on average, lower credit quality and higher information asymmetry than
registered debt offerings,\231\ conditions that may increase the
likelihood that investors require guarantees and collateral relative to
investment grade issuers who may not need such credit enhancements.
This is consistent with studies that have found the cost of capital
associated with debt offerings made under Rule 144A to be higher than
the cost of capital in registered debt offerings.\232\ According to
these studies, there are two main benefits of Rule 144A offerings: (1)
The speed of issuance, given the absence of a registration requirement;
and (2) relative high liquidity, given the possibility to exchange the
securities for registered securities.\233\
---------------------------------------------------------------------------

    \230\ Number of offerings does not include registered exchanges
of debt securities previously issued privately with registration
rights.
    \231\ See, e.g., Matteo P. Arena, The Corporate Choice Between
Public Debt, Bank Loans, Traditional Private Debt Placements, and
144A Debt Issues, 36 Rev. of Quantitative Fin. & Acct. 391 (2011).
    \232\ See George W. Fenn, Speed of Issuance and the Adequacy of
Disclosure in the 144A High-Yield Debt Market, 56 J. of Fin. Econ.
383 (2000); Miles Livingston & Lei Zhou, The Impact of Rule 144A
Debt Offerings Upon Bond Yields and Underwriter Fees, 31 Fin. Mgmt.
5 (2002); Susan Chaplinsky & Latha Ramchand, The Impact of SEC Rule
144A on Corporate Debt Issuance by International Firms, 77 J. of
Bus. 1073 (2004); Usha R. Mittoo & Zhou Zhang, The Evolving World of
Rule 144A Market: A Cross-Country Analysis (2010) (unpublished
working paper) (University of Manitoba, Winnipeg MD). The studies of
Fenn (2000) and Chaplinsky and Ramchand (2004) find the yield
premium decreased over time, whereas the study of Livingston and
Zhou (2002) and unpublished working paper of Mittoo and Zhang (2011)
do not observe that trend. Mittoo and Zhang (2011), however, find
that the yield premium increased after the Sarbanes-Oxley Act was
enacted.
    \233\ See, e.g., Fenn, note 232 above.
---------------------------------------------------------------------------

    As discussed above,\234\ Rule 3-10 requires that every issuer of a
registered security that is guaranteed and every guarantor of a
registered security file the financial statements required for a
registrant by Regulation S-X, except under certain circumstances when
Alternative Disclosures are permitted. There are two forms of
Alternative Disclosures prescribed by the rule: (1) Consolidating
Information; and (2) a brief narrative. Consolidating Information is
the most common type of alternative disclosure under Rule 3-10. Table 2
presents data on the number of unique registrants and filings that
included Consolidating Information under Rule 3-10 for the period 2013-
2017; \235\ the data is consistent with estimates provided by one
commenter.\236\
---------------------------------------------------------------------------

    \234\ See Section II.A, ``Background.''
    \235\ To identify these disclosures, we searched all Forms 10-K,
10-Q, 20-F, 40-F, S-1, S-4, and F-4 and their amendments using XBRL
tags most commonly associated with Consolidating Information. The
amounts in the table represent the number of annual, quarterly, and
periodic filings including amendments that are unique for the
covered period in each calendar year from 2013-2017.
    \236\ See letter from EY. The commenter identified 494
registrants that provided Consolidating Information by searching for
keywords on Form 10-K filings only. If we limit our search to Form
10-K filings in 2013, we reach a similar number, which we believe
provides validity to our methodology.

                     Table 2--Estimated Number of Unique Registrants and Filings Including Consolidating Information Under Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                      Number of    Number of
                Year                    unique       total         10-K         10-Q         20-F         40-F         S-1          S-4          F-4
                                     registrants    filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
2013...............................          533        1,834          431        1,339           12            0           15           34            3
2014...............................          530        1,861          461        1,360           10            0            9           21            0
2015...............................          500        1,750          437        1,288            9            0            5           11            0
2016...............................          469        1,641          417        1,199            8            0            1           16            0
2017...............................          403        1,430          369        1,043            5            1            1           11            0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of Edgar Filings.

    The second and less common form of Alternative Disclosures under
existing Rule 3-10 is a brief narrative. While we believe the number of
filings including the brief narrative form of Alternative Disclosure is
smaller than the number of filings using Consolidating
Information,\237\ we are unable to determine that number due to
methodological and data extraction challenges.\238\
---------------------------------------------------------------------------

    \237\ As described in Section II.F, ``Exceptions,'' the brief
narrative form of Alternative Disclosures is available for three
situations. One of these situations is when a parent company uses a
finance subsidiary to issue securities that the parent company
guarantees, which in our experience is limited and generally for
convenience purposes. As several commenters noted, the other
situations permitting the brief narrative form of Alternative
Disclosures require additional restrictive conditions to be met,
which greatly limit the circumstances in which they can be used.
See, e.g., letters from ABA-Committees, AB-NYC, CAQ, DT, EY, FedEx,
KPMG, and PwC. Based on our experience, we believe there are fewer
instances of the brief narrative form of Alternative Disclosures
than Consolidating Information.
    \238\ These narrative disclosures are typically no more than a
paragraph in length and vary in content based on the three scenarios
under which the brief narrative can be provided. We conducted text
searches of EDGAR filings in an attempt to accurately identify
issuers providing narrative disclosure under Rule 3-10. However,
given the variation in phrasing in these paragraphs, the search did
not produce meaningful results.

---------------------------------------------------------------------------

    As discussed above,\239\ under existing Rule 3-16, a registrant is
required to provide Rule 3-16 Financial Statements for each affiliate
whose securities, which are pledged as collateral, constitute a
substantial portion of the collateral for any class of securities
registered or being registered. Table 3 presents data on the number of
filings and unique registrants that included Rule 3-16 Financial
Statements since 2013. The number of registrants remained steady over
this period. Due to the manual process by which we attained these
estimates, there are likely more registrants providing Rule 3-16
Financial Statements than are reflected here.\240\ However, based on
the comments we received, we do not expect the number to be
significantly larger.\241\
---------------------------------------------------------------------------

    \239\ See Section IV, ``Rule 3-16 of Regulation S-X.''
    \240\ There are no XBRL tags specific to Rule 3-16. To identify
these disclosures, we searched all Forms 10-K, 10-Q, 20-F, 40-F, S-
1, S-3, S-4, S-11, F-1, F-3, F-4, 10, 1-A, 1-K, and 1-SA and their
amendments using a text search on the word combination ``Rule 3-
16.'' We applied different text search combinations and found that
using ``Rule 3-16'' offered the most accurate search results. Even
so, we received hundreds of false hit returns. These were mainly
registrants mentioning ``Rule 3-16'' as part of a description of
collateral release provisions. That is, if Rule 3-16 were triggered,
the debt agreement would release the collateral that triggered Rule
3-16. This is consistent with one commenter who noted that issuers
use such release provisions to avoid compliance with Rule 3-16. See
letter from PwC. We manually sifted through these false returns to
identify the positive results listed in Table 3.
    \241\ One commenter noted that Rule 3-16 application is rarely
seen in practice, see letter from BDO, while another commenter noted
that many deals are intentionally structured to avoid Rule 3-16 by
using Rule 144A and not providing registration rights. See letter
from Covenant.

      Table 3--Estimated Number of Unique Registrants and Filings Including Rule 3-16 Financial Statements
----------------------------------------------------------------------------------------------------------------
                                                     Number of
                      Year                            unique         Number of         10-K            20-F
                                                    registrants    total filings
----------------------------------------------------------------------------------------------------------------
2013............................................               7               7               6               1
2014............................................               7               7               6               1
2015............................................               7               7               6               1
2016............................................               7               7               6               1
2017............................................               7               7               6               1
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of EDGAR filings.

Request for Comment
    105. Are there reliable sources of information or robust means of
estimating the proportion of Rule 144A offerings that do not include
registration rights versus those that do include registration rights?
If so, please describe these sources and methods.
    106. What is the current level of participation of non-QIB and
retail investors in registered offerings of corporate debt? Are there
reliable sources of information or robust means of estimating the
proportion of registered versus unregistered debt offerings held by
different investor types such as QIBs and non-QIBs? If so, please
describe these sources and methods.
    107. How do investors and other market participants currently use
the information required to be disclosed by Rules 3-10 and 3-16? Are
these disclosures generally consumed directly by investors? Is
information derived from these disclosures made available to investors
by financial analysts or other third party service providers?

C. Anticipated Economic Effects

    In this section we discuss the anticipated economic benefits and
costs of the proposed amendments to Rules 3-10 and 3-16.
1. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule 13-
01
    We received a number of comments indicating that the existing
requirements often lead registered debt agreements to be structured in
such a way as to avoid compliance with Rule 3-10,\242\ thereby
depriving certain investors of the opportunity to invest in guaranteed
securities. Similarly, others noted that issuers who have not
previously issued guaranteed debt securities often are deterred by the
associated compliance costs and prefer instead to issue securities
privately through Rule 144A.\243\ In light of these comments, we expect
the proposed amendments to benefit issuers and investors. For example,
as a result of the overall reduced burdens associated with the proposed
amendments, investors may benefit from access to more registered
offerings that are structured to include guarantees and, accordingly,
the additional protections that come with Section 11 liability for
disclosures made in those offerings. Also, an increase in the overall
use of guarantees could reduce structural subordination issues that
arise. Typically, all of a parent company's subsidiaries support the
parent company's debt-paying ability. However, in the event of default,
the holders of debt without the benefit of guarantees are comparatively
disadvantaged. In the event of default, a holder of a guaranteed debt
security issued by a parent company can make claims for payment
directly against the issuer and its subsidiary guarantors. The assets
of non-guarantor subsidiaries typically would be accessible by the
debtholder only indirectly through a bankruptcy proceeding. In such a
proceeding, absent a guarantee, the claims of the debtholder would be
structurally subordinate to the claims of other creditors, including
trade creditors of the non-guarantor subsidiaries. The less burdensome
disclosures under the proposed amendments may lead to greater use of
guarantees to address these structural subordination issues, which
could result in more efficient risk sharing within corporate groups and
potentially a lower cost of capital for registrants.
---------------------------------------------------------------------------

    \242\ See, e.g., letters from CAQ and KPMG.
    \243\ See, e.g., letter from Cahill.
---------------------------------------------------------------------------

    Furthermore, the less burdensome disclosures may lead issuers to
register the initial offerings of guaranteed securities rather than
opting to issue them under Rule 144A with registration rights. Issuers
may be able to comply with the proposed rule and access the capital
markets more quickly than under the existing Rule 3-10 requirements.
These issuers would not incur costs associated with exchanging the
privately issued debt securities for registered guaranteed debt
securities.
a. Eligibility Conditions To Omit Financial Statements of Subsidiary
Issuer or Guarantor
    As detailed in Section III.C.1.b, ``Consolidated Subsidiary,'' we
propose to replace one of the conditions that must be met to be
eligible to omit the separate financial statements of a subsidiary
issuer or guarantor--that the

subsidiary issuer or guarantor be 100% owned by the parent company--
with a condition that the subsidiary issuer or guarantor be
consolidated in the parent company's consolidated financial statements.
This proposed change would permit the parent company to omit the
separate financial statements of a consolidated subsidiary issuer or
guarantor even if third parties hold non-controlling ownership
interests in that subsidiary issuer or guarantor. However, the proposed
rule would require, to the extent material, a description of any
factors that may affect payments to holders of the guaranteed security,
such as the rights of a non-controlling interest holder.
    In addition to the proposed change from 100% owned to
consolidation, we are proposing changes to simplify the Rule's
eligibility conditions. Namely, as discussed in Section III.C.1.d,
``Eligible Issuer and Guarantor Structures Condition,'' the proposed
amendments would replace the five specific issuer and guarantor
structures currently eligible under the existing rule with a broader
two-category framework. Under these changes, separate financial
statements of consolidated subsidiary guarantors may be omitted for
each issuer and guarantor structure that is eligible. Additionally,
unlike the existing rule, the nature of the subsidiary guarantees,
including whether the guarantee is full and unconditional or joint and
several, would no longer impact the eligibility to omit separate
subsidiary financial statements and instead would only impact the
extent of disclosure in the Proposed Alternative Disclosures.
    Overall, these proposed amendments would permit a broader scope of
issuers and guarantors to be eligible to provide the Proposed
Alternative Disclosures in lieu of separate financial statements of
each subsidiary issuer and guarantor than under existing Rule 3-10.
This, in turn, would reduce the compliance costs associated with
preparation of disclosures for these registered debt offerings and
ongoing periodic reporting.\244\ To the extent there are more issuers
and guarantors that are eligible to provide the less burdensome
Proposed Alternative Disclosures in lieu of separate financial
statements of each subsidiary issuer and guarantor under proposed Rule
3-10, these entities may be more likely to register their debt
offerings, either at the outset or through an exempt offering with
registration rights. As a result, some issuers may realize a lower cost
of capital. Such an outcome would be consistent with previous studies
that have found the cost of capital associated with registered debt
offerings to be lower than that of private offerings made under Rule
144A,\245\ although other issuer characteristics indicative of
creditworthiness would remain relevant with respect to the cost of
capital, regardless of offering method. Additionally, subsidiary
issuers and guarantors that are currently required to file separate
financial statements because they do not meet existing Rule 3-10's
eligibility criteria would have reduced compliance costs to the extent
they meet the revised eligibility criteria under proposed Rule 3-10 and
the Proposed Alternative Disclosures are provided in lieu of their
separate financial statements.
---------------------------------------------------------------------------

    \244\ Commenters highlighted the significant time and cost
associated with preparing the Alternative Disclosures. See, e.g.,
letters from Cahill, FedEx, and Noble-UK. Noble-UK estimated that
compliance with Rule 3-10 requires the equivalent of approximately
two full time employees across its organization. FedEx estimated
that compliance requires approximately 280 hours per year. Based on
this commenter's estimate of compliance hours, estimated compliance
costs under the existing rule amount to $97,000 per year (calculated
as 280 hours x Compliance Attorney at $348 per hour = $97,440 per
year). The per hour figure for a Compliance Attorney is taken from
SIFMA's 2013 Management & Professional Earnings in the Securities
Industry, modified by Commission staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead and adjusted for inflation. See Sec.
Indus. and Fin. Mkts. Ass'n (SIFMA), Management & Professional
Earnings in the Securities Industry (2013), https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013. For purposes of the Paperwork Reduction
Act of 1995 (``PRA''), 44 U.S.C. 3501 et seq., we estimate that the
proposed amendments to Rule 3-10 would result in an overall
reduction of 30 burden hours for each form affected by the proposed
amendments. See Section VIII.B.1, ``Rule 3-10,'' below.
    \245\ See discussion and references within Section VII.B.2,
``Market Conditions.''
---------------------------------------------------------------------------

    Certain investors could also benefit from the proposed amendments
to the eligibility conditions. If issuers opt to register debt
offerings, rather than structure them as private offerings using Rule
144A, then new investors--namely, non-QIB institutional investors and
retail investors who cannot participate in Rule 144A offerings--would
be eligible to participate in the offerings. To the extent that the
proposed amendments to the eligibility conditions encourage additional
registered debt offerings, more investment opportunities would be made
available, and a resulting increase in market participation would
improve the overall competitiveness and efficiency of the capital
markets. Furthermore, these debt offerings would benefit investors by
extending to them the protections associated with registration.
    We expect little, if any, adverse effect on issuers and guarantors
of guaranteed debt securities from these proposed amendments. We also
believe the adverse effects on investors, if any, are likely to be
limited. Under the existing rule, investors receive separate financial
statements of subsidiary issuers and guarantors if these entities are
not 100% owned by the parent company. If these subsidiaries are
consolidated in the parent company's financial statements and all other
conditions of proposed Rule 3-10 are met, investors may no longer
receive the separate financial statements of these subsidiary issuers
and guarantors. In such cases, although investors would not receive the
detailed information about each such subsidiary issuer or guarantor
included in the separate financial statements, a parent company would
be required to provide, to the extent material, financial and non-
financial information for consolidated subsidiary issuers and
guarantors with non-controlling interests, as well as a description of
any factors associated with non-controlling interest holders that may
affect payments to holders of the guaranteed security. Where all
eligibility conditions of the proposed rule are met, we believe the
Proposed Alternative Disclosures would provide the information
investors need to make informed investment decisions with respect to a
guaranteed security.
    Several commenters supported modifying the 100% owned condition in
the existing rule for reasons consistent with the analysis above.\246\
One commenter recommended we eliminate this condition and instead
require separate disclosure of subsidiaries providing lesser
guarantees,\247\ whereas another commenter stated that the existing
requirement should remain unchanged.\248\
---------------------------------------------------------------------------

    \246\ See, e.g., letters from ABA-Committees, AB-NYC, Chamber,
EY, SIFMA, and PwC.
    \247\ See letter from SIFMA.
    \248\ See letter from CalPERS.
---------------------------------------------------------------------------

b. Disclosure Requirements
    As detailed in Section III.C.2, ``Disclosure Requirements,'' one of
the conditions in the existing rule for omitting separate financial
statements of a subsidiary issuer or guarantor is providing the
Alternative Disclosures in the footnotes to the parent company's
consolidated financial statements. The proposed rule would retain the
requirement to provide the Alternative Disclosures, but with
modifications. We address below the proposed amendments related to the
Alternative

Disclosures (the Proposed Alternative Disclosures).
i. Financial and Non-Financial Disclosures
    As described in Section III.C.2.a, ``Financial Disclosures,'' we
propose to simplify the financial disclosures required by current Rule
3-10 by replacing Consolidating Information with a requirement to
provide Summarized Financial Information. The level of detail currently
required in Consolidating Information often contributes to multiple
pages of detail in the parent company's financial statements. The
proposed Summarized Financial Information would focus on the
information that is most likely to be material to an investment
decision. If additional line items, beyond what is required in the
Summarized Financial Information are material, they would be required
to be disclosed.
    The proposed amendments should simplify the disclosures and reduce
the cost of compliance and could engender further benefits. For
example, academic literature finds that simplified financial statements
are associated with more efficient price discovery,\249\ and that
investors underreact more to firms with less readable financial
disclosures.\250\ More generally, we believe the proposed amendments
would provide investors with streamlined and easier to understand
financial information that we believe is material to an investment
decision. Thus, to the extent that the proposed amendments have their
intended effect, reducing complexity while maintaining the material
completeness of financial disclosures, we anticipate that the financial
disclosures that result from the proposed amendments would improve
price discovery, enhance the allocative efficiency of markets, and
facilitate capital formation.
---------------------------------------------------------------------------

    \249\ See Brian P. Miller, The Effects of Reporting Complexity
on Small and Large Investor Trading, 85 Acct. Rev. 2107 (2010).
    \250\ See Haifeng You & Xiao-jun Zhang, Financial Reporting
Complexity and Investor Underreaction to 10-K Information, 14 Rev.
of Acct. Stud. 559 (2009); Alastair Lawrence, Individual Investors
and Financial Disclosure, 56 J. of Acct. & Econ. 130 (2013).
---------------------------------------------------------------------------

    We are also proposing that a parent company be permitted to provide
financial disclosures about the Obligor Group on a combined basis
rather than on a disaggregated basis. Additionally, if non-financial
disclosure provided in response to proposed Rule 13-01 were applicable
to one or more, but not all, guarantors, such as where a subsidiary's
guarantee is limited to a particular dollar amount, separate disclosure
of Summarized Financial Information for one or more issuers and
guarantors would be required, to the extent material.
    To the extent that investors are indifferent about whether payment
under the guaranteed security comes from the issuer or one or more
guarantors in the same consolidated group, or both, the disclosure
resulting from the proposed amendments would not adversely impact
investment decisions and could offer investors more readable,
streamlined financial information. To the extent that increased
readability without loss of material information would facilitate
investor evaluation of whether the entities in the Obligor Group have
the ability to make payments as required under the guaranteed security,
the proposed amendments would promote the efficiency of security prices
and investor portfolios. Consistent with potential benefits from these
changes, a growing body of academic literature finds that financial
statement readability affects the information environment and that more
readable statements are associated with lower cost of debt capital and
reduced bond rating agency disagreement.\251\
---------------------------------------------------------------------------

    \251\ See Samuel B. Bonsall & Brian P. Miller, The Impact of
Narrative Disclosure Readability on Bond Ratings and the Cost of
Debt, 22 Rev. of Acct. Stud. 608 (2017).
---------------------------------------------------------------------------

    The proposed rule also requires that Summarized Financial
Information be provided only for the most recently completed fiscal
year and year-to-date interim period, if applicable, included in the
parent company's consolidated financial statements, rather than for the
additional periods specified under existing Rules 3-01 and 3-02 of
Regulation S-X. This is intended to preserve information that is
material to an investment decision while reducing compliance costs for
registrants. This proposed change is consistent with commenter views.
The commenters that discussed the number of annual periods for
disclosure recommended limiting disclosure to the current year, citing
challenges recasting prior period information for circumstances such as
legal entity mergers and discontinued operations. Others cited
significant costs to issuers from requiring additional periods.\252\
---------------------------------------------------------------------------

    \252\ See, e.g., letters form BDO, Headwaters, Medtronic, and
PwC. Headwaters noted that Alternative Disclosure composed
approximately 15% of the entire financial disclosure in its most
recent Form 10-K and approximately 28% of the entire financial
disclosure in its most recent Form 10-Q. Medtronic indicated that it
has one staff person on its external reporting team that spends over
80% of his or her time preparing Rule 3-10 related information in
support of quarterly filings.
---------------------------------------------------------------------------

    In addition, we are proposing to require non-financial disclosures
to supplement the proposed financial disclosures with additional
information that may be material to an investment decision. This would
include material information about how payments to holders of
guaranteed securities may be affected by such things as the issuer and
guarantor structure, the terms and conditions of the guarantees, the
impact of non-controlling ownership interests, or other factors
specific to the offering. These proposed amendments should enhance the
information provided to investors about the investment without imposing
significant burdens on registrants. Overall, this should lead to
greater transparency and reduce information asymmetries between issuers
and investors.
    Despite being unable to estimate the number of filings that provide
brief narrative disclosures under the existing Alternative Disclosure,
we do not expect parent companies to incur significant costs to provide
the Proposed Alternative Disclosures. For example, where Alternative
Disclosures under the current rule would constitute only a brief
narrative, we generally believe separate financial disclosures about
the issuers and guarantors of the guaranteed securities likely would
not be material and therefore could be omitted under the proposed
amendments. Finally, as with any change to reporting format and
presentation of information, the recommended proposals may lead
companies and investors to incur costs to adjust to the new
disclosures. As further discussed below, we do not expect such costs to
be substantial.
ii. When Disclosure Is Required
    As explained in Section III.C.2.c, ``When Disclosure is Required,''
we propose eliminating the numerical thresholds of existing Rule 3-10
that are used to determine the form and content of disclosure. Instead,
all proposed disclosures would be required unless such information
would not be material to holders of the guaranteed security. While
numerical thresholds may be easier to apply than a materiality standard
that requires judgment, this change would allow for a more principles-
based disclosure approach that is more tailored to the specific
circumstances and the needs of investors.\253\ Allowing the parent

company to omit immaterial information would lower the costs of
disclosure relative to existing requirements and may help focus
investor attention on decision-relevant information. However, this
change could also increase the risk that a parent company would omit,
potentially inadvertently, value-relevant information. In such
instances, investors may make suboptimal investment decisions. Omitting
material information, however, would subject issuers and guarantors to
increased litigation risk, providing incentive for issuers to make
careful determinations on the form and content of disclosures.
---------------------------------------------------------------------------

    \253\ A number of academic studies have explored the use of
bright-line thresholds and ``when material'' disclosure standards.
The majority of these papers highlight a preference for principles-
based ``when material'' standard. See generally, e.g., Eugene A.
Imhoff Jr. & Jacob K. Thomas, Economic Consequences of Accounting
Standards: The Lease Disclosure Rule Change, 10 J. of Acct. & Econ.
277 (1988) (providing evidence that management modifies existing
lease agreements to avoid crossing bright-line threshold for lease
capitalization).
---------------------------------------------------------------------------

    In certain settings, there is academic evidence that allowing
issuers to make principles-based disclosure decisions using a
materiality criterion is consistent with investor preferences.\254\
However, there is also evidence of investor benefits from rules-based
reporting standards.\255\ While the proposed amendments could result in
reduced comparability across registrants and transactions, using a
principles-based standard could benefit investors by allowing
registrants to tailor their disclosure to provide material information
to them. The proposed amendment also accords with a number of
commenters who indicated that existing thresholds are overly
restrictive.\256\
---------------------------------------------------------------------------

    \254\ See Usha Rodrigues & Mike Stegemoller, An Inconsistency in
SEC Disclosure Requirements? The Case of the ``Insignificant''
Private Target, 13 J. of Corp. Fin. 251 (2007) (providing evidence,
in the context of mergers and acquisitions, that bright-line
thresholds can deviate from investor preferences).
    \255\ See Mark W. Nelson, Behavioral Evidence on the Effects of
Principles- and Rules-Based Standards, 17 Acct. Horizons 91 (2003);
see also Katherine Schipper, Principles-Based Accounting Standards,
17 Acct. Horizons 61 (2003). These studies note potential advantages
of rules-based accounting standards, including: Increased
comparability among firms, increased verifiability for auditors, and
reduced litigation for firms.
    \256\ See letters from ABA-Committees, AB-NYC, CAQ, DT, EY,
FedEx, KPMG, and PwC.
---------------------------------------------------------------------------

iii. Location of Proposed Alternative Disclosures and Audit Requirement
    The proposed amendments would allow the parent company the choice
of whether to provide the Proposed Alternative Disclosures in the
financial statement footnotes or elsewhere in the registration
statement covering the offer and sale of the guaranteed debt and any
related prospectus, as well as annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed. If the
parent company were to provide the Proposed Alternative Disclosures in
its financial statements in its registration statement and in certain
Exchange Act periodic reports required to be filed during fiscal year
in which the first bona fide sale of the subject securities is
completed, consistent with the existing rule, the disclosures would be
subject to annual audit, interim review, and internal control over
financial reporting requirements. Investors may perceive this choice of
placement to mean the disclosures are more reliable than if they were
not in the financial statements at the time of registration.
    In contrast, if the parent company were to provide the Proposed
Alternative Disclosures outside its financial statements in its
registration statement and in certain Exchange Act periodic reports
required to be filed during the fiscal year in which the first bona
fide sale of the subject securities is completed, lower compliance
costs would likely result with respect to these filings. While we
generally would expect lower compliance costs, disclosures outside the
financial statements may result in certain costs to parent companies,
such as legal costs or due diligence activities (e.g., comfort
letters). Additionally, this proposed optionality may reduce the
potential for delay in offerings that exists under the current rule due
to the need to prepare audited Alternative Disclosures. Parent
companies using this proposed option to provide the disclosures outside
the consolidated financial statements may be able to register
guaranteed debt offerings and go to market more quickly than under the
existing rule. This may allow parent companies to more promptly access
favorable market conditions. Although these disclosures are
supplemental in nature, investors may nevertheless be adversely
impacted as these disclosures would not immediately benefit from the
enhanced accuracy and reliability associated with information that is
included in the financial statements at registration. To the extent
that investors prefer these initial disclosures to be included in the
parent company's financial statements, their willingness to invest may
be influenced or they may discount the information provided in the
unaudited portion of the disclosure, potentially reducing the amount of
information incorporated into security prices and increasing the
issuer's cost of capital.\257\
---------------------------------------------------------------------------

    \257\ One commenter noted that supplemental information
typically included in offering memoranda for Rule 144A debt
offerings, including revenues, operating income, assets and
liabilities of the non-guarantor group, is provided on an unaudited
basis. See letter from ABA-Committees. If QIBs currently do not
require such supplemental disclosures to be audited in 144A debt
offerings, the costs outlined above would not be expected to apply
to this group of investors.
---------------------------------------------------------------------------

    Additionally, the amount of information that investors receive in
the registration statement and in certain Exchange Act periodic reports
required to be filed during the fiscal year in which the first bona
fide sale of the subject securities is completed could be affected by
the choice of placement. The safe harbor for forward-looking
information under PSLRA is not available for disclosures provided in
the financial statements. A parent company providing the Proposed
Alternative Disclosures outside its financial statements may be more
likely to voluntarily supplement those required disclosures with
forward-looking information, as compared to a parent company that
provides the Proposed Alternative Disclosures in its financial
statements. Such supplemental forward-looking information, if provided,
could benefit investors. The relocation of disclosures may also affect
the prominence of the disclosures. Some academic research provides
indirect evidence that users may treat information differently
depending on the location of the disclosure.\258\
---------------------------------------------------------------------------

    \258\ For instance, research shows a weaker relation between
equity prices and disclosed items in the notes to the financial
statements versus recognized items on the face of the financial
statements. See, e.g., Maximilian A. M[uuml]ller, Edward J. Riedl &
Thorsten Sellhorn, Recognition versus Disclosure of Fair Values, 90
Acct. Rev. 2411 (2015) (showing a lower association between equity
prices and disclosed investment property fair values relative to
recognized investment property fair values and finding that reduced
information processing costs and higher readability mitigates the
discount applied to disclosed fair values); Hassan Espahbodi et al.,
Stock Price Reaction and Value Relevance of Recognition versus
Disclosure: The Case of Stock-Based Compensation, 33 J. of Acct. &
Econ. 343 (2002) (examining the equity price reaction to the
announcements related to accounting for stock-based compensation to
assess the value relevance of recognition (on the face of the
financial statements) versus disclosure (in the notes to the
financial statements) and concluding that recognition and disclosure
are not substitutes).
---------------------------------------------------------------------------

    If a parent company provides the Proposed Alternative Disclosures
in its financial statements, consistent with the existing rule, such
disclosures would be subject to XBRL requirements. Because the machine-
readable nature of XBRL disclosures facilitates aggregation,
comparison, and large-scale analysis of reported information through
automated means, investors stand to benefit from enhanced analysis
capabilities, particularly in the comparison of disclosures across
issuers and time periods. The parent company may incur

additional costs to comply with these tagging requirements. In
contrast, Proposed Alternative Disclosures provided outside the
financial statements would not be subject to XBRL tagging requirements.
Investors would not benefit from the enhanced analysis capabilities and
the parent company would not incur the related costs to comply with the
tagging requirements. In general, we believe the incremental cost of
tagging the Proposed Alternative Disclosures in XBRL, and hence the
incremental cost savings of not having to tag the proposed Alternative
Disclosures likely would be relatively low, as issuers already would
have software or processes in place for tagging financial statement
information.
    Finally, while a parent company is afforded a choice of where to
locate disclosures in its registration statement and in certain
Exchange Act periodic reports required to be filed during fiscal year
in which the first bona fide sale of the subject securities is
completed, beginning with its annual report filed on Form 10-K or Form
20-F for the fiscal year during which the first bona fide sale of the
subject securities is completed, the parent company would be required
to locate the disclosures within the footnotes to its consolidated
financial statements, which are subject to applicable annual audit,
interim review, and internal control over financial reporting. Because
this requirement would be consistent with existing location
requirements, we do not anticipate economic effects from this
requirement as compared to the current state except, as discussed above
that there may be decreases in costs attributable to the more
simplified and streamlined proposed disclosures.
iv. Recently Acquired Subsidiary Issuers and Guarantors
    We are proposing to delete the requirement to provide pre-
acquisition audited financial statements of a recently acquired
subsidiary issuer or guarantors. The existing requirement for pre-
acquisition financial statements of recently-acquired subsidiary
issuers or guarantors calls for far greater detail than what is
required for any other subsidiary issuer and guarantor.\259\ As
discussed in Section III.C.2.e, ``Recently-Acquired Subsidiary Issuers
and Guarantors,'' we believe Rule 3-05 of Regulation S-X, which
requires audited pre-acquisition financial statements of an acquired
business to be provided if the acquired subsidiary exceeds specified
thresholds of significance, provides sufficient information in this
context such that the pre-acquisition financial statements of recently-
acquired subsidiary issuers and guarantors required by existing Rule 3-
10(g) are unnecessary.
---------------------------------------------------------------------------

    \259\ Some commenters also noted the inconsistency in that
information required for recently acquired subsidiary issuers and
guarantors is more detailed than information required for other
subsidiary issuers and guarantors. See, e.g., letters from DT and
PwC.
---------------------------------------------------------------------------

    In addition, the trigger for pre-acquisition financial statements
of a recently-acquired subsidiary issuer or guarantor under existing
Rule 3-10(g) is based on the significance of the acquired subsidiary
compared to the size of the offering. This may lead issuers to provide
audited financial statements of a recently-acquired subsidiary that is
small relative to its consolidated parent company. The proposed changes
would address these circumstances.
    We believe the proposed amendment would reduce the compliance
burden for preparers without reducing material information for
investors, since material information about recently acquired
subsidiaries would be required by Rule 3-05 of Regulation S-X and
proposed Rule 13-01(a)(5). Furthermore, to the extent that investors
find the information provided under the existing requirement redundant,
as it overlaps with Rule 3-05 of Regulation S-X, eliminating the
existing requirement would streamline disclosures. Academic research
suggests that individuals invest more in firms with more concise
financial disclosures.\260\ Thus, to the extent that the proposed
amendments alleviate duplication and do not affect the completeness of
financial disclosures, the resulting disclosures could result in
improved price discovery, enhance the allocative efficiency of the
market, and facilitate capital formation.
---------------------------------------------------------------------------

    \260\ See Lawrence, note 250 above.
---------------------------------------------------------------------------

v. Continuous Reporting Obligation
    As discussed in Section III.C.2.f, ``Continuous Reporting
Obligation,'' we are proposing that a parent company be permitted to
cease providing the Proposed Alternative Disclosures in its ongoing
reporting if the corresponding subsidiary issuer's or guarantor's
reporting obligation under Section 13 and/or Section 15(d) of the
Exchange Act with respect to the guaranteed securities is terminated or
suspended. This amendment would reduce compliance costs without loss of
material information for investors. To the extent that the existing
requirements impose unnecessary burdens by requiring a parent company
to continue providing the Alternative Disclosures beyond when the
subsidiary would have to report with respect to the guaranteed
securities,\261\ or otherwise deter issuers and guarantors from
engaging in public debt offerings to avoid such reporting
obligations,\262\ this amendment would remove such inefficiencies.
Commenters generally supported the proposed amendment, noting
inconsistencies between the existing requirement and other reporting
rules,\263\ and suggesting that it likely deters registration of debt
offerings.\264\
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    \261\ See letters from DT and Simpson.
    \262\ See letter from Simpson.
    \263\ See letters from ABA-Committees, DT, EY, PwC, SIFMA, and
Simpson.
    \264\ See letters from DT and Simpson.
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2. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
    As discussed in detail in Section V.B, ``Overview of the Proposed
Changes,'' although affiliates whose securities are pledged as
collateral are not registrants with respect to the collateralized
security, Rule 3-16, when triggered, requires financial statements as
if such affiliates were registrants. We are proposing to replace the
existing requirement to provide separate financial statements for each
affiliate whose securities are pledged as collateral with financial and
non-financial disclosures about the affiliate(s) and the collateral
arrangement, where material, as a supplement to the consolidated
financial statements of the registrant that issues the collateralized
security.
    Debt agreements are often structured to avoid the requirements of
Rule 3-16 by either structuring the debt agreement to release any
pledge of affiliate securities as collateral if and when such pledge
triggers the requirements under Rule 3-16, or by not including pledges
of affiliate securities as collateral altogether.\265\ In such
circumstances, investors may demand a higher interest rate from issuers
to compensate for the absence of collateral, potentially increasing the
cost of capital to issuers. The proposed amendments would reduce the
burden of having to provide separate financial statements of affiliates
under the existing rule and provide issuers with the flexibility to
structure their debt agreements with pledges of affiliate securities.
If, as a result of the proposed amendments, debt agreements are no
longer structured to avoid Rule 3-16 requirements, investors would
obtain the benefit of both the collateral and the related disclosures,
all of which would be subject to Section 11 liability. This flexibility
may also permit issuers

to attract investors that prefer to invest in obligations where
collateral is fully available and not subject to the release mechanisms
designed to avoid Rule 3-16 requirements. By appealing to a broader
range of investors and providing more attractive collateral
arrangements, registrants may be able to obtain a lower cost of
capital.
---------------------------------------------------------------------------

    \265\ See letters from ABA-Committees, Cahill, Chamber,
Covenant, Davis, DT, and EY.
---------------------------------------------------------------------------

    As discussed above for the Proposed Amendments to Rule 3-10,
Proposed Rule 13-02 would provide flexibility to place the proposed
disclosures within the notes to the financial statements or in
specified prominent locations outside the financial statements in
registration statements covering the offer and sale of the
collateralized debt securities and any related prospectus, as well as
annual and quarterly Exchange Act periodic reports required to be filed
during the fiscal year in which the first bona fide sale of the subject
securities is completed. For registrants that include the proposed
disclosures in their financial statements, such information would be
subject to applicable annual audit, interim review, and internal
control over financial reporting requirements. Investors may perceive
this choice of placement as making the disclosure more reliable than if
it were placed outside of the financial statements. To the extent that
investors prefer these disclosures to be located in the registrant's
financial statements, this choice may influence their willingness to
invest. Registrants could attempt to influence such willingness by
including the proposed disclosures in their financial statements. Also
consistent with the proposed amendments to Rule 3-10, the registrant
would, however, be required to provide the proposed disclosures in a
footnote to its consolidated financial statements in its annual and
quarterly reports beginning with its annual report filed for the fiscal
year during which the first bona fide sale of the subject securities is
completed. This requirement would be consistent with existing location
requirements, and we do not anticipate economic effects as compared to
the current state.
    Finally, as with any change to reporting format and presentation of
information, the proposed amendments may lead companies and investors
to incur costs to adjust to the new disclosures, as further discussed
below.
a. Financial Disclosures
i. Level of Detail
    As discussed in Section V.C.1, ``Level of Detail,'' affiliates
whose securities are pledged as collateral are almost always
consolidated subsidiaries of the registrant,\266\ and their financial
information is thus already reflected in the registrant's consolidated
financial statements. We propose to require Summarized Financial
Information for each such affiliate and disclosure of additional
financial information if material to holders of the collateralized
security. For registrants, this would reduce compliance costs by
reducing the amount of information needed to be prepared and
disclosed.\267\ For investors, we do not anticipate significant costs
since material information would still be required to be provided. The
simplified disclosures would highlight material information needed to
make informed investment decisions and therefore would enable investors
to process information more efficiently and make more informed
investment decisions.
---------------------------------------------------------------------------

    \266\ In the rare circumstances where the affiliate is not a
consolidated subsidiary of the registrant, proposed Rule 13-02(a)(5)
would require the registrant to provide any other quantitative or
qualitative information that would be material to making an
investment decision with respect to the collateralized security. In
this regard, separate financial statements of the unconsolidated
affiliate may be necessary if material to an investment decision.
See additional discussion in Section V.C.1, ``Level of Detail.''
    \267\ For purposes of the PRA, we estimate that the proposed
amendments to Rule 3-16 would result in an overall reduction of 30
burden hours for each form (other than Form 10-Q) affected by the
proposed amendments. See Section VIII.B.2, ``Rule 3-16,'' below.
---------------------------------------------------------------------------

ii. Presentation on a Combined Basis
    We are proposing to permit a registrant to provide the Summarized
Financial Information of consolidated affiliates that are pledged as
collateral on a combined rather than individual basis. Additional
disclosure specific to an affiliate would be required, if material. As
with the effects of the proposed amendments to Rule 3-10 discussed
above, we believe the simplified disclosures in the proposed amendments
to Rule 3-16 would both lower compliance costs for issuers and provide
investors with more streamlined and concise disclosures that would
promote more efficient decision-making by investors. We do not
anticipate significant costs to investors since material information
would still be required to be provided.
iii. Periods to Present
    The proposed amendments would require the disclosure of Summarized
Financial Information for the most recently ended fiscal year and year-
to-date interim period included in the registrant's consolidated
financial statements. Rule 3-16 financial statements are not currently
required in quarterly reports, and as such, registrants would incur
costs to provide this additional interim disclosure.\268\ We believe
the proposed amendments would benefit investors by providing them with
the most recent information to ensure informed investment decisions.
---------------------------------------------------------------------------

    \268\ For purposes of the PRA, we estimate that the proposed
amendments to Rule 3-16 would result in an increase of 70 burden
hours per Form 10-Q filing. See Section VIII.B.2, ``Rule 3-16,''
below.
---------------------------------------------------------------------------

b. Non-Financial Disclosures
    We are proposing to require non-financial information about
affiliates whose securities are pledged as collateral and the
collateral arrangements, to the extent material. While we did not
receive comments on non-financial disclosures, we do not believe this
proposed amendment would impose undue costs for issuers, as the
majority of the information required to be disclosed under the proposed
amendments should be readily available or attainable.\269\ We believe
investors would benefit because the proposed amendment would supplement
the financial disclosures with additional, material information,
thereby rendering the combined financial and non-financial disclosures
more informative for investment decisions.
---------------------------------------------------------------------------

    \269\ The content of the proposed non-financial disclosures
consists of basic information about the collateral arrangement and
the entities involved. We do not expect such information, which is
generally available from debt agreements, would impose a significant
burden on a registrant to prepare.
---------------------------------------------------------------------------

c. When Disclosure Is Required
    Rather than utilizing existing numerical thresholds, disclosure of
the proposed financial and non-financial disclosures would be required
if material to holders of the collateralized security. To the extent
the numerical thresholds under the existing rule result in disclosure
of unnecessary or immaterial information, investors may benefit from
reduced search costs and the facilitation of more efficient information
processing.\270\ Further, we believe that, compared to existing rule
requirements, the proposed amendments to Rule 3-16 would reduce
compliance costs for issuers and increase the likelihood of
registration.
---------------------------------------------------------------------------

    \270\ See David Hirschleifer & Siew Hong Teoh, Limited
Attention, Information Disclosure, and Financial Reporting, 36 J. of
Acct. and Econ. 337 (2003) (developing a theoretical model where
investors have limited attention and processing power). The authors
show that with partially attentive investors, means of presenting
information may have an impact on stock price reactions,
misvaluation, long-run abnormal returns, and corporate decisions.

---------------------------------------------------------------------------

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

    Several commenters noted that the need to comply with existing
disclosure requirements often makes issuers structure registered
offerings to avoid triggering Rules 3-10 or 3-16, or avoid registration
altogether.\271\ As discussed above, and as a general matter, we
believe the proposed amendments would improve the content, format, and
focus of required registrant disclosures. This should both reduce the
compliance cost for issuers and allow more efficient decision-making by
investors. This may be true particularly to the extent that the
proposed amendments result in more efficient and effective
dissemination of material information to investors and increase the
efficiency of investor processing and usage of this information.
Further, the proposed rule amendments may affect issuers' registration
choices. This, in turn, could broaden the investment opportunities
available for different types of investors and may allow for more
efficient matching of investors with assets that meet their investment
objectives and preferences. Retail investors could additionally be
indirectly affected through their investments managed by institutional
investors, who would have greater access to a broader range of
investment opportunities in the registered debt market. To the extent
that the proposed amendments ease registration burdens for issuers,
there could be an increase in the number of registered offerings. If
such issuers would not have otherwise issued debt securities under Rule
144A, this would result in an increase in capital formation. If such
issuers would have otherwise issued debt under Rule 144A, it is
possible that a switch to a registered offering would lower the
issuers' cost of capital while also providing investors with the
enhanced protections afforded by registered offerings.
---------------------------------------------------------------------------

    \271\ See, e.g., letters from BDO, Cahill, Covenant, and PwC.
---------------------------------------------------------------------------

    Finally, rather than be 100% owned by the parent company, the
proposed amendments allow for the subsidiary issuer or guarantor to be
consolidated in the parent company's consolidated financial statements
as one of the conditions that must be met in order to be eligible to
omit separate subsidiary issuer and guarantor financial statements. To
the extent that the proposed amendments expand the scope of subsidiary
issuers and guarantors that meet Rule 3-10 eligibility requirements,
the proposed amendments may promote greater competition among issuers
and guarantors of guaranteed debt securities. This may enable more
registrants, especially those on the margins, to compete on better
terms. However, we do not anticipate the overall impact on competition
to be substantial.

E. Consideration of Reasonable Alternatives

    We discuss below potential alternatives to the proposed amendments
to existing Rules 3-10 and 3-16.
1. Alternative to Proposed Amendments to Existing Rule 3-10
    An alternative to the proposed amendments to Rule 3-10 would be to
permit the Proposed Alternative Disclosures be provided if the
subsidiary issuers and/or guarantors were ``wholly owned'' by the
parent company, as defined in Rule 1-02(aa) of Regulation S-X.\272\
Using ``wholly owned'' as the parent company ownership threshold,
rather than the existing 100% ownership requirement, would likely
permit more subsidiary issuers and guarantors to use the Alternative
Disclosures as compared to the existing rule, but would be less
flexible than the proposed amendments, as detailed above. As a result,
we believe the proposed amendments would better serve to enhance
efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \272\ Rule 1-02(aa) of Regulation S-X (''The term wholly owned
subsidiary means a subsidiary substantially all of whose outstanding
voting shares are owned by its parent and/or the parent's other
wholly owned subsidiaries.'' (Emphasis in original.)).
---------------------------------------------------------------------------

2. Alternatives Common to Proposed Amendments to Existing Rule 3-10 and
Existing Rule 3-16
    One alternative to each set of proposed amendments would be to
require that the Proposed Alternative Disclosures, or the disclosures
specified in proposed Rule 13-02, as applicable, be located in the
audited annual and unaudited interim financial statement footnotes of
the parent company, or registrant, as applicable, in all filings. Under
this alternative, the parent company or registrant would not have a
choice of whether to locate the proposed disclosures outside its
consolidated financial statements in registration statements covering
the offer and sale of the guaranteed or collateralized debt securities
and any related prospectus, or in annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed. On the
one hand, this could increase investor confidence in the disclosed
information and provide the benefits of XBRL tagging. On the other
hand, the cost to a parent company or registrant associated with
preparing registration statements and certain periodic reports would be
higher with this alternative than if the disclosures were provided
outside of the financial statements. Furthermore, the flexibility of
going to market more quickly would not be available under this
alternative. This could limit the incentives to pursue registered
offerings compared to the proposed amendments, and those registrants
that do pursue registered offerings may be less likely to issue
guarantees, or pledge affiliate securities as collateral, given the
additional cost associated with including the proposed disclosures in
the financial statements. Additionally, a parent company or registrant
may be less likely to voluntarily supplement the disclosures with
forward-looking information because the safe harbor for forward-looking
information under PSLRA is not available for disclosures provided in
the financial statements. As discussed above,\273\ guarantees and
pledges of affiliate securities as collateral serve, in part, to reduce
investor risk of structural subordination. Overall, we believe the
benefits to investors of enhanced access to registered offerings with
guarantees and pledges of affiliate securities as collateral, together
with the benefits of reduced compliance burdens for issuers, justify
forgoing the benefits of requiring these disclosures to be located in
the financial statements of the parent company, or registrant, as
applicable, included in registration statements covering the offer and
sale of the guaranteed or collateralized debt securities and any
related prospectus, as well as annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed.
However, we solicit comment on this point and the potential benefits
and concerns for registrants and investors of requiring the proposed
disclosures to be located in the notes to the financial statements in
all filings.
---------------------------------------------------------------------------

    \273\ See Section VII.C.1, ``Proposed Amendments to Rule 3-10
and Partial Relocation to Rule 13-01.''
---------------------------------------------------------------------------

    A second related alternative to each set of the proposed rules
would be to allow the parent company or registrant to provide the
Proposed Alternative Disclosures, or the disclosures specified in
proposed Rule 13-02, as applicable, outside the financial statement
footnotes in all filings. On the one hand, if the

parent company or registrant opts to disclose the information outside
the financial statements, the cost to a parent company or registrant
associated with preparing the information would be lower with this
alternative than if the disclosures were provided in the financial
statements. This could incentivize the pursuit of registered offerings
with guarantees or collateral, given the flexibility and associated
reduced costs. While we generally would expect lower compliance costs,
disclosures outside the financial statements may result in certain
costs to parent companies and registrants, such as legal costs or due
diligence activities (e.g., comfort letters). Additionally, a parent
company or registrant may be more likely to voluntarily supplement the
disclosures with forward-looking information because the safe harbor
for forward-looking information under PSLRA is not available for
disclosures provided in the financial statements. On the other hand,
allowing the parent company or registrant the flexibility of disclosing
outside the financial statements may reduce investor confidence in the
disclosed information, as this information would not be subject to
annual audit, interim review, and internal control over financial
reporting requirements. As a result, this alternative could reduce
investor confidence in the disclosed information and may affect their
willingness to invest.
    While we acknowledge that providing additional flexibility to the
parent company or registrant in the location of the disclosures would
likely further reduce the compliance burdens associated with registered
offerings with guarantees or collateral, investors may demand a higher
expected return if they perceive reduced reliability of the Proposed
Alternative Disclosure. The potential for higher borrowing costs may
encourage issuers to voluntarily include the Proposed Alternative
Disclosures or proposed disclosures, as applicable, in the financial
statements of the parent company, or registrant, as applicable. We
solicit comment on this point and the potential benefits and concerns
for registrants and investors of providing flexibility to locate the
Proposed Alternative Disclosures outside the financial statements in
all filings.
    Finally, a third alternative relevant to each set of proposed
amendments would be to require Summarized Financial Information to be
provided for the same periods as the parent company or registrant, as
applicable, instead of the most recent annual and interim period as
proposed. While this alternative would increase the amount of
information available to investors, the additional information may not
be material in making informed investment decisions. As discussed
above,\274\ prior studies have suggested that simpler disclosures may
benefit investors by reducing search costs and facilitating more
efficient information processing. Moreover, including additional
historical periods would result in higher costs to registrants when
preparing registration information and ongoing reporting. We do not
believe the potential benefit to investors of this additional
historical information justifies the potential cost to the registrants.
---------------------------------------------------------------------------

    \274\ See note 249 and accompanying text.
---------------------------------------------------------------------------

F. Request for Comment

    We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the rules, if adopted, would
promote efficiency, competition, and capital formation or have an
impact on investor protection. Commenters are requested to provide
empirical data, estimation methodologies, and other factual support for
their views, in particular, on costs and benefits estimates.

VIII. Paperwork Reduction Act

A. Background

    Certain provisions of our rules and forms that would be affected by
the proposed amendments contain ``collection of information''
requirements within the meaning of the PRA.\275\ The Commission is
submitting the proposal to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA.\276\ The hours and
costs associated with preparing and filing the forms and reports
constitute reporting and cost burdens imposed by each collection of
information. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information requirement unless
it displays a currently valid OMB control number. Compliance with the
information collections is mandatory. Responses to the information
collections are not kept confidential and there is no mandatory
retention period for the information disclosed. The titles for the
affected collections of information are: \277\
---------------------------------------------------------------------------

    \275\ See note 244 above.
    \276\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \277\ As noted above, while the proposed amendments would apply
to registered investment companies, and could thereby affect
registered investment advisers, based on staff experience, we
believe registered investment companies are unlikely to engage in
the activities addressed by the proposed amendments. Accordingly, we
are not revising the burden estimates for the forms and reports
filed by these types of entities.
---------------------------------------------------------------------------

     ``Regulation S-K'' (OMB Control No. 3235-0071); \278\
---------------------------------------------------------------------------

    \278\ The paperwork burdens for Regulation S-K and Regulation S-
X are imposed through the forms that are subject to the requirements
in these regulations and are reflected in the analysis of those
forms. To avoid a PRA inventory reflecting duplicative burdens, and
for administrative convenience, we estimate that the proposed
amendments would not impose an incremental burden for these
regulations.
---------------------------------------------------------------------------

     ``Regulation S-X'' (OMB Control No. 3235-0009);
     ``Form S-1'' \279\ (OMB Control No. 3235-0065);
---------------------------------------------------------------------------

    \279\ 17 CFR 239.11.
---------------------------------------------------------------------------

     ``Form S-3'' \280\ (OMB Control No. 3235-0073); \281\
---------------------------------------------------------------------------

    \280\ 17 CFR 239.13.
    \281\ The paperwork burdens for Form S-3 and Form F-3 are
imposed through the forms from which they incorporate by reference
and are reflected in the analysis of those forms. To avoid a PRA
inventory reflecting duplicative burdens and for administrative
convenience, we assign a one-hour burden to each of these forms.
---------------------------------------------------------------------------

     ``Form S-4'' \282\ (OMB Control No. 3235-0324);
---------------------------------------------------------------------------

    \282\ 17 CFR 239.25.
---------------------------------------------------------------------------

     ``Form S-11'' \283\ (OBM Control No. 3235-0067);
---------------------------------------------------------------------------

    \283\ 17 CFR 239.18.
---------------------------------------------------------------------------

     ``Form F-1'' (OMB Control No. 3235-0258);
     ``Form F-3'' (OMB Control No. 3235-0256);
     ``Form F-4'' \284\ (OMB Control No. 3235-0325);
---------------------------------------------------------------------------

    \284\ 17 CFR 239.34.
---------------------------------------------------------------------------

     ``Form 10'' \285\ (OMB Control No. 3235-0064);
---------------------------------------------------------------------------

    \285\ 17 CFR 249.210.
---------------------------------------------------------------------------

     ``Form 20-F'' (OMB Control No. 3235-0288);
     ``Form 40-F'' \286\ (OMB Control No. 3235-0381);
---------------------------------------------------------------------------

    \286\ 17 CFR 249.240f.
---------------------------------------------------------------------------

     ``Form 10-K'' \287\ (OMB Control No. 3235-0063);
---------------------------------------------------------------------------

    \287\ 17 CFR 249.310.
---------------------------------------------------------------------------

     ``Form 8-K'' \288\ (OMB Control No. 3235-0060); \289\
---------------------------------------------------------------------------

    \288\ 17 CFR 249.308.
    \289\ The paperwork burdens for Form 8-K is imposed through the
forms from which they incorporate by reference and are reflected in
the analysis of those forms. To avoid a PRA inventory reflecting
duplicative burdens and for administrative convenience, we estimate
that the proposed amendments would not impose an incremental burden
for this form.
---------------------------------------------------------------------------

     ``Regulation 14A'' \290\ and ``Schedule 14A'' \291\ (OMB
Control No. 3235-0059); \292\
---------------------------------------------------------------------------

    \290\ 17 CFR 240.14a-1 through 240.14a-104.
    \291\ 17 CFR 240.14a-101.
    \292\ As described below, our estimates for Form 10-K take into
account the burden that would be incurred by including the proposed
disclosure in the annual report directly or incorporating by
reference from a proxy or information statement. To avoid a PRA
inventory reflecting duplicative burdens, we estimate that the
proposed disclosure would not impose an incremental burden for proxy
statements on Schedule 14A.

---------------------------------------------------------------------------

     ``Regulation 14C'' \293\ and ``Schedule 14C'' \294\ (OMB
Control No. 3235-0057); \295\
---------------------------------------------------------------------------

    \293\ 17 CFR 240.14c-1 through 240. 14c-7.
    \294\ 17 CFR 240.14c-101.
    \295\ As described below, our estimates for Form 10-K take into
account the burden that would be incurred by including the proposed
disclosure in the annual report directly or incorporating by
reference from a proxy or information statement. To avoid a PRA
inventory reflecting duplicative burdens, we estimate that the
proposed disclosure would not impose an incremental burden for
information statements on 14C.
---------------------------------------------------------------------------

     ``Form 10-Q'' (OMB Control No. 3235-0070);
     ``Form SF-1'' \296\ (OMB Control No. 3235-0707);
---------------------------------------------------------------------------

    \296\ 17 CFR 239.44.
---------------------------------------------------------------------------

     ``Form SF-3'' \297\ (OMB Control No. 3235-0690);
---------------------------------------------------------------------------

    \297\ 17 CFR 239.45.
---------------------------------------------------------------------------

     ``Form 1-A'' \298\ (OMB Control No. 3235-0286);
---------------------------------------------------------------------------

    \298\ 17 CFR 239.90.
---------------------------------------------------------------------------

     ``Form 1-K'' \299\ (OMB Control No. 3235-0720); and
---------------------------------------------------------------------------

    \299\ 17 CFR 239.91.
---------------------------------------------------------------------------

     ``Form 1-SA'' \300\ (OMB Control No. 3235-0721).
---------------------------------------------------------------------------

    \300\ 17 CFR 239.92.
---------------------------------------------------------------------------

    The regulations, schedules, and forms listed above were adopted
under the Securities Act and/or the Exchange Act. These regulations,
schedules, and forms set forth the disclosure requirements for
registration statements, periodic and current reports, distribution
reports, and proxy and information statements filed by registrants to
help investors make informed investment and voting decisions.
    We are proposing amendments to the disclosure requirements in Rules
3-10 and 3-16 of Regulation S-X to better align those requirements with
the needs of investors and to simplify and streamline the disclosure
obligations of registrants. We are proposing to amend both rules and
relocate part of Rule 3-10 and all of Rule 3-16 to proposed Rules 13-01
and 13-02, respectively. We also are proposing to make conforming
amendments to Items 504, 1100, 1112, 1114, and 1115 of Regulation S-K;
Forms F-1, F-3, 1-A, 1-K, and 1-SA under the Securities Act; and Rule
12h-5 and Form 20-F under the Exchange Act. These amendments are
intended to provide investors with the information that is important
given the specific facts and circumstances, make the disclosures easier
to understand, and reduce the costs and burdens to registrants.

B. Summary of the Proposed Amendments Impact on Collection of
Information

    In this section, we summarize the proposed amendments and their
general impact on the paperwork burdens associated with the forms
listed above. In the subsequent section below, we provide the revised
burden estimates of each affected form.
1. Rule 3-10
    The proposed amendments to Rule 3-10 would replace the
Consolidating Information required by existing Rule 3-10 with
Summarized Financial Information of the Obligor Group. Several
commenters noted that preparing and providing Consolidated Information
is particularly challenging, complex, and costly.\301\ Among other
things, the Proposed Alternative Disclosures would permit a parent
company to: (1) Exclude the financial information of non-obligated
entities; (2) reduce the number of periods to be presented; and (3)
provide the information of each issuer and guarantor on a combined,
rather than disaggregated, basis. These changes would reduce a parent
company's paperwork burden by permitting the parent company to exclude
information unnecessary to an investment decision as compared to the
existing rule. In certain circumstances, the paperwork burden could be
reduced even further because registrants would not be required to
recast prior period information, which commenters noted can be
particularly challenging.\302\
---------------------------------------------------------------------------

    \301\ See, e.g., letters from ABA-Committees, Anuradha, BDO,
Cahill, CAQ, DT, EY, FedEx, GM, Grant, Headwaters, KPMG, Medtronic,
and Noble-UK.
    \302\ See, e.g., letters from Medtronic and PwC.
---------------------------------------------------------------------------

    Existing Rule 3-10 requires the Alternative Disclosures to be
included in the notes to the parent company's consolidated financial
statements, thereby requiring the Alternative Disclosures to be audited
for the same periods. The proposed amendments would revise this
requirement so that parent companies may provide the Proposed
Alternative Disclosures outside their financial statement footnotes in
a registration statement covering the offer and sale of the subject
securities and any related prospectus, and in Exchange Act annual and
quarterly reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed, but
require the Proposed Alternative Disclosures to be included in the
footnotes to the parent company's consolidated financial statements for
annual and quarterly reports beginning with the annual report for the
fiscal year during which the first bona fide sale of the subject
securities is completed. This amendment could reduce the burdens
associated with preparing the Proposed Alternative Disclosures because
the information would not need to be immediately audited or tagged.
However, this amendment could result in certain legal and due diligence
costs (e.g., comfort letters).
    Whether a parent company would elect to provide the Proposed
Alternative Disclosures outside its financial statement footnotes
likely would depend on the company's specific facts and circumstances
and, as discussed above,\303\ we believe there could be reasons for
companies to elect either option. In addition, any reduction in
paperwork burden associated with such an election would be incremental,
as the parent company would still incur expenses to prepare audited
financial information. Given these considerations, and to avoid
overestimating the overall paperwork burden reduction associated with
the proposed amendments, we are not estimating a specific burden
reduction for this aspect of the proposed amendments. However, we
solicit comment on whether it would be appropriate to do so, and, if
so, how we might estimate such a reduction.
---------------------------------------------------------------------------

    \303\ See Sections III.C.2.d, ``Location of Proposed Alternative
Disclosures and Audit Requirement,'' and VII.C.1.b.iii, ``Location
of Proposed Alternative Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

    The existing rule also requires a parent company to provide the
Alternative Disclosures as a condition to omitting the separate
financial statements of a subsidiary issuer or guarantor. In most
cases, the Alternative Disclosures consist of Consolidating
Information, but the Alternative Disclosures may consist of a brief
narrative if certain numerical thresholds are met. The proposed
amendments would eliminate these separate categories of Alternative
Disclosures. Instead, the proposed amendments would require a parent
company to provide all financial and non-financial disclosures
specified in proposed Rule 13-01 to the extent they are material to a
holder of the guaranteed security. The proposed amendments would also
require disclosure of any additional information that would be material
to a holder of the guaranteed security.
    While the proposed amendments would eliminate some disclosure that
may be required by the existing rule, they would also require other
disclosure that may not be required by the existing rule. For example,
if a numerical

threshold is met under the existing rule, disclosure is required even
if that disclosure is immaterial to an investment decision. The
proposed amendments would not require that disclosure if it was not
material, which would reduce the parent company's paperwork burden.
Conversely, if a numerical threshold is not met under the existing
rule, disclosure is not required unless that information is necessary
to make the disclosure provided not misleading.\304\ The proposed
amendments would require that disclosure in all cases, to the extent
material, which could increase the parent company's paperwork burden.
---------------------------------------------------------------------------

    \304\ See 17 CFR 230.408(a), 240.12b-20.
---------------------------------------------------------------------------

    We have estimated the number of filings that include Consolidating
Information under Rule 3-10, but we are unable to identify accurately
the issuers providing narrative disclosures under Rule 3-10 because the
language of those disclosures varies based on facts and
circumstances.\305\ However, we do not believe that the proposed
amendments would affect the paperwork burden for filings that include
the narrative disclosures under existing Rule 3-10 because registrants
that provide these narrative disclosures would be permitted to provide
similar information under the proposed amendments.
---------------------------------------------------------------------------

    \305\ See Section VII.B.2, ``Baseline and Affected Parties--
Market Conditions.''
---------------------------------------------------------------------------

    Further, under the proposed amendments, parent companies would no
longer be required to provide the pre-acquisition financial statements
of recently-acquired subsidiary issuers and guarantors, as is currently
required by existing Rule 3-10(g). Disclosure may be required under the
proposed rule, however, if it is material to an investment decision in
the guaranteed security. This aspect of the proposed amendments would
decrease the overall paperwork burden of the affected forms. This
reduction would be mitigated somewhat, however, because parent
companies would still be required to provide information about any
recently-acquired subsidiaries when it is material.
    Finally, we are proposing amendments to require specific non-
financial disclosures, where material, about the issuers and
guarantors, the terms and conditions of the guarantees, and how the
issuer and guarantor structure and other factors may affect payments to
holders of the guaranteed securities. These disclosures would enhance
the information provided about subsidiary issuers and guarantors and
would be more comprehensive than the similar disclosures a parent
company must provide under existing Rule 3-10. These additional
disclosures, therefore, could incrementally increase a parent company's
existing paperwork burden.
    Considering the various impacts to the existing collection of
information requirements outlined above, we estimate that the proposed
amendments to Rule 3-10 would reduce the overall paperwork burden for
registrants. Moreover, some aspects of the proposed amendments could
reduce the paperwork burden significantly. For example, Consolidating
Information, which includes multiple columns and typically occupies
several pages of a parent company's filing, would be replaced with the
Proposed Alternative Disclosures, which we expect in most cases would
consist of one or two pages of disclosure in a parent company's filing.
Overall, therefore, we estimate that the proposed amendments would
reduce the paperwork burden for registrants by approximately 30 hours
for each filing that includes the Proposed Alternative Disclosures in
lieu of the existing Alternative Disclosures.
    Although the proposed amendments would reduce the paperwork burden
for any particular filing on an affected form that includes the
existing Alternative Disclosures, not all filings on the affected forms
include these disclosures because they are provided only in certain
instances.\306\ Therefore, to estimate the overall paperwork burden
reduction from the proposed amendments, we estimated the number of
filings that include the Alternative Disclosures. To do so, we used a
number of methods that varied based on the affected form.
---------------------------------------------------------------------------

    \306\ We were not able to determine the number of filings that
included the Alternative Disclosures with certainty because
registrants are not required to state explicitly that the
disclosures they are providing are meant to satisfy the requirements
of Rule 3-10.
---------------------------------------------------------------------------

    As an initial step, we examined the XBRL tags most commonly
associated with Consolidating Information. Not all filings include XBRL
tags, so we estimated the number of all the affected forms that
included XBRL tags and extrapolated the number of affected forms based
on the percentage of filings that include XBRL tags. For example, in
Section VII.B.2, ``Market Conditions,'' using XBRL tags, we estimated
that registrants filed 1,223 Form 10-Ks with the Alternative
Disclosures in the last three calendar years from 2015 to 2017, which
averages approximately 407.67 filings per year. However, over those
three years, only approximately 86 percent of Forms 10-K included XBRL
tags. For PRA purposes, therefore, we divided 407.67 by 0.86 to
estimate that 474 filings per year included Alternative Disclosures
over the last three years.
    We were able to use this extrapolation method for Forms 10-K, 10-Q,
S-1, 20-F, and 40-F, because the percentage of filings made on those
forms that included XBRL tags was sufficient to make the extrapolation
meaningful. The table below sets forth our estimates of the number of
filings on these forms that included the Alternative Disclosures based
on the XBRL tagging extrapolation method.

          Table 4--Calculation of the Number of Filings on Affected Forms With the Alternative Disclosures Based on XBRL Tagging Extrapolation
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Number of
                                                             responses over    Annual  average     Percentage  of   Annual average of      Estimated
                                                           three-year period    of  responses    responses  tagged       responses       average annual
                                                             using XBRL data   using  XBRL data     using  XBRL                            responses
                                                                         (A)                (B)                (C)    (D) = (B) / (C)                (E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K.....................................................              1,223             407.67                .86             474.03                474
10-Q.....................................................              3,530           1,176.67                .94           1,251.77              1,252
S-1......................................................                  7               2.33                .24               9.71                 10
20-F.....................................................                 17               5.67                .41              12.82                 14
40-F.....................................................                  1                .33                .16               8.31                  8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We also searched Forms S-4, S-11, 10, F-1, F-4, SF-1, SF-3, 1-A, 1-
K, and 1-SA using XBRL tags most commonly associated with Consolidating
Information. However, this extrapolation method did not provide
meaningful results because registrants rarely include XBRL tags for
these affected forms. For example, only one percent of Form S-4 filings
include XBRL tags.\307\ Therefore, to provide a more meaningful
estimate of the number of these forms that include the Alternative
Disclosures, we conducted separate database searches for filings of
those forms over the last three calendar years using search terms
similar to those used by a commenter.\308\
---------------------------------------------------------------------------

    \307\ Similarly, only six percent of Form S-11, three percent of
Form F-1, and three percent of Form 10 filings include XBRL tags.
    \308\ See letter from EY.
---------------------------------------------------------------------------

    Based on these searches, we estimate that, over the last three
calendar years from 2015 to 2017, there were on average 300 filings on
Form S-4, 15 filings on Form S-11, 20 filings on Form 10, 15 filings on
Form F-1, and 20 filings on Form F-4 that included the Alternative
Disclosures. We were unable to find any filings on the remaining
affected forms that included the Alternative Disclosures. Therefore, we
estimate that no filings on those forms included the Alternative
Disclosures. The table below sets forth our estimates of the number of
filings on these forms that included the Alternative Disclosures based
on the other database searches.

    Table 5--Calculation of the Number of Filings on Affected Forms With the Alternative Disclosures Based on
                                                Database Searches
----------------------------------------------------------------------------------------------------------------
                                                             Number of
                                                           responses over   Annual average of      Estimated
                                                         three-year period   responses using     average annual
                                                           using database   database searches      responses
                                                              searches
                                                                       (A)      (B) = (A) / 3                (C)
----------------------------------------------------------------------------------------------------------------
S-4....................................................                300                100                100
S-11...................................................                 15                  5                  5
10.....................................................                 20               6.67                  7
F-1....................................................                 15                  5                  5
F-4....................................................                 20               6.67                  7
1-A....................................................                  0                  0                  0
1-K....................................................                  0                  0                  0
1-SA...................................................                  0                  0                  0
SF-1...................................................                  0                  0                  0
SF-3...................................................                  0                  0                  0
----------------------------------------------------------------------------------------------------------------

    Although the proposed amendments to Rule 3-10 would reduce the
paperwork burden for each individual affected form, the proposed
amendments could cause the number of affected forms filed to change
over a period of time. One commenter \309\ stated that the high
compliance costs associated with preparing the Rule 3-10 financial
information leads many companies to issue debt securities privately.
Again, we believe that the proposed amendments would encourage
potential issuers to conduct registered debt offerings or private
offerings with registration rights. Therefore, we believe that the
number of registration statements and periodic reports filed on
affected forms that include the Proposed Alternative Disclosures would
increase.
---------------------------------------------------------------------------

    \309\ Letter from Cahill.
---------------------------------------------------------------------------

    For example, we believe the number of issuers and guarantors
eligible to provide the Proposed Alternative Disclosures would increase
in lieu of providing separate financial statements of each subsidiary
issuer and guarantor because the proposed amendments would replace the
100%-owned condition with one requiring that the subsidiary issuer/
guarantor be a consolidated subsidiary of the parent company pursuant
to the relevant accounting standards it already uses and eliminate the
requirement that guarantees of subsidiary guarantors be full and
unconditional. If some of those eligible issuers and guarantors conduct
registered debt offerings or private offerings with registration rights
instead of conducting offerings privately and without registration
rights, the number of registration statements and associated periodic
reports filed on affected forms would necessarily increase when
measured over a period of time.
    Conversely, other aspects of the proposed amendments would lead to
a decrease in the number of periodic reports filed on affected forms
when measured over time. For example, under existing Rule 3-10, if a
parent company conducts a registered debt offering or private offering
with registration rights and the subsidiary issuer or guarantor is not
100%-owned, but is instead consolidated into the parent company's
financial statements, or if the subsidiary guarantor's guarantee is not
full and unconditional, the subsidiary must file its own periodic
reports. The subsidiary is required to file a registration statement
for the transaction, which is usually combined with its parent's
registration statement, so the number of registration statements filed
with the Proposed Alternative Disclosures would not decrease as a
result of this aspect of the proposed amendments. However, under the
proposed amendments, if that parent company provides the Proposed
Alternative Disclosures, and meets the other conditions of proposed
Rule 3-10, its subsidiaries would be exempt from periodic reporting
under Rule 12h-5. Therefore, fewer periodic reports on affected forms
would be filed, which would decrease those forms' paperwork burden when
measured over a period of time.
    As another example, existing Rule 3-10 requires a parent company to
include the Alternative Disclosures of its subsidiary issuers and
guarantors in its periodic reports for so long as the guaranteed
securities are outstanding. The proposed amendments would permit the
parent company to cease providing the Proposed Alternative Disclosures
in its periodic reports if the corresponding Section 15(d) obligations
of its subsidiary issuers and guarantors are suspended. Therefore, we
expect that parent companies would provide

the Proposed Alternative Disclosures in fewer filings, which would
reduce the paperwork burden for periodic reports on affected forms when
measured over a period of time.
    Overall, we believe that the decrease in the number of periodic
reports filed on affected forms due to the change in ongoing reporting
requirements would be largely mitigated, and perhaps offset, by the
number of periodic reports that would increase due to the filing of new
registration statements. Consequently, to avoid overestimating the
paperwork reduction associated with the proposed amendments, we are not
adjusting our existing estimate for the number of periodic reports
filed on affected forms. However, we solicit comment on whether and, if
so, how we should make an adjustment to this estimate in light of the
proposed amendments.
    Although we believe the number of periodic reports filed on
affected forms would remain steady, we estimate that the number of
registration statements that include the Proposed Alternative
Disclosures, as opposed to those that presently include the existing
Alternative Disclosures, would increase. As discussed in Section
VII.B.2, ``Market Conditions,'' we note that issuers have conducted
approximately half as many Rule 144A debt offerings as registered debt
offerings. We do not believe that all the issuers that conducted Rule
144A would conduct registered debt offerings as a result of the
proposed amendments, but we estimate that there would be a 33 percent
increase in registration statements filed based on the proposed
amendments. Therefore, we estimate that there would be an additional
three filings on Form S-1,\310\ 33 filings on Form S-4,\311\ two
filings on Form S-11,\312\ two filings on Form 10,\313\ two filings on
Form F-1,\314\ and two filings on Form F-4 per year.\315\ Further, we
estimated above that 14 filings on Form 20-F included the existing
Alternative Disclosures. We estimate that half of those filings were
registration statements. Therefore, we estimate there would be an
additional two registration statements filed on Form 20-F per
year.\316\
---------------------------------------------------------------------------

    \310\ Ten current filings on Form S-1 x 0.33 = 3.3 filings,
which rounds to 3 filings.
    \311\ One hundred current filings on Form S-4 x 0.33 = 33
filings.
    \312\ Five current filings on Form S-11 x 0.33 = 1.65 filings,
which rounds to two filings.
    \313\ Seven current filings on Form 10 x 0.33 = 2.31 filings,
which rounds to two filings.
    \314\ Five current filings on Form F-1 x 0.33 = 1.65 filings,
which rounds to two filings.
    \315\ Seven current filings on Form F-4 x 0.33 = 2.31 filings,
which rounds to two filings.
    \316\ Seven current fillings on Form 20-F x .033 = 2.31 filings,
which rounds to two filings.
---------------------------------------------------------------------------

    Finally, to determine the paperwork burden for an issuer to file a
registration statement with the Proposed Alternative Disclosures, we
first estimated the number of burden hours required for an issuer to
provide the existing Alternative Disclosures. A number of commenters
provided examples of the burdens required to prepare and process the
existing Alternative Disclosures,\317\ but only one commenter
quantified the number of hours.\318\ This commenter indicated that it
required 280 hours per year to prepare and review its Alternative
Disclosures.\319\ We note that this commenter is relatively large and
not necessarily representative of the size of all reporting companies.
Therefore, for PRA purposes, we estimate that the existing Alternative
Disclosures require an average of 100 burden hours to prepare and
process. However, we solicit comment on the number of burden hours
required to prepare the Alternative Disclosures. If the Proposed
Alternative Disclosures would reduce an issuer's burden by 30 hours, as
compared to the issuer providing the existing Alternative Disclosures,
we estimate that the Proposed Alternative Disclosures would require 70
hours to prepare and process.
---------------------------------------------------------------------------

    \317\ See, e.g., letters from EY, FedEx, Medtronic, and Noble-
UK.
    \318\ Letter from FedEx.
    \319\ Id. The commenter noted that it would require 280 hours to
prepare and review its Consolidating Information. As discussed
above, the existing Alternative Disclosures may include either
Consolidating Information or brief narrative disclosure, and we do
not believe that the proposed amendments would affect the paperwork
burden for filings that include the narrative disclosure under
existing Rule 3-10 because registrants that provide these narrative
disclosures would be permitted to provide similar information under
the proposed amendments.
---------------------------------------------------------------------------

2. Rule 3-16
    Existing Rule 3-16 requires separate Rule 3-16 Financial Statements
for each affiliate whose securities constitute a ``substantial
portion'' of the collateral for any class of registered securities as
if the affiliate were a separate registrant. The proposed amendments
related to Rule 3-16 would replace this requirement with a requirement
for a registrant to provide Summarized Financial Information of those
affiliates on a combined basis, pursuant to proposed Rule 13-02, if the
affiliates are consolidated subsidiaries of the registrant. If
additional line items of financial information are material to an
investment decision, the registrant would be required to disclose that
information as well. In addition, the proposed amendments would
require, to the extent material, certain non-financial disclosures
about the securities pledged as collateral, each affiliate whose
securities are pledged, the terms and conditions of the collateral
arrangement, and whether a trading market exists for the pledged
securities.
    We believe that these amendments would reduce the paperwork burden
for the affected forms because Summarized Financial Information is less
detailed than separate financial statements and, therefore, is less
costly and burdensome to prepare. Further, we believe the registrant's
ability to present Summarized Financial Information on a combined basis
with its consolidated affiliates would reduce the registrant's
paperwork burden because the registrant would not be required to
prepare and disclose each of its affiliates' financial statements
separately. However, because proposed Rule 13-02 requires certain
financial information that may not otherwise be required in the
Summarized Financial Information and additional non-financial
disclosures, when material, the expected paperwork burden reduction may
be somewhat mitigated.
    Existing Rule 3-16 requires the Rule 3-16 Financial Statements of
an affiliate to be audited for the periods required by Rules 3-01 and
3-02 of Regulation S-X. Similar to the proposed amendments to Rule 3-
10, the proposed amendments related to Rule 3-16 would permit a
registrant to provide the disclosures in proposed Rule 13-02 outside
its financial statements in a registration statement covering the offer
and sale of the subject securities and any related prospectus, and in
Exchange Act annual and quarterly reports required to be filed during
the fiscal year in which the first sale of the subject securities is
completed, but require the proposed disclosures to be included in the
footnotes to the registrant's consolidated financial statements for
annual and quarterly reports beginning with the annual report for the
fiscal year during which the first bona fide sale of the subject
securities is completed. Therefore, if provided outside the
registrant's financial statements, the proposed Rule 13-02 disclosures
would not be audited or tagged, which could reduce the burdens
associated with preparing this information. Whether a registrant would
elect to provide the disclosures outside its financial statement
footnotes likely would depend on the company's specific facts and
circumstances and, as discussed

above,\320\ we believe there could be reasons for companies to elect
either option. In addition, any reduction in paperwork burden
associated with such an election would be incremental, as the
registrant would still incur expenses to prepare audited financial
information. Given these considerations, and to avoid overestimating
the overall paperwork burden reduction associated with the proposed
amendments, we are not estimating a specific additional burden
reduction for this aspect of the proposed amendments. However, we
solicit comment on whether it would be appropriate to do so and, if so,
how we might estimate such a reduction.
---------------------------------------------------------------------------

    \320\ Sections V.B., ``Overview of the Proposed Changes,'' and
VII.C.2 ``Proposed Amendments to Rule 3-16 and Relocation to Rule
13-02.''
---------------------------------------------------------------------------

    The proposed amendments would require registrants to provide
Summarized Financial Information of affiliates as of, and for, the most
recently-ended fiscal year and interim period included in their
consolidated financial statements. Under existing Rule 3-16, financial
statements of affiliates are required for the periods specified in
Rules 3-01 and 3-02 of Regulation S-X. This aspect of the proposed
amendments, therefore, would reduce the paperwork burden for
registrants by reducing the number of periods required to be presented.
    Overall, we estimate that the proposed amendments related to Rule
3-16 would reduce the current paperwork burden by approximately 30
hours for each affected form except for quarterly reports on Form 10-Q.
Existing Rule 3-16 requires registrants to include interim period Rule
3-16 Financial Statements when the financial statements are presented
in registration statements, but it does not require Rule 3-16 Financial
Statements in quarterly reports on Form 10-Q. The proposed amendments
related to Rule 3-16 would require financial information in quarterly
reports on Form 10-Q, which would increase registrants' paperwork
burden for that form. We estimate that the proposed amendments related
to Rule 3-16 would increase the current paperwork burden by
approximately 70 hours \321\ for each affected quarterly report on Form
10-Q.
---------------------------------------------------------------------------

    \321\ This figure corresponds to the 70 burden hours we estimate
will be required to prepare and process the proposed Rule 13-02
information in connection with the filing of a registration
statement. See discussion below.
---------------------------------------------------------------------------

    As with the proposed amendments to Rule 3-10, although the proposed
amendments related to Rule 3-16 would reduce the paperwork burden for
each individual affected form, except for Form 10-Q, the proposed
amendments could cause the number of affected forms filed over a period
of time to change. A number of commenters stated that, due to the costs
and burdens associated with preparing the information, collateralized
debt offerings are often unregistered or structured to avoid or limit
Rule 3-16 disclosures.\322\ We believe that the proposed amendments
would encourage potential issuers to conduct additional registered
collateralized debt offerings because the costs of complying with
proposed Rule 13-02 could be less than the costs required to comply
with existing Rule 3-16. As the number of these registered offerings
increases, the number of affected forms filed would also increase over
a period of time.
---------------------------------------------------------------------------

    \322\ See, e.g., letters from ABA-Committees, Cahill, Chamber,
Covenant, Davis Polk, DT, KPMG, EY, and PwC.
---------------------------------------------------------------------------

    As discussed in Section VII.B.2, ``Market Conditions,'' over the
last three calendar years from 2015 to 2017, approximately seven
filings per year have included Rule 3-16 Financial Statements, with six
of those filings on Form 10-K and one on Form 20-F. However, a number
of filings on affected forms include references to Rule 3-16 even
though they do not include Rule 3-16 Financial Statements.\323\ As
commenters indicated, indenture agreements frequently include
provisions that release collateral requirements if their inclusion
would trigger Rule 3-16 Financial Statements.\324\
---------------------------------------------------------------------------

    \323\ We estimate that, over the last three calendar years,
approximately 21 filings on Form 10-K included Rule 3-16 Financial
Statements and an additional 15 filings on that form referenced Rule
3-16 but did not include Rule 3-16 Financial Statements. Also, three
filings on Form 20-F included Rule 3-16 Financial Statements and no
other filings on that form referenced Form 3-16. Further, 25 filings
on Form 10-Q, 11 filings on Form S-1, 35 filings on Form S-4, one
filing on Form S-11, one filing on Form 10, and one filing on Form
1-A referred to Rule 3-16 but did not include Rule 3-16 Financial
Statements. No filings on the other affected forms referenced the
rule.
    \324\ See, e.g., letters from Davis, KPMG, and PwC.
---------------------------------------------------------------------------

    We do not believe that all the filings on affected forms that
reference Rule 3-16 but do not include Rule 3-16 Financial Statements
would include the proposed Rule 13-02 information, but we believe many
would include this information. For PRA purposes, we estimate that the
proposed amendments would result in approximately 33 percent of the
registration statements that reference Rule 3-16 but do not include
Rule 3-16 Financial Statements providing the proposed Rule 13-02
information. As such, we estimate that approximately ten additional
registration statements would include the proposed Rule 13-02
information, with four of those filings on Form S-4 \325\ and one each
on Forms S-1,\326\ S-11, 10, 1-A, F-1, and F-4.\327\
---------------------------------------------------------------------------

    \325\ We estimated this figure by multiplying the average number
of filings per year from the last three calendar years on Form S-4
that referenced Rule 3-16 but did not include the Rule 3-16
Financial Statements (12 filings) by 0.33. The average annual number
of filings on Form S-4 that referenced Rule 3-16 but did not include
the Rule 3-16 Financial Statements is 11.67, which rounds to 12.
    \326\ We estimated this figure by multiplying the average number
of filings per year from the last three calendar years on Form S-1
that referenced Rule 3-16 but did not include the Rule 3-16
Financial Statements (four filings) by 0.33. The average annual
number of filings on Form S-1 that referenced Rule 3-16 but did not
include the Rule 3-16 Financial Statements is 1.33, which rounds to
one.
    \327\ Over the last three calendar years, one filing on Form S-
11, one filing on Form 10, and one filing on Form 1-A referred to
Rule 3-16 but did not include Rule 3-16 Financial Statements.
Therefore, we estimate that one additional filing on each of these
forms would include the proposed Rule 13-02 information. Also,
although there were no filings on Forms F-1 and F-4 that referenced
Rule 3-16 in the last three calendar years, one filing on Form F-1
and two filings on Form F-4 referenced Rule 3-16 in calendar years
2013 and 2014, so we estimated that one additional filing on each of
these forms would include the proposed Rule 13-02 information.
---------------------------------------------------------------------------

    Further, we do not believe that all registrants that file
additional registration statements with the proposed Rule 13-02
information would be new registrants, so we do not believe there would
be an additional ten filings on Form 10-K. We estimate that 33 percent
of the registrants that file additional registration statements with
the proposed Rule 13-02 information would be new registrants, so an
additional three filings on Form 10-K would include the proposed Rule
13-02 information.\328\ Also, we estimate that two additional filings
on Form 20-F, one registration statement and one annual report, would
include the proposed Rule 13-02 information.
---------------------------------------------------------------------------

    \328\ Thirty-three percent of ten is 3.33, which rounds to
three.
---------------------------------------------------------------------------

    Estimating the number of additional filings on Form 10-Q requires a
separate determination because the proposed amendments would require
that proposed Rule 13-02 information be included in quarterly reports
on Form 10-Q. Rule 3-16 Financial Statements are not required in
quarterly reports on Form 10-Q under existing Rule 3-16. To estimate
the number of additional filings on Form 10-Q that would include the
proposed Rule 13-02 information, we look to the estimated number of
filings on Form 10-K. For every Form 10-K, a registrant would be
required to file three quarterly reports on Form 10-Q. Assuming that
six filings on Form 10-K would be made each year with the proposed Rule
13-02

information,\329\ we estimate that 18 quarterly reports on Form 10-Q
per year would be filed with the proposed Rule 13-02 information.
---------------------------------------------------------------------------

    \329\ This figure was determined by adding the two current
filings on Form 10-K that include Rule 3-16 Financial Statements
with the estimated four additional filings on Form 10-K that would
include proposed Rule 13-02 information.
---------------------------------------------------------------------------

    Finally, to determine the paperwork burden for a registrant to file
a registration statement with the proposed Rule 13-02 information, we
estimated the number of burden hours required for an issuer to provide
the existing Rule 3-16 Financial Statements. Unlike for Rule 3-10, no
commenter provided an estimate for the cost of Rule 3-16 Financial
Statements. For PRA purposes, we estimate that the Rule 3-16 Financial
Statements require an average of 100 burden hours, which is the same
estimate we use for the hours required to prepare and process the
Alternative Disclosures under existing Rule 3-10. However, we solicit
comment on the number of burden hours required to prepare the Rule 3-16
Financial Statements. If proposed Rule 13-02 would reduce a
registrant's burden by 30 hours, as compared to the registrant
providing the existing Rule 3-16 Financial Statements, we estimate that
the proposed Rule 13-02 information would require 70 hours to prepare
and process.

C. Burden and Cost Estimates for the Proposed Amendments

    Below we estimate the aggregate change in paperwork burden as a
result of the proposed amendments, both in terms of the change to
existing responses as well as the effect of additional responses. These
estimates represent the average burden for all registrants, both large
and small. In deriving our estimates, we recognize that the burdens
will likely vary among individual registrants based on a number of
factors, including the nature of their business. The burden estimates
were calculated by multiplying the estimated number of responses by the
estimated average amount of time it would take a registrant to prepare
and review disclosure required under the proposed amendments. The
portion of the burden carried by outside professionals is reflected as
a cost, while the portion of the burden carried by the registrant
internally is reflected in hours.
    For purposes of the PRA, we estimate that 75% of the burden of
preparation of Forms 10-K, 10-Q, 1-A, and 1-K is carried by the
registrant internally and that 25% of the burden of preparation is
carried by outside professionals retained by the company at an average
cost of $400 per hour.\330\ Additionally, we estimate that 25% of the
burden of preparation for Forms 10, S-1, S-3, S-4, S-11, SF-3, F-1, F-
3, F-4, 20-F, and 40-F and is carried by the registrant internally and
that 75% of the burden of preparation is carried by outside
professionals retained by the company at an average cost of $400 per
hour. Finally, we estimate that 85% of the burden of preparation of
Form 1-SA is carried by the registrant internally and that 15% of the
burden of preparation is carried by outside professionals retained by
the company at an average cost of $400 per hour.
---------------------------------------------------------------------------

    \330\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This estimate is
based on consultations with several registrants, law firms and other
persons who regularly assist registrants in preparing and filing
reports with the Commission.
---------------------------------------------------------------------------

    The tables below illustrate the change to the total annual
compliance burden of affected forms, in hours and in costs, as a result
of the proposed amendments.

                    Table 6--Calculations of Change in Burden Estimates of Current Responses Due to Proposed Amendments to Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Change in        Change in
                                                         Number of      Burden hour      Change in        Change in       professional     professional
                                                          current       change per      burden hours    company  hours     hours for        costs for
                                                         affected         current       for current      for  current       current          current
                                                         responses       affected         affected         affected         affected         affected
                                                                         response        responses        responses        responses        responses
                                                                 (A)             (B)  (C) = (A) x (B)      (D) = (C) x      (E) = (C) x      (F) = (E) x
                                                                                0.75, 0.25, or   0.25, 0.75, or             $400
                                                                                0.85             0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................             474            (30)         (14,220)         (10,665)          (3,555)     ($1,422,000)
10-Q................................................           1,252            (30)         (37,560)         (28,170)          (9,390)      (3,756,000)
S-1.................................................              10            (30)            (300)             (75)            (225)         (90,000)
20-F................................................              14            (30)            (420)            (105)            (315)        (126,000)
40-F................................................               8            (30)            (240)             (60)            (180)         (72,000)
S-4.................................................             100            (30)          (3,000)            (750)          (2,250)        (900,000)
S-11................................................               5            (30)            (150)           (37.5)          (112.5)         (45,000)
10..................................................               7            (30)            (210)           (52.5)          (157.5)         (63,000)
F-1.................................................               5            (30)            (150)           (37.5)          (112.5)         (45,000)
F-4.................................................               7            (30)            (210)           (52.5)          (157.5)         (63,000)
1-A.................................................               0  ..............  ...............  ...............  ...............  ...............
1-K.................................................               0  ..............  ...............  ...............  ...............  ...............
1-SA................................................               0  ..............  ...............  ...............  ...............  ...............
SF-1................................................               0  ..............  ...............  ...............  ...............  ...............
SF-3................................................               0  ..............  ...............  ...............  ...............  ...............
--------------------------------------------------------------------------------------------------------------------------------------------------------

                   Table 7--Calculations of Change in Burden Estimates of Additional Responses Due to Proposed Amendments to Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Change in        Change in
                                                         Number of      Burden hour      Change in        Change in       professional     professional
                                                        additional      change per      burden hours    company  hours     hours for        costs for
                                                         affected       additional     for additional  for  additional     additional       additional
                                                         responses       affected         affected         affected         affected         affected
                                                                         response        responses        responses        responses        responses
                                                                 (A)             (B)  (C) = (A) x (B)      (D) = (C) x      (E) = (C) x      (F) = (E) x
                                                                                0.75, 0.25, or   0.25, 0.75, or             $400
                                                                                0.85             0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K................................................               0  ..............  ...............  ...............  ...............  ...............