Safe Harbor for Disclosure of Qualitative and Quantitative Information About Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments

SUMMARY: The Securities and Exchange Commission (``Commission'') today

is proposing amendments that would apply the safe harbor provisions

recently added to the Securities Act of 1933 and Securities Exchange

Act of 1934 by the Private Securities Litigation Reform Act of 1995 to

specified disclosures made pursuant to proposed Item 305 of Regulation

S-K or proposed Item 9A of Form 20-F.

DATES: Comments should be received on or before May 20, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549. Comments also may be submitted

electronically at the following E-mail address: rule-comments @

sec.gov. All comment letters should refer to File No. S7-10-96; this

file number should be included in the subject line if E-mail is used.

Comment letters will be available for inspection and copying in the

Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,

D.C. 20549. Electronically submitted comment letters will be posted on

the Commission's Internet Web Site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Elizabeth M. Murphy, Special Counsel,

(202) 942-2910, Division of Corporation Finance, Securities and

Exchange Commission, 450 Fifth Street, N.W., Mail Stop 3-7, Washington,

D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to

proposed Item 305 of Regulation S-K 1 and proposed Item 9A of Form

20-F,2 as well as to Item 10 of Regulation S-B.3

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\1\ 17 CFR Part 229.

\2\ 17 CFR 249.220f.

\3\ 17 CFR 228.10.

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I. EXECUTIVE SUMMARY AND BACKGROUND

On December 28, 1995, the Commission issued a release 4

proposing amendments that would, among other things, require

registrants to provide disclosure of qualitative and quantitative

information about market risk inherent in derivative financial

instruments, other financial instruments, and derivative commodity

instruments (``Derivatives Proposing Release''). This disclosure would

be required pursuant to proposed new Item 305 of Regulation S-K and

proposed new Item 9A of Form 20-F.

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\4\ Release No. 33-7250 (December 28, 1995) [61 FR 578]. The

period for comment on the proposals issued in that release was

extended from May 7, 1996 to May 20, 1996 in Release No. 33-7281

issued on April 9, 1996.

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The Derivatives Proposing Release indicated that it is the

Commission's intention that disclosures made pursuant to the proposed

new items be made subject to a safe harbor, and stated that a release

would be forthcoming to propose an appropriate safe harbor in light of

the recently enacted Securities Litigation Reform Act of 1995

(``Litigation Reform Act'').5 The Litigation Reform Act, among

other changes, added new Section 27A 6 to the Securities Act of

1933 (``Securities Act'') 7 and new Section 21E 8 to the

Securities Exchange Act of 1934 (``Exchange Act''),9 establishing

statutory safe harbors for forward-looking information. The purpose of

this release is to propose amendments that would explicitly extend the

statutory safe harbor protections to specified disclosures that would

be provided pursuant to proposed Item 305 of Regulation S-K and

proposed Item 9A of Form 20-F.

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\5\ Pub. L. No. 104-67, 109 Stat. 737 (1995). See Section I and

III.B.3.e of the Derivatives Proposing Release.

\6\ 15 U.S.C. 77z-2.

\7\ 15 U.S.C. 77a et seq.

\8\ 15 U.S.C. 78u-5.

\9\ 15 U.S.C. 78a et seq.

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II. DISCUSSION OF PROPOSALS

The amendments being proposed today would add a safe harbor

provision to proposed Item 305 of Regulation S-K 10 and proposed

Item 9A of Form 20-F.11 The provision would state that the safe

harbor provided in Section 27A of the Securities Act and Section 21E of

the Exchange Act will apply to quantitative information about market

risk provided pursuant to Item 305(a) of Regulation S-K or Item 9A(a)

of Form 20-F, and information about market risk with respect to future

reporting periods provided pursuant to Item 305(b)(3) of Regulation S-K

or Item 9A(b)(3) of Form 20-F.

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\10\ Proposed paragraph (c) to proposed Item 305 of Regulation

S-K.

\11\ Proposed paragraph (c) to proposed Item 9A of Form 20-F.

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The Commission notes that, by its terms, the statutory safe harbor

may be available with respect to disclosure required by proposed Items

305 and 9A, to the extent that all of the conditions of the statutory

safe harbor are met. By invoking its rulemaking authority under

Sections 27A and 21E, the Commission seeks to ensure the application of

the statutory safe harbor to specified disclosures under Items 305 and

9A, and to broaden the application of the statutory safe harbor with

respect to those disclosures. The Commission believes that the proposed

safe harbor protection is consistent with the public interest and the

protection of investors.

Comment is solicited as to whether it is appropriate to include a

safe harbor provision in proposed Item 305 of Regulation S-K and

proposed Item 9A of Form 20-F, and if so, whether it is appropriate to

apply the new statutory safe harbor protection to the disclosure

required by these items, or whether a different safe harbor should be

established. The proposed safe harbor is limited to paragraphs (a) and

(b)(3) of Items 305 and 9A because these appear to be the provisions

pursuant to which forward-looking information may be required. Comment

is requested on whether the proposed safe harbor should be expanded to

apply to any or all of the information required by paragraphs (b)(1)

and (b)(2) of proposed Items 305 and 9A, especially in light of the

difficult nature of the required disclosure.

As proposed, the safe harbor would be available with respect to the

specified information regardless of whether the issuer providing it or

the type of transaction otherwise is excluded from the statutory safe

harbor.12 Thus, for

[[Page 16673]]

example, first-time Commission registrants and those making initial

public offerings would be covered by the safe harbor with respect to

this specific information if all other conditions are satisfied. As is

the case with the statutory safe harbor, the proposed safe harbor would

apply only to a forward-looking statement made by: (1) an issuer; (2) a

person acting on behalf of the issuer; (3) an outside reviewer retained

by the issuer making a statement on behalf of the issuer; or (4) an

underwriter, with respect to information provided by the issuer or

information derived from information provided by the issuer. Comment is

solicited on whether all or some of the types of issuers and

transactions excluded from the statutory safe harbor also should be

excluded from the proposed safe harbor provisions.

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\12\ Paragraph (b) of Section 27A of the Securities Act and

Section 21E of the Exchange Act exclude from the statutory safe

harbor a forward-looking statement:

(1) that is made with respect to the business or operations of

an issuer that: (A) during the three-year period preceding the date

on which the statement was first made: (i) was convicted of a felony

or misdemeanor described in clauses (i) through (iv) of Exchange Act

Section 15(b)(4)(B) [15 U.S.C. 78o(b)(4)(B)]; or (ii) has been made

the subject of a judicial or administrative decree or order arising

out of a governmental action that prohibits future violations of the

antifraud provisions of the securities laws, requires that the

issuer cease and desist from violating the antifraud provisions of

the securities laws, or determines that the issuer violated the

antifraud provisions of the federal securities laws; (B) makes the

forward-looking statement in connection with an offering of

securities by a blank check company; (C) issues penny stock; (D)

makes the forward-looking statement in connection with a rollup

transaction; or (E) makes the forward-looking statement in

connection with a going private transaction; or

(2) that is: (A) included in a financial statement prepared in

accordance with generally accepted accounting principles; (B)

contained in a registration statement of, or otherwise issued by, an

investment company; (C) made in connection with a tender offer; (D)

made in connection with an initial public offering; (E) made in

connection with an offering by, or relating to the operations of, a

partnership, limited liability company, or a direct participation

investment program; or (F) made in a disclosure of beneficial

ownership in a report required to be filed with the Commission

pursuant to Exchange Act Section 13(d) [15 U.S.C. 78m(d)].

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As proposed, the Item 305 and 9A disclosures may be provided in

footnotes to the financial statements,13 and the safe harbor

proposed today would also be available regardless of whether the

information is set forth in text or financial statement footnotes.

Comment is requested as to whether disclosure contained in a footnote

to the financial statements, which, in the absence of Commission

rulemaking, would be excluded from the statutory safe harbor, should be

covered by the proposed safe harbor provisions, as proposed.

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\13\ See General Instruction 5 to paragraphs (a) and (b) of

proposed Item 305 of Regulation S-K and proposed Item 9A of Form 20-

F.

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As proposed, Item 305 information would not be required of small

business issuers complying with Regulation S-B. The safe harbor

proposed today would be available to those small business issuers that

choose to provide this information.14 To the extent that this

disclosure is voluntarily provided, however, the proposed safe harbor

protection would be available for information within the scope of

proposed Item 305(a) only if all of the information that would be

required by 305(a) were provided, rather than just a portion of it.

Similarly, the safe harbor protection would be available for

information within the scope of Item 305(b)(3) only if all of the

information required by Item 305(b) were provided. Comment is requested

as to whether the proposed safe harbor should apply to voluntarily

provided disclosures. Additionally, comment is solicited as to whether

the proposed safe harbor's application to voluntarily reported

information should depend on providing all of the disclosure that would

be required by proposed Item 305, rather than permitting compliance

with either 305(a) or 305(b) separately. Conversely, should the

proposed safe harbor apply to voluntary disclosures even when only a

portion of the information required by paragraph (a) or paragraph (b)

is provided by a small business issuer?

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\14\ Proposed Item 10(g) to Regulation S-B.

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III. Request for Comment

Any interested person wishing to submit written comments on the

proposed amendments as well as other matters that might have an impact

on the proposed rules, is requested to do so. The Commission also

requests comment on whether the proposed amendments, if adopted, would

have an adverse impact on competition that is neither necessary nor

appropriate in furthering the purposes of the Exchange Act. Comments

responsive to this inquiry will be considered by the Commission in

complying with its responsibilities under Section 23(a) of the Exchange

Act.15

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\15\ 15 U.S.C. 78w(a).

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IV. Cost-Benefit Analysis

To evaluate fully the costs and benefits associated with the

proposed rules, the Commission requests commenters to provide their

views and data as to the costs and benefits associated therewith. It is

expected that the proposed amendments would reduce the costs to

companies that provide disclosure pursuant to proposed Items 305 and 9A

by providing protection as set forth in the safe harbor.

V. Summary of Initial Regulatory Flexibility Analysis

An Initial Regulatory Flexibility Analysis has been prepared in

accordance with 6 U.S.C. 603 concerning the proposed amendments. The

analysis notes that the purpose of the amendments proposed is to extend

the applicability of the safe harbor provisions in Section 27A of the

Securities Act and Section 21E of the Exchange Act to quantitative

information about market risk included in Securities Act and Exchange

Act documents pursuant to paragraph (a) of proposed Item 305 of

Regulation S-K or proposed Item 9A of Form 20-F, and information about

market risk with respect to future reporting periods provided pursuant

to paragraph (b)(3) of those proposed items.

As discussed more fully in the analysis, the changes would affect

persons that are small entities, as defined by the Commission's rules,

by making the safe harbor available to those small entities that

voluntarily provide such disclosure.

The analysis discusses possible alternatives to the proposed

amendments including, among others, establishing different compliance

or reporting requirements or exempting small issuers from all or part

of the proposed amendments. Given the fact that the proposed amendments

would extend protection to all issuers, including small business

issuers, disclosing information to which the safe harbor protection

applies, the Commission does not believe that any of the alternatives

are preferable at this time.

Comments are encouraged on any aspect of this analysis. A copy of

the analysis may be obtained by contacting Elizabeth M. Murphy, Office

of Disclosure Policy, Division of Corporation Finance, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

VI. Statutory Basis

The amendments to Item 10 of Regulation S-B, and proposed Item 305

of Regulation S-K and Item 9A of Form 20-F are being proposed pursuant

to Section 27A of the Securities Act and Section 21E of the Exchange

Act.

List of Subjects in 17 CFR Parts 228, 229 and 249

Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendments

In accordance with the foregoing, Title 17, Chapter II of the Code

of Federal Regulations is proposed to be amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

1. The authority citation for Part 228 continues to read as

follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,

77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,

78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-

11, unless otherwise noted.

[[Page 16674]]

2. By amending Sec. 228.10 by adding paragraph (g) to read as

follows:

Sec. 228.10 (Item 10) General.

* * * * *

(g) Quantitative and qualitative disclosures about market risk. The

safe harbor provision included in paragraph (c) of Item 305 of

Regulation S-K (Sec. 229.305(c) of this chapter) shall apply to

information required by paragraph (a) of Item 305 of Regulation S-K

(Sec. 229.305(a) of this chapter) that is voluntarily provided by or on

behalf of a small business issuer complying with Regulation S-B, but

only if all of the information required by Item 305(a), and not just a

portion of it, is provided. The safe harbor provision also shall apply

to statements with respect to future reporting periods provided

pursuant to paragraph (b)(3) of Item 305 of Regulation S-K

(Sec. 229.305(b)(3) of this chapter) that are voluntarily provided by

or on behalf of a small business issuer complying with Regulation S-B,

but only if all of the information required by Item 305(b)

(Sec. 229.305(b) of this chapter), and not just a portion of it, is

provided.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES

ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND

CONSERVATION ACT OF 1975--REGULATION S-K

3. The authority citation for Part 229 continues to read in part as

follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,

77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,

77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n,

79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.

* * * * *

4. By amending Sec. 229.305, as provided in the Federal Register

(61 FR 593, January 8, 1996), by adding paragraph (c) after the General

Instructions to paragraphs 305(a) and 305(b) to read as follows:

Sec. 229.305 (Item 305) Quantitative and qualitative disclosures about

market risk.

* * * * *

(c) Safe Harbor. The safe harbor provided in Section 27A of the

Securities Act of 1933 (15 U.S.C. 77z-2) and Section 21E of the

Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe

harbors'') shall apply, with respect to all types of issuers and

transactions, to information provided pursuant to paragraph (a) of this

Item (Sec. 229.305(a)), and any statements with respect to future

reporting periods provided pursuant to paragraph (b)(3) of this Item

(Sec. 229.305(b)(3)), whether located in text or notes to financial

statements, provided that the disclosure is made by an issuer; a person

acting on behalf of the issuer; an outside reviewer retained by the

issuer making a statement on behalf of the issuer; or an underwriter,

with respect to information provided by the issuer or information

derived from information provided by the issuer.

* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

5. The authority citation for Part 249 continues to read in part as

follows:

Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;

6. By amending Form 20-F (referenced in Sec. 249.220f) by adding

paragraph (c) to Item 9A in Part I after the General Instructions to

paragraphs 9A(a) and 9A(b) to read as follows:

Note: The text of Form 20-F does not, and this amendment will

not, appear in the Code of Federal Regulations.

Form 20-F--Registration Statement Pursuant to Section 12 (b) or (g) of

the Securities Exchange Act of 1934 or Annual Report Pursuant to

Section 13 or 15(d) of the Securities Exchange Act of 1934 or

Transaction Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

* * * * *

Part I

* * * * *

Item 9A. Quantitative and qualitative disclosures about market risk.

* * * * *

(c) Safe Harbor. The safe harbor provided in Section 21E of the

Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe

harbor'') shall apply, with respect to all types of issuers and

transactions, to information provided pursuant to paragraph (a) of this

Item, and any statements with respect to future reporting periods

provided pursuant to paragraph (b)(3) of this Item, whether located in

text or notes to financial statements, provided that the disclosure is

made by an issuer; a person acting on behalf of the issuer; an outside

reviewer retained by the issuer making a statement on behalf of the

issuer; or an underwriter, with respect to information provided by the

issuer or information derived from information provided by the issuer.

* * * * *

By the Commission.

Dated: April 9, 1996.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-9183 Filed 4-15-96; 8:45 am]

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