
[Federal Register Volume 80, Number 190 (Thursday, October 1, 2015)]
[Proposed Rules]
[Pages 59083-59092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-24875]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 210

[Release No. 33-9929; 34-75985; IC-31849; File No. S7-20-15]


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

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Commission is publishing this request for comment to seek 
public comment regarding the financial disclosure requirements in 
Regulation S-X for certain entities other than a registrant. These 
disclosure requirements require registrants to provide financial 
information about acquired businesses, subsidiaries not consolidated 
and 50 percent or less owned persons, guarantors and issuers of 
guaranteed securities, and affiliates whose securities collateralize 
registered securities. This request for comment is related to an 
initiative by the Division of Corporation Finance to review the 
disclosure requirements applicable to public companies to consider ways 
to improve the requirements for the benefit of investors and public 
companies.

DATES: Comments should be received on or before November 30, 2015.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-20-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-20-15. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's Web site (http://www.sec.gov/rules/other.shtml). Comments also are available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: Todd E. Hardiman, Associate Chief 
Accountant, at (202) 551-3516, Division of Corporation Finance; Duc 
Dang, Special Counsel, at (202) 551-3386, Office of the Chief 
Accountant; or Matthew Giordano, Chief Accountant, at (202) 551-6892, 
Division of Investment Management, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
II. Rule 3-05 of Regulation S-X--Financial Statements of Businesses 
Acquired or To Be Acquired and Related Requirements
    A. Current Rule 3-05 Disclosure and Related Requirements
    1. Content of the Rule 3-05 Disclosure and Related Requirements
    2. Tests for Determining Disclosure Required by Rule 3-05 and 
Related Requirements
III. Rule 3-09 of Regulation S-X--Separate Financial Statements of 
Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons 
and Related Requirements
    A. Current Rule 3-09 Disclosure and Related Requirements
    B. Consideration of Current Rule 3-09 Disclosure and Related 
Requirements
    1. Content of the Rule 3-09 Disclosure and Related Requirements
    2. Tests for Determining Disclosure Required by Rule 3-09 and 
Related Requirements
IV. Rule 3-10 of Regulation S-X--Financial Statements of Guarantors 
and Issuers of Guaranteed Securities Registered or Being Registered
    A. Current Rule 3-10 Disclosure and Related Requirements
    B. Consideration of Current Rule 3-10 Disclosure and Related 
Requirements
    1. Content of the Rule 3-10 Alternative Disclosure
    2. Conditions To Providing Alternative Disclosure

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V. Rule 3-16 of Regulation S-X--Financial Statements of Affiliates 
Whose Securities Collateralize an Issue Registered or Being 
Registered
    A. Current Rule 3-16 Disclosure and Related Requirements
    B. Consideration of Current Rule 3-16 Disclosure and Related 
Requirements
VI. Other Requirements
VII. Closing

I. Introduction

    Over the years, the Commission has considered its disclosure system 
and engaged periodically in rulemakings designed to enhance our 
disclosure and registration requirements. Some requirements have been 
considered and updated relatively frequently, while others have changed 
little since they were first adopted. For example, the Commission has 
revised the registration requirements a number of times, most recently 
in 2005 with Securities Offering Reform, and at that time, the 
Commission also adopted new methods of communicating offering 
information.\1\ As another example, the disclosure requirements 
applicable to small businesses also have been updated on a variety of 
occasions, most recently in 2007.\2\ In contrast, other requirements in 
Regulations S-K \3\ and S-X,\4\ which encompass many of the 
Commission's financial and non-financial disclosure rules, have not 
been updated frequently.
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    \1\ See Securities Offering Reform, Release No. 33-8591 (July 
19, 2005) [70 FR 44722].
    \2\ See Smaller Reporting Company Regulatory Relief and 
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934].
    \3\ 17 CFR 229.10 et seq.
    \4\ 17 CFR part 210.
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    In 2013, the staff issued its Report on Review of Disclosure 
Requirements in Regulation S-K,\5\ which was mandated by Section 108 of 
the Jumpstart Our Business Startups Act (the ``JOBS Act'').\6\ Section 
108(b) of the JOBS Act required the Commission to submit a report to 
Congress including the specific recommendations of the Commission on 
how to streamline the registration process in order to make it more 
efficient and less burdensome for the Commission and for prospective 
issuers who are emerging growth companies. The Commission staff 
recommended the development of a plan to systematically review the 
disclosure requirements in the Commission's rules and forms, including 
both Regulation S-K and Regulation S-X, and the presentation and 
delivery of information to investors and the marketplace. At the time 
the report was issued, Commission Chair Mary Jo White asked the staff 
to develop specific recommendations for updating the rules that dictate 
what a company must disclose in its filings.\7\ Pursuant to this 
request, the staff is undertaking a broad-based review of the 
disclosure requirements and the presentation and delivery of the 
disclosures, which the Commission may consider whether to review. This 
ongoing review by the staff is known as the Disclosure Effectiveness 
Initiative.
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    \5\ Report on Review of Disclosure Requirements in Regulation S-
K (Dec. 2013), available at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf. Section 108(a) of the 
JOBS Act directed the Commission to conduct a review of Regulation 
S-K to (1) comprehensively analyze the current registration 
requirements of such regulation; and (2) determine how such 
requirements can be updated to modernize and simplify the 
registration process and reduce the costs and other burdens 
associated with these requirements for issuers who are emerging 
growth companies.
    \6\ Jumpstart Our Business Startups Act, Public Law 112-106, 126 
Stat. 306 (2012).
    \7\ See SEC Press Release 2013-269, dated December 20, 2013, 
available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540530982.
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    Initially, the staff is focusing on the business and financial 
information that is required to be disclosed in periodic and current 
reports, namely Forms 10-K, 10-Q and 8-K, and registration 
statements.\8\ As part of the review, the staff requested public 
input,\9\ and received a number of comments. Two of the comment letters 
addressed Regulation S-X,\10\ which is the subject of this request for 
comment and the first product resulting from the Disclosure 
Effectiveness Initiative.
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    \8\ See Keith F. Higgins, Disclosure Effectiveness: Remarks 
Before the American Bar Association Business Law Section Spring 
Meeting (April 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370541479332.
    \9\ See request for public comment at http://www.sec.gov/spotlight/disclosure-effectiveness.shtml.
    \10\ See letter from Thomas J. Kim, Chair, Disclosure 
Effectiveness Working Group of the Federal Regulation of Securities 
Committee and the Law and Accounting Committee, Business Law 
Section, American Bar Association, November 14, 2014 available at 
http://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness-23.pdf; but see letter from Sandra J. Peters 
and James C. Allen, CFA Institute, November 12, 2014 available at 
http://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness-24.pdf.
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    Regulation S-X contains disclosure requirements that dictate the 
form and content of financial statements to be included in filings with 
the Commission. It addresses both registrant financial statements and 
financial statements of certain entities other than the registrant. As 
an initial step in the review of Regulation S-X, we are considering the 
requirements applicable to these other entities, which is a discrete, 
but important, subset of the Regulation S-X disclosure requirements. 
The staff is continuing to evaluate other Regulation S-X disclosure 
requirements applicable to the registrant and how those requirements 
integrate with, for example, Regulation S-K and the applicable 
accounting standards and will make further recommendations to the 
Commission for consideration. In this request for comment, we are 
seeking public comment on the following rules, along with certain 
related requirements:
     Rule 3-05, Financial Statements of Businesses Acquired or 
to be Acquired; \11\
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    \11\ 17 CFR 210.3-05.
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     Rule 3-09, Separate Financial Statements of Subsidiaries 
Not Consolidated and 50 Percent or Less Owned Persons; \12\
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    \12\ 17 CFR 210.3-09.
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     Rule 3-10, Financial Statements of Guarantors and Issuers 
of Guaranteed Securities Registered or Being Registered; \13\ and
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    \13\ 17 CFR 210.3-10.
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     Rule 3-16, Financial Statements of Affiliates Whose 
Securities Collateralize an Issue Registered or Being Registered.\14\
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    \14\ 17 CFR 210.3-16.
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    We seek to better understand how well these requirements, some of 
which have remained largely the same for many years,\15\ are informing 
investors and we are soliciting comment on how investors use the 
disclosures to make investment and voting decisions. We are also 
interested in learning about any challenges that registrants face in 
preparing and providing the required disclosures. Finally, we are 
interested in potential changes to these requirements that could 
enhance the information provided to investors and promote efficiency, 
competition, and capital formation.\16\
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    \15\ Rule 3-05 has not been thoroughly reconsidered since 1996. 
See Streamlining Disclosure Requirements Related to Significant 
Business Acquisitions, Release No. 33-7355 (Oct. 10, 1996) [61 FR 
54509]. Rules 3-09 and 3-16 have not been thoroughly reconsidered 
since 1981. See Separate Financial Statements Required by Regulation 
S-X, Release No. 33-6359 (Nov. 6, 1981) [46 FR 56171]. Rule 3-10 was 
substantially revised in 2000. See Financial Statements and Periodic 
Reports for Related Issuers and Guarantors, Release No. 33-7878 
(Aug. 4, 2000) [65 FR 51692].
    \16\ Section 3(f) of the Securities Exchange Act of 1934 
(``Exchange Act'') [15 U.S.C. 78a et seq.] requires that, whenever 
the Commission is engaged in rulemaking under the Exchange Act and 
is required to consider or determine whether an action is necessary 
or appropriate in the public interest, the Commission shall 
consider, in addition to the protection of investors, promotion of 
efficiency, competition and capital formation. Section 2(b) of the 
Securities Act of 1933 (``Securities Act'') [15 U.S.C. 77a et seq.] 
also sets forth this same requirement. See also Section 23(a)(2) of 
the Exchange Act.
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    To focus the discussion, this request for comment describes the

[[Page 59085]]

requirements \17\ that apply to domestic registrants \18\ that do not 
qualify as smaller reporting companies \19\ or emerging growth 
companies.\20\ When relevant, we note different disclosure requirements 
triggered by each type of registrant.\21\ In addition, unless otherwise 
noted, the disclosure requirements we describe in this request for 
comment should be assumed to apply to periodic reporting under the 
Exchange Act and registration statements filed under the Exchange Act 
and the Securities Act.


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    \17\ The descriptions in this release are provided for the 
convenience of commenters and to facilitate the comment process. The 
descriptions should not be taken as Commission or staff guidance 
about the relevant rules.
    \18\ Generally, the requirements described in this release apply 
to entities registered as investment companies and entities that 
have elected to be treated as business development companies under 
the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq]. See 
Rule 6-03 of Regulation S-X [17 CFR 210.6-03], which states in part, 
``[t]he financial statements filed for persons to which Sec. Sec.  
210.6-01 to 210.6-10 are applicable shall be prepared in accordance 
with the . . . special rules [Sec. Sec.  210.6-01 to 210.6-10] in 
addition to the general rules in Sec. Sec.  210.1-01 to 210.4-10 
(Articles 1, 2, 3, and 4). Where the requirements of a special rule 
differ from those prescribed in a general rule, the requirements of 
the special rule shall be met.''
    \19\ Exchange Act Rule 12b-2 [17 CFR 240.12b-2] defines a 
smaller reporting company as an issuer that is not an investment 
company, an asset-backed issuer, or a majority-owned subsidiary of a 
parent that is not a smaller reporting company and that has a public 
float of less than $75 million. If an issuer has zero public float, 
it would be considered a smaller reporting company if its annual 
revenues are less than $50 million.
    \20\ Section 2(a)(19) of the Securities Act defines an emerging 
growth company as an issuer that had total gross revenues of less 
than $1 billion during its most recently completed fiscal year. It 
retains that status for five years after its initial public offering 
unless its revenues rise above $1 billion, it issues more than $1 
billion of non-convertible debt in a three year period, or it 
qualifies as a large accelerated filer pursuant to Exchange Act Rule 
12b-2.
    \21\ For example, we indicate by footnote where different 
disclosure requirements apply to foreign private issuers. The 
definition of foreign private issuer is contained in Securities Act 
Rule 405 [17 CFR 230.405] and Exchange Act Rule 3b-4(c) [17 CFR 
240.3b-4(c)]. A foreign private issuer is any foreign issuer other 
than a foreign government, except for an issuer that (1) has more 
than 50 percent of its outstanding voting securities held of record 
by U.S. residents and (2) any of the following: (i) a majority of 
its officers and directors are citizens or residents of the United 
States; (ii) more than 50 percent of its assets are located in the 
United States; or (iii) its business is principally administered in 
the United States.
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II. Rule 3-05 of Regulation S-X--Financial Statements of Businesses 
Acquired or To Be Acquired and Related Requirements

A. Current Rule 3-05 Disclosure and Related Requirements

    When a registrant acquires a business, Rule 3-05 generally requires 
it to provide separate audited annual and unaudited interim pre-
acquisition financial statements (``Rule 3-05 Financial Statements'') 
of the business \22\ if it is significant to the registrant.\23\ A 
registrant determines whether an acquisition is significant using the 
investment, asset, and income tests defined in Rule 1-02(w) of 
Regulation S-X.\24\ Performing these tests for purposes of applying 
Rule 3-05 and related requirements can be generally described as 
follows:
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    \22\ Registrants determine whether a ``business'' has been 
acquired by applying Rule 11-01(d) [17 CFR 210.11-01(d)] of 
Regulation S-X. This determination is separate and distinct from a 
determination made under the applicable accounting standards 
requiring registrants to account for and disclose the transaction in 
a registrant's financial statements. The definition of ``business'' 
in Regulation S-X focuses primarily on whether the nature of the 
revenue-producing activity of the target will remain generally the 
same as before the transaction. The definition in the applicable 
accounting standards (see Financial Accounting Standards Board 
(``FASB'') Accounting Standards Codification (``ASC'') 805, Business 
Combinations in U.S. GAAP and a similar definition in IFRS 3, 
Business Combinations) focuses on whether the target is an 
integrated set of activities and assets that is capable of being 
conducted and managed by a market participant for the purpose of 
providing a return.
    \23\ Domestic issuers file the disclosures required by Rule 3-05 
and its related requirements in current reports filed on Form 8-K 
[17 CFR 249.308] under the Exchange Act, as well as in registration 
statements. Foreign private issuers, however, only file the 
disclosures in registration statements. In Foreign Issuer Reporting 
Enhancements, Release No. 33-8900 (Feb. 29, 2008) [73 FR 13404], the 
Commission proposed requiring foreign private issuers to provide 
certain financial information required by Rule 3-05 in periodic 
reports. This requirement was not adopted by the Commission. See 
Foreign Issuer Reporting Enhancements, Release No. 33-8959 (Sept. 
23, 2008) [73 FR 58300].
    \24\ 17 CFR 210.1-02(w).
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     Investment Test--the purchase consideration is compared to 
the total assets of a registrant reflected in its most recent annual 
financial statements required to be filed at or prior to the 
acquisition date.
     Asset Test--a registrant's proportionate share of the 
business's total assets reflected in the business's most recent annual 
pre-acquisition financial statements is compared to the total assets of 
the registrant reflected in its most recent annual financial statements 
required to be filed at or prior to the acquisition date.
     Income Test--a registrant's equity in the income from 
continuing operations before income taxes and cumulative effect of a 
change in accounting principle,\25\ as reflected in the business's most 
recent annual pre-acquisition financial statements, exclusive of 
amounts attributable to any noncontrolling interests, is compared to 
the same measure of the registrant reflected in its most recent annual 
financial statements required to be filed at or prior to the 
acquisition date. Rule 3-05 requires more disclosure as the size of the 
acquisition, relative to the size of the registrant, increases based on 
the test results. If none of the Rule 3-05 tests exceeds 20 percent, a 
registrant is not required to file any Rule 3-05 Financial Statements. 
If any of the Rule 3-05 tests exceeds 20 percent, but none exceeds 40 
percent, Rule 3-05 Financial Statements are required for the most 
recent fiscal year and any required interim periods. If any Rule 3-05 
test exceeds 40 percent, but none exceeds 50 percent, a second fiscal 
year of Rule 3-05 Financial Statements is required. When at least one 
Rule 3-05 test exceeds 50 percent, a third fiscal year \26\ of Rule 3-
05 Financial Statements is required unless revenues of the acquired 
business were less than $50 million in its most recent fiscal year.\27\
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    \25\ Rule 1-02(w) of Regulation S-X refers to extraordinary 
items, but the FASB eliminated this concept from U.S. GAAP in its 
Accounting Standards Update No. 2015-1, Simplifying Income Statement 
Presentation by Eliminating the Concept of Extraordinary Items, 
issued on January 9, 2015. IFRS prohibit the presentation and 
disclosure of extraordinary items in IAS 1, Presentation of 
Financial Statements.
    \26\ A smaller reporting company is subject to requirements 
similar to Rule 3-05 that are found in Rule 8-04 of Regulation S-X 
[17 CFR 210.8-04], but is never required to provide a third fiscal 
year. An emerging growth company, although subject to Rule 3-05, 
need not provide a third year of Rule 3-05 Financial Statements when 
it only presents two years of its own financial statements pursuant 
to Section 7(a)(2)(A) of the Securities Act.
    \27\ 17 CFR 210.3-05(b)(2).
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    Rule 3-05 Financial Statements must be accompanied by the pro forma 
financial information described in Article 11 of Regulation S-X (``Pro 
Forma Information'').\28\ Pro Forma Information typically includes the 
most recent balance sheet and most recent annual and interim period 
income statements. The Pro Forma Information is based on the historical 
financial statements of the registrant and the acquired business and 
generally includes adjustments to show how the acquisition might have 
affected those financial statements had it occurred at an earlier time. 
Adjustments to the pro forma balance sheet and income statements must 
be ``factually supportable'' and ``directly attributable to the 
transaction.'' An additional criterion, ``continuing impact,'' applies 
only to adjustments to the pro forma

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income statement.\29\ The adjustments are computed assuming the 
transaction occurred at the beginning of the fiscal year presented and 
carried forward through any interim period presented.\30\
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    \28\ 17 CFR 210.11. A smaller reporting company provides the pro 
forma financial information described in Rule 8-05 of Regulation S-X 
[17 CFR 210.8-05]. Although the preliminary notes to Article 8 
indicate that smaller reporting companies may wish to consider 
Article 11, it is not required.
    \29\ 17 CFR 210.11-02(b)(6).
    \30\ For example, amortization expense of an acquired intangible 
asset would be shown in the fiscal year and subsequent interim 
period pro forma income statements as if the acquisition occurred on 
the first day of the fiscal year.
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    A registrant must provide a brief description of a significant 
acquisition by filing a Form 8-K \31\ within four business days after 
consummation of the acquisition. If Rule 3-05 Financial Statements and 
Pro Forma Information are not provided with this Form 8-K, the 
registrant must provide them within approximately 75 days after 
consummation by filing an amendment to the Form 8-K.\32\ The 75-day 
period is intended to provide sufficient time to obtain the Rule 3-05 
Financial Statements and prepare the Pro Forma Information.
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    \31\ General Instruction B.1 of Form 8-K.
    \32\ Item 9.01(a)(4) of Form 8-K requires that the amendment be 
filed no later than 71 calendar days after the date that the initial 
Form 8-K must be filed.
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    When filing certain registration statements,\33\ a registrant may 
need to update, based on the effective date, Rule 3-05 Financial 
Statements and Pro Forma Information previously provided on Form 8-
K.\34\ A registrant must also include, in certain registration 
statements filed ahead of the due date of the Form 8-K, Rule 3-05 
Financial Statements and Pro Forma Information for a recently-
consummated acquisition when a Rule 3-05 test exceeds 50 percent.\35\ 
Finally, the following additional disclosures that are not required on 
Form 8-K must be provided in certain registration statements: \36\
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    \33\ These additional requirements do not apply to all 
registration statements. For example, they do not apply to 
registration statements filed on Form S-8 [17 CFR 239.16b] or 
registration statements filed pursuant to Rule 462(b) of Regulation 
C [17 CFR 230.462(b)].
    \34\ 17 CFR 210.3-12.
    \35\ 17 CFR 210.3-05(b)(4).
    \36\ In 1996, the Commission partially conformed these reporting 
requirements in Streamlining Disclosure Requirements Related to 
Significant Business Acquisitions, Release No. 33-7355 (Oct. 10, 
1996) [61 FR 54509] and retained these disclosures because it 
recognized that ``an acquisition could be so large relative to an 
issuer that investors would need financial statements of the 
acquired business for a reasoned evaluation of any primary capital 
raising transaction by the issuer.''
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     Rule 3-05 Financial Statements and Pro Forma Information 
for a probable acquisition when a Rule 3-05 test exceeds 50%; and
     Rule 3-05 Financial Statements and Pro Forma Information 
for the substantial majority of individually insignificant consummated 
and probable acquisitions since the date of the most recent audited 
balance sheet if a Rule 3-05 test exceeds 50 percent for any 
combination of the acquisitions.\37\
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    \37\ 17 CFR 210.3-05(b)(2)(i). Commission staff has clarified 
that certain significant acquisitions should also be included. See 
Sec.  2035.2 of the Division of Corporation Finance's Financial 
Reporting Manual. This manual was originally prepared by the staff 
of the Division of Corporation Finance to serve as internal 
guidance. In 2008, in an effort to increase transparency of informal 
staff interpretations, the Division of Corporation Finance posted 
the manual to its Web site at http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml.
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    The accounting standards require disclosure \38\ to enable 
investors to understand the nature and financial effect of a business 
combination that occurs during the periods presented in the 
registrant's financial statements or subsequent to the most recent 
balance sheet date, but before the registrant's financial statements 
are issued. Some of the disclosures required by the accounting 
standards are the same as those required by Rule 3-05 and the related 
requirements, such as the name and description of the acquired 
business. Others, such as pro forma financial information, are similar 
although the Pro Forma Information required by Article 11 of Regulation 
S-X is significantly more detailed. More significantly, Rule 3-05 
requires historical financial statements of the acquired entity and the 
accounting standards do not.
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    \38\ See FASB ASC 805, Business Combinations and IFRS 3, 
Business Combinations.
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B. Consideration of Current Rule 3-05 Disclosure and Related 
Requirements

1. Content of the Rule 3-05 Disclosure and Related Requirements
    Financial disclosures required by our rules about a business 
acquisition are important to investors because an acquisition will 
result in changes to a registrant's financial condition, results of 
operations, liquidity, and future prospects. Depending on the impact of 
the acquisition, those changes could be significant. While it is 
important to provide investors with information about an acquisition, 
the types of financial information currently required under the rules 
may have some limitations as a predictor of the financial condition and 
results of operations of the combined entity following the acquisition. 
Prior to the adoption of Rule 3-05 in 1982, some commenters questioned 
the need for financial statements of acquired businesses for periods 
prior to the acquisition. Those commenters criticized the utility and 
relevance of pre-acquisition financial statements in assessing the 
future impacts of an acquisition on a registrant. Specifically, 
commenters noted that pre-acquisition financial statements do not 
reflect the new basis of accounting that arises upon consummation, 
changes in management, or various other items affected by the 
acquisition.\39\ Although the Pro Forma Information addresses some of 
these concerns by showing how the accounting for an acquisition might 
have affected a registrant's historical financial statements had the 
transaction been consummated at an earlier time, restrictions on pro 
forma adjustments prohibit a registrant from reflecting other 
significant changes it expects to result from the acquisition. For 
example, Commission staff has stated that workforce reductions and 
facility closings, both actions that registrants frequently take when 
acquiring businesses, are generally too uncertain to meet the criteria 
for adjustment.\40\ In addition, Pro Forma Information usually lacks 
comparative prior periods and is unaudited. Finally, unless a 
registrant files certain registration statements that trigger the 
required disclosures earlier, investors typically must wait 
approximately 75 days for the Rule 3-05 Financial Statements and the 
Pro Forma Information.
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    \39\ These comments were received in connection with the 
proposal, Instructions for the Presentation and Preparation of Pro 
Forma Financial Information and Financial Statements of Companies 
Acquired or to be Acquired, Release 33-6350 (September 24, 1981) [46 
FR 48943]. In the adopting release, Instructions for the 
Presentation and Preparation of Pro Forma Financial Information and 
Requirements for Financial Statements of Businesses Acquired or to 
be Acquired, Release No. 33-6413 (June 24, 1982) [47 FR 29832], the 
Commission considered reducing the required disclosure to condensed 
or summarized information. However, the Commission decided that full 
financial statements of an acquired business were necessary because 
it believed that there was important information in the notes to the 
financial statements that would not be reflected in condensed or 
summarized information and that it was essential that financial 
information about an acquired business be audited by an independent 
auditor.
    \40\ See Sec.  3250.1 of the Division of Corporation Finance's 
Financial Reporting Manual.
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Request for Comment
    1. How do investors use each of the following: The Rule 3-05 
Financial Statements; the Pro Forma Information; and the disclosures 
required by the applicable accounting standards? Are there challenges 
that investors face in using these disclosures?
    2. Are there changes to these requirements we should consider to 
further facilitate the disclosure of useful information to investors? 
For example, is there different or additional information that 
investors need about

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acquired businesses or about how the combined entities might perform 
following the acquisition? If so, what information is needed and are 
there challenges that registrants would face in preparing and providing 
it?
    3. Are there challenges that registrants face in preparing and 
providing the required disclosures? If so, what are the challenges? Are 
there changes to these requirements we should consider to address those 
challenges? If so, what changes and how would those changes affect 
investors' ability to make informed decisions?
    4. Are there requirements that result in disclosures that investors 
do not consider useful? If so, what changes to these requirements would 
make them useful or should we consider eliminating or replacing all or 
part of those requirements?
    5. How could we improve the usefulness of the Pro Forma 
Information? Could we do so by changing the extent of information 
required and/or the methodologies used to prepare it? For example, 
should we add a requirement for comparative pro forma income statements 
of the prior year and/or modify the restrictions on pro forma 
adjustments? If so, what changes should be made and should auditors 
have any level of involvement with the information? Are there 
disclosures we should consider adding to the Pro Forma Information that 
are currently found only in the Rule 3-05 Financial Statements?
    6. If we make changes to improve the usefulness of the Pro Forma 
Information, should we modify the requirement to provide Rule 3-05 
Financial Statements? If so, how? If not, why?
    7. Should we modify the amount of time that registrants have to 
provide disclosures about acquired businesses to investors? If so, 
under what circumstances and how? If not, why?
    8. Should certain registration statements continue to require 
accelerated and additional disclosure as compared to the Form 8-K 
requirements? If so, to what extent and why? If not, why?
2. Tests for Determining Disclosure Required by Rule 3-05 and Related 
Requirements
    The Rule 3-05 tests employ bright-line percentage thresholds that a 
registrant must apply to a limited set of financial statement measures. 
Use of these thresholds provides registrants with certainty and 
promotes consistency. At the same time, they do not allow judgment to 
be applied to all of the facts and circumstances. In addition, the 
tests can be difficult to apply in certain situations and have not 
eliminated the need for implementation guidance.\41\ Commission staff 
receives frequent requests \42\ to consider anomalous disclosure 
outcomes, particularly resulting from application of the income 
test.\43\
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    \41\ Topic 2 of the Division of Corporation Finance's Financial 
Reporting Manual addresses several significance testing 
implementation issues including (1) acquisitions achieved in 
multiple stages; (2) acquisitions after a reverse merger; (3) 
aggregation of multiple individually insignificant acquisitions for 
a registration statement; (4) multiple acquisitions prior to an 
initial public offering; and (5) acquisitions of foreign businesses 
where the acquired company uses a different basis of accounting than 
the registrant.
    \42\ During 2014, Commission staff received approximately 60 
requests. The Commission has the authority under Rule 3-13 of 
Regulation S-X [17 CFR 210.3-13] to permit the omission of one or 
more of the financial statements required, and the Commission has 
delegated that authority to the staff.
    \43\ Anomalous results can occur, for example, when applying the 
income test where the registrant's income is at or near zero. An 
acquisition of a small entity, in terms of the asset and investment 
tests, may trigger Rule 3-05 disclosures as a result of the income 
test even if the acquired business has very modest income.
---------------------------------------------------------------------------

Request for Comment
    9. Are significance tests the appropriate means to determine the 
nature, timing, and extent of disclosure under Rule 3-05 and the 
related requirements?
    10. Are there changes or alternatives to the tests that we should 
consider to further facilitate the disclosure of useful information to 
investors? If so, what changes and are there challenges that 
registrants would face as a result?
    11. Are there changes to the tests we should consider to address 
challenges registrants face in preparing and providing the required 
disclosures? If so, what changes and how would those changes affect 
investors' ability to make informed decisions?
    12. Should we revise the financial measures used to determine 
significance or change the percentage thresholds? For example, should 
we consider limiting the use of the income test and/or devise new tests 
such as purchase price compared to a registrant's market 
capitalization?
    13. Should we allow registrants to apply more judgment in 
determining what is considered a significant acquisition? If so, why 
and how? What concerns might arise from allowing registrants to apply 
more judgment and, if allowed, should registrants disclose the 
rationale for the judgments?
Additional Request for Comment on Rule 3-05 and Related Requirements
    14. Should we consider requiring foreign private issuers to provide 
disclosures similar to those provided by domestic companies when 
reporting on Form 8-K? Why or why not? Are there other issues that we 
should address related to acquisitions by foreign private issuers or 
acquisitions of foreign businesses?
    15. Should smaller reporting companies and emerging growth 
companies be subject to the same requirements or should requirements 
for those registrants be scaled? If they should be scaled, in what way? 
If not, why?
    16. Investment companies, and particularly business development 
companies, generally file Rule 3-05 Financial Statements in cases where 
the investment company is acquiring one or more private funds. This 
type of acquisition typically occurs early in the life of the 
investment company when it has little or no financial information of 
its own. In these cases, Rule 3-05 Financial Statements of the private 
funds(s) may be the primary financial information considered by 
investors when making investment decisions with respect to the 
investment company. Should Rule 3-05 continue to apply to investment 
companies, or should investment companies be subject to different 
requirements? If so, how and why should the requirements be different? 
For example, should Rule 3-05 and the related requirements apply when 
an investment company purchases a significant portion of the assets of 
a fund, but not all of the assets and liabilities of the fund?
    17. Should we align the definition of a business in Rule 11-01(d) 
with the definitions in the applicable accounting standards? Why or why 
not?

III. Rule 3-09 of Regulation S-X--Separate Financial Statements of 
Subsidiaries not Consolidated \44\ and 50 Percent or Less Owned Persons 
and Related Requirements
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    \44\ Commission staff has observed, based on filing reviews, 
that investment companies, particularly business development 
companies, may have unconsolidated subsidiaries not accounted for 
using the equity method, but other registrants typically do not. As 
a result, the body of this section focuses on requirements that 
apply to 50 percent or less owned persons accounted for using the 
equity method. Requirements applying to unconsolidated subsidiaries, 
not accounted for using the equity method, if different, are 
footnoted.
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A. Current Rule 3-09 Disclosure and Related Requirements

    When a registrant owns 50 percent or less of an entity 
(``Investee''), Rule 3-09

[[Page 59088]]

of Regulation S-X generally requires the registrant to provide separate 
audited or unaudited annual financial statements (``Rule 3-09 Financial 
Statements'') of the Investee if it is significant.\45\ The Rule 3-09 
Financial Statements provide investors with detailed financial 
information about Investees that have a significant financial impact on 
the registrant through its investment, but are not subject to the 
disclosure requirements that would apply if it were a consolidated 
subsidiary. Insofar as practicable, the Rule 3-09 Financial Statements 
must be as of the same dates and for the same periods as a registrant's 
annual financial statements.\46\ Significance is determined using the 
tests defined in Rule 1-02(w) of Regulation S-X, although only the 
investment and income tests are used.\47\ The Rule 3-09 tests can be 
generally described as follows:
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    \45\ Rule 3-09 does not apply to smaller reporting companies nor 
does Article 8 of Regulation S-X contain similar requirements.
    \46\ Rule 3-09 does not require the presentation of separate 
interim financial statements of Investees.
    \47\ 17 CFR 210.3-09(a).
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     Investment Test--A registrant's investment in and advances 
to the Investee as of the end of each fiscal year presented by a 
registrant is compared to the total assets of the registrant at the end 
of each of those same years.
     Income Test--A registrant's equity in the Investee's 
income from continuing operations before income taxes and cumulative 
effect of a change in accounting principle, exclusive of amounts 
attributable to any noncontrolling interests, for each fiscal year 
presented by a registrant is compared to the same measure of the 
registrant for each of those same years.
    If neither of the Rule 3-09 tests exceeds 20 percent, Rule 3-09 
Financial Statements are not required. If at least one Rule 3-09 test 
exceeds 20 percent, Rule 3-09 Financial Statements are required for all 
years and must be audited for each year that a test exceeds 20 
percent.\48\
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    \48\ Registrants with majority-owned subsidiaries that are not 
consolidated must perform the asset test in addition to the 
investment and income tests described in Rule 1-02(w). See Rule 3-
09(a) of Regulation S-X.
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    Separately, Rule 4-08(g) of Regulation S-X \49\ requires 
disclosure, in the notes to a registrant's audited annual financial 
statements, of summarized balance sheet and income statement 
information on an aggregate basis for all Investees (``Summarized 
Financial Information'').\50\ These disclosures are only required if a 
Rule 3-09 test or an additional asset test \51\ exceeds 10 percent for 
any individual Investee or combination of Investees.\52\ If a 
registrant includes Rule 3-09 Financial Statements of an Investee in 
its annual report, then notes to the registrant's financial statements 
need not include Summarized Financial Information for that particular 
Investee.\53\
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    \49\ 17 CFR 210.4-08(g).
    \50\ 17 CFR 210.1-02(bb).
    \51\ In 1994, Rule 3-09 was revised to eliminate the asset test; 
however, the test was retained for Rule 4-08(g) to ensure a minimum 
level of financial information about an investee when the investment 
test was small, but a registrant's proportionate interest in the 
Investee's assets was material, as might be the case for a highly-
leveraged Investee. See Financial Statements of Significant Foreign 
Equity Investees and Acquired Foreign Businesses of Domestic Issuers 
and Financial Schedules, Release No. 33-7118 (Dec. 13, 1994) [59 FR 
65632].
    \52\ A smaller reporting company must provide summarized 
information in its annual financial statements if a Rule 3-09 test 
or an additional asset test exceeds 20 percent, rather than 10 
percent, for any individual Investee or combination of Investees. 
Although Article 8 of Regulation S-X does not include an explicit 
annual requirement analogous to Rule 4-08(g), Commission staff 
analogizes to Rule 8-03(b)(3) and typically issues a comment to 
request annual summarized information if it is not otherwise 
included. See Sec.  2420.9 of the Division of Corporation Finance's 
Financial Reporting Manual.
    \53\ See Staff Accounting Bulletin Topic 6.K.4.b. The purpose of 
the summarized information is to provide minimum standards of 
disclosure when the impact of Investees on the consolidated 
financial statements is significant. If the registrant furnishes 
more financial information in the annual report than is required by 
these minimum disclosure standards, such as separate audited 
statements, the summarized information can be excluded.
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    Interim financial statements of a registrant must also include 
summarized income statement information of individually significant 
Investees.\54\ Individual Investees are considered significant for 
purposes of this rule if a Rule 3-09 test, using interim period 
information, exceeds 20 percent.\55\
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    \54\ 17 CFR 210.10-01(b)(1).
    \55\ A smaller reporting company must provide summarized 
information in its interim financial statements pursuant to Rule 8-
03(b)(3). Unless it is registering securities, a foreign private 
issuer need not provide interim information because it is not 
required to file quarterly financial information pursuant to 
Exchange Act Rules 13a-13 or 15d-13.
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    The applicable accounting standards also require that the notes to 
the annual financial statements include summarized balance sheet and 
income statement information about equity-method investees.\56\ 
Commission staff has observed, based on filing reviews, that 
registrants typically follow the Commission rules rather than making 
separate judgments under the applicable accounting standards.
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    \56\ FASB ASC 323, Investments-Equity Method and Joint Ventures, 
requires disclosure if material in relation to the financial 
position or results of operations of the registrant. Paragraphs B12 
and B13 of IFRS 12, Disclosure of Interests in Other Entities, 
require similar disclosure.
---------------------------------------------------------------------------

B. Consideration of Current Rule 3-09 Disclosure and Related 
Requirements

1. Content of the Rule 3-09 Disclosure and Related Requirements
    Financial disclosures required by our rules about an Investee are 
important to investors because the Investee can have a significant 
financial impact on a registrant. Also, the Investee is not 
consolidated so it is not subject to the same disclosure requirements 
that apply to consolidated subsidiaries. While it is important to 
provide information about Investees, the types of financial information 
currently required may have limitations and there may be opportunities 
for improvement. For example, Rule 3-09 Financial Statements may be 
presented using different accounting standards, fiscal year ends, and/
or reporting currencies than those used by a registrant.\57\ In 
addition, Rule 3-09 Financial Statements are required only for 
significant Investees rather than all Investees that may affect a 
registrant's financial statements. As a result, Rule 3-09 Financial 
Statements often cannot be reconciled to the amounts recognized in a 
registrant's financial statements for that Investee. The Summarized 
Financial Information also may not be reconcilable because the 
financial information of multiple Investees, each one with a different 
percentage owned by a registrant, can be aggregated in the 
presentation.
---------------------------------------------------------------------------

    \57\ For example, when the Investee is a foreign business.
---------------------------------------------------------------------------

    Summarized Financial Information is required more often \58\ than 
Rule 3-09 financial statements and it also may have limitations. For 
example, the aggregate presentation, combined with the lack of 
reconciliation to amounts recognized in a registrant's financial 
statements, could diminish an investor's ability to discern the impact 
of significant Investees on a registrant's financial statements. This 
ability may be further diminished when Investees with income and 
Investees with losses are combined in the presentation.
---------------------------------------------------------------------------

    \58\ Summarized Financial Information is required by Rule 4-
08(g) when certain tests exceed 10%, while Rule 3-09 Financial 
Statements are required when certain tests exceed 20%.
---------------------------------------------------------------------------

Request for Comment
    18. How do investors use each of the following: The Rule 3-09 
Financial Statements; the Summarized Financial Information; and the 
interim disclosures? Are there challenges that

[[Page 59089]]

investors face in using these disclosures?
    19. Are there changes to these requirements we should consider to 
further facilitate the disclosure of useful information to investors? 
For example, is there different or additional information that 
investors need about Investees? If so, what information is needed and 
are there challenges that registrants would face in preparing and 
providing it?
    20. Are there challenges that registrants face in preparing and 
providing the required disclosures? If so, what are the challenges? Are 
there changes to these requirements we should consider to address those 
challenges? If so, what changes and how would those changes affect 
investors' ability to make informed decisions?
    21. Are there requirements that result in disclosures that 
investors do not consider useful? If so, what changes to these 
requirements would make them useful or should we consider eliminating 
or replacing all or part of those requirements?
    22. How could we improve the usefulness of the Summarized Financial 
Information? Could we do so by adding a requirement to present 
separately each significant Investee and/or reconcile the disclosures 
to the amounts recognized in a registrant's financial statements? Are 
there disclosures we should consider adding that are currently found 
only in Rule 3-09 Financial Statements?
    23. If we make changes to improve the usefulness of the Summarized 
Financial Information, would it be appropriate to modify the 
requirement to provide Rule 3-09 Financial Statements? If so, how? If 
not, why?
    24. Are unaudited Rule 3-09 Financial Statements and Summarized 
Financial Information for fiscal years during which an Investee was not 
significant useful to investors? Why or why not?
2. Tests for Determining Disclosure Required by Rule 3-09 and Related 
Requirements
    The tests used for determining disclosure pursuant to Rule 3-09 and 
the related requirements employ bright-line percentage thresholds 
similar to Rule 3-05. In addition, the use of these tests to determine 
the need for disclosure in interim financial statements is different 
than the other financial statement footnote disclosure requirements 
specified in Rule 10-01(a)(5) of Regulation S-X.\59\ Rule 10-01(a)(5) 
allows registrants to apply judgment and omit details of accounts which 
have not changed significantly in amount or composition since the end 
of the most recently completed fiscal year.
---------------------------------------------------------------------------

    \59\ 17 CFR 210.10-01(a)(5).
---------------------------------------------------------------------------

    Additionally, investment companies may face challenges when 
applying the income test. The numerator of the income test, as defined 
in Rule 1-02(w) of Regulation S-X, includes the registrant's equity in 
the Investee's income from continuing operations; however, investment 
companies account for their Investees using fair value rather than the 
equity method. The denominator used for the test includes changes in 
the fair value of investments that can cause the denominator to 
fluctuate significantly. As a result, registrants frequently consult 
with Commission staff about anomalous results.
Request for Comment
    25. Are significance tests the appropriate means to determine the 
nature, timing, and extent of disclosure under Rule 3-09 and the 
related requirements?
    26. Are there changes or alternatives to the tests that we should 
consider to further facilitate the disclosure of useful information to 
investors? If so, what changes and are there challenges that 
registrants would face as a result?
    27. Are there changes to the tests that we should consider to 
address challenges that registrants face in preparing and providing the 
required disclosures? If so, what changes and how would those changes 
affect investors' ability to make informed decisions?
    28. Should we allow more judgment to be applied by registrants in 
determining significance? Why or why not? What concerns might arise 
from allowing registrants to apply more judgment and, if allowed, 
should registrants disclose the rationale for the judgments?
    29. Should we revise the current percentage thresholds and/or the 
financial measures used to determine significance? For example, should 
we consider limiting the use of the income test or devise new tests?
    30. Should we consider revising the requirements to provide interim 
disclosures about Investees to focus on significant changes similar to 
Rule 10-01(a)(5) of Regulation S-X, which allows registrants to apply 
judgment and omit details of accounts that have not changed 
significantly in amount or composition since the end of the most 
recently completed fiscal year? Why or why not?
Additional Request for Comment on Rule 3-09 and Related Requirements
    31. Should smaller reporting companies and emerging growth 
companies be subject to the same requirements or should requirements 
for those registrants be scaled? If they should be scaled, in what way? 
If not, why?
    32. Should investment companies, particularly business development 
companies, be subject to different requirements? If so, how and why 
should the requirements be different? For example, should the 
significance tests be modified to apply measures other than the income 
test or asset test that are more relevant to investment companies? 
Should there be a different income test related to investment 
companies? Should we tailor the disclosures provided by unconsolidated 
subsidiaries of investment companies further by, for example, creating 
separate requirements for Summarized Financial Information and/or 
requiring a schedule of investments for unconsolidated subsidiaries not 
accounted for as investment companies \60\ that are in similar lines of 
business?
---------------------------------------------------------------------------

    \60\ Rule 3-09 Financial Statements for unconsolidated 
subsidiaries accounted for as investment companies are required to 
include the schedules required by Rule 6-10 of Regulation S-X.
---------------------------------------------------------------------------

IV. Rule 3-10 of Regulation S-X--Financial Statements of Guarantors and 
Issuers of Guaranteed Securities Registered or Being Registered

A. Current Rule 3-10 Disclosure and Related Requirements

    A guarantor of a registered security is an issuer because the 
guarantee of a security is a separate security.\61\ As a result, both 
issuers of registered securities that are guaranteed and guarantors of 
registered securities must file their own audited annual and unaudited 
interim \62\ financial statements required by Regulation S-X.\63\ Rule 
3-10 of Regulation S-X provides certain exemptions \64\ from those 
financial reporting requirements and is commonly relied upon by a 
parent company when it raises capital through: (1) An offering of its 
own securities guaranteed by one or more of

[[Page 59090]]

its subsidiaries; or (2) an offering of securities by its subsidiary 
that it guarantees and, sometimes, that one or more of its other 
subsidiaries also guarantees. Under Rule 3-10, if the subsidiary 
issuers and guarantors (``issuers/guarantors'') satisfy specified 
conditions, the parent company can provide disclosures in its own 
annual and interim consolidated financial statements in lieu of 
providing financial statements of each subsidiary issuer and guarantor 
(``Alternative Disclosures'').
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    \61\ See Section 2(a)(1) of the Securities Act.
    \62\ A foreign private issuer need only provide interim period 
disclosure in certain registration statements.
    \63\ 17 CFR 210.3-10(a).
    \64\ Rule 3-10 exemptions are available to issuers/guarantors of 
securities that are ``debt or debt-like.'' See Financial Statements 
and Periodic Reports for Related Issuers and Guarantors, Release No. 
33-7878 (August 4, 2000) [65 FR 51692].
---------------------------------------------------------------------------

    The Alternative Disclosures are available in a variety of fact 
patterns. The rule addresses six specific fact patterns, two of which 
are:
     A single subsidiary guarantees securities issued by its 
parent; \65\ and
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    \65\ 17 CFR 210.3-10(e).
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     an operating subsidiary issues securities guaranteed only 
by its parent.\66\
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    \66\ 17 CFR 210.3-10(c).
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    All fact patterns must satisfy two primary conditions to qualify 
for the Alternative Disclosure. First, the subsidiary issuers/
guarantors must be ``100% owned'' \67\ by the parent company. Second, 
the guarantees must be ``full and unconditional.'' \68\ Once those two 
conditions are met, the form and content of the Alternative Disclosure 
is determined based upon additional conditions. For example, in the 
fact patterns above, the parent company can provide abbreviated 
narrative disclosure in its financial statements if: (1) It has no 
independent assets or operations \69\ and (2) all of its subsidiaries 
other than the issuer or guarantor, depending on the fact pattern, are 
minor.\70\ Otherwise, the parent company must provide the more detailed 
condensed consolidating financial information (``Consolidating 
Information'') described below.
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    \67\ 17 CFR 210.3-10(h)(1). A subsidiary is ``100% owned'' if 
all of its outstanding voting shares are owned, either directly or 
indirectly, by its parent company. A subsidiary not in corporate 
form is 100% owned if the sum of all interests are owned, either 
directly or indirectly, by its parent company other than: (1) 
Securities that are guaranteed by its parent, and, if applicable, 
other 100%-owned subsidiaries of its parent; and (2) securities that 
guarantee securities issued by its parent and, if applicable, other 
100%-owned subsidiaries of its parent.
    \68\ 17 CFR 210.3-10(h)(2). A guarantee is ``full and 
unconditional,'' if, when an issuer of a guaranteed security has 
failed to make a scheduled payment, the guarantor is obligated to 
make the scheduled payment immediately and, if it does not, any 
holder of the guaranteed security may immediately bring suit 
directly against the guarantor for payment of all amounts due and 
payable.
    \69\ 17 CFR 210.3-10(h)(5).
    \70\ 17 CFR 210.3-10(h)(6).
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    Consolidating Information is a columnar footnote presentation of 
each category of parent and subsidiaries as issuer, guarantor, or non-
guarantor.\71\ It must include all major captions of the balance sheet, 
income statement, and cash flow statement that are required to be shown 
separately in interim financial statements under Article 10 of 
Regulation S-X.\72\ In order to distinguish the assets, liabilities, 
operations and cash flows of the entities that are legally obligated to 
make payments under the guarantee from those that are not, the columnar 
presentation must show: (1) A parent company's investments in all 
consolidated subsidiaries based upon its proportionate share of the net 
assets; \73\ and (2) subsidiary issuer/guarantor investments in certain 
consolidated subsidiaries using the equity method.\74\ This 
presentation is a unique format designed to ensure, for example, that a 
subsidiary guarantor does not consolidate, within this presentation, 
its own non-guarantor subsidiary.
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    \71\ 17 CFR 210.3-10(i)(6).
    \72\ 17 CFR 210.10-01(a).
    \73\ 17 CFR 210.3-10(i)(3).
    \74\ 17 CFR 210.3-10(i)(5).
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    Recently-acquired subsidiary issuers/guarantors create an 
information gap in the Consolidating Information because the 
subsidiaries will only be included from the date that the subsidiaries 
were acquired. The Securities Act registration statement of a parent 
company \75\ must include one year of audited pre-acquisition financial 
statements for these subsidiaries in its registration statement if: (1) 
The subsidiary is significant; and (2) the subsidiary is not reflected 
in the audited consolidated results for at least nine months of the 
most recent fiscal year.\76\ A subsidiary is significant if its net 
book value or purchase price, whichever is greater, is 20 percent or 
more of the principal amount of the securities being registered.
---------------------------------------------------------------------------

    \75\ Filed in connection with the offer and sale of the debt or 
debt-like securities.
    \76\ 17 CFR 210.3-10(g)(1).
---------------------------------------------------------------------------

    Issuers/guarantors availing themselves of the exemption that allows 
for Alternative Disclosure are automatically exempt from Exchange Act 
reporting by Exchange Act Rule 12h-5.\77\ The parent company, however, 
must continue to provide the Alternative Disclosure for as long as the 
guaranteed securities are outstanding.\78\ The parent company may not 
cease to report this information even at such time that the subsidiary 
issuers/guarantors, had they declined to avail themselves of the 
exemptions and reported separately, could have suspended their 
reporting obligations under Section 15(d) of the Exchange Act.\79\
---------------------------------------------------------------------------

    \77\ 17 CFR 240.12h-5.
    \78\ Section III.C.1 of Release No. 33-7878 (August 4, 2000) [65 
FR 51692].
    \79\ 15 U.S.C. 78o(d).
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B. Consideration of Current Rule 3-10 Disclosure and Related 
Requirements

1. Content of the Rule 3-10 Alternative Disclosure
    Separate financial disclosures required by our rules about issuers 
of guaranteed debt and guarantors of those securities are important to 
investors because the disclosures allow investors to evaluate 
separately the likelihood of payment by the issuer and guarantors. The 
content of the Alternative Disclosure, despite being less robust than 
financial statements required by Regulation S-X, is detailed and 
unique. For example, the Consolidating Information includes all major 
captions that are found in quarterly reports filed on Form 10-Q \80\ 
and must be prepared using a unique format that is not found elsewhere 
in Commission rules or the applicable accounting standards. A parent 
company may also need to provide, in a registration statement, pre-
acquisition financial statements of significant, recently-acquired 
subsidiary issuers/guarantors. These financial statements are required 
even if those subsidiaries will qualify for the Alternative Disclosure 
once included in a registrant's audited consolidated results for nine 
months of the most recent fiscal year.
---------------------------------------------------------------------------

    \80\ 17 CFR 249.308a.
---------------------------------------------------------------------------

Request for Comment
    33. How do investors use the information provided in financial 
statements of subsidiary issuers/guarantors and the information 
provided in the Alternative Disclosure? Are there challenges that 
investors face in using the disclosures?
    34. Are there changes to these requirements we should consider to 
further facilitate the disclosure of useful information to investors? 
For example, is there different or additional information that 
investors need about guarantors and issuers of guaranteed securities? 
If so, what information is needed and are there challenges that 
registrants would face in preparing and providing it?
    35. Are there challenges that registrants face in preparing and 
providing the required disclosures? If so, what are the challenges? Are 
there changes to these requirements we should consider to address those 
challenges? If so, what changes and how would those changes affect 
investors' ability to make informed decisions?

[[Page 59091]]

    36. Are there requirements that result in disclosures that 
investors do not consider useful? If so, what changes would make them 
useful or should we consider eliminating or replacing all or part of 
those requirements?
    37. How could we improve the usefulness of the Consolidating 
Information? Could we do so by revising its content requirements? If 
so, what changes should be made and why?
    38. Should we consider revising the requirement to provide 
Consolidating Information for interim periods to focus on significant 
changes similar to Rule 10-01(a)(5) of Regulation S-X, which allows 
registrants to apply judgment and omit details of accounts that have 
not changed significantly in amount or composition since the end of the 
most recently completed fiscal year? Why or why not?
    39. Is there other disclosure that would allow us to modify the 
requirement for separate, audited financial statements of recently-
acquired subsidiary issuers/guarantors that would be useful to 
investors? If so, what disclosure would be appropriate and in what 
circumstances? If not, why?
2. Conditions to Providing Alternative Disclosure
    As stated above, one of the primary conditions that must be met for 
a parent company to provide the Alternative Disclosure is that the 
subsidiary issuers/guarantors are ``100% owned.'' For example, the 
Alternative Disclosure is not available if a subsidiary is organized in 
a jurisdiction that requires directors to own a small number of shares 
unless the registrant obtains relief from Commission staff.\81\ The 
condition is intended to ensure the risks associated with an investment 
in a parent company and the risks associated with its subsidiary are 
``identical.'' \82\ Similarly, ``full and unconditional'' is intended 
to ensure the payment obligations of the issuer and guarantor are 
``essentially identical.'' \83\ Registrants may not provide the 
Alternative Disclosure unless the guarantee operates such that, when an 
issuer of a guaranteed security has failed to make a scheduled payment, 
the guarantor is obligated to make the scheduled payment immediately 
and, if it does not, any holder of the guaranteed security may 
immediately bring suit directly against the guarantor for payment of 
all amounts due and payable. For example, registrants are not allowed 
to use the Alternative Disclosure when guarantees become enforceable 
after the passage of some time period after default. These are precise 
standards that must be met in order to reduce disclosure from, for 
example, full financial statements to the detailed and unique 
Consolidating Information.
---------------------------------------------------------------------------

    \81\ Release No. 33-7878 (Aug. 4, 2000) [65 FR 51692, fn. 29].
    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

    Separately, the duration of the obligation to provide the 
Alternative Disclosure is different than the obligation to provide 
separate financial statements. To obtain the exemption under Rule 12h-
5, a parent company must provide the Alternative Disclosures as long as 
the securities are outstanding, while the obligation to provide 
separate financial statements can be suspended earlier as provided in 
Section 15(d) of the Exchange Act.
Request for Comment
    40. Do the current conditions to providing the Alternative 
Disclosure influence the structure of guarantee relationships? If so, 
how and what are the consequences, if any, to investors and 
registrants?
    41. Should we consider allowing a parent company to provide the 
Alternative Disclosure if its subsidiary issuers or guarantors do not 
meet the current definition of 100% owned? If so, how should we revise 
the Alternative Disclosure conditions and what additional disclosure 
might address concerns about the presence of outside ownership 
interests? If not, why?
    42. Should we consider allowing a parent company to provide the 
Alternative Disclosure if a guarantee does not meet the current 
definition of full and unconditional? If so, how should we revise the 
Alternative Disclosure conditions? Should we consider, for example, 
allowing the Alternative Disclosure for guarantees that become 
enforceable after the passage of some time period after default? What 
additional disclosure might address concerns about the delayed 
enforceability? If not, why?
    43. Should we consider revising the conditions that must be 
satisfied to qualify for the abbreviated narrative disclosure? If so, 
how? If not, why?
    44. Should we modify the parent company's requirement to provide 
the Alternative Disclosure during the period in which the securities 
are outstanding? If so, how? If not, why?
Additional Request for Comment on Rule 3-10 and Related Requirements
    45. Should smaller reporting companies and emerging growth 
companies be subject to the same requirements or should requirements 
for those registrants be scaled? If they should be scaled, in what way?

V. Rule 3-16 of Regulation S-X--Financial Statements of Affiliates 
Whose Securities Collateralize an Issue Registered or Being Registered

A. Current Rule 3-16 Disclosure and Related Requirements

    Rule 3-16 of Regulation S-X requires a registrant to provide 
separate annual and interim financial statements for each affiliate 
\84\ whose securities constitute a substantial portion of the 
collateral for any class of securities registered or being registered 
as if the affiliate were a separate registrant (``Rule 3-16 Financial 
Statements'').\85\ The affiliate's portion of the collateral is 
determined by comparing: (a) The highest amount among the aggregate 
principal amount, par value, book value, or market value of the 
affiliates' securities to (b) the principal amount of the securities 
registered or being registered. If this test equals or exceeds 20 
percent for any fiscal year presented by a registrant, Rule 3-16 
Financial Statements are required.\86\
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    \84\ 17 CFR 210.1-02(b) states, ``An affiliate of, or a person 
affiliated with, a specific person is a person that directly, or 
indirectly through one or more intermediaries, controls, or is 
controlled by, or is under common control with, the person 
specified.'' Although not the same, in practice such affiliates are 
almost always consolidated subsidiaries of the registrant.
    \85\ Both domestic registrants and foreign private issuers need 
only provide interim period information in certain registration 
statements.
    \86\ 17 CFR 210.3-16(b).
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    Separately, Rule 4-08(b) of Regulation S-X \87\ requires 
disclosure, in the notes to a registrant's annual financial statements, 
of the amounts of assets mortgaged, pledged, or otherwise subject to 
lien.
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    \87\ 17 CFR 210.4-08(b).
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B. Consideration of Current Rule 3-16 Disclosure and Related 
Requirements

    Disclosures required by our rules that facilitate an evaluation of 
an affiliate's ability to satisfy its commitment in the event of a 
default by a registrant are important to investors. Rule 3-16 requires 
financial statements as though the affiliate were a registrant despite 
the fact that the collateral pledge is not considered a separate 
security. Also, registrants have suggested, in consultations with 
Commission staff, that the Rule 3-16 Financial Statements can be 
confusing. For example, where the securities of a subsidiary of a 
registrant (``Subsidiary A'') are pledged as collateral and the 
securities of an entity consolidated by Subsidiary A (``Subsidiary B'') 
are also pledged, Rule 3-16 Financial Statements may be

[[Page 59092]]

required for both subsidiaries and both will include Subsidiary B's 
assets, liabilities, operations, and cash flows.
    The test used in applying Rule 3-16 employs a bright-line 
percentage threshold that a registrant must apply to a limited set of 
measures similar to Rules 3-05 and 3-09. Unlike those rules, the market 
value of an affiliate's securities may not be readily available in the 
absence of a public market for those securities.
Request for Comment
    46. Do the Rule 3-16 requirements influence the structure of 
collateral arrangements? If so, how and what are the consequences, if 
any, to investors and registrants?
    47. How do investors use Rule 3-16 Financial Statements and the 
Rule 4-08(b) footnote disclosures? Are there challenges that investors 
face in using the disclosures?
    48. Are there changes to these requirements we should consider to 
further facilitate the disclosure of useful information to investors? 
For example, is there different or additional information that 
investors need about affiliates whose securities collateralize 
registered securities? If so, what information is needed and are there 
challenges that registrants would face in preparing and providing it?
    49. Are there challenges that registrants face in preparing and 
providing the required disclosures? If so, what are the challenges? Are 
there changes to these requirements we should consider to address those 
challenges? If so, what changes and how would those changes affect 
investors' ability to make informed decisions?
    50. Are there requirements that result in disclosures that 
investors do not consider useful? If so, what changes would make them 
useful or should we consider eliminating or replacing all or part of 
those requirements?
    51. How could we improve the usefulness of the Rule 4-08(b) 
footnote disclosure? Could we do so by adding a requirement to disclose 
additional details about the affiliates? If so, what additional details 
should we require?
    52. If we make changes to improve the usefulness of the footnote 
disclosure, would it be appropriate to modify the requirement to 
provide Rule 3-16 Financial Statements? If so, how? If not, why?
    53. Should we revise the test used in applying Rule 3-16? If so, 
how? If not, why?
Additional Request for Comment on Rule 3-16 and Related Requirements
    54. Should smaller reporting companies and emerging growth 
companies continue to be subject to the same requirements or should 
requirements for those registrants be scaled? If they should be scaled, 
in what way? If not, why?

VI. Other Requirements

    In addition to the issues raised in this request for comment, we 
encourage all interested persons to submit their views on any issues 
relating to the financial information about entities, or portions of 
entities, other than a registrant. For example, Rule 3-14, Special 
Instructions for Real Estate Operations to be Acquired,\88\ while 
separate and distinct from Rule 3-05, is intended to achieve similar 
objectives within a particular industry. In addition, Item 2.01 of Form 
8-K uses significance tests to determine when to provide disclosure 
about asset acquisitions. The requirements addressed in this request 
for comment may apply more broadly than the situations described. To 
the extent there may be additional effects, please provide comments.
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    \88\ 17 CFR 210.3-14.
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Request for Comment
    55. As we continue our ongoing efforts to review disclosure rules, 
what other rules and forms should be considered for review and why?
    56. Currently, financial disclosures related to entities other than 
a registrant are filed in XBRL format to the extent that they are part 
of the registrant's financial statements.\89\ Other disclosures, such 
as the separate financial statements of entities other than the 
registrant and Pro Forma Financial Information are not required to be 
presented in a structured, machine-readable format. Would investors 
benefit from having all of the disclosures related to these entities 
made in an interactive data format? Would it depend on the nature of 
the information being disclosed (e.g., disclosure related to a one-time 
transaction such as an acquisition or ongoing disclosure related to an 
Investee)? What would be the cost to registrants?
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    \89\ For example, the Summarized Financial Information required 
by Rule 4-08(g) of Regulation S-X and the Consolidating Information 
required by Rule 3-10 of Regulation S-X.
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    57. In what other ways could we utilize technology to further 
facilitate the disclosure of useful information to investors or address 
challenges faced by investors and registrants?
    58. Are there ways that we could further facilitate the use of 
information by all types of investors? If so, please explain. For 
example, should we consider alternative ways of presenting the 
information, such as specifically allowing or requiring registrants to 
provide a summary along with more detailed required information to 
enable investors to review the information at the level of detail that 
they prefer?

VII. Closing

    This request for comment is not intended in any way to limit the 
scope of comments, views, issues or approaches to be considered. In 
addition to investors and registrants, the Commission welcomes comment 
from other market participants and particularly welcomes statistical, 
empirical, and other data from commenters that may support their views 
and/or support or refute the views or issues raised.

    By the Commission.

    Dated: September 25, 2015.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-24875 Filed 9-30-15; 8:45 am]
BILLING CODE 8011-01-P


