connection with business combinations accounted for on a purchase basis similar to that required in annual statements by APB No. 16.

See Interim Financial Data Proposals to Increase Disclosure,

Release No. 33-5549 (Dec. 19, 1974) [40 FR 1079].

183

SFAS No. 141R, paragraph B426.

As a result of these changes, issuers are required to disclose more pro forma information about business combinations in interim periods than in annual periods,

184

even though Regulation S-X generally imposes fewer obligations with regard to interim

financial statements.

185

Moreover, Rule 8-03(b)(4) requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to present more line items than the corresponding requirement in Rule 10-01(b)(4) for non-SRCs, even though Commission disclosure requirements, as a general matter, provide certain accommodations for SRCs

186

and Regulation A issuers.

184

See

ASC 805-10-50-2h.3.

185

For example, Article 8 and Article 10 of Regulation S-X permit the presentation of condensed financial statements, do not require audits of interim financial statements, allow issuers to assume that a user has read the preceding year's audited financial statements, permit omission of details of accounts that have not changed significantly since the audited balance sheet date, and permit omission of the disclosures required by Rule 4-08 of Regulation S-X.

186

For example, SRCs are required to present only two, rather than three, years of financial statements and are not required to present selected financial data in accordance with Item 301 of Regulation S-K [17 CFR 229.301].

In addition, we believe Item 9.01 of Form 8-K mitigates at least in part the absence of a U.S. GAAP requirement to present pro forma earnings per share, as it requires SRCs and non-SRCs to file, within approximately 75 days after the transaction, pro forma financial information for significant acquisitions, including earnings per share, through the issuer's most recently filed balance sheet. We note, however, this pro forma financial information would not cover the same periods as the pro forma information required under Rule 8-03(b)(4) and Rule 10-01(b)(4).

187

For example, for a significant acquisition that occurs on September 1, 2015, the Form 8-K would contain pro forma financial information for the year ended December 31, 2014 and the six months ended June 30, 2015 and 2014. Under Rule 8-03(b)(4) and Rule 10-01(b)(4), however, the Form 10-Q for the nine months ended September 30, 2015 would be required to include pro forma disclosures for the nine months ended September 30, 2015 and 2014.

Based on the foregoing, we propose to delete the requirements for pro forma financial information in interim filings for business combinations in Rule 8-03(b)(4) and Rule 10-01(b)(4).

Request for Comment

35. Would elimination of the specific requirements discussed above to disclose the line items pro forma income from continuing operations, net income attributable to the issuer, and net income per share affect, in any material respect, the usefulness of information that investors receive? If so, how? Do the pro forma disclosures in Form 8-K sufficiently substitute for the loss of these specific line items, despite the differences in timing discussed above?

10. Interim Financial Statements—Dispositions

188

Please refer to the related discussion in section II.B.14.

For significant dispositions, Regulation S-X requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose in the notes to the financial statements pro forma revenue, income from continuing operations, net income, net income attributable to the issuer, and net income per share for all interim periods presented, as though the disposition occurred at the beginning of the periods.

189

There are two types of dispositions: (1) those that meet the definition of discontinued operations and (2) all others (hereafter referred to as “other dispositions”).

189

See

Rule 8-03(b)(4) of Regulation S-X.

U.S. GAAP requires that the effects of discontinued operations be isolated and separately presented on the income statement on a retrospective basis,

190

thereby obviating the need for pro forma information for discontinued operations in the notes to the financial statements.

190

See

ASC 205-20-45.

For other dispositions, we believe that the disclosures required by U.S. GAAP and Item 9.01 of Form 8-K results in reasonably similar disclosures as the pro forma disclosures mandated by Rule 8-03(b)(4). Specifically, U.S. GAAP requires disclosure of pre-tax profit and pre-tax profit attributable to the parent for individually significant dispositions for all interim periods presented.

191

However, U.S. GAAP does not contain an equivalent to the requirement in Rule 8-03(b)(4) to disclose pro forma revenues as if the other disposal occurred at the beginning of the periods presented.

191

See

ASC 270-10-50-7, which refers to ASC 360-10-50-3A for purposes of interim disclosures. ASC 360-10-50-3A is effective for public business entities on a prospective basis to: (1) All disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years and (2) all businesses that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance.

We believe Item 9.01 of Form 8-K provides some mitigation, as it requires SRCs to file within four business days after a significant disposition, pro forma financial information, including revenue, income from continuing operations, and income per share, through the most recently filed balance sheet date. We note, however, this pro forma financial information would not cover the same periods as the separate results required under Rule 8-03(b)(4).

192

For example, for a significant disposal that occurs on August 3, 2015, the Form 8-K filed by August 7, 2015, would contain pro forma financial information for the year ended December 31, 2014 and the three months ended March 31, 2015 and 2014, as if the disposal had occurred on January 1, 2014. In contrast, Rule 8-03(b)(4) would require pro forma disclosures in the September 30, 2015 interim financial statements, filed on Form 10-Q by November 16, 2015, for the nine months ended September 30, 2015 and 2014, as if the disposal had occurred at the beginning of each period presented.

In addition, Rule 8-03(b)(4) requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose more information about dispositions in interim periods than in annual periods,

193

even though Regulation S-X, as noted above, generally imposes fewer obligations with regard to interim financial statements. Moreover, Rule 8-03(b)(4) requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose more extensive information about other dispositions than is required of non-SRCs,

194

even though Commission disclosure requirements, as a general matter, provide certain scaled disclosure accommodations for SRCs.

195

193

See

ASC 360-10-50-3A.

194

See

Rule 10-01(b)(5) of Regulation S-X [17 CFR 210.10-01(b)(5)].

195

See supra

note 186.

Based on the foregoing, we propose to delete these requirements in Rule 8-03(b)(4).

Request for Comment

36. Would elimination of the specific requirement discussed above to disclose pro forma revenue affect, in any material respect, the usefulness of information that investors receive? If so, how? Do the pro forma disclosures in Form 8-K sufficiently substitute for this specific line item, despite the differences in timing discussed above?

11. Segments

Item 101(b) of Regulation S-K

196

requires disclosure of segment financial information, restatement of prior periods when reportable segments change, and discussion of interim segment performance that may not be indicative of current or future operations. U.S. GAAP

197

and Item 303(b) of Regulation S-K

198

require

similar disclosures. In fact, Item 101(b) explicitly permits issuers to cross-reference between the notes to the financial statements and the description of business to avoid duplicative disclosures about segments. We, therefore, propose to delete Item 101(b). We note that because these disclosures (or the cross-reference to the notes to the financial statements) are located in the business section of the filing, while the corresponding disclosures are in the notes to the financial statements, their elimination gives rise to Disclosure Location—Prominence Considerations.

196

17 CFR 229.101(b).

197

See

ASC 280-10-50-22, ASC 280-10-50-34, and ASC 280-10-50-35.

198

17 CFR 229.303(b). Specifically, Instruction 4 of Item 303(b) of Regulation S-K, which addresses interim periods, requires that the registrant's discussion of material changes in results of operations shall identify any significant elements of the registrant's income or loss from continuing

operations which do not arise from or are not necessarily representative of the registrant's ongoing business. The introduction paragraph to Item 303(b) also states that the interim discussion and analysis shall include a discussion of material changes in those items specifically listed in paragraph (a) of the Item. Since paragraph (a) indicates that where in a registrant's judgment a discussion of segment information or of other subdivisions of the registrant's business would be appropriate to an understanding of such business, the discussion shall focus on each relevant, reportable segment or other subdivision of the business and on the registrant as a whole, the requirement in Item 101(b)(2) of Regulation S-K is duplicative of Item 303 requirements.

Regulation A issuers are similarly required to cross-reference to their segment disclosures under U.S. GAAP or IFRS.

199

We also propose to delete Item 7(b) of Form 1-A. We note that because the cross-reference to the notes to the financial statements is located in the business section of the filing, while the corresponding disclosures are in the notes to the financial statements, its elimination also gives rise to Disclosure Location—Prominence Considerations.

199

See

Item 7(b) of Form 1-A.

12. Geographic Areas

200

Please refer to the related discussion in section III.D.3.

a. Financial Information

Regulation S-K

201

requires disclosure of financial information by geographic area. U.S. GAAP requires similar disclosures.

202

In fact, Item 101(d)(2) explicitly permits issuers to cross-reference between the notes to the financial statements and the description of business to avoid duplicative disclosures about geographic areas. We, therefore, propose to delete Item 101(d)(1) and Item 101(d)(2).

203

We note that because these disclosures (or the cross-reference to the notes to the financial statements) are located in the business section of the filing, while the corresponding disclosures are in the notes to the financial statements, their elimination gives rise to Disclosure Location—Prominence Considerations.

201

17 CFR 229.101(d)(1) and 17 CFR 229.101(d)(2).

202

See

ASC 280-10-50-41.

203

Two commenters on the Disclosure Effectiveness Initiative recommended that Item 101(d)(1) and Item 101(d)(2) be deleted given the overlap with ASC 280.

See

letters from the Disclosure Effectiveness Working Group of the Federal Regulation of Securities Committee and the Law & Accounting Committee of the American Bar Association (“ABA”) (Mar. 6, 2015)

and

Center for Capital Markets Competitiveness, U.S. Chamber of Commerce (“CCMC”) (July 29, 2014).

b. Risks and Dependence

Item 101(d)(3) of Regulation S-K requires disclosures of any risks associated with an issuer's foreign operations and any segment's dependence on foreign operations. We believe that Item 101(d)(3) requires disclosures that are largely encompassed by the disclosures that result from compliance with other parts of Regulation S-K. Specifically, Item 503(c) of Regulation S-K requires disclosure of significant risk factors. Although Item 101(d)(3) is more expansive than Item 503(c) in its requirement to disclose “any” risk, rather than “significant” risk factors, we believe that disclosure of “significant” risk factors provides appropriate disclosure to investors and disclosure of “any” risk is not necessary.

In addition, Item 303(a) of Regulation S-K requires disclosure of trends and uncertainties by segment, if appropriate to an understanding of the issuer as a whole, which would include disclosure of a segment's dependence on foreign operations.

204

We, therefore, propose to delete Item 101(d)(3).

205

We note that because these disclosures are located in the business section of the filing, while the corresponding disclosures are in the risk factors and management's discussion and analysis (“MD&A”) sections, their elimination gives rise to Disclosure Location—Prominence Considerations.

204

The proposed amendment to add a reference to “geographic areas” to Item 303(a), as discussed in section III.D.3, would also help ensure disclosure of a segment's dependence on foreign operations.

205

One commenter on the Disclosure Effectiveness Initiative observed that material disclosures about geographic areas would already be provided under Item 303 of Regulation S-K.

See

letter from CCMC (July 29, 2014).

Request for Comment

37. Would deletion of the requirements in Item 101(d)(3) affect, in any material respect, the usefulness of information that investors receive? If so, how?

13. Seasonality

Regulation S-K

206

and U.S. GAAP

207

both require disclosures about seasonality. As discussed below, we believe that these provisions in Instruction 5 to Item 303(b) (“Instruction 5”) and Item 101(c)(1)(v) require disclosures that convey reasonably similar information as the disclosures that result from compliance with U.S. GAAP and other parts of Regulation S-K, in combination.

206

See

Instruction 5 to Item 303(b) of Regulation S-K. This disclosure is required where the effect is material.

See

also Item 101(c)(1)(v) [17 CFR 229.101(c)(1)(v)] of Regulation S-K.

207

See

ASC 270-10-45-11.

a. Interim Disclosures

Instruction 5 and U.S. GAAP both require disclosures about seasonality in interim periods. Accordingly, we propose to delete Instruction 5. We note that because U.S. GAAP requires seasonality disclosures in the financial statements, whereas Instruction 5 requires disclosure in MD&A, its elimination gives rise to Disclosure Location—Prominence Considerations. With the proposed amendments, issuers may also be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to safe harbor protections under the PSLRA.

Request for Comment

38. Would the unavailability of the PSLRA safe harbor in this instance affect issuers or investors? If so, how? What disclosures, if any, are currently provided to voluntarily supplement the required disclosures above? Would issuers cease to provide these voluntary disclosures if we delete Instruction 5? If so, would such a change affect the information available to investors?

b. Annual Disclosures

Item 101(c)(1)(v) requires annual seasonality disclosure. Seasonality, by definition, relates to variations within annual periods, so the effects of seasonality are not evident in annual financial statements. We, therefore, believe that interim seasonality disclosures required under U.S. GAAP, as discussed above, are more useful to investors than annual seasonality disclosures.

Item 101(c)(1)(v), unlike U.S. GAAP, incrementally requires seasonality disclosure at the segment level, to the extent material to an understanding of the business as a whole. However, Item 303(b) of Regulation S-K requires disclosure of results of operations, liquidity, and capital resources in interim periods at the segment level, when appropriate to an understanding of the business.

208

Accordingly, we

believe Item 303(b), in conjunction with U.S. GAAP, would result in reasonably similar disclosures as Item 101(c)(1)(v) about the effects of seasonality on an issuer's financial statements at the segment level, if material and appropriate to an understanding of the business.

208

Specifically, Item 303(b) requires discussion of material changes in the items listed in Item 303(a).

Item 303(a) requires discussion at the reportable segment level where appropriate to an understanding of the business.

Based on the foregoing, we propose to delete Item 101(c)(1)(v). We note that because these disclosures are located in the business section and MD&A, while the corresponding disclosures are in MD&A and the notes to the financial statements, their elimination gives rise to Disclosure Location—Prominence Considerations. With the proposed amendments, issuers may also be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to safe harbor protections under the PSLRA.

Request for Comment

39. Would deletion of the requirements in Item 101(c)(1)(v) affect, in any material respect, the usefulness of information that investors receive? If so, how?

40. Would the unavailability of the PSLRA safe harbor in this instance affect issuers or investors? If so, how? What disclosures, if any, are currently provided to voluntarily supplement the required disclosures above? Would issuers cease to provide these voluntary disclosures if we delete Item 101(c)(1)(v)? If so, would such a change affect the information available to investors?

14. Research and Development Activities

a. Domestic Issuers

Regulation S-K requires disclosures, if material, of the amount spent on research and development activities for all years presented.

209

Although Regulation S-K uses terms that differ from U.S. GAAP,

210

we believe U.S. GAAP results in reasonably similar disclosures as this requirement.

209

See

Item 101(c)(1)(xi) of Regulation S-K for non-SRCs and Item 101(h)(4)(x) of Regulation S-K for SRCs. Item 101(c)(1)(xi) only requires this disclosure by non-SRCs if material.

210

See

ASC 730-10-50-1 and ASC 730-20-50-1.

First, Regulation S-K refers to the “amount spent,” while U.S. GAAP refers to “costs charged to expense” or “costs incurred.” We note, however, that the Regulation S-K adopting release used the term “expense” when discussing this requirement.

211

See Adoption of Disclosure Regulation and Amendments of Disclosure Forms and Rules,

Release No. 33-5893 (Dec. 23, 1977) [42 FR 65554].

Regulation S-K also uses the term “company-sponsored,” but U.S. GAAP does not. However, the Regulation S-K adopting release specified that the amount of company-sponsored research and development expenses to be disclosed should be determined in accordance with U.S. GAAP, suggesting no difference in scope was intended.

212

Id.

In addition, Regulation S-K refers to “customer-sponsored” research and development activities, while U.S. GAAP refers to “research and development performed on behalf of others.” Because U.S. GAAP is broader in its reference to all other parties, rather than only customers, the disclosures required by U.S. GAAP would encompass those required by Regulation S-K.

Further, Item 101(c)(1)(xi) only refers to customer-sponsored “research activities” rather than research

and

development activities. However, we do not believe this difference is substantive because Item 101(h)(4)(x) refers to “research and development activities” and it was intended to “parallel” Item 101(c)(1)(xi).

213

See Small Business Initiatives,

Release No. 33-6949, (Jul. 30, 1992) [57 FR 36442].

Based on the foregoing, we propose to delete Item 101(c)(1)(xi) of Regulation S-K and Item 101(h)(4)(x) of Regulation S-K. We note that because the Item 101(c)(1)(xi) disclosures are located in the business section of the filing, while the corresponding disclosures are in the notes to the financial statements, their elimination gives rise to Disclosure Location—Prominence Considerations. With the proposed amendments, issuers may also be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to safe harbor protections under the PSLRA.

Request for Comment

41. Would deletion of the requirements in Item 101(c)(1)(xi) and Item 101(h)(4)(x) affect, in any material respect, the usefulness of information that investors receive? If so, how?

42. Would the unavailability of the PSLRA safe harbor in this instance affect issuers or investors? If so, how? What disclosures, if any, are currently provided to voluntarily supplement the required disclosures above? Would issuers cease to provide these voluntary disclosures if we delete Item 101(c)(1)(xi) and Item 101(h)(4)(x)? If so, would such a change affect the information available to investors?

b. Foreign Private Issuers

Item 5.C of Form 20-F requires foreign private issuers to describe their research and development policies, where significant, and disclose the amount spent on company-sponsored research and development activities. We propose to delete the requirement to disclose the amount spent, as foreign private issuers are already required to disclose the amount of research and development expenses in the notes to the financial statements.

214

We note that, in certain circumstances, IFRS requires amounts spent on development be capitalized as an intangible asset, instead of expensed.

215

However, although Commission disclosure requirements use terms different from IFRS, for the same reasons discussed above about differences between Commission disclosure requirements and U.S. GAAP terminology, we believe IFRS results in reasonably similar disclosures as this requirement. We also note that because the Item 5.C disclosures are located in the operating and financial review and prospects section of Form 20-F, while the corresponding disclosures are in the notes to the financial statements, their elimination gives rise to Disclosure Location—Prominence Considerations. With the proposed amendments, issuers may also be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to safe harbor protections under the PSLRA.

214

Paragraph 126 of IAS 38,

Intangible Assets,

requires foreign private issuers that report under IFRS to disclose the aggregate amount of research and development expenses in the notes to their financial statements. Foreign private issuers that report under U.S. GAAP or Another Comprehensive Body of Accounting Principles with a reconciliation to U.S. GAAP are also required to disclose the amount of research and development expenses in the notes to their financial statements, as discussed above.

215

See paragraph 57 of IAS 38,

Intangible Assets.

Request for Comment

43. Does the requirement in Item 5.C of Form 20-F to disclose the amount spent on company-sponsored research and development activities result in reasonably similar disclosure as IFRS, which requires disclosure of research and development expense?

44. Would deletion of the above requirements in Item 5.C of Form 20-F affect, in any material respect, the

usefulness of information that investors receive? If so, how?

45. Would the unavailability of the PSLRA safe harbor in this instance affect issuers or investors? If so, how? What disclosures, if any, are currently provided to voluntarily supplement the required disclosures above? Would issuers cease to provide these voluntary disclosures if we delete the above requirement in Item 5.C of Form 20-F? If so, would such a change affect, in any material respect, the usefulness of the information that investors receive?

c. Regulation A Issuers

Form 1-A requires Regulation A issuers to disclose, if material, the amount spent on research and development activities for all years presented.

216

This requirement is based on the requirement in Regulation S-K. Accordingly, Regulation A issuers that report under either U.S. GAAP or IFRS will provide substantially the same information in the notes to their financial statements, as described above. We, therefore, propose to delete Item 7(a)(1)(iii) of Form 1-A. We note that because the Item 7(a)(1)(iii) disclosures are located in the business section of Form 1-A, while the corresponding disclosures are in the notes to the financial statements, their elimination gives rise to Disclosure Location—Prominence Considerations. With the proposed amendments, issuers may also be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to safe harbor protections under the PSLRA.

216

Item 7(a)(1)(iii) of Form 1-A.

Request for Comment

46. Would deletion of Item 7(a)(1)(iii) of Form 1-A affect, in any material respect, the usefulness of information that investors receive? If so, how?

47. Would the unavailability of the PSLRA safe harbor in this instance affect issuers or investors? If so, how? What disclosures, if any, are currently provided to voluntarily supplement the required disclosures above? Would issuers cease to provide these voluntary disclosures if we delete Item 7(a)(1)(iii) of Form 1-A? If so, would such a change affect, in any material respect, the usefulness of the information that investors receive?

15. Warrants, Rights, and Convertible Instruments

217

Please refer to the related discussion in section II.B.5.

Regulation S-K requires disclosure on Form S-1 or Form 10 of the amount of common equity subject to outstanding options, warrants, or convertible securities, when the class of common equity has no established United States public trading market.

218

U.S. GAAP more broadly requires disclosure of the terms of significant contracts to issue additional shares, the number of shares authorized for certain equity awards,

219

and, in the calculation of diluted earnings per share, the weighted-average incremental shares that would be issued from the assumed exercise or conversion of options, warrants, and convertible securities.

220

As such, we propose to delete Item 201(a)(2)(i) of Regulation S-K. We note that because Item 201(a)(2)(i) disclosures are located with related information about the potential dilution of equity for which there is no established United States public trading market, such as the amount of common equity that is being publicly offered which could have a material effect on the market price of the issuer's common equity, while the corresponding disclosures are in the notes to the financial statements, the proposed amendments give rise to Disclosure Location—Prominence Considerations.

218

17 CFR 229.201(a)(2)(i).

219

ASC 470-20-50, ASC 505-10-50-3, ASC 505-50-50-1, ASC 718-10-50-1, ASC 718-10-50-2, and ASC 815-40-50-5.

220

ASC 260-10-50. U.S. GAAP also requires disclosure of amounts not included in the calculation of diluted earnings per share because exercise or conversion of the securities would have had an antidilutive effect in the period. In aggregate, these amounts may be similar to, but not the same as, those required by Item 201(a)(2)(i) of Regulation S-K, as U.S. GAAP determines the incremental shares as a weighted average based on the period outstanding during the year and assumes that cash received from the assumed exercise or conversion is used to repurchase outstanding shares.

Request for Comment

48. Would deletion of Item 201(a)(2)(i) affect, in any material respect, the usefulness of information that investors receive? If so, how?

16. Dividends

Item 201(c)(1) of Regulation S-K

221

requires disclosure of the frequency and amount of cash dividends declared for the two most recent fiscal years and any subsequent interim period. Rule 3-04 of Regulation S-X requires annual disclosure of the amount of dividends per share and in the aggregate for each class of shares and changes in stockholders' equity for each period for which an income statement is required to be filed, but does not apply to interim periods. We propose to add requirements to Rule 8-03 and Rule 10-01 to mandate that Rule 3-04 be applied to interim periods. These proposed amendments would provide disclosure of the amount of dividends in interim periods, similar to Item 201(c)(1). In addition, the frequency of dividends would be evident from this disclosure.

222

221

17 CFR 229.201(c)(1).

222

These proposed amendments also address certain inconsistencies between Rule 3-04 of Regulation S-X [17 CFR 210.3-04] and U.S. GAAP and may create some additional burdens for issuers, as discussed in section V.B.5.

Based on the foregoing, we propose to delete the requirement in Item 201(c)(1) to disclose the frequency and amount of cash dividends declared. We also propose to delete the reference to dividends in Instruction 2 to Item 201 to conform to the deletion of Item 201(c)(1).

223

Three commenters on the Disclosure Effectiveness Initiative stated that the requirement to disclose the frequency and amount of dividends pursuant to Item 201(c)(1) are unnecessary and proposed its elimination.

See

letters from ABA (Mar. 6, 2015), CCMC (July 29, 2014), and Standards & Financial Market Integrity Division, CFA Institute (“CFA Institute”) (Nov. 12, 2014). One commenter on the Disclosure Effectiveness Initiative recommended more transparency in the disclosure of dividends, observing “[t]oo often these amounts are deliberately buried in financial statements that many small investors cannot read.”

See

letter from Rosann Balfour (Sept. 27, 2015).

Extending Rule 3-04 disclosures to interim periods may create some additional burden for issuers. However, we expect this burden would be minimal, as the required information is already available from the preparation of the interim financial statements.

224

In addition, we note that because disclosures required by Regulation S-K are located with related information about dividends and other stockholder matters, while the corresponding disclosures are in the notes to the financial statements, the proposed amendments give rise to Disclosure Location—Prominence Considerations. With the proposed amendments, issuers may also be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to safe harbor protections under the PSLRA.

224

Please refer to further discussion of the potential additional burden and request for comment in section V.B.5.

Request for Comment

49. Would deletion of Item 201(c)(1) affect, in any material respect, the

usefulness of information that investors receive? If so, how?

50. Would the unavailability of the PSLRA safe harbor in this instance affect issuers or investors? If so, how? What disclosures, if any, are currently provided to voluntarily supplement the required disclosures above? Would issuers cease to provide these voluntary disclosures if we delete Item 201(c)(1)? If so, would such a change affect the information available to investors?

17. Equity Compensation Plans

Regulation S-K prescribes the form and content for the disclosure of existing equity compensation plans with equity securities authorized for issuance.

225

This information is currently required in Part III of Form 10-K,

226

Item 11 of Form S-1, Item 9 of Form 10, and Item 10 of Schedule 14A.

227

In 2004, the FASB issued SFAS No. 123 (revised 2004),

Share-Based Payment

(“SFAS No. 123R”), which resulted in disclosures that overlap with Item 201(d).

228

225

See

Item 201(d) of Regulation S-K [17 CFR 229.201(d)].

226

There was previously uncertainty regarding whether this disclosure should appear both in Part II, Item 5 and Part III, Item 12 of Form 10-K. The staff of the Division Corporation Finance has provided guidance to clarify that the general reference to Item 201 of Regulation S-K in Part II, Item 5 does not include Item 201(d). Issuers therefore provide the Item 201(d) disclosure in response to Part III, Item 12, which specifically references Item 201(d).

See

Division of Corporation Finance CD&I 106.01 available at

http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm

. As with any staff guidance referenced in this release, the views of the staff are not rules or interpretations of the Commission. The Commission has neither approved nor disapproved the views of the staff.

227

17 CFR 240.14a-101. Item 1 of Schedule 14C [17 CFR 240.14c-101] also requires inclusion of the information that would have been provided in a Schedule 14A if proxies were being solicited even though consents are not being solicited by the information statement.

228

See

ASC 718-10-50-1 to 4. Additionally, ASC 505-50-50-1 requires similar disclosure when share based payments are made to non-employees.

Regulation S-K incrementally requires: (1) For options, warrants, or rights assumed in a business combination, disclosure of the number of securities to be issued upon exercise and the weighted-average exercise price

229

and (2) disclosure of any formula for calculating the number of securities available for issuance under the plan.

230

Item 201(d) further provides instructions about the aggregation of equity compensation plan disclosures. Although these requirements and instruments are not explicitly contained in U.S. GAAP, we believe that the U.S. GAAP requirement to provide disclosures to enable investors to understand the nature and terms of equity compensation arrangements and the potential effects of those arrangements on shareholders

231

would results in reasonably similar disclosures.

229

See

Instruction 5 to Item 201(d).

230

See

Instruction 8 to Item 201(d).

231

ASC 718-10-50-1a.

Regulation S-K also incrementally requires disaggregation of information between equity compensation plans approved by security holders and those not approved by security holders. The Commission adopted these requirements in 2001

232

before the major national securities exchanges required listed issuers to have, with limited exceptions, shareholder approved plans.

233

Because the major exchanges

234

now have such requirements, we believe disaggregation of the disclosures about the plans in this manner is no longer useful to investors.

235

232

See Disclosure of Equity Compensation Plan Information,

Release No. 33-8048 (Dec. 21, 2001) [67 FR 232], available at

https://www.sec.gov/rules/final/33-8048.htm

233

For example, the New York Stock Exchange (“NYSE”) listing standard does not require shareholder approval of employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain other specific types of plans.

See Self-Regulatory Organizations; New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc.; Order Approving NYSE and Nasdaq Proposed Rule Changes and Nasdaq Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to NYSE Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 Thereto Relating to Equity Compensation Plans,

Release No. 34-48108 (June 30, 2003).