absence of a registration requirement; and (2) relatively high
liquidity, given the possibility to exchange the securities for
registered securities.\540\
---------------------------------------------------------------------------

    \538\ 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).
    \539\ 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Rule 144A Market: A Cross-Country Analysis (2010) (unpublished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Zhou (2002) and unpublished working paper of Mittoo and Zhang (2011)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.
    \540\ See, e.g., Fenn (2000), note 539 above.
---------------------------------------------------------------------------

    As discussed above,\541\ existing 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 existing rule: (1)
Consolidating Information; and (2) a brief narrative. Consolidating
Information is the most common type of Alternative Disclosure under
existing Rule 3-10. Table 2 presents data on the number of unique
registrants and filings that included Consolidating Information under
Rule 3-10 in that filing for the period 2013-2018.\542\
---------------------------------------------------------------------------

    \541\ See Section II.A, ``Background.''
    \542\ To identify these disclosures, we searched all Forms 10-K,
10-Q, 20-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 2013-2018. 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.
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 using specific
search terms. We were unable to find any filings on the remaining
affected forms that included the Alternative Disclosures. Our
analysis did not include Forms S-3 or F-3, because Consolidating
Information included with those registration statements is typically
incorporated by reference from Exchange Act reports.

                Table 2--Estimated Number of Unique Registrants and Filings Including Consolidating Information Under Existing Rule 3-10
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   Number of    Number of
                      Year                           unique       total         10-K         10-Q         20-F         S-1          S-4          F-4
                                                  registrants    filings
--------------------------------------------------------------------------------------------------------------------------------------------------------
2013............................................          533         1834          431         1339           12           15           34            3
2014............................................          530         1861          461         1360           10            9           21            0
2015............................................          500         1750          437         1288            9            5           11            0
2016............................................          469         1641          417         1199            8            1           16            0
2017............................................          403         1430          369         1043            5            1           11            0
2018............................................          349         1261          328          922            6            0            4            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, we
are unable to determine that number due to methodological and data
extraction challenges.\543\
---------------------------------------------------------------------------

    \543\ 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,\544\ 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.\545\
---------------------------------------------------------------------------

    \544\ See Section IV, ``Rule 3-16 of Regulation S-X.''
    \545\ There are no XBRL tags specific to Rule 3-16. To identify
these disclosures, we searched all Forms 10-K, 10-Q, 20-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. We manually sifted through these false returns to identify the
positive results listed in Table 3.

      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
2018............................................               7               7               6               1
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis of EDGAR filings.

C. Anticipated Economic Effects

    In this section we discuss the anticipated economic benefits and
costs of the amendments to Rules 3-10 and 3-16.
1. Amendments to Rule 3-10 and Partial Relocation to Rule 13-01
    The final rules amend the disclosure requirements in Rule 3-10 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 expect the amendments to benefit issuers and investors.
    As a result of the overall reduced burdens associated with the
amendments, investors may benefit from access to more registered
offerings that are structured to include guarantees and, accordingly,
the additional protections that come with a registered offering. 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 disadvantaged as compared to the direct creditors of any
subsidiary not providing a guarantee. In the event of default, a holder
of a debt security issued by a parent company can make claims for
payment directly against the issuer and guarantors. In a bankruptcy
proceeding, the assets of non-guarantor subsidiaries that are not
issuers typically would be accessible only by the holder indirectly
through the parent's equity interest. In such a proceeding, without a
direct guarantee, the claims of the holder would be structurally
subordinate to the claims of other creditors, including trade creditors
of those subsidiaries. The less burdensome disclosures under the final
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.
    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 access the capital markets more quickly than under the
existing Rule 3-10 requirements because it is likely to take issuers
less time and cost to prepare Summarized Financial Information under
the final amendments than to prepare Consolidating Information under
existing Rule 3-10. By registering the initial offering, these issuers
would incur the cost of only one offering, rather than two; that is,
issuers would not incur any additional costs associated with exchanging
the guaranteed debt securities issued in an unregistered Rule 144A
offering for guaranteed debt securities issued in an offering
registered under the Securities Act.
    Commenters generally agreed with these assessments.\546\ Some
commenters argued that the expected reduction in registrants' costs and
burdens of providing the proposed disclosures would lead to an increase
in the number of registered debt offerings with guarantees.\547\ One
commenter suggested that this increase would result from the
disclosures that would be required in proposed Rule 13-01 more closely
resembling the disclosure practice in the Rule 144A and Regulation S
market.\548\ One commenter noted that, although the proposed amendments
would reduce the burdens of registering offerings of guaranteed
securities, the proposed amendments may not result in a significant
increase in such offerings because of the general

trend toward Rule 144A transactions.\549\ Even so, the commenter
asserted that the proposed amendments could result in more uniform and
better financial disclosures for investors if they are incorporated
into market practice for Rule 144A offerings. Another commenter,
however, was skeptical that, due to the proposed amendments, high-yield
issuers using the Rule 144A market would return to the registered
market ``to a meaningful extent'' because, according to that commenter,
the Rule 144A market has ``largely eliminated the historical pricing
benefits'' of registered offerings.\550\
---------------------------------------------------------------------------

    \546\ See, e.g., letters from Ball Corp., Cravath, Davis Polk,
Eaton Corp., EY, FEI, and Simpson Thacher.
    \547\ See, e.g., letters from Ball Corp., Davis Polk, EY, and
FEI.
    \548\ See letter from Cravath.
    \549\ See letter from NYC Bar.
    \550\ See letter from Shearman.
---------------------------------------------------------------------------

    Several commenters provided us with burden estimates regarding the
disclosure requirements of Rule 3-10. One commenter noted that
presentation of Consolidating Information required under existing rules
comprises approximately 10% of the total pages in its Forms 10-Q and
10-K and the preparation of this information is both costly and time
consuming.\551\ Another commenter indicated that the existing Rule 3-10
disclosure requirements add approximately one week of additional time
to the preparation of its annual and quarterly reports on Forms 10-K
and 10-Q, respectively, and stated that its annual report for 2017
included nine pages of Rule 3-10 disclosures even though its compliance
with the terms of its credit facility and indentures is measured based
on consolidated financial statement amounts and not guarantor financial
information.\552\ One commenter stated that its 2017 annual report on
Form 10-K contained 27 pages of Rule 3-10 disclosures.\553\ Another
commenter estimated that the existing Rule 3-10 disclosure requirements
add approximately three weeks of additional time annually to the
preparation of its quarterly and annual reports.\554\ One commenter
stated that the preparation and review of its Consolidating Information
is time-consuming and costly, requiring approximately 280 hours per
year.\555\
---------------------------------------------------------------------------

    \551\ See letter from T-Mobile.
    \552\ See letter from Windstream.
    \553\ See letter from WTW.
    \554\ See letter from Freeport.
    \555\ See letter from FedEx.
---------------------------------------------------------------------------

a. Eligibility Conditions To Omit Financial Statements of Subsidiary
Issuer or Guarantor
    As detailed in Section III.C.1.b, ``Consolidated Subsidiary
Condition,'' the final amendments will 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 change
will 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 final rule will 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 change from 100%-owned to consolidation, we are
simplifying the other eligibility conditions. Namely, as discussed in
Section III.C.1.d, ``Eligible Issuer and Guarantor Structures
Condition,'' the final amendments will 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, will no longer impact the eligibility to omit
separate subsidiary financial statements and instead will only impact
the extent of disclosure in the Revised Alternative Disclosures.
    Overall, these final amendments should permit a broader scope of
issuers and guarantors to be eligible to provide the Revised
Alternative Disclosures in lieu of separate financial statements of
each subsidiary issuer and guarantor than under existing Rule 3-10.
This, in turn, will reduce the compliance costs associated with
preparation of disclosures for these registered debt offerings and
ongoing periodic reporting. To the extent there are more issuers and
guarantors that are eligible to provide the Revised Alternative
Disclosures in lieu of separate financial statements of each subsidiary
issuer and guarantor under amended Rule 3-10, these entities may be
more likely to register their guaranteed 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,\556\ 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 could have
reduced compliance costs to the extent they meet the revised
eligibility criteria under the final Rule 3-10 and the Revised
Alternative Disclosures are provided in lieu of their separate
financial statements.
---------------------------------------------------------------------------

    \556\ See discussion within Section VIII.B.2, ``Market
Conditions.'' See also supra note 539.
---------------------------------------------------------------------------

    Certain investors could also benefit from the final 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 final
amendments to the eligibility conditions encourage additional
registered debt offerings, more investment opportunities would be made
available, and a resulting increase in market participation could
improve the overall competitiveness and efficiency of the capital
markets. Furthermore, registered 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 final 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
less than 100%-owned by the parent company. If these subsidiaries are
consolidated in the parent company's financial statements and all other
conditions of amended 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 final rule are met, we believe the Revised Alternative Disclosures
will provide the information investors need to make informed investment
decisions with respect to a guaranteed security.
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 final rule retains the
requirement to provide the Alternative Disclosures, but with
modifications. We address below the amendments related to the
Alternative Disclosures (the Revised Alternative Disclosures).
i. Financial and Non-Financial Disclosures
    As described in Section III.C.2.a, ``Financial Disclosures,'' the
final rules should 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 Summarized Financial Information is intended
to focus on the information that we believe is most likely to be
material to an investment decision. Additional line items beyond what
is required in the Summarized Financial Information are required to be
disclosed if they are material for investors to evaluate the
sufficiency of the guarantee and/or are necessary to make the financial
and non-financial information presented not misleading. Additionally,
the final rules require that an issuer's or guarantor's receivables
from, payables to, and transactions with non-obligated subsidiaries and
related parties be presented in separate line items. This requirement
in the final rule, which is a change from the proposal, should enhance
the transparency of the Summarized Financial Information and further an
investor's evaluation of the sufficiency of the guarantee. At the same
time, we do not expect this requirement to impose significant costs on
issuers.
    The final 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, and that investors on
average take more time to incorporate complex financial
disclosures.\557\ More generally, we believe the final amendments will
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 final amendments have their intended
effect of reducing complexity while maintaining the material
completeness of financial disclosures, we anticipate that the financial
disclosures that result from the final amendments will improve price
discovery, enhance the allocative efficiency of markets, and facilitate
capital formation. Commenters generally agreed with such arguments,
asserting that providing the Summarized Financial Information instead
of the Consolidating Information would reduce an issuer's burdens \558\
while continuing to provide investors with sufficient information to
make informed investment decisions.\559\
---------------------------------------------------------------------------

    \557\ See Haifeng You & Xiao-jun Zhang, Financial Reporting
Complexity and Investor Underreaction to 10-K Information, 14 Rev.
of Acct. Stud. 559 (2009); Brian P. Miller, The Effects of Reporting
Complexity on Small and Large Investor Trading, 85 Acct. Rev. 2107
(2010); Alastair Lawrence, Individual Investors and Financial
Disclosure, 56 J. of Acct. & Econ. 130 (2013).
    \558\ See, e.g., letters from Ball Corp., Eaton Corp., EY, FEI,
Freeport, KPMG, NYC Bar, Sullivan & Cromwell, and T-Mobile.
    \559\ See, e.g., letters from Ball Corp., EY, FedEx, FEI,
Freeport, and Sullivan & Cromwell.
---------------------------------------------------------------------------

    Under the final rules, a parent company will generally be permitted
to provide financial disclosures about the Obligor Group on a combined
basis rather than on a disaggregated basis. As proposed, if non-
financial disclosure provided in response to Rule 13-01 were applicable
to one or more, but not all, issuers and/or guarantors, such as where a
subsidiary's guarantee is limited to a particular dollar amount,
separate disclosure of Summarized Financial Information for the
affected issuers and/or guarantors would be required, to the extent
material. In a change from the proposal, the final rules will permit,
in limited circumstances (i.e., where the separate financial
information of the affected issuers and guarantors can be easily
explained and understood), narrative disclosure in lieu of separate
disclosure of the financial information of the subsidiary issuers and
guarantors affected by those factors. This change to the final rule is
expected to reduce the compliance burden for registrants without loss
of relevant information for investors. By simplifying and streamlining
the disclosure of financial and non-financial information, this
amendment could also facilitate investors' information processing,
leading to more efficient investment decisions.\560\
---------------------------------------------------------------------------

    \560\ See supra note 557.
---------------------------------------------------------------------------

    Whereas the existing rule required issuers and guarantors to
account for their investments in non-issuer and non-guarantor
subsidiaries under the equity method of accounting within the
Alternative Disclosures, the final rules require the complete exclusion
of non-issuer and non-guarantor subsidiary financial information from
the combined financial information of the Obligor Group. In this
regard, investments in non-issuer and non-guarantor subsidiaries held
by issuers and guarantors will be excluded from the financial
information of the issuers and guarantors. The financial information
depicted will be only that of the issuers and guarantors. This
requirement represents a change from the proposal, which would have
permitted parent companies to determine the method of exclusion. We
acknowledge that a parent company may have incurred lower costs under
the proposed amendments by being able to select the method of excluding
non-issuer and non-guarantor subsidiary information at its choice
(e.g., the parent company would likely incur lower costs if its systems
were already designed to utilize a particular method). However, under
the final amendments, a parent company is not required to justify that
its selected method was reasonable under the circumstances as was
proposed, and we expect in most circumstances that requiring exclusion
of non-issuer and non-guarantor subsidiary financial information will
be a less costly presentation than methods that would have required the
disclosure of such financial information under the proposed amendments
or than the required used of the equity method under the existing rule.
By requiring the complete exclusion of non-issuer and non-guarantor
subsidiary financial information, the final rule will also avoid
potential confusion among issuers and investors about the appropriate
method of exclusion.
    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 final 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 final amendments may
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.\561\ Some commenters argued that providing this
information on a combined basis would still provide investors with
material information in making an investment decision \562\ while also
reducing a burdensome requirement for issuers.\563\
---------------------------------------------------------------------------

    \561\ 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).
    \562\ See, e.g., letters from Dell, FedEx, and Sullivan &
Cromwell.
    \563\ See, e.g., letters from Davis Polk, KPMG, and Sullivan &
Cromwell.
---------------------------------------------------------------------------

    The final rule also will require that Summarized Financial
Information be provided for the most recently ended 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 provide information that is
material to an investment decision while reducing compliance costs for
registrants. Some commenters, however, recommended requiring the most
recent interim period only in limited circumstances, such as when there
had been a material change since the most recent annual period.\564\
While we acknowledge the concerns about the burden to provide interim
information in all cases, we note that the final amendments already
significantly reduce the burdens on parent companies by eliminating the
earliest two years of required Summarized Financial Information and, in
filings on Form 10-Q, by eliminating both the quarter-to-date interim
period requirement in filings covering more than one fiscal quarter and
comparable prior year interim period(s), as applicable. Under the final
amendments, investors will continue to receive the most recent interim
and annual period information, and we continue to believe this is the
most appropriate approach to reducing burdens for parent companies
while providing investors with the relevant information they need to
make informed investment decisions.
---------------------------------------------------------------------------

    \564\ See, e.g., letters from ABA, Ball Corp., Comcast, Dell,
Deloitte, EY, FedEx, FEI, and PWC.
---------------------------------------------------------------------------

    In addition, the final rules will require non-financial disclosures
to supplement the amended financial disclosures with additional
information, to the extent material. This would include information
about how payments to holders of guaranteed securities may be affected
by such factors as the issuer and guarantor structure, the terms and
conditions of the guarantees, the impact of non-controlling ownership
interests, or other facts and circumstances specific to the offering.
These final 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.
    Finally, as with any change to reporting format and presentation of
information, the final amendments may lead companies and investors to
incur costs to adjust to the new disclosures. As further discussed in
Sections VIII.C.1.b.ii and iii 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 are eliminating the numerical thresholds of existing Rule 3-10 that
are used to determine the form and content of disclosure.\565\ Instead,
disclosures specified in new Rule 13-01 will be required unless such
information would not be material. Additionally, the final rule will
require disclosure of any financial and narrative information about
each guarantor if it would be material for investors to evaluate the
sufficiency of the guarantee, and disclosure of sufficient information
to make the financial and non-financial information presented not
misleading. While numerical thresholds may be easier to apply than a
materiality standard that requires judgment, this change will allow for
a more principles-based disclosure approach that is more tailored to
the specific circumstances and the needs of investors.\566\
Furthermore, registrants are already well-versed in making judgements
about whether disclosure is material as part of complying with other
disclosure requirements.
---------------------------------------------------------------------------

    \565\ While we are eliminating the numerical thresholds of
existing Rule 3-10 used to determine the form and content of
disclosure for existing issuers and guarantors and instead requiring
disclosure to the extent material, the final amendments continue to
use a numerical test for determining whether pre-acquisition
financial information of recently acquired subsidiary issuers and
guarantors is required. See discussion in Section VIII.C.1.b.iv,
``Recently Acquired Subsidiary Issuers and Guarantors.''
    \566\ A number of academic studies have explored the use of
numerical 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 numerical threshold for lease
capitalization).
---------------------------------------------------------------------------

    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 currently providing the brief
narrative to incur significant costs to provide the Revised Alternative
Disclosures. For example, where Alternative Disclosures under the
current rule 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 amendments.
    Proposed Rule 13-01(a)(4) would have required, if the financial
disclosures specified in proposed Rule 13-01(a)(4) were omitted because
they are not material, disclosure of a statement to that effect and the
reasons therefore. As discussed above, we did not adopt this proposed
requirement.\567\ In a change from the proposal, the final rule
identifies four scenarios which we believe generally capture the
situations under which the financial disclosures would not be material.
These scenarios are intended to help address concerns \568\ about the
need for greater certainty as to the circumstances when the omission of
financial disclosures may be appropriate while continuing to provide
investors with the basic reasons as to why the financial information
was omitted in a manner similar to existing Rule 3-10's narrative
exceptions. If the scenario is applicable and disclosed, the parent
company could then omit the financial disclosures. We believe the
greater certainty afforded to a parent company that chooses to rely on
one of the identified scenarios, if applicable, will result in lower
burdens in preparing the disclosure. If one of the identified scenarios
does not apply, however, the parent company has the option to make its
own assessment

based upon a consideration of other relevant facts and circumstances
under the general materiality provision of Rule 13-01(a).
---------------------------------------------------------------------------

    \567\ See discussion in Section III.C.2.c.iii, ``When Disclosure
is Required.''
    \568\ See, e.g., letter from Shearman.
---------------------------------------------------------------------------

    Allowing the parent company to omit information that is not
material will lower the costs of disclosure relative to existing
requirements and may help focus investor attention on decision-relevant
information. This could also increase the risk that a parent company
would omit, potentially inadvertently, value-relevant information, and
that investors may make suboptimal investment decisions. Such risk will
be mitigated, however, by the requirement to disclose any financial and
narrative information about each guarantor if it would be material for
investors to evaluate the sufficiency of the guarantee and sufficient
information to make the financial and non-financial information
presented not misleading. Also, omitting material information would
subject issuers and guarantors to increased litigation risk, providing
incentive for issuers to make careful determinations on the form and
content of disclosures.
    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.\569\
However, there is also evidence of investor benefits from rules-based
reporting standards.\570\ While the final amendments could result in
reduced comparability across registrants and transactions, investors
could benefit from disclosures that are more tailored to the material
facts and circumstances through registrants' application of a
principles-based standard.
---------------------------------------------------------------------------

    \569\ 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 numerical
thresholds can deviate from investor preferences).
    \570\ 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.
---------------------------------------------------------------------------

iii. Location of Alternative Disclosures and Audit Requirement
    The final amendments will allow the parent company the choice of
whether to provide the Revised Alternative Disclosures in its
consolidated financial statement footnotes or, alternatively, in MD&A.
If not otherwise included in the consolidated financial statements or
MD&A, the disclosures must be provided in other specified prominent
locations. Under the proposed amendments, this flexibility of where to
locate the disclosures would only be available in the registration
statement covering the offer and sale of the subject securities and any
related prospectus, and in Exchange Act reports on Forms 10-K and 10-Q
required to be filed during the fiscal year in which the first bona
fide sale of the subject securities is completed. Under the final
amendments, consistent with the recommendation of a number of
commenters,\571\ the parent company will have flexibility to locate the
disclosures in a footnote to its consolidated financial statements or
in the locations specified in Rule 13-01(b) in all of its filings.
---------------------------------------------------------------------------

    \571\ See, e.g., letters from ABA, Cravath, Davis Polk, Dell,
SIFMA, Simpson Thacher and Sullivan & Cromwell.
---------------------------------------------------------------------------

    If the parent company were to provide the Revised Alternative
Disclosures in its consolidated financial statements, 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.
    In contrast, if the parent company were to provide the Revised
Alternative Disclosures outside its financial statements, lower
compliance costs would likely result with respect to these filings.
Consistent with this, some commenters argued that not requiring the
disclosures to be audited will reduce costs.\572\ While we generally
expect lower compliance costs for parent companies that provide the
Revised Alternative Disclosures outside of their consolidated financial
statements, these parent companies may incur other costs, such as due
diligence activities (e.g., comfort letters).\573\ Additionally, this
optionality may reduce the potential for delay in offerings that exists
under the current rule due to the requirement to have the Alternative
Disclosures audited. Parent companies using this 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. Several commenters agreed
with our assessment that such an option would allow issuers to register
guaranteed debt securities and access capital markets faster.\574\
---------------------------------------------------------------------------

    \572\ See, e.g., letters from ABA, Ball Corp., Cravath, Davis
Polk, Dell, Freeport, SIFMA, Simpson Thacher, Sullivan & Cromwell,
and WTW.
    \573\ See, e.g., letters from BDO, EY, Grant Thornton, KPMG, and
Windstream.
    \574\ See, e.g., letters from ABA, BDO, Cravath, Davis Polk,
Dell, and Simpson Thacher. Cf. letter from BDO. See also note 269.
---------------------------------------------------------------------------

    Although these disclosures are supplemental in nature, investors
may nevertheless perceive them to be less reliable if a parent company
provides these disclosures outside its financial statements as they
would not benefit from an audit or interim review conducted by the
auditor. Some commenters asserted that the flexibility to determine the
location of the Proposed Alternative Disclosures under the proposed
amendments could lead to investor confusion about the location of the
disclosures,\575\ and uncertainty as to the level of audit assurance
that is applied to the disclosures.\576\ One commenter did not support
locating the Proposed Alternative Disclosures outside the financial
statements,\577\ and another suggested either requiring the Proposed
Alternative Disclosures be audited or limiting unaudited disclosures to
underwritten offerings.\578\ One of these commenters indicated that
many investors place significant value on having required disclosures
subject to annual audit and/or interim review, internal control over
financial reporting, and XBRL tagging requirements, and not subject to
the forward-looking statements safe harbor.\579\ To the extent that
investors prefer the Revised Alternative 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.
---------------------------------------------------------------------------

    \575\ See letters from Deloitte, FedEx, and PWC.
    \576\ See letters from Deloitte and KPMG.
    \577\ See letter from CII.
    \578\ See letter from BDO.
    \579\ See letter from CII.
---------------------------------------------------------------------------

    Additionally, the amount of information that investors receive in
the registration statement and in certain Exchange Act periodic reports
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 Revised Alternative Disclosures outside its consolidated
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 Revised Alternative Disclosures in its

consolidated financial statements. Such supplemental forward-looking
information, if provided, could benefit investors. The location 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.\580\
---------------------------------------------------------------------------

    \580\ 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 Revised Alternative Disclosures in
its financial statements, consistent with the existing rule, such
disclosures would be subject to XBRL tagging 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, Revised
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 Revised Alternative Disclosures in XBRL, and hence the incremental
cost savings of not having to tag the Revised Alternative Disclosures
likely would be relatively low, as issuers already would have software
or processes in place for tagging financial statement information. One
commenter argued that the cost of XBRL formatting should be
minimal.\581\
---------------------------------------------------------------------------

    \581\ See letter from XBRL.
---------------------------------------------------------------------------

iv. Recently Acquired Subsidiary Issuers and Guarantors
    The final rule eliminates the requirement to provide pre-
acquisition audited financial statements of a recently acquired
subsidiary issuer or guarantor. 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. 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 require issuers to provide audited
financial statements of a recently acquired subsidiary that is small
relative to its consolidated parent company, which would increase
issuers' compliance burdens.
    The proposed rule would have required parent companies to provide
information about recently acquired subsidiary issuers and guarantors
only if material to an investment decision in the guaranteed security.
The final rule contains a different test for determining whether
disclosures about recently acquired subsidiary issuers and guarantors
must be provided. More specifically, the final rule requires, in
certain circumstances,\582\ pre-acquisition Summarized Financial
Information for significant recently acquired subsidiary issuers and
guarantors to be provided in a Securities Act registration statement
filed in connection with the offer and sale of the subject guaranteed
security. Whereas separate financial statements are required for
significant recently acquired subsidiary issuers and guarantors under
existing Rule 3-10(g), the final rule requires Summarized Financial
Information for significant recently acquired subsidiary issuers and
guarantors, which is substantially less burdensome and costly for
issuers to prepare and consistent with what is required for existing
issuers and guarantors under the final amendments. We believe
Summarized Financial Information required by the final rule for
recently acquired subsidiary issuers and guarantors will provide
investors with material information with which to make an informed
investment decision while reducing costs for issuers.
---------------------------------------------------------------------------

    \582\ See description of the circumstances when pre-acquisition
summarized financial information is required in Section
III.C.2.e.iii, ``Recently Acquired Subsidiary Issuers and
Guarantors.''
---------------------------------------------------------------------------

    Consistent with existing Rule 3-10(g), the final amendments specify
a numerical threshold-based significance test for determining whether
pre-acquisition financial information for recently acquired subsidiary
issuers and guarantors is required, albeit a different significance
test than existing Rule 3-10(g), and the information continues to be
required only in Securities Act registration statements. The continued
use of a numerical threshold for pre-acquisition financial information
is in contrast to the amendments to existing Rule 3-10 to determine the
form and content of disclosures related to existing issuers and
guarantors.\583\ Unlike disclosure that relates to existing issuers and
guarantors, which will be prepared by the parent company on an ongoing
basis, and where materiality will therefore be evaluated regularly, in
an acquisition context parent companies must rely on information
provided by third parties to make a determination of whether the
acquisition is significant and whether the related disclosure is
material. In these circumstances, a numerical threshold will provide
parent companies with a level of certainty that allows them to
efficiently make determinations of what level of disclosure is required
in an environment where delay of the debt securities offering can be
costly. In addition, absent a specific numerical threshold requirement,
if the parent company determines not to provide disclosure, investors
would not receive information about the recently acquired subsidiary
issuer's or guarantor's financial impact on the Obligor Group until the
operating results of that acquired issuer or guarantor have been
subsequently reflected in the Summarized Financial Information of the
Obligor Group. As a result, the impact of the acquisition may be
difficult for investors to discern from other events affecting the
Obligor Group, even where the acquisition may be economically
significant. Thus, we expect a numerical threshold requirement in the
case of these disclosures to be less costly for parent companies and
result in more consistent disclosure for investors where transactions
are of economic significance.
---------------------------------------------------------------------------

    \583\ See discussion in Section VII. C.1.b.ii, ``When Disclosure
is Required.''
---------------------------------------------------------------------------

    Overall, we believe replacing the existing pre-acquisition
financial statement requirement with pre-acquisition Summarized
Financial Information in certain circumstances will reduce the
compliance burden for preparers without reducing material information
for investors. Furthermore, investors may find the information

provided under the existing pre-acquisition financial statement
requirement redundant, as it overlaps with Rule 3-05 of Regulation S-X.
Consequently, eliminating the existing requirement would streamline
disclosures. Academic research suggests that individuals invest more in
firms with more concise financial disclosures.\584\ Thus, to the extent
that the final 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.
---------------------------------------------------------------------------

    \584\ See Lawrence, note 557 above.
---------------------------------------------------------------------------

v. Continuous Reporting Obligation
    As discussed in Section III.C.2.f, ``Continuous Reporting
Obligation,'' the final rules permit a parent company to cease
providing the Revised Alternative Disclosures in its ongoing reporting
if the corresponding subsidiary issuers' and guarantors' reporting
obligations under Section 13 and/or Section 15(d) of the Exchange Act
with respect to the guaranteed securities are terminated or suspended.
This amendment will 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 Revised Alternative Disclosures beyond when the
subsidiary would otherwise have to report under the Exchange Act with
respect to the guaranteed securities, or otherwise deter issuers and
guarantors from engaging in public debt offerings to avoid such
reporting obligations, this amendment will address such issues.
    Many commenters supported eliminating the existing Rule 3-10
requirement to provide continuous reporting for as long as the
guaranteed securities are outstanding if they use the Alternative
Disclosures.\585\ One commenter stated that the existing rule's
continuous reporting requirement ``is highly anomalous and frequently
results in an expensive ongoing disclosure cost with no discernable
benefit to investors following business combination transactions.''
\586\ Some commenters suggested that eliminating these requirements
would reduce burdens on issuers.\587\ In contrast, two commenters
opposed eliminating existing Rule 3-10's continuous reporting
requirement and stressed that the Commission should retain the
requirement.\588\ These commenters asserted that the Proposed
Alternative Disclosures are important to investors, and recommended the
Commission require continuous reporting for as long as the securities
are outstanding.\589\ These commenters also argued that investors
accept less compensation for securities whose issuers provide financial
reporting because it reduces the risks of investing in those
securities, so issuers should not be able to pay less interest while
being permitted to stop financial reporting. We note that any potential
adverse effects from eliminating continuous reporting may be mitigated
by the fact that, as one commenter indicated, it has become commonplace
for issuers to tailor contractual reporting obligations to meet the
perceived needs of investors.\590\
---------------------------------------------------------------------------

    \585\ See, e.g., letters from Cravath, Davis Polk, FedEx,
Freeport, Nareit, PWC, and Sullivan & Cromwell.
    \586\ See letter from Cravath.
    \587\ See, e.g., letters from Cravath, Freeport, Nareit, and
Sullivan & Cromwell.
    \588\ See letters from CII and Credit Roundtable.
    \589\ See letters from CII and Credit Roundtable.
    \590\ See letter from Cravath.
---------------------------------------------------------------------------

2. Amendments to Rule 3-16 and Partial Relocation to Rule 13-02
    As discussed in detail in Section V.B, ``Overview of the
Amendments,'' 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. The final rule will 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 as a supplement to the consolidated financial statements of
the registrant that issues the collateralized security.\591\
---------------------------------------------------------------------------

    \591\ As a transitional matter, the final amendments do not
eliminate existing Rule 3-16, which will continue to be applicable
to registered collateralized securities with collateral release
provisions issued and outstanding as of the effective date of the
final amendments. See Section VI.B ``Rule 3-16 Collateral Release
Provisions.''
---------------------------------------------------------------------------

    Debt agreements are often structured to avoid the requirements of
Rule 3-16 by either structuring the debt agreement to release pledges
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. 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 final amendments will reduce the burden of
having to provide separate financial statements of affiliates in
comparison to the requirements under the existing rule and thereby
provide issuers with the flexibility to structure their debt agreements
with pledges of affiliate securities. If, as a result of the final
amendments, debt agreements are no longer structured to avoid
disclosure requirements about affiliates whose securities are pledged
as collateral, investors would obtain the benefit of the collateral as
well as the related disclosures, 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. Commenters
generally supported the amendments to Rule 3-16. Several commenters
asserted the proposed amendments to Rule 3-16 would benefit investors,
who would receive information critical to making informed decisions in
a simpler format, as well as registrants by reducing offering
costs.\592\
---------------------------------------------------------------------------

    \592\ See, e.g., letters from Davis Polk, EY, and FEI.
---------------------------------------------------------------------------

    Finally, as with any change to reporting format and presentation of
information, the amendments may lead companies and investors to incur
costs to adjust to the new disclosures, as further discussed in
Sections VIII.C.2.a through c 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,\593\ and their financial
information is thus already reflected in the registrant's consolidated
financial statements. The final amendments require Summarized Financial
Information for each such affiliate and disclosure of additional
financial information about each affiliate if material for investors to
evaluate the

pledge of the affiliate's securities as collateral and/or necessary to
make the financial and non-financial information presented not
misleading. For registrants, this will reduce compliance costs by
reducing the amount of information they need to prepare and
disclose.\594\ For investors, we do not anticipate significant costs
since material information will still be required to be provided. The
simplified disclosures will highlight material information needed to
make informed investment decisions and therefore should enable
investors to process information more efficiently and make more
informed investment decisions.
---------------------------------------------------------------------------

    \593\ In the rare circumstances where the affiliate is not a
consolidated subsidiary of the registrant, Rule 13-02(a)(6) requires
the registrant to provide ``[a]ny financial and narrative
information about each such affiliate if the information would be
material for investors to evaluate the pledge of the affiliate's
securities as collateral'' and Rule 13-02(a)(7) requires
``[s]ufficient information so as to make the financial and non-
financial information presented not misleading.'' In this regard,
separate financial statements of the unconsolidated affiliate may be
necessary to comply with these requirements. See additional
discussion in Section V.C.1, ``Level of Detail.''
    \594\ For purposes of the PRA, we estimate that the final
amendments to Rule 3-16 will result in an overall reduction of 30
burden hours for each form (other than Form 10-Q) affected by the
final amendments. See Section VIII.B.2, ``Rule 3-16,'' below.
---------------------------------------------------------------------------

    Several commenters asserted that the proposed amendment would
reduce a registrant's costs and burdens \595\ while still providing
investors with clear and sufficient information.\596\
---------------------------------------------------------------------------

    \595\ See, e.g., letters from Davis Polk EY, FEI, and PWC.
    \596\ See letters from EY and FEI.
---------------------------------------------------------------------------

ii. Presentation on a Combined Basis
    The final rules will permit a registrant to provide the Summarized
Financial Information of consolidated affiliates that are pledged as
collateral on a combined rather than individual basis. However, if non-
financial disclosure provided in response to Rule 13-02 were applicable
to one or more, but not all, affiliates, separate disclosure of
Summarized Financial Information for the affected affiliates would be
required, to the extent material. The final rules will permit, in
limited circumstances (i.e., where the separate financial information
of the affected affiliates can be easily explained and understood),
narrative disclosure in lieu of separate disclosure of the financial
information of the affiliates affected by those factors. Although this
narrative would be allowed in limited circumstances, separate columnar
financial information for affected affiliates would generally be
expected. As with the effects of the final amendments to Rules 3-10 and
13-01 discussed above,\597\ we believe the simplified disclosures in
the final amendments to Rules 3-16 and 13-02 will both lower compliance
costs for issuers and provide investors with more streamlined and
concise disclosures that will promote more efficient decision-making by
investors. We do not anticipate significant costs to investors since
material information will still be required to be provided.
---------------------------------------------------------------------------

    \597\ See discussion in Section VII.C.1.b.i, ``Financial and
Non-Financial Disclosures.''
---------------------------------------------------------------------------

iii. Periods to Present
    Under the existing rule, the periods required in Rule 3-16
Financial Statements are those required by Rules 3-01 and 3-02 of
Regulation S-X, or, for smaller reporting companies, the periods
required by Rule 8-02 of Regulation S-X. The final amendments will
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, consistent with the
proposed amendments to Rule 3-10 above. Rule 3-16 financial statements
are not currently required in quarterly reports, and as such,
registrants will incur costs to provide this additional interim
disclosure.\598\ While we acknowledge the concerns about the burden to
provide interim information in all cases, consistent with our analysis
of the economic effect of the corresponding requirement in the final
amendments to Rules 3-10 and 13-01 above, we believe the adopted
approach will significantly reduce burdens on issuers while providing
investors with the relevant information they need to make informed
investment decisions.\599\
---------------------------------------------------------------------------

    \598\ For purposes of the PRA, we estimate that the amendments
to Rule 3-16 will result in an increase of 70 burden hours per Form
10-Q filing. See Section VIII.B.2, ``Rule 3-16,'' below.
    \599\ See discussion in Section VII.C.1.b.i, ``Financial and
Non-Financial Disclosures.''
---------------------------------------------------------------------------

b. Non-Financial Disclosures
    The final rules will require non-financial information about
affiliates whose securities are pledged as collateral and the
collateral arrangements. We do not believe this amendment will impose
undue costs for issuers, as the majority of the information required to
be disclosed under the final amendments should be readily available or
attainable.\600\ We believe the amendments will benefit investors by
supplementing the required financial disclosures with additional,
material information, thereby rendering the combined financial and non-
financial disclosures more informative for investment decisions.
---------------------------------------------------------------------------

    \600\ The content of the amended 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, will impose a significant
burden on a registrant to prepare.
---------------------------------------------------------------------------

    Commenters generally supported the proposed rules' requirement to
provide certain non-financial disclosures, to the extent material,
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.\601\ Consistent with our analysis of the potential impact
on investors, one commenter explicitly stated that such disclosure
would be helpful to investors.\602\
---------------------------------------------------------------------------

    \601\ See, e.g., letters from Davis Polk, FEI, and NYC Bar.
    \602\ See letter from Davis Polk.
---------------------------------------------------------------------------

c. When Disclosure Is Required
    Rather than utilizing existing numerical thresholds, disclosure of
the specified financial and non-financial disclosures will be required
unless the information is not material. Additionally, the final rule
will require disclosure of any financial and narrative information
about each affiliate if it would be material for investors to evaluate
the pledge of the affiliate's securities as collateral, and disclosure
of sufficient information to make the financial and non-financial
information presented not misleading. A number of commenters stated
explicitly that they supported replacing existing Rule 3-16's numerical
threshold requirement with a principles-based materiality
standard.\603\ One commenter noted that, by focusing on materiality,
proposed Rule 13-02 would require registrants to undertake the expense
of providing the required disclosures only when doing so would be
helpful to investors.\604\ Another commenter contended that the
existing substantial portion numerical threshold requirement could
cause registrants to provide information that is not material or
possibly not require financial statements even if such affiliates are
material to the registrant's business.\605\ To the extent the numerical
thresholds under the existing rule result in disclosure of information
that is not material, investors may benefit from reduced search costs
and the facilitation of more efficient information processing.\606\
Further, we believe that, compared to the existing rule, final Rule 13-
02 will reduce compliance costs for issuers and increase the likelihood
that offerings will be registered because

issuers will only be required to provide disclosure to the extent
material. At the same time, compared to numerical thresholds, having a
principles-based disclosure approach may create more uncertainty for
issuers as it requires more judgement. However, we expect any
additional uncertainty would be justified by the ability to provide
disclosures more tailored to the specific circumstances and the needs
of investors, and we note that registrants are already well-versed in
making judgements about whether disclosure is material as part of
complying with other disclosure requirements.
---------------------------------------------------------------------------

    \603\ See, e.g., letters from CII, Cravath, Davis Polk,
Deloitte, EY, and FEI.
    \604\ See letter from Davis Polk.
    \605\ See letter from Dell.
    \606\ 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.
---------------------------------------------------------------------------

    Proposed Rule 13-02(a)(4) would have required, if the financial
disclosures specified in proposed Rule 13-02(a)(4) were omitted because
they were not material, disclosure of a statement to that effect and
the reasons therefor. As discussed above, we did not adopt this
proposed requirement.\607\ Similar to the final amendments to Rules 3-
10 and 13-01, in a change from the proposal, the final rule identifies
two scenarios which we believe generally capture the situations under
which the financial disclosures would not be material. These scenarios
were intended to help address concerns \608\ about the need for greater
certainty as to the circumstances when the omission of financial
disclosures may be appropriate while continuing to provide investors
with the basic reasons as to why the financial information was omitted.
If the scenario is applicable and disclosed, the parent company could
then omit the financial disclosures. We believe the greater certainty
afforded to a registrant that chooses to rely on one of the identified
scenarios, if applicable, will result in lower burdens in preparing the
disclosure. If one of the identified scenarios does not apply, however,
the registrant has the option to make its own assessment based upon a
consideration of other relevant facts and circumstances under the
general materiality provision of Rule 13-02(a).
---------------------------------------------------------------------------

    \607\ See discussion in Section V.E.3, ``When Disclosure is
Required.''
    \608\ See, e.g., letter from Shearman.
---------------------------------------------------------------------------

d. Location of Disclosures and Audit Requirement
    As discussed above for the final amendments to Rule 3-10, new Rule
13-02 will allow registrants the choice of whether to provide the
amended disclosures in its consolidated financial statement footnotes
or, alternatively, in MD&A. If not otherwise included in the
consolidated financial statements or MD&A, the disclosures must be
provided in other specified prominent locations. Under the proposed
amendments, this flexibility of where to locate the disclosures would
only be available in the registration statement covering the offer and
sale of the subject securities and any related prospectus, and in
Exchange Act reports on Forms 10-K and 10-Q required to be filed during
the fiscal year in which the first bona fide sale of the subject
securities is completed. Under the final amendments, registrants will
have flexibility to locate the disclosures in a footnote to the
consolidated financial statements or in the locations specified in Rule
13-02(b) in all of its filings. Our analysis of this amendment is
generally consistent with our analysis of the economic effect of the
corresponding requirement in the final amendments to Rule 13-01 above.
If a registrant provides the amended disclosures in its consolidated
financial statements, the disclosures will be subject to annual audit,
interim review, internal control over financial reporting, and XBRL
tagging requirements. Investors may perceive this choice of placement
to indicate that the disclosures are more reliable. 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 disclosures in their financial statements.
    In contrast, if a registrant provides the disclosures outside its
financial statements, lower compliance costs would likely result with
respect to these filings, and the registrant may be able to register
guaranteed debt offerings more quickly than under the existing rule and
thereby more promptly access favorable market conditions. However,
registrants may incur other costs, such as due diligence activities.
Although these disclosures are supplemental in nature, investors may
nevertheless perceive them to be less reliable if a registrant provides
these disclosures outside its financial statements as they would not
benefit from an audit or interim review conducted by the auditor. To
the extent that investors prefer the disclosures to be included in the
registrant'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.
e. Recently Acquired Affiliates Whose Securities Are Pledged as
Collateral
    The proposed rule would have required registrants to provide
information about recently acquired subsidiary affiliates only if
material to an investment decision in the collateralized security. The
final rule contains a different test for determining whether
disclosures about recently acquired affiliates must be provided. More
specifically, the final rule requires, in certain circumstances,\609\
pre-acquisition Summarized Financial Information for recently acquired
affiliates to be provided in a Securities Act registration statement
filed in connection with the offer and sale of the subject
collateralized security. Existing Rule 3-16 does not contain a specific
requirement to provide pre-acquisition financial information of
recently acquired affiliates whose securities are pledged as
collateral. However, if a recently acquired affiliate meets the
substantial portion threshold in the existing rule, financial
statements for periods prior to the date of acquisition by the
registrant are required to be filed. Generally consistent with the
effects of the corresponding final amendments to Rule 3-10 discussed
above, we believe requiring pre-acquisition Summarized Financial
Information of affiliates whose securities are pledged as collateral in
certain circumstances will provide material information for investors
without imposing significant burdens on issuers.\610\
---------------------------------------------------------------------------

    \609\ See description of the circumstances when pre-acquisition
summarized financial information is required in Section V.G.3,
``Recently Acquired Affiliates Whose Securities are Pledged as
Collateral.''
    \610\ See discussion in Section VII.C.1.b.iv, ``Recently
Acquired Subsidiary Issuers and Guarantors.''
---------------------------------------------------------------------------

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

    As discussed above, and as a general matter, we believe the final
amendments will 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 final 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.
    To the extent that the final 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, 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.
    Since the final rule amendments may increase the number of
registered debt offerings as discussed above, the investment
opportunities available for different types of investors may be
broadened and may allow for more efficient matching of investors with
assets that meet their investment objectives and preferences. To the
extent that the final amendments to the eligibility conditions that
must be met to omit the separate financial statements of subsidiary
issuers and guarantors of guaranteed debt securities encourage
additional registered guaranteed debt offerings, more investment
opportunities would be made available, and a resulting increase in
market participation could improve the overall competitiveness and
efficiency of the capital markets. 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 final amendments provide investors with
streamlined and easier to understand financial information while
maintaining the material completeness of the financial disclosures, we
expect that the financial disclosures that result from the final
amendments would improve price discovery, enhance the allocative
efficiency of markets, and facilitate capital formation.
    Rather than only 100%-owned subsidiaries of the parent company, the
final amendments permit subsidiary issuers or guarantors that are
consolidated in the parent company's financial statements to omit
separate subsidiary issuer and guarantor financial statements, if the
other criteria in amended Rule 3-10 are satisfied. To the extent that
the final amendments expand the scope of subsidiary issuers and
guarantors that meet Rule 3-10 eligibility requirements, the final
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.
    As describe above,\611\ many outstanding registered debt securities
have a collateral release provision, which automatically reduces the
pledged collateral if it would trigger existing Rule 3-16's requirement
for a registrant to file separate financial statements for each
affiliate whose securities constitute a substantial portion of the
collateral for any class of registered securities as if the affiliate
were a separate registrant. The proposed amendments could possibly have
affected senior lenders and unsecured lenders indirectly as these
collateral release provisions may no longer be operable and the
collateral available to lenders may be modified, potentially causing
unintended credit consequences. As a transitional matter, the final
amendments do not eliminate existing Rule 3-16, which will continue to
be applicable to registered collateralized securities with collateral
release provisions issued and outstanding as of the effective date of
the final amendments.\612\ Subsequent to the transition period, new
issuances of registered securities collateralized by affiliate
securities must comply with new Rule 13-02, and provide certain
financial and non-financial disclosures of that affiliate in all cases,
to the extent material. If, as a result of the final amendments,
issuers no longer include collateral release provisions in their
indentures, the pledged collateral would be maintained, which would
lead to improved investment options for investors and thus increased
market efficiency.
---------------------------------------------------------------------------

    \611\ See Section VI.B ``Rule 3-16 Collateral Release
Provisions.''
    \612\ See id.
---------------------------------------------------------------------------

E. Consideration of Reasonable Alternatives

    We discuss below potential alternatives to the final amendments to
existing Rules 3-10 and 3-16.
1. Alternative to Final Amendments to Existing Rule 3-10
    An alternative to the final amendments to Rule 3-10 would have been
to permit the Revised Alternative Disclosures to 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.\613\
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 final amendments, as detailed above. As a result, we
believe the final amendments better serve to enhance efficiency,
competition and capital formation, while still maintaining appropriate
investor protections. Many commenters supported the revision to
existing Rule 3-10's condition that a subsidiary issuer or guarantor be
100% owned by the parent company to one in which the subsidiary issuer
or guarantor be consolidated in the parent company's financial
statements.\614\
---------------------------------------------------------------------------

    \613\ 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.)).
    \614\ See, e.g., letters from Comcast, Cravath, Davis Polk, EEI/
AGA, FedEx, FEI, Nareit, NYC Bar, and Sullivan & Cromwell.
---------------------------------------------------------------------------

2. Alternatives Common to Final Amendments to Existing Rule 3-10 and
Existing Rule 3-16
    One alternative to each set of final amendments would have been to
require that the Revised Alternative Disclosures, or the disclosures
specified in final 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 disclosures outside its consolidated
financial statements. 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 permitted to be 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 final
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 costs associated with including the
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,\615\ 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 statement
footnotes of the parent company, or registrant, as applicable.
---------------------------------------------------------------------------

    \615\ See Section VII.C.1, ``Amendments to Rule 3-10 and Partial
Relocation to Rule 13-01.''
---------------------------------------------------------------------------

    While providing additional flexibility to the parent company or
registrant in the location of the disclosures will likely further
reduce the compliance burdens associated with registered offerings with
guarantees or collateral, we acknowledge that investors may demand a
higher expected return if they perceive reduced reliability of the
Revised Alternative Disclosure. The potential for higher borrowing
costs may encourage issuers to voluntarily include the Revised
Alternative Disclosures in the financial statements of the parent
company, or registrant, as applicable.
    Finally, another alternative relevant to each set of final
amendments would have been to require the Summarized Financial
Information specified in final Rules 13-01 and 13-02 to be provided for
the same periods as the parent company or registrant, as applicable,
instead of the most recent annual and interim period. While this
alternative would increase the amount of information available to
investors in the specific filing, the additional information may not be
material in making informed investment decisions. As discussed
above,\616\ 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.
---------------------------------------------------------------------------

    \616\ See note 557 and accompanying text.
---------------------------------------------------------------------------

    Related to the above alternative, some commenters recommended not
requiring the most recent interim period disclosures or requiring them
only in limited circumstances, such as when there had been a material
change since the most recent annual period.\617\ As discussed in
Section VIII.C.1.b.i. with respect to new Rule 13-01, we acknowledge
that parent companies will continue to incur compliance costs to
include the most recent interim period disclosure under the final
amendments. However, we believe that the most recent interim period
disclosures provide timely and relevant information for investors to
make informed investment decisions. Moreover, in comparison to the
existing rules, the final amendments already significantly reduce the
burdens on parent companies by eliminating, in filings on Form 10-Q,
both the quarter-to-date interim period requirement in filings covering
more than one fiscal quarter and the comparable prior year interim
period(s), as applicable. These observations related to new Rule 13-01
also extend to new Rule 13-02. Overall, we believe that the benefit of
providing the most recent interim period disclosures under the final
amendments justifies the compliance costs to registrants.
---------------------------------------------------------------------------

    \617\ See note 564 and accompanying text.
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

A. Background

    Certain provisions of our rules, schedules, and forms that would be
affected by the rule amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\618\ We published a notice requesting comment on revisions
to these collections of information requirements in the Proposing
Release and have submitted these requirements to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\619\ The hours and costs associated with preparing, filing, and
sending the schedules and forms 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 comply with, a collection of
information 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 collections of information are:
---------------------------------------------------------------------------

    \618\ 44 U.S.C. 3501 et seq.
    \619\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

     Regulation S-X (OMB Control No. 3235-0009);
     Regulation S-K (OMB Control No. 3235-0071); \620\
---------------------------------------------------------------------------

    \620\ The paperwork burdens for Regulation S-K and Regulation S-
X are imposed through the forms, schedules and reports that are
subject to the requirements in these regulations and are reflected
in the analysis of those documents.
---------------------------------------------------------------------------

     Form S-1 (OMB Control No. 3235-0065);
     Form S-4 (OMB Control No. 3235-0324);
     Form S-3 (OMB Control No. 3235-0073);
     Form S-11 (OBM Control No. 3235-0067);
     Form F-1 (OMB Control No. 3235-0258);
     Form F-3 (OMB Control No. 3235-0256);
     Form F-4 (OMB Control No. 3235-0325);
     Form 20-F (OMB Control No. 3235-0288);
     Form 10-K (OMB Control No. 3235-0063);
     Form 10-Q (OMB Control No. 3235-0070);
     Form SF-1 (OMB Control No. 3235-0707);
     Form SF-3 (OMB Control No. 3235-0690);
     Form 1-A (OMB Control No. 3235-0286);
     Form 1-K (OMB Control No. 3235-0720); and
     Form 1-SA (OMB Control No. 3235-0721).
    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.
    As described in more detail above, we are amending 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 amending
both rules and relocating parts of the disclosure requirements of Rule
3-10 and Rule 3-16 to new Rules 13-01 and 13-02. We also are making
conforming amendments to Items 504, 1100, 1112, 1114, and 1115 of
Regulation S-K; Forms F-1, F-3, 1-A, 1-K, 1-SA, and Rule 257(b) 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 material given the specific facts and
circumstances,

make the disclosures easier to understand, and reduce the costs and
burdens to registrants.

B. Summary of Comment Letters

    In the Proposing Release, the Commission requested comment on the
PRA burden hour and cost estimates and the analysis used to derive such
estimates. We did not receive any comments that directly addressed the
PRA analysis of the proposed amendments. Several commenters, however,
did provide responses to certain requests for comment that have
informed some of our PRA estimates. In this regard, several commenters
indicated that the costs and burdens of providing the disclosures under
the proposed amendments would be lower than the compliance burdens
under the current disclosure requirements and could potentially result
in an increase in the number of registered debt offerings.\621\
---------------------------------------------------------------------------

    \621\ See letters from Ball Corp., Davis Polk, EY, and FEI. Cf.
letter from NYC Bar (indicating that the proposed amendments would
reduce the burdens for registering offerings but may not result in a
significant increase in such offerings because of the general trend
toward private offerings).
---------------------------------------------------------------------------

C. Summary of the Impact on Collections of Information

    As discussed in more detail in the Proposing Release,\622\ we
derived the burden hour estimates by estimating change in paperwork
burden as a result of the amendments, both in terms of the change to
the paperwork burden for current responses as well as the change in the
number of responses. For purposes of the PRA, we estimate that the
current disclosure burdens under Rules 3-10 and 3-16 require an average
of 100 burden hours to prepare and process, and that the amendments
would reduce these burdens by 30 hours. Correspondingly, we estimate
that the disclosure burdens under the amendments will require 70 hours
to prepare and process. We estimated the number of responses by
conducting separate database searches of filings containing XBRL tags
most commonly associated with Consolidating Information and terms
associated with the Alternative Disclosures during the calendar years
of 2016 through 2018.
---------------------------------------------------------------------------

    \622\ See Section VIII of the Proposing Release.
---------------------------------------------------------------------------

    As discussed in Sections III through V, we have made some changes
to the proposed amendments as a result of comments received. While
certain of these changes could further reduce burdens on registrants,
others may incrementally increase those burdens relative to the
proposals. Considered together, we do not expect these changes to
appreciably impact our assessment of the compliance burdens of the
final rule amendments for purposes of the PRA. Accordingly, we have not
revised the estimates from the Proposing Release of the impact on the
per hour burden for the affected forms.
    PRA Table 1 summarizes the estimated impact of the final amendments
on the paperwork burdens associated with the affected forms listed
above.

 PRA Table 1--Estimated Paperwork Burden Effects of the Final Amendments
------------------------------------------------------------------------
                                                         Estimated net
  Final amendments and effects      Affected forms          effect
------------------------------------------------------------------------
Rule 3-10 and New Rule 13-01 of
 Regulation S-X:
     Replaces the          Forms S-    30 hour
     Consolidating Information     1, S-3, S-4, S-     net decrease in
     required by current Rule 3-   11, F-1, F-3, F-    compliance burden
     10 with Summarized            4, SF-1, SF-3, 20-  per each existing
     Financial Information for     F, 10-K, 10-Q, 1-   filing containing
     each issuer and guarantor     A, 1-K, and 1-SA.   current Rule 3-10
     and in certain                                    disclosures.
     circumstances additional                          Small
     summarized disclosure of                          increase in the
     intercompany and related-                         number of Form S-
     party transactions.                               1, Form S-3, Form
                                                       S-4, Form S-11,
                                                       Form F-1, Form F-
                                                       4, and Form 20-F
                                                       filings.
     Allows supplemental
     financial and non-financial
     disclosure about subsidiary
     issuers and/or guarantors
     to be disclosed outside of
     the parent company's
     financial statements;.
     Eliminates current
     requirement to provide pre-
     acquisition financial
     statements of recently
     acquired subsidiary issuers
     and guarantors, but
     requires, in certain
     instances, pre-acquisition
     Summarized Financial
     Information about
     significant recently
     acquired subsidiary issuers
     and guarantors.
Rule 3-16 and New Rule 13-02 of
 Regulation S-X:
     Replaces current      Forms S-    30 hour
     Rule 3-16's requirement to    1, S-3, S-4, S-     net decrease in
     provide separate financial    11, F-1, F-3, F-    compliance burden
     statements for each           4, SF-1, SF-3, 20-  per each existing
     affiliate whose securities    F, 10-K, 10-Q, 1-   filing containing
     are pledged as collateral     A, 1-K, and 1-SA.   current Rule 3-16
     with a requirement that the                       disclosures.
     registrant provide                                Small
     Summarized Financial                              increase in the
     Information and non-                              number of Form S-
     financial disclosures about                       1, Form S-3, Form
     the affiliate(s) and the                          S-4, Form S-11,
     collateral arrangement as a                       Form F-1, Form F-
     supplement to the                                 4, Form 20-F,
     registrant's consolidated                         Form 10-K, Form
     financial statements,                             10-Q, and Form 1-
     including disclosure of                           A filings.
     intercompany and related-
     party transactions.
     Permits the
     Summarized Financial
     Information and non-
     financial disclosures to be
     presented outside of the
     registrant's financial
     statements;.
     Requires, in
     certain instances, pre-
     acquisition Summarized
     Financial Information about
     significant recently
     acquired affiliates.
------------------------------------------------------------------------

D. Burden and Cost Estimates to the Amendments

    Below we estimate the incremental change in paperwork burdens as a
result of the final amendments. 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 size
and 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 the disclosures required under
the proposed amendments. For purposes of the PRA, the burden is
allocated between internal burden hours and outside professional costs.
The table below sets forth the percentage estimates the Commission
typically uses for the burden allocation for each affected form. We
also estimate that the average cost of retaining an outside
professional is $400 per hour.\623\
---------------------------------------------------------------------------

    \623\ 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 entities that regularly assist registrants in preparing and
filing documents with the Commission.

  PRA Table 2--Standard Estimated Burden Allocation for Specified Forms
                              and Schedules
------------------------------------------------------------------------
                                                              Outside
           Form/Schedule type              Internal (%)    professionals
                                                                (%)
------------------------------------------------------------------------
Forms S-1, S-3, S-4, S-11, F-1, F-3, F-               25              75
 4, 20-F, SF-1, and SF-3................
Forms 10-K, 10-Q, 1-A, and..............              75              25
1-K.....................................
Form 1-SA...............................              85              15
------------------------------------------------------------------------

    PRA Table 3 illustrates the estimated incremental reduction to the
annual compliance burdens for the affected forms, in hours and in
costs, as a result of the final amendments.

 PRA Table 3--Calculation of the Reduction in Burden Estimates to Existing Affected Responses That Include Disclosures Under Current Rules 3-10 and 3-16
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Estimated
                                                           Estimated       Estimated         Total         Estimated       Estimated         outside
                         Form                              number of      incremental     incremental      internal         outside       professional
                                                           affected      burden hours/   burden hours    burden hours    professional    costs/affected
                                                           responses         form                                            hours          responses
                                                                 (A) *             (B)     (C) = (A) x     (D) = (C) x     (E) = (C) x  (F) = (E) x $400
                                                                                (B)  (allocation %)  (allocation %)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K..................................................             481            (30)        (14,430)      (10,822.5)       (3,607.5)      ($1,443,000)
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..................................................              15            (30)           (450)         (112.5)         (337.5)         (135,000)
S-4...................................................             100            (30)         (3,000)           (750)         (2,250)         (900,000)
S-11..................................................               5            (30)           (150)          (37.5)         (112.5)          (45,000)
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
                                                       -------------------------------------------------------------------------------------------------
    Totals............................................  ..............  ..............  ..............      (40,057.5)  ..............       (6,346,845)
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The number of estimated affected responses is an estimate of the average number of filings that included Consolidating Information under Rule 3-10,
  Alternative Disclosures or Rule 3-16 financial statements over the 2016-2018 calendar years.

    PRA Table 4 below illustrates the estimated increase in the number
of filings and the related total annual compliance burdens of the
affected forms, in hours and in costs, as a result of the final
amendments.

  PRA Table 4--Calculation of the Incremental Change in Burden Estimates From the Increase in the Number of Affected Responses Filed as a Result of the
                                                                    Final Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Estimated
                                                           Estimated       Estimated         Total         Estimated       Estimated         outside
                         Form                             increase in     incremental     incremental      internal         outside       professional
                                                           affected      burden hours/   burden hours    burden hours    professional    costs/affected
                                                           responses         form                                            hours          responses
                                                                   (A)             (B)     (C) = (A) x     (D) = (C) x     (E) = (C) x  (F) = (E) x $400
                                                                                (B)  (allocation %)  (allocation %)
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K..................................................               6              70             420             315             105           $42,000
10-Q..................................................              18              70           1,260             945             315           126,000
S-1...................................................               4              70             280              70             210            84,000
S-3...................................................               4              70             280              70             210            84,000
20-F..................................................               4              70             280              70             210            84,000
S-4...................................................              37              70           2,590           647.5         1,942.5           777,000
S-11..................................................               3              70             210            52.5           157.5            63,000
F-1...................................................               3              70             210            52.5           157.5            63,000
F-3...................................................               1              70              70            17.5            52.5            21,000
F-4...................................................               3              70             210            52.5           157.5            63,000
1-A...................................................               1              70              70            52.5            17.5             7,000
1-K...................................................               0
1-SA..................................................               0
SF-1..................................................               0
SF-3..................................................               0
                                                       -------------------------------------------------------------------------------------------------
    Totals............................................  ..............  ..............  ..............           2,345  ..............         1,414,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    PRA Table 5 illustrates the estimated net incremental change to the
total annual compliance burdens for the affected forms, in hours and in
costs, as a result of the final amendments.

 PRA Table 5--Calculation of the Net Incremental Change in Burden Estimates of Affected Responses Resulting From
                                              the Final Amendments
----------------------------------------------------------------------------------------------------------------
                                                     Estimated                                       Estimated
                                     Estimated       change in       Estimated        Outside         outside
              Form                   number of     burden hours/     internal      professional    professional
                                     affected        affected      burden hours        hours      costs/affected
                                     responses       response                                        response
                                             (A)             (B)             (C)             (D)             (E)
----------------------------------------------------------------------------------------------------------------
10-K............................             487        (14,610)        (10,958)         (3,652)    ($1,460,800)
10-Q............................           1,270        (36,300)        (27,225)         (9,075)     (3,630,000)
S-1.............................              14            (20)             (5)            (15)         (6,000)
20-F............................              19           (170)          (42.5)         (127.5)        (51,000)
S-4.............................             137           (410)         (102.5)         (307.5)       (123,000)
S-11............................               8              60              15              45          18,000
F-1.............................               8              60              15              45          18,000
F-4.............................              10               0               0               0               0
1-A.............................               1              70            52.5            17.5           7,000
1-K.............................               0
1-SA............................               0
SF-1............................               0
SF-3............................               0
                                 -------------------------------------------------------------------------------
    Total.......................  ..............  ..............      (38,235.5)  ..............     (5,227,800)
----------------------------------------------------------------------------------------------------------------

    PRA Table 6 summarizes the current OMB collections of information
inventory for the affected forms and the requested change in the total
reporting burdens and costs as a result of the final amendments.\624\
---------------------------------------------------------------------------

    \624\ For convenience, figures in the table have been rounded to
the nearest whole number.

                                                               PRA Table 6--Requested Paperwork Burden Under the Final Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Current burden                                  Program change                            Requested change in burden
                                                 -----------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Increase or
                      Form                        Current annual  Current burden   Current cost      Number of      Increase or    reduction in       Annual
                                                     responses         hours          burden         affected      reduction in    professional      responses     Burden hours     Cost burden
                                                                                responses     company hours       costs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.............................................             901         148,556    $182,048,700              14             (5)        ($6,000)             905         148,551    $182,042,700
S-3.............................................           1,657         193,730     236,322,036               4              70          84,000           1,661         193,800     236,406,036
S-4.............................................             551         563,216     678,291,204             137           (103)       (123,000)             588         563,113     678,168,204
S-11............................................              64          12,290      15,016,968               8              15          18,000              67          12,305      15,034,968
F-1.............................................              63          26,815      32,445,300               8              15          18,000              66          26,830      32,463,300
F-3.............................................             112           4,448       5,712,000               1              18          21,000             113           4,466       5,733,000
F-4.............................................              39          14,076      17,106,000              10               0               0              42          14,076      17,106,000
SF-1............................................               6           2,076       2,491,200               0                                               6           2,076       2,491,200
SF-3............................................              71          24,548      29,457,900               0
10-K............................................           8,137      14,220,652   1,898,891,869             487        (10,958)     (1,460,800)           8,143      14,209,694   1,897,431,069
10-Q............................................          22,907       3,253,411     432,290,354           1,270        (27,225)     (3,630,000)          22,925       3,226,186     428,660,354
1-A.............................................             179          98,396      13,111,912               1              53           7,000             180          98,449      13,118,912
20-F............................................             725         479,304     576,875,025              19            (43)        (51,000)             729         479,262     576,824,025
1-K.............................................              36          16,200       2,160,000               0                                              36          16,200       2,160,000
1-SA............................................              55           8,791         618,420               0                                              55           8,791         618,420
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X. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with the Regulatory Flexibility Act
(``RFA'').\625\ It relates to amendments to Rules 3-10 and 3-16 of
Regulation S-X, and corresponding amendments to certain other rules and
forms to improve the disclosures of guarantors and issuers of
guaranteed securities and issuers' affiliates whose securities
collateralize securities.
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    \625\ 5 U.S.C. 601 et seq.
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A. Need for, and Objectives of, the Amendments

    The purpose of the amendments is to modernize and simplify Rules 3-
10 and 3-16 of Regulation S-X to better align the requirements of these
rules with the needs of investors and reduce disclosure burdens on
registrants. Specifically, the amendments modernize and simplify these
rules by clarifying, consolidating, relocating and eliminating elements
of these rules. These changes are intended to provide investors with
information that is material to an investment decision, make the
disclosures easier to understand, and reduce costs and burdens of these
requirements on registrants. The amendments are discussed in more
detail in Sections III through V, above. We discuss the economic impact
and potential alternatives to the amendments in Section VIII (Economic
Analysis), and the estimated compliance costs and burdens, of the
amendments Section IX (Paperwork Reduction Act) above.

B. Significant Issues Raised by Public Comments

    In the Proposing Release, the Commission requested comment on any
aspect of the Initial Regulatory Flexibility Analysis (``IRFA''),
including how the proposed amendments could achieve their objective
while lowering the burden on small entities, the number of small
entities that would be affected by the proposed rule and form
amendments, the existence or nature of the potential effects of the
proposed amendments on small entities discussed in the analysis, and
how to quantify the effects of the proposed amendments. We did not
receive any comments that specifically addressed the IRFA. However,
some commenters addressed aspects of the proposed rules that could
potentially affect small entities. One commenter indicated that the
costs and challenges of preparing condensed consolidating information
currently required by Rule 3-10 is likely far greater for smaller
reporting companies in comparison to larger companies, and that the
proposed summarized financial information would be easier for issuers
and guarantors to prepare and disclose.\626\ Another commenter agreed
that the proposed amendments should apply to smaller reporting
companies.\627\
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    \626\ See letter from Freeport. Under Commission rules, most
small entities would qualify as smaller reporting companies.
    \627\ See letter from Sullivan & Cromwell.
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C. Small Entities Subject to the Amendments

    The amendments will apply to some registrants that are small
entities. The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental jurisdiction.'' \628\
For purposes of the RFA, under our rules, a registrant, other than an
investment company or an investment adviser, is a ``small business'' or
``small organization'' if it had total assets of $5 million or less on
the last day of its most recent fiscal year and is engaged or proposing
to engage in an offering of securities that does not exceed $5
million.\629\ An investment company, including a business development
company,\630\ is considered to be a ``small business'' if it, together
with other investment companies in the same group of related investment
companies, has net assets of $50 million or less as of the end of its
most recent fiscal year.\631\
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    \628\ 5 U.S.C. 601(6).
    \629\ See 17 CFR 230.157 [Securities Act Rule 157] and 17 CFR
240.0-10(a) [Exchange Act Rule 0-10(a)].
    \630\ Business development companies are a category of closed-
end investment company that are not registered under the Investment
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
    \631\ See 17 CFR 270.0-10(a) [Investment Company Act Rule 0-
10(a)].
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    Commission staff estimates that there are 1,171 registrants that
file with the Commission, other than investment companies, that may be
considered small entities.\632\ In addition, our staff estimates that,
as of June 2019, there were 99 investment companies that may be
considered small entities.\633\
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    \632\ This estimate is based on staff analysis of EDGAR filings
and related XBRL submissions made during the 2018 calendar year, and
data from Compustat, and Audit Analytics.
    \633\ This estimate is derived from an analysis of data obtained
from Morningstar Direct as well as data reported to the Commission
for the period ending June 2019.
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

    As described in greater detail above, the amendments will simplify
and update disclosure requirements of Rules 3-10 and 3-16 of Regulation
S-X. For example, the amendments replace existing requirements that
registrants must provide consolidating information

or separate financial statements with Summarized Financial Information,
and allows registrants to present supplemental financial and non-
financial disclosure outside of the registrant's financial statements.
We anticipate that the amendments will reduce reporting, recordkeeping,
and other compliance burdens for all registrants, including small