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

Federal RegisterApr 20, 2020

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SECURITIES AND EXCHANGE COMMISSION

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

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

RIN 3235-AM12

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

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

DATES:

Effective date:

The final rules are effective on January 4, 2021.

Compliance dates:

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

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

The Commission is amending

Commission reference

CFR citation

(17 CFR)

Regulation S-X [17 CFR 210.1-01 through 210.13-02]:

Rule 3-10

210.3-10

Rule 3-16

210.3-16

Rule 8-01

210.8-01

Rule 8-03

210.8-03

Rule 10-01

210.10-01

Rule 13-01

210.13-01

Rule 13-02

210.13-02

Regulation S-K [17 CFR 229.10 through 229.1305]:

Item 504

229.504

Item 601

229.601

Item 1100

229.1100

Item 1112

229.1112

Item 1114

229.1114

Item 1115

229.1115

Securities Act of 1933 (Securities Act) [15 U.S.C. 77a

et seq.

Rule 257

230.257

Form F-1

239.31

Form F-3

239.33

Form 1-A

239.90

Form 1-K

239.91

Form 1-SA

239.92

Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. 78a

et seq.

Rule 12h-5

240.12h-5

Form 20-F

249.220f

Table of Contents

I. Introduction

A. Background

B. Scope of Proposals

II. Rule 3-10 of Regulation S-X

A. Background

B. Overview of the Existing Requirements

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

A. Overarching Principle

B. Overview of the Proposed and Final Amendments

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

1. Eligibility Conditions

a. Parent Company Financial Statements Condition

b. Consolidated Subsidiary Condition

c. Debt or Debt-Like Securities Condition

d. Eligible Issuer and Guarantor Structures Condition

2. Disclosure Requirements

a. Financial Disclosures

i. Level of Detail

ii. Presentation on a Combined Basis

iii. Periods to Present

b. Non-Financial Disclosures

c. When Disclosure Is Required

d. Location of Revised Alternative Disclosures and Audit Requirement

e. Recently Acquired Subsidiary Issuers and Guarantors

f. Continuous Reporting Obligation

D. Application of Amendments to Certain Types of Issuers

1. Foreign Private Issuers

2. Smaller Reporting Companies

3. Offerings pursuant to Regulation A

4. Issuers of Asset-Backed Securities—Third Party Financial Statements

IV. Rule 3-16 of Regulation S-X

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

A. Overarching Principle

B. Overview of the Proposed and Final Amendments

C. Financial Disclosures

1. Level of Detail

2. Presentation on a Combined Basis

3. Periods to Present

D. Non-Financial Disclosures

E. When Disclosure Is Required

F. Location of Disclosures and Audit Requirement

G. Recently Acquired Affiliates Whose Securities Are Pledged as Collateral

H. Application of Amendments to Certain Types of Issuers

1. Foreign Private Issuers

2. Smaller Reporting Companies

3. Offerings Pursuant to Regulation A

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

A. Transition to Final Amendments

B. Rule 3-16 Collateral Release Provisions

VII. Other Matters

VIII. Economic Analysis

A. Introduction

B. Baseline and Affected Parties

1. Market Participants

2. Market Conditions

C. Anticipated Economic Effects

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

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

b. Disclosure Requirements

i. Financial and Non-Financial Disclosures

ii. When Disclosure Is Required

iii. Location of Alternative Disclosures and Audit Requirement

iv. Recently Acquired Subsidiary Issuers and Guarantors

v. Continuous Reporting Obligation

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

a. Financial Disclosures

i. Level of Detail

ii. Presentation on a Combined Basis

iii. Periods to Present

b. Non-Financial Disclosures

c. When Disclosure Is Required

d. Location of Disclosures and Audit Requirement

e. Recently Acquired Affiliates Whose Securities Are Pledged as Collateral

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

E. Consideration of Reasonable Alternatives

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

2. Alternatives Common to Final Amendments to Existing Rule 3-10 and Existing Rule 3-16

IX. Paperwork Reduction Act

A. Background

B. Summary of Comment Letters

C. Summary of the Impact on Collections of Information

D. Burden and Cost Estimates to the Amendments

X. Final Regulatory Flexibility Act Analysis

A. Need for, and Objectives of, the Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Amendments

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

XI. Statutory Authority

I. Introduction

A. Background

On July 24, 2018, the Commission proposed changes to the disclosure requirements in Rules 3-10 and 3-16 of Regulation S-X to better align those requirements with the needs of investors and to simplify and streamline the disclosure obligations of registrants.

Rule 3-10 requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, but also provides several exceptions to that requirement. These exceptions are typically available for individual subsidiaries of a parent company

when the consolidated financial statements of that parent company are filed and certain conditions are met. Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral for any class of registered securities as if the affiliate were a separate registrant. The changes the Commission proposed included amending both rules and relocating part of Rule 3-10 and all of Rule 3-16 to new Rules 13-01 and 13-02 in Regulation S-X, respectively.

These proposed changes were intended to provide investors with the information that is material given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens to registrants. The proposal resulted from an ongoing, comprehensive evaluation of the Commission's disclosure requirements.

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

Release No. 33-10526 (July 24, 2018) [83 FR 49630 (Oct. 2, 2018)] (“Proposing Release”).

The identity of the parent company depends on the particular corporate structure.

See

Section II.C of the Proposing Release.

Proposed Rules 13-01 and 13-02 would contain financial and non-financial disclosure requirements for certain types of securities registered or being registered that, while material to investors, need not be included in the audited and unaudited financial statements in certain circumstances.

See

Sections III.C.2.c, “When Disclosure is Required” and V.E, “When Disclosure is Required,” below.

The staff, under its Disclosure Effectiveness Initiative, is reviewing the disclosure requirements in Regulations S-K and Regulation S-X and is considering ways to improve the disclosure regime for the benefit of both companies and investors. The goal is to comprehensively review the requirements and make recommendations on how to update them to facilitate timely, material disclosure by companies and shareholders' access to that information.

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

In general, commenters supported the proposed amendments. In certain instances, commenters opposed the proposed revisions and suggested modifications to the proposals.

See, e.g.,

letters from American Bar Association, Federal Regulation of Securities Committee and the Law Accounting Committee of the Business Law Section (“ABA”); Association of the Bar of the City of New York, Securities Regulation Committee (“NYC Bar”); Ball Corporation (“Ball Corp.”); BDO USA, LLP (“BDO”); Center for Audit Quality (“CAQ”); Comcast Corporation (“Comcast”); Council of Institutional Investors (“CII”); Cravath, Swaine & Moore LLP (“Cravath”); The Credit Roundtable (“Credit Roundtable”); Davis Polk & Wardwell LLP (“Davis Polk”); Debevoise & Plimpton LLP (“Debevoise”); Dell Technologies, Inc. (“Dell”); Deloitte & Touche LLP (“Deloitte”); Eaton Corporation plc (“Eaton Corp.”); Edison Electric Institute and American Gas Association (“EEI/AGA”); Ernst & Young LLP (“EY”); FedEx Corporation (“FedEx”); Financial Executives International (“FEI”); Freeport-McMoRan Inc. (“Freeport”); Grant Thornton LLP (“Grant Thornton”); KPMG LLP (“KPMG”); Medtronic plc (“Medtronic”); Nareit (“Nareit”); PricewaterhouseCoopers LLP (“PWC”); Securities Industry and Financial Markets Association (“SIFMA”); Shearman & Sterling LLP (“Shearman”); Simpson Thacher & Bartlett LLP (“Simpson Thacher”); Sullivan & Cromwell LLP (“Sullivan & Cromwell”); T-Mobile US, Inc. (“T-Mobile”); Willis Towers Watson plc (“WTW”); Windstream Holdings, Inc. (“Windstream”); and XBRL US, Inc. The public comments we received are available on our website at

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

We have reviewed and considered all of the comments that we received on the proposed amendments. The final rules reflect changes made in response to many of these comments. We discuss our revisions with respect to each proposed rule and amendment in more detail throughout this release.

B. Scope of Proposals

The Commission proposed changes to the disclosure requirements contained in Rules 3-10 and 3-16. These rules represent a discrete, but important, subset of the Regulation S-X disclosure requirements. Both rules affect disclosures made in connection with registered debt offerings

and subsequent periodic reporting.

In the Proposing Release, the Commission stated its belief that revising these rules would reduce the cost of compliance for registrants and encourage potential issuers to conduct registered debt offerings or private offerings with registration rights.

The proposed amendments were intended to benefit investors by simplifying and streamlining the disclosure provided to them about registered transactions and improving transparency in the market to the extent more offerings are registered.

In addition, the Commission noted that, if the proposed changes reduce the burden associated with providing guarantees or pledges of affiliate securities as collateral,

investors could benefit from access to more registered offerings that are structured to include such enhancements and, accordingly, the additional protections that come with Section 11 liability for disclosures made in those offerings.

In practice, pledges of affiliate securities as collateral are almost always for debt securities. However, the requirements of Rule 3-16 are applicable to any security registered or being registered, whether or not in the form of debt.

The proposed amendments would not have affected the presentation of registrants' consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) or International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board in registration statements and Exchange Act periodic reports, such as Form 10-K. The proposed amendments were focused on the supplemental information about subsidiary issuers and guarantors as well as affiliates whose securities are pledged as collateral.

See

Section I of the Proposing Release.

Based on analysis performed by staff from the Commission's Division of Economic and Risk Analysis, the registered debt market was approximately $1.1 trillion in 2018. In 2018, debt offerings under Securities Act Rule in 17 CFR 230.144A (“Rule 144A”) raised approximately $658 billion, based on staff analysis of data from the Mergent database. The dollar volume of registered debt and Rule 144A offerings generally appears to be higher in recent years (

i.e.,

2016, 2017, 2018) than in earlier years (

i.e.,

2013, 2014, 2015).

See

Section VIII.B.2, “Market Conditions.”

Currently, registrants often structure debt agreements to release affiliate securities pledged as collateral if the disclosure requirements of Rule 3-16 would be triggered, thereby depriving investors of that collateral protection.

See

additional discussion in Section VI.B “Rule 3-16 Collateral Release Provisions” below. In the Proposing Release, the Commission observed that registrants may cease structuring offerings to release such collateral if disclosure burdens would be reduced by the proposed amendments, which would benefit investors.

See

Section I.B of the Proposing Release.

15 U.S.C. 77k.

II. Rule 3-10 of Regulation S-X

A. Background

A guarantee of a debt or debt-like security (“debt security”)

is a separate

security under the Securities Act

and, as a result, offers and sales of these guarantees

must be either registered or exempt from registration. If the offer and sale is registered, the issuer of the debt security and the guarantor

must each file its own audited annual and unaudited interim

financial statements required by Regulation S-X. Additionally, the offer and sale of the securities pursuant to a Securities Act registration statement causes the issuer and guarantor to become subject to reporting under Section 15(d) of the Exchange Act.

Reporting under Section 15(d), among other things, requires filing periodic reports that must include audited annual and unaudited interim financial statements, for at least the fiscal year in which the related Securities Act registration statement became effective.

Rule 3-10 exceptions are available to issuers and guarantors of guaranteed securities that are “debt or debt-like.” In connection with amendments to Rule 3-10 in 2000 the Commission stated “[t]he characteristics that identify a guaranteed security as debt or debt-like for this purpose are: the issuer has a contractual obligation to pay a fixed sum at a fixed time; and where the obligation to make such payments is cumulative, a set amount of interest must be paid.”

Financial Statements and Periodic Reports for Related Issuers and Guarantors,

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

see also

Section II.H of the Proposing Release.

See

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

These securities, while separately identified in the Securities Act, are typically purchased by investors together with the related debt security and are held together while outstanding.

The issuer and guarantor structures contemplated by Rule 3-10 can comprise multiple issuers and multiple guarantors. For example, a parent can co-issue a security with one of its subsidiaries that several of its other subsidiaries guarantee.

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

See

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

The duty to file under Section 15(d) is automatically suspended as to any fiscal year, other than the fiscal year within which the registration statement became effective, if, at the beginning of such fiscal year, the securities of each class to which the registration statement relates are held of record by less than 300 persons.

See

Section 15(d)(1) of the Exchange Act.

When the Commission amended Rule 3-10 in 2000, it recognized that “[t]here are circumstances, however, where full Securities Act and Exchange Act disclosure by both the issuer and the guarantors may not be useful to an investment decision and, therefore, may not be necessary.”

Common examples are when: (1) A parent company offers its own securities that its subsidiary guarantees; and (2) a subsidiary offers securities that its parent company fully and unconditionally guarantees. In these and similar situations, in which a parent company and one or more of its subsidiaries serve as issuers and/or guarantors of guaranteed securities, we believe the disclosure requirements generally have been guided by an overarching principle: the consolidated financial statements of the parent company are the principal source of information for investors when evaluating the debt security and its guarantee together.

This principle is grounded in the idea that the investment is in the

consolidated

enterprise when: (1) The parent company is fully obligated as either issuer or full and unconditional guarantor of the security;

(2) the parent company controls each subsidiary issuer and guarantor, including having the ability to direct all debt-paying activities;

and (3) the financial information of each subsidiary issuer and guarantor is included as part of the consolidated financial statements of the parent company.

In these circumstances, we believe full Securities Act and Exchange Act financial disclosures for each subsidiary issuer and guarantor are generally not material for an investor to make an informed investment decision about a guaranteed security. Instead, we believe information included in the consolidated disclosures about the parent company, as supplemented with details about the issuers and guarantors, is sufficient. These disclosures help an investor understand how the consolidated entities within the enterprise support the obligation.

See

Section I of the 2000 Release.

Parent company consolidated financial statements must be filed in all instances where the omission of financial statements of subsidiary issuers and guarantors is permitted under existing Rule 3-10.

See

paragraph (4) in each of Rules 3-10(b) through (f).

Typically, all of a parent company's subsidiaries support the parent company's debt-paying ability. However, in the event of default, the holders of a debt security issued by a parent company are disadvantaged as compared to the direct creditors of any subsidiary not providing a guarantee because the holders can only make claims for payment directly against the issuer and any guarantors. In addition, in a bankruptcy proceeding, the assets of non-guarantor subsidiaries that are not issuers typically would be accessible only by the holder indirectly through the parent's equity interest. In such a proceeding, without a direct guarantee, the claims of the holder would be structurally subordinate to the claims of other creditors, including trade creditors of those subsidiaries.

Debt-paying activities typically include, but are not limited to, the use of the subsidiary issuer's and guarantor's assets and the timing and amount of distributions.

A parent company that prepares its financial statements in accordance with U.S. GAAP, would apply Accounting Standards Codification (“ASC”) 810,

Consolidation,

in determining whether to consolidate a subsidiary issuer or guarantor. A parent company that qualifies as a foreign private issuer and prepares its financial statements in accordance with IFRS would apply IFRS 10,

Consolidated Financial Statements.

B. Overview of the Existing Requirements

Rule 3-10(a) states the general rule that every issuer of a registered security that is guaranteed and every guarantor of a registered security must file the financial statements required for a registrant by Regulation S-X. The rule also sets forth five exceptions to this general rule.

Each exception specifies conditions that must be met, including, in each case, that the parent company provide certain disclosures (“Alternative Disclosures”).

If the conditions are met, separate financial statements of each qualifying subsidiary issuer and guarantor may be omitted from the Securities Act registration statement and subsequent Exchange Act reports. Only one of the five exceptions can apply to any particular offering and the subsequent Exchange Act reporting.

See

Rules 3-10(b) through (f) of Regulation S-X.

See

also Section II.F of the Proposing Release.

The Alternative Disclosures must be provided in the footnotes to the parent company's consolidated financial statements.

Two primary conditions, included in each of the exceptions, must be satisfied for a subsidiary issuer or guarantor to be eligible to omit its separate financial statements:

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

and

See

Section II.D of the Proposing Release.

• Each guarantee must be “full and unconditional.”

See

Section II.E of the Proposing Release.

The form and content of the Alternative Disclosures are determined based on the facts and circumstances and can range from a brief narrative

to highly detailed condensed consolidating financial information (“Consolidating Information”).

Subsidiary issuers and guarantors that are permitted to omit their separate financial statements under Rule 3-10 are also automatically exempt from Exchange Act reporting under Exchange Act Rule 12h-5. The parent company, however, must continue to provide the Alternative Disclosures for as long as the guaranteed securities are outstanding.

See

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

See

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

See

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

Recently acquired subsidiary issuers and guarantors are addressed separately within Rule 3-10. Rule 3-10(g)

requires the Securities Act registration statement of a parent company filed in connection with issuing guaranteed debt securities to include one year of audited, and, if applicable, unaudited interim pre-acquisition financial statements for recently acquired subsidiary issuers and guarantors that

are significant and have not been reflected in the parent company's audited results for at least nine months of the most recent fiscal year.

Rule 3-10(g) of Regulation S-X.

See

additional discussion in Section II.I of the Proposing Release.

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

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

A. Overarching Principle

The Commission proposed amendments to address the challenges posed by the current rules while continuing to adhere to the overarching principle upon which existing Rule 3-10 is based, namely, that investors in guaranteed debt securities rely primarily on the consolidated financial statements of the parent company and supplemental details about the subsidiary issuers and guarantors when making investment decisions.

A number of commenters agreed with this overarching principle.

Of these commenters, one asserted that this principle is particularly true when the parent company is fully obligated as either issuer or full and unconditional guarantor of the security; the parent company controls each subsidiary issuer and guarantor, including having the ability to direct all debt paying activities; and the financial information of each subsidiary issuer and guarantor is included as part of the consolidated financial statements of the parent company.

Another of these commenters asserted investors in guaranteed securities rely primarily on the consolidated financial statements of the parent company when making investment decisions, and that these investors need only supplemental details about subsidiary issuers and guarantors.

Other commenters noted that in addition to relying on the consolidated financial statements of the parent company, the key disclosure for investors in guaranteed securities is disclosure that enables them to evaluate the extent of their structural subordination risk.

According to these commenters, the principal value of subsidiary guarantees to investors is that the guarantees improve the investor's claim on the assets of the subsidiaries in the event of a default and therefore supplemental financial information for subsidiary guarantees should focus on factors impacting structural subordination, not the financial ability of any individual subsidiary guarantor to make payment under the guarantee.

See

discussion in Section II.A, “Background.”

See, e.g.,

letters from Ball Corp., Cravath, Davis Polk, Eaton Corp., EY, FEI, Freeport, Nareit, Shearman, and T-Mobile.

See

letter from Freeport.

See

letter from Eaton Corp.

See

letters from Cravath, Davis Polk and Shearman.

See

id.

B. Overview of the Proposed and Final Amendments

Under the proposed amendments, the rules would continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees (“Proposed Alternative Disclosures”). Proposed Rule 3-10 would provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. Proposed Rule 13-01 would specify the disclosure requirements for the accompanying Proposed Alternative Disclosures.

The proposed amendments would:

The disclosures specified in proposed Rule 13-01(a) would be required “[f]or each class of guaranteed security registered or being registered for which the registrant is the parent company (as that term is defined in § 210.3-10(b)(1)). . .” As a technical modification, final Rule 13-01(a) has been revised to require the disclosures specified therein “[f]or each guaranteed security subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and for each guaranteed security the offer and sale of which is being registered under the Securities Act of 1933, for which the registrant is the parent company (as that term is defined in § 210.3-10(b)(1)) of one or more subsidiaries that issue or guarantee the guaranteed security . . .”

• Replace the condition that a subsidiary issuer or guarantor be 100%-owned by the parent company with a condition that it be consolidated in the parent company's consolidated financial statements;

• Replace Consolidating Information with summarized financial information, as defined in 17 CFR 210.1-02(bb)(1)

(“Summarized Financial Information”), of the issuers and guarantors (together, “Obligor Group”), which may be presented on a combined basis, and reduce the number of periods presented;

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

• Expand the qualitative disclosures about the guarantees and the issuers and guarantors;

• Eliminate quantitative thresholds for disclosure and require disclosure of additional information that would be material to making an investment decision with respect to the guaranteed security;

• Permit the Proposed Alternative Disclosures to be provided outside the footnotes to the parent company's audited annual and unaudited interim consolidated financial statements in the registration statement covering the offer and sale of the subject securities and any related prospectus, and in certain Exchange Act reports filed thereafter;

• Require that the Proposed Alternative Disclosures be included in the footnotes to the parent company's consolidated financial statements for annual and quarterly reports beginning with the annual report for the fiscal year during which the first bona fide sale of the subject securities is completed;

• Eliminate the requirement to provide pre-acquisition financial statements of recently acquired subsidiary issuers and guarantors; and

• Require the Proposed Alternative Disclosures for as long as the issuers and guarantors have an Exchange Act reporting obligation with respect to the guaranteed securities rather than for so long as the guaranteed securities are outstanding.

The proposed amendments were intended to simplify and streamline the rule structure in several ways. Most significantly, under the proposed amendments there would be only a single set of eligibility criteria that would apply to all issuer and guarantor structures instead of separate sets of criteria in each of the five exceptions in existing Rules 3-10(b) through (f). Similarly, the requirements for the Proposed Alternative Disclosures would be included in a single location within proposed Rule 13-01, rather than spread among the multiple paragraphs of existing Rule 3-10. In the Proposing Release, the Commission expressed its belief that these changes would simplify the rule structure and facilitate compliance.

See

Section III of the Proposing Release.

After considering public comments, we are adopting these amendments substantially as proposed with certain modifications. Specifically, the final rule:

• Modifies the proposed requirement to disclose additional information that would be material to holders of the guaranteed security to be more specific by requiring disclosure of additional information about each guarantor that would be material for investors to evaluate the sufficiency of the guarantee, consistent with existing Rule 3-10;

• Permits the amended supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees (“Revised Alternative Disclosures”) to be provided outside the footnotes to the parent company's audited annual and unaudited interim consolidated financial statements in all cases rather

than only in the proposed circumstances;

• Eliminates the requirement to provide pre-acquisition financial statements of recently acquired subsidiary issuers and guarantors as proposed, but requires, in certain instances, pre-acquisition Summarized Financial Information about significant recently acquired subsidiary issuers and guarantors; and

• Reflects other modifications from the proposed amendments as described below.

The proposed and final amendments, along with our consideration of public comments, are discussed in detail below.

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

Under the proposed amendments, the financial statements of a subsidiary issuer or guarantor could be omitted if the eligibility conditions contained in proposed Rules 3-10(a) and 3-10(a)(1) are met and the Proposed Alternative Disclosures specified in proposed Rule 13-01 are provided in the filing, as required by proposed Rule 3-10(a)(2). As proposed, the eligibility conditions would be that:

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

• The subsidiary issuer or guarantor is a consolidated subsidiary of the parent company;

• The guaranteed security is debt or debt-like; and

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

○ The parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries; or

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

The proposed amendments, comments received, and final amendments to the eligibility conditions are described below.

1. Eligibility Conditions

a. Parent Company Financial Statements Condition

i. Proposed Amendments

Proposed Rule 3-10 would continue to require the filing of the parent company's consolidated financial statements. Additionally, under the proposed amendments, “parent company” would be defined as in the 2000 Release, with one change. The first two conditions would continue to be that the entity is: (1) An issuer or guarantor of the securities; and (2) an Exchange Act reporting company, or will become one as a result of the subject Securities Act registration statement. However, the third condition, that the entity owns, directly or indirectly, 100% of each subsidiary issuer and guarantor, would no longer be required for an entity to be considered the parent company.

Instead, the third condition would be that the entity consolidates each subsidiary issuer and guarantor in its consolidated financial statements.

For clarity, the definition of “parent company” would be included in proposed Rule 3-10(b)(1), stating that the parent company is the entity that meets the three aforementioned conditions.

See

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

See

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

The note to existing Rule 3-10(a)(2) states that “the financial statements of an entity that is not an issuer or guarantor of the registered security cannot be substituted for those of the parent company.” Because the definition of parent company was included in proposed Rule 3-10(b)(1), which states that the parent company must be an issuer or guarantor of the guaranteed security, the note to existing Rule 3-10(a)(2) was deemed unnecessary and excluded from the proposed rule.

ii. Comments on the Proposed Amendments

We received one comment on this aspect of the proposed amendments, which was supportive. The commenter specifically supported the proposed conforming revision to the definition of “parent company,” stipulating that the entity must consolidate each subsidiary issuer and guarantor in its consolidated financial statements.

See

letter from FEI.

iii. Final Amendments

We are adopting the amendments as proposed. The parent company's financial statements will continue to be required to be filed pursuant to amended Rule 3-10(a). Previously, a definition of “parent company” was set forth in the 2000 Release but was not included in existing Rule 3-10 itself. For clarity, and given the importance of appropriately identifying the issuer or guarantor that is the “parent company,” the revised definition has been included in amended Rule 3-10(b)(1). Due to the inclusion of this definition, as proposed, we have eliminated the note to existing Rule 3-10(a)(2).

b. Consolidated Subsidiary Condition

i. Proposed Amendments

Proposed Rule 3-10(a) would require the subsidiary issuer or guarantor to be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards already in use.

This proposed change would eliminate the distinction between subsidiaries in corporate form and those in other than corporate form, applying a consistent eligibility condition across entities. Also, certain subsidiary issuers and guarantors that are currently not eligible to omit their financial statements under existing Rule 3-10, such as consolidated subsidiary issuers or guarantors that have issued securities convertible into their own voting shares, would be eligible to omit their financial statements. The proposed amendments would instead require the parent company to provide disclosures that address the material risks, if any, associated with non-controlling interests in the subsidiary issuer or guarantor, including any risks arising from securities issued by the subsidiary that may be convertible into voting shares and may cause the percentage of non-controlling interest to increase, and to separately provide Summarized Financial Information attributable to those subsidiaries.

See supra

note 23.

Specifically, proposed Rule 13-01(a)(3) would require a description of any factors that may affect payments to holders of the guaranteed security, such as the rights of a non-controlling interest holder.

In addition, proposed Rule 13-01(a)(4) would require separate disclosure of Summarized Financial Information for subsidiary issuers and guarantors affected by those factors.

For example, if, through its ability to exercise significant influence

over a subsidiary guarantor, a non-controlling interest holder could materially affect payments to holders of the guaranteed security, the parent company would be required to disclose those factors and

the Summarized Financial Information attributable to that subsidiary guarantor.

See

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

See

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

See

ASC 323,

Investments—Equity Method and Joint Ventures.

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

ii. Comments on the Proposed Amendments

Comments were supportive of these proposals. Many commenters supported the proposed revisions to Rule 3-10 to require the subsidiary issuer or guarantor to be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards already in use.

One commenter indicated that the proposed requirement to describe any factors that may affect payments to holders of the guaranteed security would elicit the necessary material disclosures for a consolidated subsidiary issuer or guarantor that is less than 100%-owned.

See, e.g.,

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

See

letter from NYC Bar.

Several commenters asserted that the existing rule's 100%-owned requirement was overly restrictive

or burdensome.

One commenter indicated that the proposed condition that each issuer and guarantor be a consolidated subsidiary of the parent company would provide more flexibility to issuers.

Several commenters asserted that there is no practical difference between whether a subsidiary is 100%-owned or is consolidated when making an evaluation of the subsidiary's creditworthiness

and noted that, in either case, the minority equity interests are subordinated to the subsidiary's debt obligation.

See

letters from Comcast, Cravath, and Davis Polk.

See

letter from Nareit.

See

letter from NYC Bar.

See

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

See

letters from Cravath, Davis Polk, and Nareit.

iii. Final Amendments

We are adopting the amendments as proposed. Amended Rule 3-10(a) requires the subsidiary issuer or guarantor to be a consolidated subsidiary of the parent company as one condition of eligibility that must be met to omit the subsidiary issuer's or guarantor's financial statements. Additionally, a description of any factors that may affect payments to holders of the guaranteed security, such as the rights of a non-controlling interest holder, is required by Rule 13-01(a)(3),

and separate disclosure of Summarized Financial Information for the issuers and guarantors to which those factors apply is required by Rule 13-01(a)(4)(iv).

See

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

See

discussion in Section III.C.2.a.ii, “Presentation on a Combined Basis.” As described therein, in limited circumstances, a brief narrative is permitted in lieu of separate Summarized Financial Information of the affected issuers and guarantors.

Under the existing rule, we understand that a parent company with a consolidated but less than 100%-owned subsidiary generally would avoid designating that subsidiary as a guarantor of the debt in a registered offering, would issue registered debt without subsidiary guarantees, or would avoid registering the offering altogether due to the requirement to provide that subsidiary's separate financial statements. These choices may lead to a higher cost of capital and less protection for investors than if the subsidiary were designated as a guarantor.

For example, if an offering of guaranteed debt securities was conducted on a registered basis but the subsidiary was not added as a guarantor, the claims of a holder against the non-guarantor subsidiary may be structurally subordinate to the claims of other creditors.

See supra

note 21.

Consistent with the view expressed in the Proposing Release, we note that the existence of non-controlling interest holders generally does not alter the fundamental nature of the investment such that it should be evaluated similar to multiple investments in different issuers.

Specifically, we believe that where a parent company is obligated as an issuer or a full and unconditional guarantor of a guaranteed security and it controls and includes the subsidiary issuer(s) and guarantor(s) in its consolidated financial statements, there is sufficient financial unity between the parent company and the related subsidiary with respect to the guaranteed debt security such that the consolidated financial statements of that parent company and the Revised Alternative Disclosures would enable investors to evaluate and sufficiently assess the risks associated with an investment in such guaranteed debt security. We expect this change will cause more subsidiary issuers and guarantors to be eligible to omit their financial statements, while continuing to provide the information about subsidiary issuers and guarantors that investors need to make informed investment decisions. This change may also result in parent companies no longer omitting consolidated but less than 100%-owned subsidiaries as guarantors in registered offerings, possibly reducing the cost of capital.

See

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

We also note that the final amendments will require specific disclosure about any material factors that may affect payments to holders, including the rights of a non-controlling interest holder. This disclosure should more directly provide insight into any competing common equity interest in the assets or revenues of a subsidiary, in contrast to the indirect disclosure in the form of separate financial statements of the consolidated subsidiary issuer or guarantor that an investor receives under the existing rule. We also expect this change will reduce costs and burdens for consolidated but less than 100%-owned subsidiary issuers and guarantors, which are currently required to provide separate financial statements.

c. Debt or Debt-Like Securities Condition

i. Proposed Amendments

The exceptions in existing Rules 3-10(b) through (f) are available only to issuers and guarantors of debt securities.

Similarly, the proposed rule would be available only for issuers and guarantors of guaranteed debt and guaranteed preferred securities that have payment terms that are substantially the same as debt. In order to provide clarity, proposed Rule 3-10(a)(1) would state explicitly that the guaranteed security must be “debt or debt-like.”

See

Section II.H of the Proposing Release.

For additional clarity, proposed Rule 3-10(b)(2) would specify when a guaranteed security would be considered “debt or debt-like.” Consistent with the guidance provided in the 2000 Release,

a guaranteed security would be considered “debt or debt-like” under the proposed rule if:

See

Section III.A.4 of the 2000 Release.

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

• Where the obligation to make such payments is cumulative, a set amount of interest must be paid.

As is currently the case, the substance of the security's obligation would determine the availability of relief under Rule 3-10 rather than the form or title of the security. Accordingly, the proposed rule would clarify, consistent with the 2000 Release,

that:

See

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

• Neither the form of the security nor its title will determine whether a security is debt or debt-like. Instead, the substance of the obligation created by the security will be determinative; and

• The phrase “set amount of interest” is not intended to mean “fixed amount of interest.” Floating and adjustable rate securities, as well as indexed securities, may meet the criteria specified in paragraph (b)(2)(ii) as long as the

payment obligation is set in the debt instrument and can be determined from objective indices or other factors that are outside the discretion of the obligor.

ii. Comments on the Proposed Amendments

We received one comment supporting this aspect of the proposed amendments. The commenter supported the “debt or debt-like” condition in proposed Rule 3-10, stating that the proposed revision would be a useful modification to Rule 3-10.

See

letter from Sullivan & Cromwell.

iii. Final Amendments

We are adopting the amendments as proposed. Amended Rule 3-10(a)(1) requires that the guaranteed security must be “debt or debt-like,” and amended Rule 3-10(b)(2) specifies when a guaranteed security would be considered “debt or debt-like” as proposed.

d. Eligible Issuer and Guarantor Structures Condition

i. Proposed Amendments

The proposed amendments would simplify and streamline the existing rule by replacing the specific issuer and guarantor structures permitted under the five exceptions in existing Rules 3-10(b) through (f) with a broader two-category framework. Under this framework, an issuer and guarantor structure would be eligible if:

• The parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries;

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

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

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

Under the proposed amendments, the ability to provide the Proposed Alternative Disclosures in lieu of separate subsidiary issuer and guarantor financial statements would only be available when the parent company's obligation is full and unconditional. Accordingly, under the proposed rule, the parent company's role as issuer,

co-issuer,

or full and unconditional guarantor with respect to the guaranteed security

would determine whether the issuer and guarantor structure is eligible.

In a change from the existing exceptions, the status of subsidiary guarantors would not be specified in the proposed categories of eligible issuer and guarantor structures,

and subsidiary guarantees would no longer be required to be full and unconditional as a condition of eligibility.

Although one or more other subsidiaries of the parent company may, and the Commission expected often would, guarantee the security, in the Proposing Release, the Commission stated its belief that the eligibility of an issuer and guarantor structure should depend on the role of the parent company.

Accordingly, under the proposed amendments separate financial statements of consolidated subsidiary guarantors may be omitted for each eligible issuer and guarantor structure if the other conditions of proposed Rule 3-10 are met.

When acting as the sole issuer, the parent company would be fully and unconditionally obligated for the full amount of any scheduled payments when they come due.

When acting as a co-issuer with one or more of its consolidated subsidiaries, all co-issuers would be required to be jointly and severally liable under the security. This would obligate each of the parent company and its subsidiary co-issuers to all legal responsibilities of an issuer, including making scheduled payments on the security in full when they come due. The parent company would control each consolidated co-issuer, the financial information of the subsidiary co-issuer(s) would be reflected in the consolidated financial statements of the parent company, and the parent company would be fully and unconditionally obligated to make payments in full when due under the security.

Whether the parent company's guarantee is “full and unconditional” would be determined in the same manner as in existing Rule 3-10(h)(2) and section III.A.1.b of the 2000 Release, and would be included in proposed Rule 3-10(b)(3). The parent company would control each consolidated subsidiary issuer, the financial information of the subsidiary issuer(s) would be reflected in the consolidated financial statements of the parent company, and the parent company would be fully and unconditionally obligated to make payments in full when due under the guaranteed security.

Because the proposed amendments to Rule 3-10 do not focus on the role and nature of the subsidiary as a condition to eligibility, the proposed amendments would no longer require a subsidiary issuer or guarantor to be designated as a “finance subsidiary” in any particular circumstances. Likewise, the proposed amendments would remove the definition of “finance subsidiary” from the existing rule, since it is not otherwise used in Regulation S-X. Existing Rule 3-10(h)(8) defines an “operating subsidiary” to differentiate it from a “finance subsidiary.” Since the proposed amendments would remove the “finance subsidiary” distinction and definition, proposed Rule 3-10 likewise would no longer need to refer to or define “operating subsidiary.”

While not specified in the proposed eligible categories of issuer and guarantor structures, the role of subsidiary guarantors and their guarantees would, however, affect the required disclosure under the proposed rule. For example, the subsidiary guarantors would be required to be identified pursuant to proposed Rule 13-01(a)(1), and if factors exist that may affect payments to holders, such as factors affecting guarantee enforceability, disclosure of the factors would be required by proposed Rule 13-01(a)(3), to the extent material. Furthermore, proposed Rule 13-01(a)(4) would require separate disclosure of Summarized Financial Information applicable to subsidiary guarantors to which such factors apply, to the extent material.

One of the conditions a subsidiary guarantor must meet under the existing rule is that its guarantee must be full and unconditional. A subsidiary's guarantee may have the characteristics of a full and unconditional guarantee at its inception except that there may be contractual provisions permitting the subsidiary to be released from that guarantee under certain circumstances. Such release provisions could cause the subsidiary's guarantee to fail to meet the requirement that the guarantee be full and unconditional because the potential elimination of the guarantee is a condition beyond the issuer's failure to pay. Because the nature of the guarantee of a subsidiary guarantor does not affect whether the issuer and guarantor structure is eligible under the proposed rule, a subsidiary guarantee would no longer be required to be full and unconditional. As such, the existence of subsidiary guarantee release provisions would not prevent that subsidiary guarantor from omitting its financial statements. However, to the extent material, such release provisions would be required to be disclosed pursuant to proposed Rule 13-01(a)(2) and separate disclosure of Summarized Financial Information applicable to that subsidiary guarantor would be required by proposed Rule 13-01(a)(4).

See

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

ii. Comments on the Proposed Amendments

Comments on the proposals were generally supportive. Commenters generally supported the simplified and streamlined approach of the proposed amendments that replaced the specific issuer and guarantor structures permitted under the five exceptions in existing Rules 3-10(b) through (f) with a broader two-category framework of eligible issuer and guarantor structures.

One commenter suggested that an exemption to the required financial disclosures about guarantors should be permitted if the issuer of the debt is the parent company.

This commenter stated that, for registrants that issue securities only from the parent entity, the relevant financial information could be derived from the parent's consolidated financial statements.

See, e.g.,

letters from FEI and NYC Bar.

See

letter from Ball Corp.

Two commenters supported the proposed requirement that only the parent company's guarantee need be full and unconditional,

of which one stated that “disclosure of the limitations on the scope of the guarantee is more important to investors than providing separate financial statements of the issuer of a limited guarantee.”

This same commenter indicated that local law requirements in many foreign jurisdictions preclude the issuance of a guarantee that satisfies the Commission's definition of “full and unconditional,” and that historically, it

was rare for foreign subsidiaries to guarantee debt of domestic registrants due to potentially adverse tax consequences.

Another commenter asserted that the proposed amendments contemplate changing the definition of “full and unconditional” and recommended that, if such changes were adopted, the Commission provide guidance around the definition akin to what was provided in the 2000 Release.

See

letters from Cravath and FEI.

See

letter from Cravath.

See

letter from Cravath.

See

letter from Debevoise. The Proposing Release requested comment on the definition of “full and unconditional,” but the proposed rules would not change the definition. The Proposing Release states, “[f]or purposes of the proposed rule, whether the parent company's guarantee is `full and unconditional' would be determined in the same manner as in existing Rule 3-10(h)(2) and the 2000 Release.”

iii. Final Amendments

We are adopting the amendments substantially as proposed. Consistent with the proposal, the specific issuer and guarantor structures permitted under the five exceptions in existing Rules 3-10(b) through (f) will be replaced with the proposed two-category framework.

As shown in the table below, issuer and guarantor structures that currently fall under existing Rules 3-10(b), (c), or (d) align with the eligible categories in amended Rules 3-10(a)(1)(i) or (ii), depending on the role of the parent company as either co-issuer or full and unconditional guarantor of the guaranteed security. Issuer and guarantor structures that currently fall under existing Rules 3-10(e) or (f), wherein the parent company is the sole issuer of the guaranteed security, align with the first category in amended Rule 3-10(a)(1)(i).

Existing rule

Amended rule

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

Rule 3-10(a)(1)(i), if the subsidiary co-issued the security, jointly and severally, with its parent.

Rule 3-10(a)(1)(ii), if the subsidiary issued the security that is fully and unconditionally guaranteed by its parent.

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

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

Under the amended rules, the ability to provide the Revised Alternative Disclosures in lieu of separate subsidiary issuer and guarantor financial statements is only available when the parent company's obligation is full and unconditional.

We are not adopting one commenter's suggestion to permit the omission of the required financial disclosures about guarantors if the issuer of the debt is the parent company.

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

we believe the financial information about the Obligor Group included in the Revised Alternative Disclosures is an important supplement to the consolidated financial statements of the parent company for investors when making investment decisions about guaranteed debt securities. Therefore, providing the Revised Alternative Disclosures is a condition that must be met to permit the omission of a subsidiary issuer's or guarantor's financial statements.

See

letter from Ball.

See

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

Consistent with the proposed rule, the status of subsidiary guarantors is not specified in the categories of eligible issuer and guarantor structures in the final rule. Although one or more other subsidiaries of the parent company may, and we expect often would, guarantee the security, the eligibility of an issuer and guarantor structure depends on the role of the parent company as issuer, co-issuer, or full and unconditional guarantor with respect to the guaranteed security. Separate financial statements of consolidated subsidiary guarantors may be omitted for each issuer and guarantor structure that is eligible if the other conditions of amended Rule 3-10 are met. Despite not affecting whether that issuer and guarantor structure is eligible, the role of subsidiary guarantors in an issuer and guarantor structure and their guarantees do affect what disclosure is required. In this regard, the subsidiary guarantors are required to be identified pursuant to Rule 13-01(a)(1), and disclosure of the terms and conditions of the guarantees is required by Rule 13-01(a)(2),

which includes but is not limited to any limitations and conditions of a subsidiary's guarantee, whether the guarantee is joint and several with other guarantees, and any guarantee release provisions. Further, separate disclosure of Summarized Financial Information applicable to subsidiary guarantors to which such disclosures apply is required by Rule 13-01(a)(4)(iv).

See

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

See

discussion in Section III.C.2.ii, “Presentation on a Combined Basis.” In limited circumstances, a brief narrative is permitted in lieu of separate Summarized Financial Information of the affected guarantors.

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

used to issue a debt security guaranteed by the parent company

will be addressed by amended Rule 3-10(a)(1)(ii) or, if the security were to be co-issued, jointly and severally, with its parent, amended Rule 3-10(a)(1)(i) will apply. Also as proposed, the final rule will no longer require a subsidiary issuer or guarantor to be designated as a “finance subsidiary” for purposes of determining whether the issuer and guarantor structure is eligible.

Consistent with the proposed amendments, the final rule also eliminates the “operating subsidiary” definition in existing Rule 3-10(h)(8).

Under existing Rule 3-10(h)(7) of Regulation S-X, “[a] subsidiary is a finance subsidiary if it has no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company.”

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

See

Section II.F of the Proposing Release.

As proposed, the “finance subsidiary” definition at existing Rule 3-10(h)(7) would have been eliminated. However, as described below, the final rule specifies certain circumstances involving a “finance subsidiary” when we believe the required supplemental financial information is not material to an investment decision and may be omitted. As part of this change, an amended definition of “finance subsidiary” has been incorporated in the note to new Rule 13-01(a)(4)(vi)(C) and (D).

See

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

2. Disclosure Requirements

Under existing Rule 3-10, one of the conditions to omitting separate financial statements of a subsidiary issuer or guarantor is providing the Alternative Disclosures in the footnotes to the parent company's consolidated financial statements. The Commission proposed to retain the requirement to provide Alternative Disclosures, with

modifications, as it believed the disclosures are an important supplement to the consolidated parent company disclosures. If the eligibility conditions in proposed Rule 3-10(a) introductory text and (a)(1) are satisfied, a parent company would be required to include the Proposed Alternative Disclosures specified in proposed Rule 13-01 in the relevant filing, but could omit the separate financial statements of subsidiary issuers and guarantors.

The proposed amendments would streamline and simplify the rule by including the Proposed Alternative Disclosures in a single location within proposed Rule 13-01 rather than having such requirements in multiple paragraphs. The proposed amendments, comments received, and final amendments to the disclosure requirements are described below.

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

a. Financial Disclosures

As discussed below,

the financial disclosure requirements in proposed Rule 13-01 were tailored to the type of material information, in addition to the parent company's consolidated financial statements, that the Commission believed investors in registered offerings need to make informed investment decisions about guaranteed debt securities. Under the proposed revisions, registrants would:

See

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

• Be required to provide Summarized Financial Information rather than Consolidating Information;

• Be required to provide disclosure about the Obligor Group without financial information of non-obligated entities (financial information of each issuer and guarantor could generally be combined into a single column); and

• Be permitted to reduce the number of periods presented.

As a result of the proposed revisions, the instructions for preparing Consolidating Information in existing Rule 3-10(i) would be eliminated.

As a result of the adoption of the proposed financial disclosures as described below, which replace Consolidating Information, the final rule eliminates the instructions in existing Rule 3-10(i).

i. Level of Detail

(A) Proposed Amendments

Unless a brief narrative is permitted, existing Rule 3-10 requires Consolidating Information, which includes all major captions of the balance sheet, income statement, and cash flow statement that Article 10 (Rule 10-01) of Regulation S-X

requires to be shown separately in interim financial statements. The proposed amendments were based on requiring supplemental financial information about issuers and guarantors that would be focused on the information that the Commission believed is most likely to be material to an investment decision. Proposed Rule 13-01(a)(4) would therefore require Summarized Financial Information, which would include select balance sheet and income statement line items. Disclosure of additional line items of financial information beyond what is specified in proposed Rule 13-01(a)(4) would have been required by proposed Rule 13-01(a)(5), to the extent they are material to an investment decision.

17 CFR 210.10-01.

While investors are provided cash flow information at the parent company consolidated level, supplemental cash flow information about subsidiary issuers and guarantors would not be a required disclosure under the proposed rule.

(B) Comments on the Proposed Amendments

Comments on the proposed amendments were generally supportive. Many commenters supported the proposal to replace Consolidating Information with Summarized Financial Information, as defined in Rule 1-02(bb)(1) of Regulation S-X.

Some commenters asserted that providing Summarized Financial Information rather than Consolidating Information would reduce disclosure burdens

while continuing to provide investors with material information to make an informed investment decision.

See, e.g.,

letters from Ball Corp., Comcast, Davis Polk, Dell, Eaton Corp., EEI/AGA, EY, FedEx, FEI, Freeport, KPMG, Medtronic, Nareit, NYC Bar, Sullivan & Cromwell, T-Mobile, and WTW.

See, e.g.,

letters from Ball Corp., Eaton Corp., EY, FEI, Freeport, KPMG, NYC Bar, Sullivan & Cromwell, and T-Mobile.

See, e.g.,

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

Some commenters noted that many issuers' information systems are not normally designed to provide the level of detail currently required by Rule 3-10, which, according to these commenters, makes complying with the rule burdensome.

Some commenters stated that investors have expressed little interest in the detailed disclosures required by existing Rule 3-10.

See

letters from Dell, FEI, and Freeport.

See, e.g.,

letters from Ball Corp., Freeport, Windstream, and WTW.

A number of commenters stated that the proposal to require only Summarized Financial Information rather than Consolidating Information was an improvement, but recommended that the final rules should permit registrants to provide even less disclosure.

In this regard, a few commenters noted that Rule 144A offerings

may include less disclosure than what is required in Summarized Financial Information.

Some commenters suggested that registrants should be allowed to provide only balance sheet information because balance sheet information should be sufficient disclosure for investors to make an informed investment decision.

One commenter contended that guarantor revenues, guarantor operating income (or a similar metric), and assets and liabilities of the issuer and guarantors were the most useful disclosures for making an investment decision and stated that these disclosures are what typically is provided in Rule 144A offerings.

See, e.g.,

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

The majority of private debt offerings are conducted using Rule 144A, and 99% of Rule 144A offerings are debt offerings. Additionally, although most Regulation D offerings are equity offerings, a significant number include debt securities.

See

U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis,

Access to Capital and Market Liquidity

96 (Aug. 2017) (“

Access to Capital and Market Liquidity Report”

), available at

https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf,

at p. 38; Scott Bauguess

et al.,

U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis,

Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014

(Oct. 2015), available at

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

See, e.g.,

letters from Davis Polk, Eaton Corp., and NYC Bar.

See, e.g.,

letters from Comcast, Eaton Corp., FEI, and Medtronic.

See

letter from T-Mobile.

Several commenters recommended other modifications to the proposed amendments. One commenter suggested that Summarized Financial Information may be too condensed and asserted that users of financial statements would be better informed if balance sheet and income statement information similar to the level of detail specified in Rule 10-01 of Regulation S-X were provided.

Another commenter recommended requiring disclosure of investments held by the Obligor Group in non-obligated subsidiaries; intercompany or related-party transactions between the obligated and non-obligated groups; and whether the obligated group includes variable interest entities, which should cross-reference the relevant disclosures in the consolidated financial statements.

100

Another commenter stated that “related party transactions with [other subsidiaries] is an example of additional information that may be material to

investor decisions, and thus may require disclosure.”

101

This commenter also stated that it would be even more meaningful to simply exclude such balances and transactions altogether. One commenter suggested that the Commission should consider whether requiring separate disclosure of the amounts in each caption of the combined Summarized Financial Information related to the non-obligated entities would enhance the usefulness of the information.

102

This commenter also suggested that the Commission consider whether using different measures, such as operating income, instead of, or in addition to, net income would provide valuable information to investors.

See

letter from PWC.

100

See

letter from EY.

101

See

letter from FEI.

102

See

letter from Deloitte.

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

103

stating that such disclosures would be consistent with information provided in Rule 144A offerings or high yield Rule 144A offerings.

104

One of these commenters suggested requiring disclosure of debt and other liabilities of the non-guarantor subsidiaries and that any profitability metrics about the obligated entities (or non-obligated subsidiaries) should be capital-structure neutral by excluding interest expense.

105

Another commenter suggested only requiring disclosure of revenue, operating income, assets and liabilities of the non-guarantors as a group.

106

This commenter suggested permitting the financial disclosures to be of the non-guarantors as a group, rather than requiring such disclosure of the Obligor Group. Yet another commenter suggested that the Commission require disclosure of a metric of earnings of the non-guarantors, which the issuer should be able to choose, as well as the assets and liabilities of the non-guarantors as a single group.

107

One commenter recommended that the Commission consider requiring registrants to evaluate and disclose information in their Management Discussion and Analysis (“MD&A”) section with respect to known trends and uncertainties that have had or are reasonably expected to have a material impact on the results and operations or capital resources of the Obligor Group and other issuers and guarantors whose information is required to be presented separately.

108

103

See

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

104

See

letters from Davis Polk, NYC Bar, and Shearman. Two of these commenters stated that their recommendations for required disclosures were based on the information they believe allows investors to evaluate structural subordination.

See

letters from Davis Polk and Shearman.

105

See

letter from Shearman. This commenter asserted that, in default, the levered equity value of the obligors is irrelevant because the capital structure will be readjusted through a reorganization or liquidation, and that where profitability metrics are included in Rule 144A offering documents, they generally consist of operating income or earnings before interest, taxes, depreciation, and amortization (“EBITDA”), each excluding interest expense. This commenter further stated that in contrast with these measures, the proposed Summarized Financial Information would consist of income from continuing operations and net income, both of which include interest expense allocated within the corporate group under the pre-default capital structure.

106

See

letter from NYC Bar.

107

See

letter from Davis Polk.

108

See

letter from Grant Thornton.

One commenter contended that holders of debt securities are expected to be interested in debt service and may need cash flow information for the Obligor Group and recommended that the Commission consider input from investors with respect to the need for summarized cash flow information.

109

Other commenters, however, stated that supplemental cash flow information should not be required.

110

Some of these commenters asserted such information would not be meaningful information as investors look primarily to the parent company's consolidated cash flow

111

and that preparing this disclosure would be costly.

112

109

See

letter from Grant Thornton.

110

See, e.g.,

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

111

See

letters from Sullivan & Cromwell and T-Mobile.

112

See

letter from Eaton Corp.

One commenter advocated that the Commission consider replacing the parent company-only condensed financial statements required by 17 CFR 210.5-04 (“Rule 5-04 of Regulation S-X”) and 210.12-04 (“Rule 12-04 of Regulation S-X”) with parent-only summarized financial information when there is a specified level of restriction on an issuer's subsidiaries' ability to transfer funds to the parent.

113

See

letter from BDO. This recommendation would affect situations beyond disclosures about issuers and guarantors of guaranteed securities and is beyond the scope of the amendments considered herein.

We are adopting the amendments in substantially the form proposed, but with modifications in response to comments received. As adopted, Rule 13-01(a)(4) will require disclosure of Summarized Financial Information for each issuer and guarantor. As described above, some commenters suggested requiring different or more limited information than what is required by Summarized Financial Information, or balance sheet only information, whereas one commenter recommended more detailed information. However, many other commenters supported the use of Summarized Financial Information, and we believe the select balance sheet and income statement line items it requires are focused on the information that is most likely to be material to an investment decision. Under the final amendments, disclosure of additional line items of financial information beyond the line items specified in Summarized Financial Information is required if necessary to comply with Rule 13-01(a)(6) and (7).

114

For example, if substantially all of the obligated entities' non-current assets consisted of goodwill, separate presentation of goodwill from non-current assets would be required if the parent company concludes such disclosure would be material for investors to evaluate the sufficiency of the guarantee. We agree with several commenters that requiring Summarized Financial Information would simplify compliance and reduce costs for preparers, while providing investors with more streamlined and easier to understand financial information that is material to an investment decision. We recognize that some of this information may go beyond what some commenters assert is typically provided in Rule 144A debt offerings, but we believe this is appropriate in light of the broader range of potential investors that may participate in a registered offering.

114

Proposed Rule 13-01(a)(1) through (4) set forth proposed requirements to disclose specific financial and non-financial information. Proposed Rule 13-01(a)(5), which would have required disclosure of “any other quantitative or qualitative information that would be material to making an investment decision with respect to the guaranteed security,” was included to require disclosure about the obligated entities and the guarantees that would be material but was not otherwise already required by the specified proposed financial and non-financial disclosures. Instead of proposed Rule 13-01(a)(5), the final amendments include Rules 13-01(a)(6) and (7), which require disclosure of “[a]ny financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee,” and “[s]ufficient information so as to make the financial and non-financial information presented not misleading,” respectively.

See

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

The Proposing Release included an example of when incremental disclosure of related party revenues would be required under the proposed rule.

115

Specifically, if a material amount of reported revenues of the obligated entities were derived from transactions with related parties, such as non-issuer and non-guarantor subsidiaries of the

parent company, separate disclosure of those amounts would be necessary. Instead of including this as an example of when disclosure would be required under Rule 13-01(a)(6) and (7), we agree with those commenters that recommended including a requirement to separately disclose an issuer's or guarantor's balance sheet and income statement amounts related to non-obligated subsidiaries.

116

Accordingly, as adopted, Rule 13-01(a)(4)(iii) requires an issuer's or guarantor's amounts due from, amounts due to, and transactions with non-obligated subsidiaries and related parties to be presented in separate line items, to the extent material.

117

We believe that clearly establishing this expectation as a stated requirement will assist in the preparation of the disclosures and provide material information to investors, and agree with one commenter that such separate disclosure enhances the transparency of the Summarized Financial Information presented.

118

115

See

Section III.C.2.a.i of the Proposing Release. Such disclosure would have been required by proposed Rule 13-01(a)(5).

116

In recommending separate disclosure of these amounts, one commenter cited enhancement of the transparency of Summarized Financial Information related to the Obligor Group (

See

letter from EY), and another cited enhanced usefulness (

See

letter from Deloitte). Given that a guarantor's transactions with a related party may not be conducted on an arm's length basis, we agree it could be useful to highlight such transactions for investors by requiring presentation of such information in a separate line item.

117

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

See

letter from EY. Based on the nature of these items, and to drive consistency in the disclosures between parent companies, Rule 13-01(a)(4)(iii) requires the amounts to be in separate line items.

118

See

letter from EY.

Unlike Consolidating Information, Summarized Financial Information does not include cash flow statement information. As described above, of the commenters that specifically discussed supplemental cash flow information, several supported not requiring such information,

119

while one suggested considering input from investors.

120

Similar to some commenters, we believe investors in a registered offering look primarily to a parent company's consolidated cash flow information to assess creditworthiness where the parent is the primary obligor or its guarantor obligation is full and unconditional,

121

and we heard no feedback from investors suggesting otherwise. As such, final Rule 13-01 does not require supplemental cash flow information of the obligated entities.

119

See, e.g.,

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

120

See

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

121

See, e.g.,

letters from Eaton and T-Mobile.

Lastly, certain of the proposed amendments would have each required additional disclosure regarding their basis of presentation.

122

Rather than including multiple separate requirements to explain the basis of presentation for individual disclosure requirements, final Rule 13-01(a)(4) includes a requirement to briefly describe the basis of presentation applicable to each of the required financial disclosures therein. In addition to simplifying the final rule, we believe this requirement will better inform users about the form and content of the disclosures provided pursuant to final Rule 13-01(a)(4).

123

We believe such disclosure enhances the understandability of the financial information provided.

122

For example, proposed Rule 13-01(a)(4) would have required disclosure of “[t]he method selected to present investments in subsidiaries that are not issuers or guarantors . . .” to inform investors about the basis of presentation of the financial information of the Obligor Group. Two commenters supported this disclosure requirement.

See

letters from CAQ and Deloitte. Instead of this proposed requirement, final Rule 13-01(a)(4)(iii) requires the financial information of non-issuer and non-guarantor subsidiaries to be completely excluded.

See

discussion in Section III.2.a.ii.(C), “Presentation on a Combined Basis,” below. Rather than including a separate requirement within final Rule 13-01(a)(4)(iii) to disclose that financial information of non-issuer and non-guarantor subsidiaries was excluded, such disclosure will be required pursuant to the new requirement to describe the basis of presentation of the financial information presented under final Rule 13-01(a)(4).

123

Such disclosure could state, for example, that the financial information presented is that of the issuers and guarantors of the guaranteed security, and that the financial information of non-issuer and non-guarantor subsidiaries has been excluded. If applicable, the disclosure could also state, for example: That the financial information of issuers and guarantors is presented on a combined basis; intercompany balances and transactions between issuers and guarantors have been eliminated; that the issuer's or guarantor's amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries and related parties have been presented in separate line items; and that financial information of certain identified subsidiary issuers and guarantors has been presented separately due to disclosed facts and circumstances applicable to those subsidiaries (as required by Rule 13-01(a)(4)(iv)).

ii. Presentation on a Combined Basis

(A) Proposed Amendments

The proposed rule would permit the parent company to present the Summarized Financial Information of the parent company issuer or guarantor, each consolidated subsidiary issuer, and each consolidated subsidiary guarantor, on a combined basis. Proposed Rule 13-01(a)(4) would require intercompany transactions between issuers and guarantors presented on a combined basis to be eliminated.

The proposed rule took into consideration that there may be circumstances in which separate financial information about certain issuers and guarantors is material to an investment decision. Accordingly, when information provided in response to proposed Rule 13-01 is applicable to one or more, but not all, issuers and guarantors, proposed Rule 13-01(a)(4) would require, to the extent it is material, separate disclosure of Summarized Financial Information for the issuers and guarantors to which the information applies. For example, if a subsidiary's guarantee were limited to a particular dollar amount, disclosure of that limitation would be required by proposed Rule 13-01(a)(2). In that case, separate disclosure of the Summarized Financial Information specified in proposed Rule 13-01(a)(4) would be required for that subsidiary guarantor.

The proposed rule would no longer require separate disclosure of the financial information of non-guarantor subsidiaries. Because non-guarantor subsidiaries are not obligated to make payments as either issuer or guarantor, the proposed rule assumed separate supplemental disclosure of their financial information as required under the existing rule is not likely to be material to an investment decision.

In order to present the assets, liabilities, and operations of the Obligor Group accurately, it is necessary to exclude the financial information of subsidiaries not obligated under the guaranteed security. Proposed Rule 13-01(a)(4) would continue to exclude the financial information of non-issuer and non-guarantor subsidiaries from the Summarized Financial Information of the Obligor Group, even if those non-issuer and non-guarantor subsidiaries would be consolidated by an issuer or guarantor. However, the proposed rule would have allowed the parent company to determine which method best meets the objective of excluding the financial information of non-issuer and non-guarantor subsidiaries from the Proposed Alternative Disclosures, so long as the selected method was disclosed and was used for all non-issuer and non-guarantor subsidiaries for all classes of guaranteed securities for which the disclosure was required, and was reasonable in the circumstances.

124

For example, the

parent company could have excluded the assets, liabilities, and operations of non-issuer and non-guarantor subsidiaries by using the equity method of accounting for those subsidiaries.

124

This proposed amendment might have resulted in decreased comparability in the combined Summarized Financial Information of the Obligor Group between parent companies that elect to use different methods of excluding the financial information of their non-issuer and non-guarantor subsidiaries. In proposing this change, the Commission considered the costs to the parent

company of requiring the use of a specific method of accounting for non-issuer and non-guarantor subsidiaries to remove their financial information from the combined Obligor Group, particularly if that parent company's systems are not designed to readily produce such information. The Commission expected any decrease of comparability to be limited, as most line items required to be disclosed in Summarized Financial Information would be unaffected by the use of different methods for this purpose (

e.g.,

current assets, current liabilities, net sales or gross revenues and gross profit).

(B) Comments on the Proposed Amendments

Comments were supportive of this aspect of the proposal. Many commenters generally supported permitting Summarized Financial Information of each issuer and guarantor that is consolidated in the parent company's consolidated financial statements to be presented on a combined basis with the parent company's Summarized Financial Information.

125

Some of these commenters indicated that providing this information on a combined basis would continue to provide investors with material information for making an informed investment decision,

126

while also reducing a burdensome requirement for issuers.

127

One commenter supported streamlining the disclosures, but asserted that the proposed amendments would likely only benefit a small number of issuers.

128

This commenter noted that the proposed amendments could lead to complexities and unintended consequences in presenting the Summarized Financial Information as proposed, regardless of the method of accounting selected.

129

Another commenter noted that, although such a combined presentation might provide some useful information when the guarantors are single-tiered operating companies with no subsidiaries, the accounting presentation becomes less meaningful when the guarantors are holding companies.

130

125

See, e.g.,

letters from ABA, Davis Polk, Dell, Eaton Corp., FedEx, FEI, KPMG, Medtronic, Nareit, NYC Bar, PWC, and Sullivan & Cromwell.

126

See

letters from Dell, FedEx, and Sullivan & Cromwell.

127

See

letters from Davis Polk, KPMG, and Sullivan & Cromwell.

128

See

letter from KPMG.

129

See

letter from KPMG. This commenter stated, as an example, that registrants may not experience a reduction in burdens in preparing guarantor disclosures that exclude the non-obligor group either using the equity method, cost method, or excluding the non-obligated subsidiaries entirely, when a registrant must account for the non-obligor subsidiaries for consolidation purposes.

130

See

letter from Comcast.

A few commenters recommended requiring disclosure only of the non-guarantor subsidiaries,

131

and another commenter recommended requiring certain balance sheet information about the non-guarantor subsidiaries and profitability metrics about the Obligor Group or the non-guarantor subsidiaries.

132

These commenters stated that such disclosures

133

would be consistent with the information provided in Rule 144A offerings

134

or high yield Rule 144A offerings.

135

131

See

letters from Davis Polk and NYC Bar.

132

See

letter from Shearman.

133

Two of these commenters stated their recommendations for required disclosures were based on the information they believe allows investors to evaluate structural subordination.

See

letters from Davis Polk and Shearman.

134

See

letters from Davis Polk and NYC Bar.

135

See

letter from Shearman.

In response to the Commission's request for comment on whether the proposed amendments should specify an accounting method (

e.g.,

the equity method) that must be used to exclude the financial information of non-obligated subsidiaries from the Summarized Financial Information of the Obligor Group, some commenters recommended that the Commission specify acceptable accounting methods in the rule.

136

See, e.g.,

letters from BDO, Deloitte and PWC. One of these commenters stated that questions may arise from the proposed flexibility in the method of excluding non-issuer and non-guarantor information, as the proposed amendments do not address the option to fully exclude investments in non-issuer and non-guarantor subsidiaries from the summarized financial information of the Obligor Group, and that providing a list of acceptable methods would indicate whether complete exclusion is an acceptable option.

See

letter from BDO. Another commenter stated that the Commission should consider specifically identifying and describing the acceptable methods of exclusion if the final rule permits the use of methods other than those based on existing U.S. GAAP principles.

See

letter from Deloitte.

Some commenters agreed with the proposed rule permitting the parent company to determine which method to use in excluding the financial information of non-issuer and non-guarantor subsidiaries.

137

A few commenters supported the requirement to disclose and/or apply consistently the selected method.

138

137

See, e.g.,

letters from ABA, Dell, Eaton Corp., EY, Grant, and PWC.

138

See

letters from CAQ and Deloitte.

Several commenters recommended modifications to the proposed amendments. A few commenters recommended that the Commission allow issuers to use only certain prescribed accounting methods, including those consistent with U.S. GAAP

139

or IFRS,

140

those permitted under the accounting framework used to prepare their financial statements or otherwise specified in Regulation S-X,

141

the equity method,

142

the fair value method,

143

and the cost method (or the fair value practical expedient for equity securities without a readily determinable fair value model as contemplated in U.S. GAAP

144

145

One commenter stated that, if the Commission decides to require the financial information to be audited, any acceptable method should be objectively auditable.

146

One commenter contended that the proposed requirement that the parent company disclose its basis for the accounting method it applied to exclude the financial information of non-issuer and non-guarantor subsidiaries from the Proposed Alternative Disclosures added an unnecessary element of complexity.

147

Alternatively, a few commenters suggested the Commission consider completely excluding the financial information of non-issuer and non-guarantor subsidiaries.

148

One of these commenters stated that the Summarized Financial Information is more meaningful if it excludes the financial information of non-issuer and non-guarantor subsidiaries,

149

and another stated that excluding balances related to investments in non-obligated subsidiaries altogether would eliminate the possible confusion over including amounts attributable to the non-obligated subsidiary investments within the Obligor Group financial information.

139

See

letters from CAQ, Deloitte, and EY.

140

See

letters from CAQ and EY.

141

Letter from Grant Thornton.

142

See

letters from Deloitte, KPMG, and PWC.

143

See

letters from Deloitte and PWC.

144

ASC 321-10-35-2, Investments—Equity Securities.

145

See

letters from Deloitte, KPMG, and PWC.

146

See

letter from Deloitte.

147

See

letter from ABA.

148

See, e.g.,

letters from BDO, KPMG, and PWC.

149

See

letter from BDO.

Two commenters asserted that the proposed amendments would require parent companies to present the Summarized Financial Information separately if the required qualitative disclosures differed within the group of subsidiary issuers or guarantors, which these commenters maintained was overly prescriptive.

150

These commenters recommended permitting greater flexibility in such instances, such as allowing the parent company to present Summarized Financial Information for the aggregate group with supplemental qualitative or quantitative

disclosure regarding material differences within the group.

150

See

letter from EY and Grant Thornton.

After considering the public comments, we are adopting the amendments substantially as proposed with modifications, including separating certain requirements within proposed Rule 13-01(a)(4) into distinct subparagraphs for clarity. As supported by several commenters, we are adopting the amendment that permits the supplemental financial disclosures of issuers and guarantors specified in Rule 13-01(a)(4) to be provided on a combined basis. Specifically, final Rule 13-01(a)(4)(i) permits the Summarized Financial Information of each issuer and guarantor consolidated in the parent company's consolidated financial statements to be presented on a combined basis with the Summarized Financial Information of the parent company, and Rule 13-01(a)(4)(ii) requires intercompany balances and transactions between issuers and guarantors whose information is presented on a combined basis to be eliminated.

151

We agree with those commenters that said providing this information on a combined basis would provide investors with material information in making an investment decision

152

while also reducing the burden on issuers.

153

151

Proposed Rule 13-01(a)(4) would have required, in part, that “[i]ntercompany transactions between issuers and guarantors whose summarized financial information is presented on a combined basis shall be eliminated.” While we are adopting the amendments substantially as proposed, final Rule 13-01(a)(4)(ii) clarifies that intercompany “balances” must also be eliminated in this regard.

152

See, e.g.,

letters from Dell, FedEx, and Sullivan & Cromwell.

153

See, e.g.,

letters from Davis Polk, KPMG, and Sullivan & Cromwell.

The proposed rule would have permitted the parent company to determine the method of excluding the financial information of non-issuer and non-guarantor subsidiaries from the Proposed Alternative Disclosures. Although most line items required to be disclosed under Summarized Financial Information would be unaffected, under the proposed approach, the effect on the financial information of the Obligor Group could have varied depending on the method used to exclude non-issuer and non-guarantor subsidiary financial information. For example, under the equity method, the investments in those subsidiaries would have continued to be included within the Obligor Group's non-current assets, and earnings or losses from those subsidiaries would have continued to be included in income or loss of the Obligor Group. A similar effect would likely exist under certain other methods described above that were suggested by commenters, such as the fair value method or the cost method as previously contemplated by U.S. GAAP.

Instead of adopting the proposed approach, or specifying certain methods of accounting that should be used, we agree with those commenters that recommended completely excluding the financial information of non-issuer and non-guarantor subsidiaries. In particular, we agree with one commenter that said excluding balances related to investments in non-obligated subsidiaries altogether would eliminate the possible confusion over including amounts attributable to the non-issuer and non-guarantor subsidiaries within the financial information of the Obligor Group.

154

In this regard, amounts attributable to non-issuer and non-guarantor subsidiaries are not generally available for payment of debt or useful for evaluating debt-paying ability. As such, we believe excluding non-issuer and non-guarantor subsidiary information will enhance the Revised Alternative Disclosures for investors.

154

See

letter from PWC.

Accordingly, under the final amendments, Rule 13-01(a)(4)(iii) requires subsidiaries that are not issuers or guarantors to be excluded from the Summarized Financial Information. Pursuant to this requirement, all non-issuer and non-guarantor subsidiary financial information must be entirely removed from the financial information of the Obligor Group, even if an issuer or guarantor would otherwise consolidate such non-issuer and non-guarantor subsidiaries. An issuer or guarantor would not present its investments in non-issuer and non-guarantor subsidiaries in the Summarized Financial Information. While we continue to expect that most line items required by Summarized Financial Information would have been unaffected by the particular method selected by a parent company to exclude non-issuer and non-guarantor subsidiary information under the proposed rule, after considering the comments received, we now believe that requiring complete exclusion of the financial information of such non-issuer and non-guarantor subsidiaries in all cases will avoid potential confusion on the part of both issuers and investors about the appropriate method of exclusion. We note that a parent company may have experienced lower costs under the proposed amendments by being able to select the method of excluding non-issuer and non-guarantor subsidiary information that its systems were already designed to produce. However, under the final amendments, a parent company is not required to justify that its selected method was reasonable under the circumstances as was proposed, and we expect in most circumstances that requiring complete exclusion of non-issuer and non-guarantor subsidiary financial information will be a less costly presentation than methods that would have required the disclosure of such financial information.

We are also adopting, substantially as proposed, the requirement that when information provided in response to Rule 13-01 is applicable to one or more, but not all, issuers and guarantors, separate disclosure of Summarized Financial Information for the issuers and guarantors to which the information applies is required. This requirement is stated in Rule 13-01(a)(4)(iv). For clarity, the final rule includes an example of disclosure required by Rule 13-01 that would trigger separate disclosure for the affected issuers and guarantors.

155

The example is disclosure that is required by Rule 13-01(a)(3): “factors that may affect payments to holders of the guaranteed security.”

155

This example is being included to clarify one situation requiring separate presentation of the Summarized Financial Information applicable to some but not all issuers and guarantors.

One commenter suggested that the Commission provide a framework for presenting Summarized Financial Information for the affected issuers and guarantors in aggregate based on the nature of disclosures.

156

We believe a parent company should consider materiality

157

and exercise judgement in determining the appropriate level of aggregation of issuers and guarantors based on the nature of the disclosure. In this regard, it may be useful to consider quantitative factors, such as the financial significance of the affected issuers and guarantors, and qualitative factors, such as the nature of the facts and circumstances applicable to the issuers and guarantors. For example, if the same contractual or statutory restrictions affect some but not all subsidiary guarantors, and such subsidiary guarantors represent a substantial portion of the Obligor

Group, aggregation of the Summarized Financial Information of such subsidiary guarantors may be appropriate. Conversely, it may not be appropriate to aggregate the Summarized Financial Information of such subsidiary guarantors where the contractual or statutory restrictions are different.

156

See

letter from Grant.

157

The disclosures specified in Rule 13-01(a) are required to the extent material. Rules 13-01(a)(6) and (7) require disclosure of “[a]ny financial and narrative information about each guarantor if the information would be material for investors to evaluate the sufficiency of the guarantee,” and “[s]ufficient information so as to make the financial and non-financial information presented not misleading,” respectively.

See

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

Another commenter stated its belief that requiring separate presentation of the Summarized Financial Information applicable to affected issuers and guarantors under proposed Rule 13-01(a)(4) is overly prescriptive.

158

While we continue to believe that separate disclosure of Summarized Financial Information for the affected issuers and guarantors is appropriate in most cases, we also agree with this commenter's suggestion that it could be acceptable to present Summarized Financial Information for the aggregate Obligor Group with supplemental qualitative or quantitative disclosure to inform investors about the disclosures affecting one or more, but not all issuers and guarantors. Accordingly, final Rule 13-01(a)(4)(iv) permits, in limited circumstances, narrative disclosure to be provided in lieu of the separate Summarized Financial Information of the affected issuers and guarantors which the paragraph otherwise requires. The limited circumstances when a narrative may be provided are when such separate financial information applicable to the affected issuers and guarantors can be easily explained and understood. For example, if contractual or statutory restrictions are applicable to one subsidiary guarantor, and that subsidiary guarantor constitutes a similar percentage of the Obligor Group's assets, liabilities, and operations, narrative disclosure may be permissible depending on the facts and circumstances. In other circumstances, such as if the subsidiary guarantor's financial significance to the Obligor Group is not easily explained (

e.g.,

the subsidiary guarantor constitutes varying proportions of each line item within the Obligor Group's Summarized Financial Information), narrative disclosure is unlikely to be sufficient.

158

See

letter from EY.

Although a few commenters recommended that the required financial disclosures depict non-guarantor subsidiaries,

159

the final amendments continue to focus on issuers and guarantors because those are the entities a holder can make claims against in the event of default. While the final rules do not require financial information to be disclosed about subsidiaries not obligated under the guarantee or guaranteed debt security, a parent company may separately provide supplemental information about non-issuer and non-guarantor subsidiaries.

159

See

letters from Davis Polk and Shearman.

iii. Periods to Present

(A) Proposed Amendments

Instead of the periods specified in 17 CFR 210.3-01 and 210.3-02

160

required by the existing rule, the proposed rule would require Summarized Financial Information only as of, and for, the most recently ended fiscal year and year-to-date interim period, if applicable.

160

Rules 3-01 and 3-02 of Regulation S-X.

In addition, because Item 1 of Part I of Form 10-Q

161

requires a registrant to provide the information required by Rule 10-01 of Regulation S-X, the Commission proposed adding Rule 10-01(b)(9) to require compliance with Rules 3-10 and 13-01.

161

17 CFR 249.308a.

(B) Comments on the Proposed Amendments

Comments on the proposed amendments were mixed. A number of commenters agreed with the proposed amendments, which would limit the periods for which Summarized Financial Information is required to the most recently ended fiscal year and the year-to-date interim period.

162

One commenter stated that the periods in the proposed rules were consistent with disclosures that are typically provided in Rule 144A and 17 CFR 230.901 through 230.905

163

debt offerings.

164

Some commenters suggested that only the current period of the Summarized Financial Information, either annual or interim, should be required because it is the most relevant for an investment decision, especially because many issuers experience legal-entity structure changes.

165

162

See, e.g.,

letters from Cravath, Davis Polk, EEI/AGA, FEI, Freeport, Grant Thornton, Nareit, NYC Bar, and Sullivan & Cromwell.

163

Regulation S.

164

See

letter from Cravath.

165

See, e.g.,

letters from Eaton Corp., FEI, and Medtronic.

Other commenters, however, disagreed with the proposed requirement to include the interim period of Summarized Financial Information in all cases.

166

Some commenters suggested not requiring interim disclosures unless there has been a material change since the most recent annual period,

167

which certain commenters noted is consistent with Article 10 of Regulation S-X.

168

Some of these commenters indicated that the costs of providing interim information when no material change has occurred would be overly burdensome

169

and, without that disclosure, investors would still receive information necessary to make an informed investment decision.

170

166

See, e.g.,

letters from ABA, Ball Corp., Comcast, Dell, Deloitte, Eaton Corp., EY, FedEx, FEI, and PWC.

167

See, e.g.,

letters from ABA, Ball Corp., Comcast, Dell, Deloitte, EY, FedEx, FEI, and PWC.

168

See, e.g.,

letters from Deloitte, FEI, and PWC.

169

See, e.g.,

letters from Ball Corp. and FedEx.

170

See

letter from FedEx.

After considering the comments received, we are adopting the amendments as proposed, with one clarification. As adopted, Rule 13-01(a)(4)(v) requires the financial disclosures to be provided as of and for the most recently ended fiscal year and year-to-date interim period included in the parent company's consolidated financial statements, which as described above many commenters supported. When used in conjunction with the parent company's consolidated financial statements, we continue to believe the most recent full fiscal year and year-to-date interim period should provide investors the additional information about the Obligor Group necessary for an informed investment decision and eliminate unnecessary compliance costs for registrants.

We are not adopting the approach some commenters recommended, which would have required the most recent interim period in limited circumstances, such as when there had been a material change since the most recent annual period. We continue to believe, as stated in the Proposing Release, that the most recent interim period should be provided so that investors can make decisions based on the most recent information available.

171

We also are not adopting an approach suggested by some commenters that would require only the most recent interim or annual period.

172

We believe that investors should be provided with the most recent annual period of financial information about issuers and guarantors as a supplement to the parent company consolidated financial statements in all cases, and the most recent interim period, if applicable. While we acknowledge the concerns about the burden to provide interim information in all cases, we note that the final amendments already significantly reduce the burdens on parent companies by eliminating the earliest two years of required Summarized Financial Information and, in filings on

Form 10-Q, by eliminating both the quarter-to-date interim period requirement in filings covering more than one fiscal quarter and comparable prior year interim period(s), as applicable. Under the final rules, investors will continue to receive the most recent interim and annual period information, and we continue to believe this is the most appropriate approach to reducing burdens for parent companies while providing investors with the information they need to make informed investment decisions.

171

See

Section III.C.2.iii of the Proposing Release.

172

See, e.g.,

letters from Eaton and Medtronic.

Proposed Rule 13-01(a)(4) did not specify that the required interim period was only for the most recent year-to-date period. In certain filings, such as a parent company's Form 10-Q for its second and third fiscal quarters, both year-to-date and quarter-to-date interim financial statements are required to be presented for the parent company. To avoid any confusion, and consistent with the proposed rule's intent and suggestions from certain commenters,

173

the final rule's interim period requirement has been revised to clarify that only the most recent year-to-date interim period is required.

173

See, e.g.,

letters from EY and PWC.

Finally, as proposed, we are adopting Rule 10-01(b)(9) to require compliance with Rules 3-10 and 13-01 in quarterly reports on Form 10-Q.

b. Non-Financial Disclosures

i. Proposed Amendments

When Consolidating Information is presented, the existing rule requires limited non-financial disclosures about the issuers and guarantors and the guarantees,

174

restricted net assets,

175

and certain types of restrictions on the ability of the parent company or any guarantor to obtain funds from their subsidiaries.

176

In addition to proposing amendments to existing Rule 3-10 for financial disclosures, the Commission also proposed amendments to require specific non-financial disclosures. These amendments were proposed to enhance the information provided about subsidiary issuers and guarantors, particularly in light of the proposal to require Summarized Financial Information for those subsidiaries. Proposed Rules 13-01(a)(1) through (3) would require certain disclosures about the issuers and guarantors, the terms and conditions of the guarantees, and how the issuer and guarantor structure and other factors may affect payments to holders of the guaranteed securities. Disclosure of additional non-financial disclosures beyond what is specified in proposed Rules 13-01(a)(1) through (3) would have been required by proposed Rule 13-01(a)(5), to the extent they are material to an investment decision.

174

Existing Rules 3-10(i)(8)(i) through (iii) require disclosure, if true, that each subsidiary issuer or subsidiary guarantor is 100%-owned by the parent company, that all guarantees are full and unconditional, and where there is more than one guarantor, that all guarantees are joint and several.

175

Rule 3-10(i)(10) of Regulation S-X.

176

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

ii. Comments on the Proposed Amendments

Some commenters expressed general support for the proposed requirements regarding non-financial disclosures.

177

One commenter noted that the proposed amendments would be less burdensome on registrants than existing requirements under Rule 3-10.

178

Another commenter did not discuss the specific proposed non-financial disclosures, but stated its belief that qualitative disclosures are important to the debt holder's understanding of the overall picture of credit quality and suggested that, in certain instances, qualitative disclosures alone may be sufficient information for investors.

179

One commenter stated that, outside of the registration statement and/or the related prospectus that would identify the issuers and guarantors of the security, it was not clear why identification and disclosure of such entities would be meaningful to an investor in the context of financial disclosures.

180

The commenter recommended that the issuer and guarantors of the guaranteed security should be identified in the registration statement, but not in other filings, such as periodic reports. This commenter also suggested that, if the Commission believes this information should be presented in connection with an annual report, the disclosure should be included as an exhibit to such filing.

177

See, e.g.,

letters from Davis Polk, Freeport, and NYC Bar.

178

See

letter from Davis Polk.

179

See

letter from Comcast.

180

See

letter from PWC.

iii. Final Amendments

After considering the comments received, we are adopting the amendments largely as proposed with certain modifications based on comments received. Final Rules 13-01(a)(1) through (3) will require certain disclosures about the issuers and guarantors, the terms and conditions of the guarantees, and how the issuer and guarantor structure and other factors may affect payments to holders of the guaranteed securities. Consistent with the proposal, we believe these requirements will result in enhanced narrative disclosures that will improve investor understanding of the issuers, guarantors, and guarantees, and make the financial disclosures they accompany easier to understand. While the adopted non-financial disclosures are composed of the items we believe are most likely to be material to an investor, disclosure of additional facts and circumstances is required if necessary to comply with Rule 13-01(a)(6) and (7).

181

Additionally, when a non-financial disclosure is applicable to one or more, but not all, issuers and guarantors, Rule 13-01(a)(4)(iv) requires, to the extent it is material, separate disclosure of Summarized Financial Information for the issuers and guarantors to which the non-financial disclosure applies.

182

181

Supra

note 114.

182

See

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

We are not adopting one commenter's suggestion that disclosure of the identity of the issuers and guarantors should be required only at the time of registration of the offer and sale of guaranteed securities.

183

These entities are legally obligated under the guaranteed security along with the parent company, and we believe such information is material to investors in ongoing periodic reports. However, we are adopting the commenter's alternative suggestion that the disclosures be included in an exhibit to the subject filing.

184

After considering this commenter's suggestion, we believe that the nature of this information is better suited for disclosure in an exhibit as it can efficiently be provided in list form, and, depending on the number of subsidiary issuers and guarantors, this information could distract investor focus from the other financial and non-financial disclosures required by final Rule 13-01 if presented alongside them.

Furthermore, if the entities required to be disclosed do not change from period to period, the parent company could refer to an earlier filing's exhibit rather than filing the exhibit again. Because registrants are required to hyperlink to each exhibit filed with, or incorporated by reference to a filing,

185

this information will be easily accessible to investors. Due to this change, we have revised Rule 13-01(a)(1) to require a description of the issuers and guarantors of the guaranteed security, instead of their identification, in Securities Act registration statements and Exchange Act registration statements and periodic reports. We believe this approach will provide the information to investors in a more efficient manner and make the accompanying financial and non-financial disclosures easier to understand.

183

See

letter from PWC.

184

See

amended Item 601(a) and new Item 601(b)(22) of Regulation S-K. A parent company will be required to list, under an appropriately captioned heading that identifies the associated securities, each of its subsidiaries that is a guarantor, issuer, or co-issuer of each guaranteed security registered or being registered that the parent company issues or guarantees. A subsidiary need not be listed more than once so long as its role as issuer, co-issuer, or guarantor of a guaranteed security is clearly indicated with respect to each applicable security. This exhibit will be required in Forms S-1 [17 CFR 239.11], S-3 [17 CFR 239.13], S-4 [17 CFR 239.25], SF-1 [17 CFR 239.44], SF-3 [17 CFR 239.45], S-11 [17 CFR 239.18], F-1 [17 CFR 239.31], F-3 [17 CFR 239.33], F-4 [17 CFR 239.34], 10 [17 CFR 249.210], 10-Q [17 CFR 249.308a], and 10-K [17 CFR 249.310]. In addition, we are making corresponding revisions to the exhibit requirements of Form 20-F by creating new Exhibit 17 within Item 19, and Form 1-A by creating new Exhibit 17 within Item 17. This exhibit will also be required in Forms 1-K and 1-SA.

See

discussion in Section V.H.3.c, “Offerings pursuant to Regulation A”.

185

See

17 CFR 232.102(d) [Rule 102(d) of Regulation S-T].

c. When Disclosure Is Required

i. Proposed Amendments

One of the conditions that must be met under existing Rule 3-10 to be eligible to omit the financial statements of a subsidiary issuer and guarantor is providing the Alternative Disclosures. If certain numerical thresholds are met, including that the parent company has “no independent assets or operations” and that all non-issuer and non-guarantor subsidiaries are “minor,”

186

the Alternative Disclosures may take the form of a brief narrative in lieu of detailed Consolidating Information, but some type of the Alternative Disclosures is always required.

187

Under these thresholds, minor changes in circumstances can result in dramatically different disclosures being required. Existing Rules 3-10(i)(11)(i) and (ii) provide that Rule 3-10 disclosure may not omit any financial and narrative information about each guarantor if it would be material for investors to evaluate the sufficiency of the guarantee, and shall include sufficient information so as to make the financial information presented not misleading. This disclosure is required when Consolidating Information is disclosed.

186

Rules 3-10(h)(5) and (6) specify the numerical thresholds that must not be exceeded for a parent company to have “no independent assets or operations,” and for a subsidiary to be “minor,” respectively.

See discussion

in Section II.F of the Proposing Release.

187

See

discussion of existing requirements in Section II.F of the Proposing Release.

The proposed amendments would eliminate the “no independent assets or operations” and “minor” thresholds, as well as the brief narrative form of Alternative Disclosures, and instead require financial and non-financial disclosures to the extent material to holders of the guaranteed security. For example, under the proposed rule, the Summarized Financial Information of the Obligor Group could be omitted if the parent company's consolidated financial statements do not differ in any material respects from the Obligor Group. While the disclosures specified in proposed Rule 13-01(a)(1) through (4) could have been omitted if not material to holders of the guaranteed security, for clarity, proposed Rule 13-01(a)(4) would have required the registrant to include a statement that those financial disclosures have been omitted and disclose the reason(s) why the disclosures are not considered to be material.

While the proposed rules include specific financial and non-financial disclosures, there may be other information about the guarantees, issuers, and guarantors that could be material to holders of the guaranteed security. Accordingly, proposed Rule 13-01(a)(5) would have required disclosure of any information that would be material to making an investment decision with respect to the guaranteed security, rather than the sufficiency of the guarantee as stated in the existing rule. This requirement would have applied in all cases, including when the proposed Summarized Financial Information is omitted in accordance with the proposed rule.

ii. Comments on the Proposed Amendments

Comments were mixed on these proposals. A number of commenters generally supported the proposed elimination of existing Rule 3-10's numerical thresholds in favor of allowing issuers to provide the specified disclosures based on what information the issuer believes is material to investors.

188

However, a few commenters supported some type of numerical threshold for establishing whether financial information of an obligor group should be deemed material.

189

One commenter suggested establishing a 50% threshold as a non-exclusive safe harbor for guarantee significance.

190

This commenter stated that if the significance is at or below 50%, the alternative disclosures should be deemed not material and not required to be disclosed; while if it is above 50%, issuers should still be able to conclude that the Proposed Alternative Disclosures are not required if they would not provide material information. Another commenter recommended that the Commission establish a quantitative test that would allow issuers to evaluate whether Summarized Financial Information of an Obligor Group may be omitted.

191

188

See, e.g.,

letters from CII, FedEx, FEI, Nareit, and Sullivan & Cromwell.

189

See

letters from SIFMA and T-Mobile.

190

See

letter from SIFMA. This commenter said that significance under this suggestion would be measured in a manner consistent with the existing rule's determination of a “minor” subsidiary specified in Rule 3-10(h)(6), except that 50% would be substituted for the existing rule's 3% threshold.

See

additional discussion in Section II.F of the Proposing Release.

191

See

letter from T-Mobile. This commenter did not provide a specific figure for a quantitative threshold, but noted that the threshold should be higher than existing Rule 3-10's thresholds for minor subsidiaries. The commenter asserted that using the criteria for being considered a “significant subsidiary” specified in § 210.1-02(w) would better reflect materiality to investors compared to the existing definition of minor subsidiaries.

Some commenters opposed the requirement in proposed Rule 13-01(a)(4) that would require a registrant to disclose, if the required financial disclosures were omitted because they were not material, a statement to that effect and the reasons therefore.

192

Some commenters asserted that such disclosure would not be useful to investors,

193

could possibly result in an increase in liability,

194

and was counter to the Commission's objective of focusing on material disclosures and providing a principles-based framework.

195

One commenter suggested that, if the proposal were adopted, the Commission should make clear that issuers would only need to make a simple statement that management does not believe the information is material.

196

In contrast, one commenter specifically supported this part of proposed Rule 13-01(a)(4), asserting that the requirement would provide clarity about which disclosures were omitted and why.

197

192

See, e.g.,

letters from Debevoise, EY, KPMG, and SIFMA.

193

See

letters from Debevoise and KPMG.

194

See

letters from Debevoise and SIFMA.

195

See

letter from Debevoise.

196

See

letter from SIFMA.

197

See

letter from CII.

A number of commenters opposed proposed Rule 13-01(a)(5), which would have required disclosure of any information that would be material to making an investment decision with respect to the guaranteed security.

198

Several of these commenters contended that the proposed requirement is overly broad. Some commenters asserted that the proposed requirement would cause uncertainty for issuers and auditors as

they seek to apply and assess the adequacy of the disclosures.

199

One commenter asserted that the proposed requirement would override all other relevant disclosure obligations;

200

another commenter questioned whether the Commission is proposing to modify the overall materiality assessment in its disclosure framework;

201

and a third commenter stated its belief that in addition to creating litigation risk, the proposed rule could extend the duty to disclose material information beyond information specific to the guarantee, such as pending merger negotiations and other potential transactions.

202

However, one commenter supported this proposed requirement “because it would provide relevant information, not otherwise explicitly required by the [p]roposed [r]ule, which would likely render the disclosures taken as a whole to be more useful for investment decisions.”

203

198

See, e.g.,

letters from ABA, BDO, CAQ, Comcast, Cravath, Davis Polk, Deloitte, EY, Freeport, KPMG, PWC, Shearman, and Sullivan & Cromwell.

199

See, e.g.,

letters from BDO, CAQ, EY, and PWC.

200

See

letter from Cravath.

201

See

letter from Deloitte.

202

See

letter from Shearman.

203

See

letter from CII.

In response to the Commission's request for comment on whether the proposed amendments were sufficiently clear about the disclosures that should be provided and when, one commenter recommended that the final rules should provide explicit objectives related to assessing the guarantee, which would help issuers to prepare their disclosures.

204

Some commenters suggested that it would be helpful for the final rules to provide additional guidance or examples of information that may be material to investors.

205

One commenter recommended that the rules expressly provide that the Alternative Disclosures need not be included in a registration statement at the time of effectiveness so long as they are provided prior to an offering of the securities in respect of which the Alternative Disclosures are required.

206

Another commenter asserted that a parent company could conclude that disclosure is not material if no investor owns (or is currently being offered) the specific guaranteed or collateralized security and therefore the disclosure could be excluded based on proposed Rule 13-01.

207

204

See

letter from EY.

205

See, e.g.,

letters from KPMG and Shearman.

206

See

letter from Cravath.

207

See

letter from PWC.

iii. Final Amendments

We are adopting the amendments largely as proposed with modifications based on comments received.

As supported by several commenters,

208

the existing “no independent assets or operations” and “minor” numerical thresholds used to determine the form and content of disclosure have been replaced with a requirement to provide all disclosures specified in the final rule, unless such information is not material.

209

Whereas proposed Rule 13-01(a) required the proposed financial and non-financial disclosures “to the extent material to holders of the guaranteed security,” the final rule has been revised to require the financial and non-financial disclosures “to the extent material,” which is discussed in further detail below.

208

See, e.g.,

letters from CII, FedEx, FEI, Nareit, and Sullivan & Cromwell.

209

This requirement is specified in new Rule 13-01(a). Whether a disclosure specified in new Rule 13-01 may be omitted depends on whether the disclosure would be material to a reasonable investor. The Supreme Court in

TSC

Northway

held that a fact is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available.”

See TSC Indus., Inc.

Northway, Inc.,

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

A few commenters suggested including numerical thresholds in the rule for determining whether financial information may be omitted,

210

while others requested that we provide additional guidance or examples of what information may be material.

211

While we appreciate the desire for certainty about when disclosure is required, determinations of what information is material are highly dependent on the applicable facts and circumstances, and we are concerned that specifying numerical thresholds or providing detailed guidance could undermine the principles-based nature of this provision, to the detriment of both investors and issuers. We are therefore not adopting these suggestions. Instead, akin to the suggestion of one commenter,

212

the final rule identifies four non-exclusive scenarios in which the required information could be omitted on the basis that it is not material, provided the applicable scenario is disclosed to investors. We discuss these four scenarios in further detail below.

210

See

letters from SIFMA and T-Mobile.

211

See, e.g.,

letters from KPMG and Shearman.

212

See

letter from SIFMA. This commenter recommended the Commission establish, as a non-exclusive safe harbor, “a numerical threshold of guarantee significance at or below which [the required disclosures] would be deemed immaterial and thus not required and above which registrants would still be able to conclude that [the required disclosures] are not required because they would not provide material information.” We are not adopting the commenter's suggestion of a numerical threshold of significance, but we have identified four non-exclusive scenarios in which the required information could be omitted as discussed below.

The proposed rule sets forth financial and non-financial disclosures that were focused on the information the Commission expected was most likely to be material. It also included proposed Rule 13-01(a)(5), which would have required disclosure of “any other quantitative or qualitative information that would be material to making an investment decision with respect to the guaranteed security.” The intent of this proposed requirement was to elicit disclosure about the obligated entities and the guarantees that would be material but was not otherwise specifically required by the proposed financial and non-financial disclosures. While one commenter supported this proposed requirement, many others did not.

Instead of proposed Rule 13-01(a)(5), we are adopting new Rules 13-01(a)(6) and (7), which retain the requirements in existing Rules 3-10(i)(11)(i) and (ii),

213

respectively, as suggested by several commenters.

214

However, we are aligning the wording of existing Rules 3-10(i)(11)(i) and (ii) to the structure of Rule 13-01. We are also modifying the requirement in existing Rule 3-10(i)(11)(ii) to make reference to non-financial information, in addition to financial information, because we see no reason to limit such disclosure to financial information. Parent companies are already required to comply with existing Rule 3-10(i)(11)(i) and (ii), and we are not aware of any issues surrounding their application. We believe these existing requirements capture the disclosures the proposed rule was intended to elicit while addressing the concerns raised by commenters as discussed above. Notwithstanding these requirements in the final rule, in 17 CFR 230.408(a)

215

and 17 CFR 240.12b-20

216

require a parent company to disclose, in addition to the information expressly required to be included, such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading. While some commenters indicated these requirements provide sufficient investor protections,

217

we believe retaining the requirements in existing Rule 3-10(i)(11)(i) and (ii), in addition to those

other requirements, will help to ensure that material information is provided to investors.

213

See

Section III.C.2.c.i, “When Disclosure is Required,” for a discussion of the requirements in existing Rules 3-10(i)(11)(i) and (ii).

214

See, e.g.,

letters from BDO, PWC, and Shearman.

215

Securities Act Rule 408(a).

216

Exchange Act Rule 12b-20.

217

See, e.g.,

letters from Deloitte and EY.

Based on comments received on proposed Rule 13-01(a)(5), we have also revised Rule 13-01(a) for clarity. Proposed Rule 13-01(a) would have required disclosures “to the extent material to holders of the guaranteed security” and was not intended to introduce a nuanced or different materiality analysis specific to these disclosure requirements. A parent company's responsibility to determine whether the disclosures specified in Rule 13-01 are material is not different from how it assesses materiality in connection with other information it files with the Commission. Accordingly, we have revised final Rule 13-01 to require the financial and non-financial disclosures “to the extent material.”

Proposed Rule 13-01(a)(4) would have required, if the financial disclosures specified in proposed Rule 13-01(a)(4) were omitted because they are not material, disclosure of a statement to that effect and the reasons therefore. Most of the commenters that discussed this proposed requirement did not support it.

218

The intent of the proposed rule was not to require a parent company to disclose the analysis supporting its conclusion that the financial disclosures were not material. Rather, it was to inform an investor that financial information about issuers and guarantors was not being provided and the basic reason(s) for the omission, similar to the narrative forms of Alternative Disclosures in existing Rule 3-10.

219

In response to these comments, we are not adopting this requirement as proposed. Instead, we are adopting an approach that should help address concerns

220

about the need for greater certainty as to the circumstances when the omission of financial disclosures may be appropriate while continuing to provide investors with the basic reasons as to why the financial information was omitted in a manner similar to existing Rule 3-10's narrative exceptions. As adopted, Rule 13-01(a)(4)(vi) includes four scenarios, which we believe are the most common situations under which the financial information would not be material.

221

If the scenario is applicable and disclosed, the parent company could then omit the financial disclosures. The four scenarios are:

218

See, e.g.,

letters from Debevoise, EY, KPMG, and SIFMA.

219

The content of the brief narratives is specified within each of the exceptions of existing Rules 3-10(b) through (f) based on the applicable facts and circumstances. For example, if the conditions are met, existing Rule 3-10(b)(4) of Regulation S-X specifies that the narrative disclosure to be included in a footnote to the parent company's consolidated financial statements must state, if true, “that the issuer is a 100%-owned finance subsidiary of the parent company and the parent company has fully and unconditionally guaranteed the securities.” It also requires the footnote to include “the narrative disclosures specified in paragraphs (i)(9) and (i)(10) of this section.”

220

See, e.g.,

letter from Shearman.

221

These scenarios were discussed in the Proposing Release.

See

Section III.C.2.c of the Proposing Release.

(1) The assets, liabilities and results of operations of the combined issuers and guarantors of the guaranteed security are not materially different than corresponding amounts presented in the consolidated financial statements of the parent company;

222

This scenario is contained in Rule 13-01(a)(4)(vi)(A).

(2) The combined issuers and guarantors, excluding investments in subsidiaries that are not issuers or guarantors, have no material assets, liabilities or results of operations;

223

This scenario is contained in Rule 13-01(a)(4)(vi)(B).

(3) The issuer is a finance subsidiary of the parent company, the parent company has fully and unconditionally guaranteed the security, and no other subsidiary of the parent company guarantees the security;

224

and

224

This scenario is contained in Rule 13-01(a)(4)(vi)(C).

(4) The issuer is a finance subsidiary that co-issued the security, jointly and severally, with the parent company, and no other subsidiary of the parent company guarantees the security.

225

This scenario is contained in Rule 13-01(a)(4)(vi)(D).

While we believe these scenarios encompass most of the situations under which the required financial information would not be material, these scenarios are not intended to be exclusive. As discussed below, there may be other circumstances in which it would be appropriate to omit the required financial information on the basis that it is not material.

In the first scenario, we believe financial information of the combined Obligor Group would not be material to an investor as it is not materially different than that of the consolidated parent company.

226

If the related scenario was disclosed, investors would not need supplemental financial information as it would largely duplicate the corresponding information in the parent company's consolidated financial statements. In the second scenario, we believe disclosure that the combined Obligor Group has no material assets, liabilities or results of operations obviates the need for supplemental disclosures as an investor would know such information would not be material. The third and fourth scenarios involve finance subsidiary issuers or finance subsidiaries that co-issue securities with the parent company. These last two scenarios, which are generally consistent with existing Rule 3-10(b) narrative disclosures involving finance subsidiaries,

227

inform investors that the finance subsidiary issuer or co-issuer has no independent material debt-paying ability and has no material assets or operations other than those related to the issuance, administration, and repayment of the guaranteed security such that supplemental financial disclosures are not material.

226

Rule 13-01(a)(4)(vi) clarifies that this scenario does not apply where separate disclosure of the Summarized Financial Information of one or more, but not all issuers and/or guarantors, is required by Rule 13-01(a)(4)(iv).

227

See

discussion above in Section III.C.1.d.iii. As one of the conditions to omit the financial statements of the finance subsidiary issuer under existing Rule 3-10(b), the parent company must provide the narrative disclosure in paragraph (4) of existing Rule 3-10(b), which is that “the issuer is a 100%-owned finance subsidiary of the parent company and the parent company has fully and unconditionally guaranteed the securities. The footnote also must include the narrative disclosures specified in paragraphs (i)(9) and (i)(10) of this section.” The Note to existing Rule 3-10(b) states that “[p]aragraph (b) is available if a subsidiary issuer satisfies the requirements of this paragraph but for the fact that, instead of the parent company guaranteeing the security, the subsidiary issuer co-issued the security, jointly and severally, with the parent company. In this situation, the narrative information required by paragraph (b)(4) must be modified accordingly.”

Rule 13-01(a)(4)(vi)(C) applies to a finance subsidiary issuer of a security that the parent company has fully and unconditionally guaranteed, and Rule 13-01(a)(4)(vi)(D) applies to a finance subsidiary that co-issues a security, jointly and severally, with the parent company. No other subsidiaries of the parent company may guarantee the security under either of these scenarios. Rule 13-01(a)(4)(vi) defines when a subsidiary is a “finance subsidiary” for the purposes of the rule. This definition is consistent with the definition in existing Rule 3-10(h)(7) except that the amended definition does not make reference to revenues, which we believe are subsumed by the reference to “operations,” and does not make reference to “cash flows,” as cash flow information is not a required financial disclosure under the amended rule.

While we believe these scenarios generally capture the situations under which the financial information would not be material and may be omitted, there may be other scenarios under which the parent company may conclude Summarized Financial Information is not necessary. These scenarios would be evaluated under the

general materiality provision of Rule 13-01(a). Based on this analysis, if a parent company determines that not all of the required financial information is material, the information that is not material may be omitted without additional disclosure or explanation. Thus, under the final rule, the parent company could either rely on one of the identified scenarios, if applicable, to omit information that is not material, or make its own assessment based upon a consideration of other relevant facts and circumstances.

228

We believe this approach will preserve the principles-based nature of Rule 13-01 while providing greater certainty for issuers, and appropriate transparency for investors, regarding the information required to be disclosed.

228

To provide clarity to an issuer that its ability to omit the Summarized Financial Information required by final Rule 13-01(a)(4) is not limited to the four scenarios discussed herein, final Rule 13-01(a)(4)(vi) states: “Notwithstanding that a parent company may omit this summarized financial information if not material . . .”

Two commenters encouraged the Commission to expressly provide that the Proposed Alternative Disclosures need not be provided at the time of effectiveness so long as they are provided prior to an offering of the guaranteed securities,

229

with one of these commenters suggesting that we amend 17 CFR 230.430B(a)

230

to cover information required by proposed Rule 13-01.

231

We are not amending Rule 430B as suggested. Issuers meeting the definition of Well-Known Seasoned Issuer (“WKSI”) are currently afforded significant flexibility under Rule 430B(a), which would include the flexibility to omit the information specified in Proposed Rule 13-01 at effectiveness so long as the information is added when the shelf registration statement is amended to identify subsidiary issuers and guarantors.

232

We acknowledge that non-WKSI issuers are not similarly able to omit this information but note that WKSIs are afforded substantially greater latitude in registering and marketing securities.

233

229

See

letters from Cravath and PWC.

230

Securities Act Rule 430B(a).

231

See

letter from Cravath.

232

See

Securities Act Rule 430B(a) and

Securities Offering Reform,

Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (“Securities Offering Reform”) at text accompanying note 520.

233

See

Securities Offering Reform at note 220.

d. Location of Revised Alternative Disclosures and Audit Requirement

i. Proposed Amendments

The primary source of financial information provided to investors—the consolidated financial statements of the parent company—is required to be audited as specified in Regulation S-X.

234

The Proposed Alternative Disclosures would provide incremental detail as a supplement to the parent company's audited annual and unaudited interim consolidated financial statements to facilitate an analysis of the parts of the consolidated enterprise that are obligated to make payments as issuers or guarantors. The proposed rule would provide parent companies with the flexibility to provide the Proposed Alternative Disclosures inside or outside of the consolidated financial statements in registration statements covering the offer and sale of the guaranteed debt securities and any related prospectus, as well as annual and quarterly Exchange Act periodic reports required to be filed during the fiscal year in which the first bona fide sale of the subject securities is completed. If a parent company elects to provide the Proposed Alternative Disclosures outside its audited financial statements, the disclosures would be required in specified prominent locations in its offering documents and periodic reports.

234

Rules 3-01 and 3-02 of Regulation S-X.

Accordingly, the note to proposed Rule 13-01(a) would have allowed the parent company to provide the Proposed Alternative Disclosures in a footnote to its consolidated financial statements or, alternatively, in MD&A,

235

in the registration statement covering the offer and sale of the subject securities and any related prospectus, and in Exchange Act reports on Forms 10-K and 10-Q

236

required to be filed during the fiscal year in which the first bona fide sale of the subject securities is completed. If a parent company were to elect to provide the disclosures in its audited financial statements, the Proposed Alternative Disclosures would be required to be audited.

237

If not otherwise included in the consolidated financial statements or in the MD&A, the parent company would be required to include the Proposed Alternative Disclosures in its prospectus immediately following “Risk Factors,” if any, or otherwise, immediately following pricing information described in 17 CFR 229.503(c) (“Item 503(c) of Regulation S-K”).

238

Beginning with the parent company's annual report filed on Form 10-K for the fiscal year during which the first bona fide sale of the subject securities is completed, however, the parent company would have been required to provide the Proposed Alternative Disclosures in a footnote to its consolidated financial statements in its annual and quarterly reports. These proposed amendments would also apply to foreign private issuers and issuers offering securities pursuant to Regulation A and the forms applicable to such entities.

239

235

See

17 CFR 229.303 (Item 303 of Regulation S-K).

236

These proposed amendments also would apply to foreign private issuers and issuers offering securities pursuant to 17 CFR 230.251 through 230.263 (“Regulation A”) and the forms applicable to such entities.

See

Section III.D, “Application of Proposed Amendments to Certain Types of Issuers,” below.

237

Regardless of where the Proposed Alternative Disclosures are presented in the filing, U.S. GAAP requires disclosure in the financial statements of the pertinent rights and privileges of the various securities outstanding.

See

ASC 470-10-50-5 and ASC 505-10-50-3.

238

Subsequent to the issuance of the Proposing Release, the Commission amended and relocated the requirements previously contained in Item 503(c) to 17 CFR 229.105 [new Item 105 of Regulation S-K].

See FAST Act Modernization and Simplification of Regulation S-K,

Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674 (Apr. 2, 2019)].

239

See

Section III.D, “Application of Amendments to Certain Types of Issuers,” below.

ii. Comments on the Proposed Amendments

Comments on the proposed amendments were mixed. A few commenters generally supported the flexibility under the proposed amendments for the parent company to provide the Proposed Alternative Disclosures in specified locations outside its consolidated financial statements in the subject registration statement and Forms 10-K and 10-Q required to be filed during the fiscal year in which the first bona fide sale of the debt securities is completed, but would have required the parent company to provide the disclosures in a footnote to its consolidated financial statements in its annual and quarterly reports starting with its annual report filed on Form 10-K for the fiscal year during which the first bona fide sale of the debt securities is completed.

240

See

letters from Ball Corp., Nareit, and WTW. While one commenter expressed support for the proposed amendment that would allow locating the disclosures outside the footnotes of the financial statements in certain instances, the commenter stated its belief that having a requirement for the disclosures to be audited creates additional cost over an area of accounting and disclosure where there is limited focus from the investment community.

See

letter from WTW.

A number of commenters stated that the Proposed Alternative Disclosures should be permitted to be presented outside of the parent company's consolidated financial statements in all cases, not just in the registration statement and Forms 10-K and 10-Q required to be filed during the fiscal year in which the first bona fide sale of

the subject securities is completed.

241

One commenter suggested that the existing rule's requirement that the disclosures be included in the audited financial statements has driven would-be registered debt issuers to the Rule 144A debt market,

242

an effect other commenters asserted would continue if the Proposed Alternative Disclosures were required to be included in the consolidated financial statements in subsequent Exchange Act reports.

243

Several commenters asserted that not requiring these disclosures to be audited would reduce costs

244

and possibly allow issuers to more quickly register guaranteed debt securities and access capital markets.

245

A few commenters stated that requiring an audit of the Proposed Alternative Disclosures would provide little marginal benefit to investors.

246

241

See, e.g.,

letters from ABA, Cravath, Davis Polk, Dell, Freeport, SIFMA, Simpson Thacher and Sullivan & Cromwell.

242

See

letter from Cravath.

243

See

letters from Dell and Sullivan & Cromwell.

244

See, e.g.,

letters from ABA, Ball Corp., Cravath, Davis Polk, Dell, Freeport, SIFMA, Simpson Thacher, Sullivan & Cromwell, and WTW.

245

See, e.g.,

letters ABA, BDO, Cravath, Davis Polk, Dell, and Simpson Thacher.

246

See, e.g.,

letters from Davis Polk, Dell, Freeport, and Sullivan & Cromwell.

Other commenters, however, asserted that the flexibility to determine the location of the Proposed Alternative Disclosures under the proposed amendments could lead to investor confusion about the location of the disclosures,

247

and uncertainty as to the level of audit assurance that applied to the disclosures.

248

One commenter contended that the Proposed Alternative Disclosures should be required to be presented in a single location to avoid inconsistencies in the location and varied reliance by investors.

249

Another commenter stated that companies should not have the option to choose where their disclosures will appear, and that reported disclosures should be consistently reported in the same location.

250

247

See

letters from Deloitte, FedEx, and PWC.

248

See

letters from Deloitte and KPMG.

249

See

letter from KPMG.

250

See

letter from XBRL US, Inc.

One commenter did not support locating the Proposed Alternative Disclosures outside the financial statements,

251

and another suggested either requiring the Proposed Alternative Disclosures to be audited or limiting unaudited disclosures to underwritten offerings.

252

One of these commenters argued that many investors place significant value on having required disclosures subject to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements, and not being subject to the forward-looking statements safe harbor.

253

Another commenter did not express a view on where the disclosures should be located, but indicated that investors may benefit from having the disclosures in the financial statements because they would be subject to audit and interim review requirements.

254

251

See

letter from CII.

252

See

letter from BDO.

253

See

letter from CII.

254

See

letter from CAQ.

Other commenters, however, recommended the disclosures be located outside the financial statements in all cases.

255

One of these commenters argued presentation outside the financial statements in all cases was appropriate as the Proposed Alternative Disclosures are supplementary to the financial statements.

256

This commenter asserted that this change would reduce costs of preparing the disclosures by allowing the information to be unaudited, and noted that the disclosures would still be subject to the parent company's disclosure controls and procedures and required certifications. Another of these commenters recommended the disclosures be required in the liquidity and capital resources section of the MD&A or in a separate section following “Risk Factors” as is currently done in the Rule 144A market and has been accepted by the investor community.

257

This commenter also observed that if disclosure outside the financial statements is sufficient at the time of the initial investment decision, it should be sufficient for future periods. Yet another of these commenters observed the Proposed Alternative Disclosures would be better presented in a discussion about a parent's liquidity in the MD&A as opposed to in the financial statements given the objective of the disclosures to provide an investor in a debt security with information about the related guarantee.

258

255

See, e.g.,

letters from FedEx, NYC Bar and PWC.

256

See

letter from FedEx.

257

See

letter from NYC Bar.

258

See

letter from PWC.

Some commenters emphasized that, even if the Proposed Alternative Disclosures are allowed to be located outside of the financial statements, these disclosures would be derived from the same internal accounting records used to prepare the parent company's audited consolidated financial statements

259

and would be subject to the parent company's disclosure controls and procedures

260

and certification by the parent company's principal executive and principal financial officers.

261

259

See

letters from Davis Polk and Freeport.

260

See

letters from Cravath and EY.

261

See

letter from FedEx.

Some commenters asserted that underwriters will likely request independent auditors to provide comfort on financial information provided outside the consolidated financial statements in connection with registered offerings.

262

Two of these commenters indicated this would involve performing limited procedures on such information under Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard 6101,

Letters for Underwriters and Certain Other Requesting Parties.

263

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