payments to holders of the guaranteed securities. Disclosure of
additional non-financial disclosures beyond what is specified in
proposed Rules 13-01(a)(1) through (3) would have been required by
proposed Rule 13-01(a)(5), to the extent they are material to an
investment decision.
---------------------------------------------------------------------------

    \174\ Existing Rules 3-10(i)(8)(i) through (iii) require
disclosure, if true, that each subsidiary issuer or subsidiary
guarantor is 100%-owned by the parent company, that all guarantees
are full and unconditional, and where there is more than one
guarantor, that all guarantees are joint and several.
    \175\ Rule 3-10(i)(10) of Regulation S-X.
    \176\ Rule 3-10(i)(9) of Regulation S-X.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Some commenters expressed general support for the proposed
requirements regarding non-financial disclosures.\177\ One commenter
noted that the proposed amendments would be less burdensome on
registrants than existing requirements under Rule 3-10.\178\ Another
commenter did not discuss the specific proposed non-financial
disclosures, but stated its belief that qualitative disclosures are
important to the debt holder's understanding of the overall picture of
credit quality and suggested that, in certain instances, qualitative
disclosures alone may be sufficient information for investors.\179\ One
commenter stated that, outside of the registration statement and/or the
related prospectus that would identify the issuers and guarantors of
the security, it was not clear why identification and disclosure of
such entities would be meaningful to an investor in the context of
financial disclosures.\180\ The commenter recommended that the issuer
and guarantors of the guaranteed security should be identified in the
registration statement, but not in other filings, such as periodic
reports. This commenter also suggested that, if the Commission believes
this information should be presented in connection with an annual
report, the disclosure should be included as an exhibit to such filing.
---------------------------------------------------------------------------

    \177\ See, e.g., letters from Davis Polk, Freeport, and NYC Bar.
    \178\ See letter from Davis Polk.
    \179\ See letter from Comcast.
    \180\ See letter from PWC.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the comments received, we are adopting the
amendments largely as proposed with certain modifications based on
comments received. Final Rules 13-01(a)(1) through (3) will require
certain disclosures about the issuers and guarantors, the terms and
conditions of the guarantees, and how the issuer and guarantor
structure and other factors may affect payments to holders of the
guaranteed securities. Consistent with the proposal, we believe these
requirements will result in enhanced narrative disclosures that will
improve investor understanding of the issuers, guarantors, and
guarantees, and make the financial disclosures they accompany easier to
understand. While the adopted non-financial disclosures are composed of
the items we believe are most likely to be material to an investor,
disclosure of additional facts and circumstances is required if
necessary to comply with Rule 13-01(a)(6) and (7).\181\ Additionally,
when a non-financial disclosure is applicable to one or more, but not
all, issuers and guarantors, Rule 13-01(a)(4)(iv) requires, to the
extent it is material, separate disclosure of Summarized Financial
Information for the issuers and guarantors to which the non-financial
disclosure applies.\182\
---------------------------------------------------------------------------

    \181\ Supra note 114.
    \182\ See discussion in Section III.C.2.ii, ``Presentation on a
Combined Basis.''
---------------------------------------------------------------------------

    We are not adopting one commenter's suggestion that disclosure of
the identity of the issuers and guarantors should be required only at
the time of registration of the offer and sale of guaranteed
securities.\183\ These entities are legally obligated under the
guaranteed security along with the parent company, and we believe such
information is material to investors in ongoing periodic reports.
However, we are adopting the commenter's alternative suggestion that
the disclosures be included in an exhibit to the subject filing.\184\
After considering this commenter's suggestion, we believe that the
nature of this information is better suited for disclosure in an
exhibit as it can efficiently be provided in list form, and, depending
on the number of subsidiary issuers and guarantors, this information
could distract investor focus from the other financial and non-
financial disclosures required by final Rule 13-01 if presented
alongside them.

Furthermore, if the entities required to be disclosed do not change
from period to period, the parent company could refer to an earlier
filing's exhibit rather than filing the exhibit again. Because
registrants are required to hyperlink to each exhibit filed with, or
incorporated by reference to a filing,\185\ this information will be
easily accessible to investors. Due to this change, we have revised
Rule 13-01(a)(1) to require a description of the issuers and guarantors
of the guaranteed security, instead of their identification, in
Securities Act registration statements and Exchange Act registration
statements and periodic reports. We believe this approach will provide
the information to investors in a more efficient manner and make the
accompanying financial and non-financial disclosures easier to
understand.
---------------------------------------------------------------------------

    \183\ See letter from PWC.
    \184\ See amended Item 601(a) and new Item 601(b)(22) of
Regulation S-K. A parent company will be required to list, under an
appropriately captioned heading that identifies the associated
securities, each of its subsidiaries that is a guarantor, issuer, or
co-issuer of each guaranteed security registered or being registered
that the parent company issues or guarantees. A subsidiary need not
be listed more than once so long as its role as issuer, co-issuer,
or guarantor of a guaranteed security is clearly indicated with
respect to each applicable security. This exhibit will be required
in Forms S-1 [17 CFR 239.11], S-3 [17 CFR 239.13], S-4 [17 CFR
239.25], SF-1 [17 CFR 239.44], SF-3 [17 CFR 239.45], S-11 [17 CFR
239.18], F-1 [17 CFR 239.31], F-3 [17 CFR 239.33], F-4 [17 CFR
239.34], 10 [17 CFR 249.210], 10-Q [17 CFR 249.308a], and 10-K [17
CFR 249.310]. In addition, we are making corresponding revisions to
the exhibit requirements of Form 20-F by creating new Exhibit 17
within Item 19, and Form 1-A by creating new Exhibit 17 within Item
17. This exhibit will also be required in Forms 1-K and 1-SA. See
discussion in Section V.H.3.c, ``Offerings pursuant to Regulation
A''.
    \185\ See 17 CFR 232.102(d) [Rule 102(d) of Regulation S-T].
---------------------------------------------------------------------------

c. When Disclosure Is Required
i. Proposed Amendments
    One of the conditions that must be met under existing Rule 3-10 to
be eligible to omit the financial statements of a subsidiary issuer and
guarantor is providing the Alternative Disclosures. If certain
numerical thresholds are met, including that the parent company has
``no independent assets or operations'' and that all non-issuer and
non-guarantor subsidiaries are ``minor,'' \186\ the Alternative
Disclosures may take the form of a brief narrative in lieu of detailed
Consolidating Information, but some type of the Alternative Disclosures
is always required.\187\ Under these thresholds, minor changes in
circumstances can result in dramatically different disclosures being
required. Existing Rules 3-10(i)(11)(i) and (ii) provide that Rule 3-10
disclosure may not omit any financial and narrative information about
each guarantor if it would be material for investors to evaluate the
sufficiency of the guarantee, and shall include sufficient information
so as to make the financial information presented not misleading. This
disclosure is required when Consolidating Information is disclosed.
---------------------------------------------------------------------------

    \186\ Rules 3-10(h)(5) and (6) specify the numerical thresholds
that must not be exceeded for a parent company to have ``no
independent assets or operations,'' and for a subsidiary to be
``minor,'' respectively. See discussion in Section II.F of the
Proposing Release.
    \187\ See discussion of existing requirements in Section II.F of
the Proposing Release.
---------------------------------------------------------------------------

    The proposed amendments would eliminate the ``no independent assets
or operations'' and ``minor'' thresholds, as well as the brief
narrative form of Alternative Disclosures, and instead require
financial and non-financial disclosures to the extent material to
holders of the guaranteed security. For example, under the proposed
rule, the Summarized Financial Information of the Obligor Group could
be omitted if the parent company's consolidated financial statements do
not differ in any material respects from the Obligor Group. While the
disclosures specified in proposed Rule 13-01(a)(1) through (4) could
have been omitted if not material to holders of the guaranteed
security, for clarity, proposed Rule 13-01(a)(4) would have required
the registrant to include a statement that those financial disclosures
have been omitted and disclose the reason(s) why the disclosures are
not considered to be material.
    While the proposed rules include specific financial and non-
financial disclosures, there may be other information about the
guarantees, issuers, and guarantors that could be material to holders
of the guaranteed security. Accordingly, proposed Rule 13-01(a)(5)
would have required disclosure of any information that would be
material to making an investment decision with respect to the
guaranteed security, rather than the sufficiency of the guarantee as
stated in the existing rule. This requirement would have applied in all
cases, including when the proposed Summarized Financial Information is
omitted in accordance with the proposed rule.
ii. Comments on the Proposed Amendments
    Comments were mixed on these proposals. A number of commenters
generally supported the proposed elimination of existing Rule 3-10's
numerical thresholds in favor of allowing issuers to provide the
specified disclosures based on what information the issuer believes is
material to investors.\188\ However, a few commenters supported some
type of numerical threshold for establishing whether financial
information of an obligor group should be deemed material.\189\ One
commenter suggested establishing a 50% threshold as a non-exclusive
safe harbor for guarantee significance.\190\ This commenter stated that
if the significance is at or below 50%, the alternative disclosures
should be deemed not material and not required to be disclosed; while
if it is above 50%, issuers should still be able to conclude that the
Proposed Alternative Disclosures are not required if they would not
provide material information. Another commenter recommended that the
Commission establish a quantitative test that would allow issuers to
evaluate whether Summarized Financial Information of an Obligor Group
may be omitted.\191\
---------------------------------------------------------------------------

    \188\ See, e.g., letters from CII, FedEx, FEI, Nareit, and
Sullivan & Cromwell.
    \189\ See letters from SIFMA and T-Mobile.
    \190\ See letter from SIFMA. This commenter said that
significance under this suggestion would be measured in a manner
consistent with the existing rule's determination of a ``minor''
subsidiary specified in Rule 3-10(h)(6), except that 50% would be
substituted for the existing rule's 3% threshold. See additional
discussion in Section II.F of the Proposing Release.
    \191\ See letter from T-Mobile. This commenter did not provide a
specific figure for a quantitative threshold, but noted that the
threshold should be higher than existing Rule 3-10's thresholds for
minor subsidiaries. The commenter asserted that using the criteria
for being considered a ``significant subsidiary'' specified in Sec.
210.1-02(w) would better reflect materiality to investors compared
to the existing definition of minor subsidiaries.
---------------------------------------------------------------------------

    Some commenters opposed the requirement in proposed Rule 13-
01(a)(4) that would require a registrant to disclose, if the required
financial disclosures were omitted because they were not material, a
statement to that effect and the reasons therefore.\192\ Some
commenters asserted that such disclosure would not be useful to
investors,\193\ could possibly result in an increase in liability,\194\
and was counter to the Commission's objective of focusing on material
disclosures and providing a principles-based framework.\195\ One
commenter suggested that, if the proposal were adopted, the Commission
should make clear that issuers would only need to make a simple
statement that management does not believe the information is
material.\196\ In contrast, one commenter specifically supported this
part of proposed Rule 13-01(a)(4), asserting that the requirement would
provide clarity about which disclosures were omitted and why.\197\
---------------------------------------------------------------------------

    \192\ See, e.g., letters from Debevoise, EY, KPMG, and SIFMA.
    \193\ See letters from Debevoise and KPMG.
    \194\ See letters from Debevoise and SIFMA.
    \195\ See letter from Debevoise.
    \196\ See letter from SIFMA.
    \197\ See letter from CII.
---------------------------------------------------------------------------

    A number of commenters opposed proposed Rule 13-01(a)(5), which
would have required disclosure of any information that would be
material to making an investment decision with respect to the
guaranteed security.\198\ Several of these commenters contended that
the proposed requirement is overly broad. Some commenters asserted that
the proposed requirement would cause uncertainty for issuers and
auditors as

they seek to apply and assess the adequacy of the disclosures.\199\ One
commenter asserted that the proposed requirement would override all
other relevant disclosure obligations; \200\ another commenter
questioned whether the Commission is proposing to modify the overall
materiality assessment in its disclosure framework; \201\ and a third
commenter stated its belief that in addition to creating litigation
risk, the proposed rule could extend the duty to disclose material
information beyond information specific to the guarantee, such as
pending merger negotiations and other potential transactions.\202\
However, one commenter supported this proposed requirement ``because it
would provide relevant information, not otherwise explicitly required
by the [p]roposed [r]ule, which would likely render the disclosures
taken as a whole to be more useful for investment decisions.'' \203\
---------------------------------------------------------------------------

    \198\ See, e.g., letters from ABA, BDO, CAQ, Comcast, Cravath,
Davis Polk, Deloitte, EY, Freeport, KPMG, PWC, Shearman, and
Sullivan & Cromwell.
    \199\ See, e.g., letters from BDO, CAQ, EY, and PWC.
    \200\ See letter from Cravath.
    \201\ See letter from Deloitte.
    \202\ See letter from Shearman.
    \203\ See letter from CII.
---------------------------------------------------------------------------

    In response to the Commission's request for comment on whether the
proposed amendments were sufficiently clear about the disclosures that
should be provided and when, one commenter recommended that the final
rules should provide explicit objectives related to assessing the
guarantee, which would help issuers to prepare their disclosures.\204\
Some commenters suggested that it would be helpful for the final rules
to provide additional guidance or examples of information that may be
material to investors.\205\ One commenter recommended that the rules
expressly provide that the Alternative Disclosures need not be included
in a registration statement at the time of effectiveness so long as
they are provided prior to an offering of the securities in respect of
which the Alternative Disclosures are required.\206\ Another commenter
asserted that a parent company could conclude that disclosure is not
material if no investor owns (or is currently being offered) the
specific guaranteed or collateralized security and therefore the
disclosure could be excluded based on proposed Rule 13-01.\207\
---------------------------------------------------------------------------

    \204\ See letter from EY.
    \205\ See, e.g., letters from KPMG and Shearman.
    \206\ See letter from Cravath.
    \207\ See letter from PWC.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments largely as proposed with
modifications based on comments received.
    As supported by several commenters,\208\ the existing ``no
independent assets or operations'' and ``minor'' numerical thresholds
used to determine the form and content of disclosure have been replaced
with a requirement to provide all disclosures specified in the final
rule, unless such information is not material.\209\ Whereas proposed
Rule 13-01(a) required the proposed financial and non-financial
disclosures ``to the extent material to holders of the guaranteed
security,'' the final rule has been revised to require the financial
and non-financial disclosures ``to the extent material,'' which is
discussed in further detail below.
---------------------------------------------------------------------------

    \208\ See, e.g., letters from CII, FedEx, FEI, Nareit, and
Sullivan & Cromwell.
    \209\ This requirement is specified in new Rule 13-01(a).
Whether a disclosure specified in new Rule 13-01 may be omitted
depends on whether the disclosure would be material to a reasonable
investor. The Supreme Court in TSC v. Northway held that a fact is
material if there is ``a substantial likelihood that the disclosure
of the omitted fact would have been viewed by the reasonable
investor as having significantly altered the `total mix' of
information made available.'' See TSC Indus., Inc. v. Northway,
Inc., 426 U.S. 438, 449 (1976).
---------------------------------------------------------------------------

    A few commenters suggested including numerical thresholds in the
rule for determining whether financial information may be omitted,\210\
while others requested that we provide additional guidance or examples
of what information may be material.\211\ While we appreciate the
desire for certainty about when disclosure is required, determinations
of what information is material are highly dependent on the applicable
facts and circumstances, and we are concerned that specifying numerical
thresholds or providing detailed guidance could undermine the
principles-based nature of this provision, to the detriment of both
investors and issuers. We are therefore not adopting these suggestions.
Instead, akin to the suggestion of one commenter,\212\ the final rule
identifies four non-exclusive scenarios in which the required
information could be omitted on the basis that it is not material,
provided the applicable scenario is disclosed to investors. We discuss
these four scenarios in further detail below.
---------------------------------------------------------------------------

    \210\ See letters from SIFMA and T-Mobile.
    \211\ See, e.g., letters from KPMG and Shearman.
    \212\ See letter from SIFMA. This commenter recommended the
Commission establish, as a non-exclusive safe harbor, ``a numerical
threshold of guarantee significance at or below which [the required
disclosures] would be deemed immaterial and thus not required and
above which registrants would still be able to conclude that [the
required disclosures] are not required because they would not
provide material information.'' We are not adopting the commenter's
suggestion of a numerical threshold of significance, but we have
identified four non-exclusive scenarios in which the required
information could be omitted as discussed below.
---------------------------------------------------------------------------

    The proposed rule sets forth financial and non-financial
disclosures that were focused on the information the Commission
expected was most likely to be material. It also included proposed Rule
13-01(a)(5), which would have required disclosure of ``any other
quantitative or qualitative information that would be material to
making an investment decision with respect to the guaranteed
security.'' The intent of this proposed requirement was to elicit
disclosure about the obligated entities and the guarantees that would
be material but was not otherwise specifically required by the proposed
financial and non-financial disclosures. While one commenter supported
this proposed requirement, many others did not.
    Instead of proposed Rule 13-01(a)(5), we are adopting new Rules 13-
01(a)(6) and (7), which retain the requirements in existing Rules 3-
10(i)(11)(i) and (ii),\213\ respectively, as suggested by several
commenters.\214\ However, we are aligning the wording of existing Rules
3-10(i)(11)(i) and (ii) to the structure of Rule 13-01. We are also
modifying the requirement in existing Rule 3-10(i)(11)(ii) to make
reference to non-financial information, in addition to financial
information, because we see no reason to limit such disclosure to
financial information. Parent companies are already required to comply
with existing Rule 3-10(i)(11)(i) and (ii), and we are not aware of any
issues surrounding their application. We believe these existing
requirements capture the disclosures the proposed rule was intended to
elicit while addressing the concerns raised by commenters as discussed
above. Notwithstanding these requirements in the final rule, in 17 CFR
230.408(a) \215\ and 17 CFR 240.12b-20 \216\ require a parent company
to disclose, in addition to the information expressly required to be
included, such further material information, if any, as may be
necessary to make the required statements, in the light of the
circumstances under which they are made not misleading. While some
commenters indicated these requirements provide sufficient investor
protections,\217\ we believe retaining the requirements in existing
Rule 3-10(i)(11)(i) and (ii), in addition to those

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

    \213\ See Section III.C.2.c.i, ``When Disclosure is Required,''
for a discussion of the requirements in existing Rules 3-
10(i)(11)(i) and (ii).
    \214\ See, e.g., letters from BDO, PWC, and Shearman.
    \215\ Securities Act Rule 408(a).
    \216\ Exchange Act Rule 12b-20.
    \217\ See, e.g., letters from Deloitte and EY.
---------------------------------------------------------------------------

    Based on comments received on proposed Rule 13-01(a)(5), we have
also revised Rule 13-01(a) for clarity. Proposed Rule 13-01(a) would
have required disclosures ``to the extent material to holders of the
guaranteed security'' and was not intended to introduce a nuanced or
different materiality analysis specific to these disclosure
requirements. A parent company's responsibility to determine whether
the disclosures specified in Rule 13-01 are material is not different
from how it assesses materiality in connection with other information
it files with the Commission. Accordingly, we have revised final Rule
13-01 to require the financial and non-financial disclosures ``to the
extent material.''
    Proposed Rule 13-01(a)(4) would have required, if the financial
disclosures specified in proposed Rule 13-01(a)(4) were omitted because
they are not material, disclosure of a statement to that effect and the
reasons therefore. Most of the commenters that discussed this proposed
requirement did not support it.\218\ The intent of the proposed rule
was not to require a parent company to disclose the analysis supporting
its conclusion that the financial disclosures were not material.
Rather, it was to inform an investor that financial information about
issuers and guarantors was not being provided and the basic reason(s)
for the omission, similar to the narrative forms of Alternative
Disclosures in existing Rule 3-10.\219\ In response to these comments,
we are not adopting this requirement as proposed. Instead, we are
adopting an approach that should help address concerns \220\ about the
need for greater certainty as to the circumstances when the omission of
financial disclosures may be appropriate while continuing to provide
investors with the basic reasons as to why the financial information
was omitted in a manner similar to existing Rule 3-10's narrative
exceptions. As adopted, Rule 13-01(a)(4)(vi) includes four scenarios,
which we believe are the most common situations under which the
financial information would not be material.\221\ If the scenario is
applicable and disclosed, the parent company could then omit the
financial disclosures. The four scenarios are:
---------------------------------------------------------------------------

    \218\ See, e.g., letters from Debevoise, EY, KPMG, and SIFMA.
    \219\ The content of the brief narratives is specified within
each of the exceptions of existing Rules 3-10(b) through (f) based
on the applicable facts and circumstances. For example, if the
conditions are met, existing Rule 3-10(b)(4) of Regulation S-X
specifies that the narrative disclosure to be included in a footnote
to the parent company's consolidated financial statements must
state, if true, ``that the issuer is a 100%-owned finance subsidiary
of the parent company and the parent company has fully and
unconditionally guaranteed the securities.'' It also requires the
footnote to include ``the narrative disclosures specified in
paragraphs (i)(9) and (i)(10) of this section.''
    \220\ See, e.g., letter from Shearman.
    \221\ These scenarios were discussed in the Proposing Release.
See Section III.C.2.c of the Proposing Release.
---------------------------------------------------------------------------

    (1) The assets, liabilities and results of operations of the
combined issuers and guarantors of the guaranteed security are not
materially different than corresponding amounts presented in the
consolidated financial statements of the parent company; \222\
---------------------------------------------------------------------------

    \222\ This scenario is contained in Rule 13-01(a)(4)(vi)(A).
---------------------------------------------------------------------------

    (2) The combined issuers and guarantors, excluding investments in
subsidiaries that are not issuers or guarantors, have no material
assets, liabilities or results of operations; \223\
---------------------------------------------------------------------------

    \223\ This scenario is contained in Rule 13-01(a)(4)(vi)(B).
---------------------------------------------------------------------------

    (3) The issuer is a finance subsidiary of the parent company, the
parent company has fully and unconditionally guaranteed the security,
and no other subsidiary of the parent company guarantees the security;
\224\ and
---------------------------------------------------------------------------

    \224\ This scenario is contained in Rule 13-01(a)(4)(vi)(C).
---------------------------------------------------------------------------

    (4) The issuer is a finance subsidiary that co-issued the security,
jointly and severally, with the parent company, and no other subsidiary
of the parent company guarantees the security.\225\
---------------------------------------------------------------------------

    \225\ This scenario is contained in Rule 13-01(a)(4)(vi)(D).
---------------------------------------------------------------------------

    While we believe these scenarios encompass most of the situations
under which the required financial information would not be material,
these scenarios are not intended to be exclusive. As discussed below,
there may be other circumstances in which it would be appropriate to
omit the required financial information on the basis that it is not
material.
    In the first scenario, we believe financial information of the
combined Obligor Group would not be material to an investor as it is
not materially different than that of the consolidated parent
company.\226\ If the related scenario was disclosed, investors would
not need supplemental financial information as it would largely
duplicate the corresponding information in the parent company's
consolidated financial statements. In the second scenario, we believe
disclosure that the combined Obligor Group has no material assets,
liabilities or results of operations obviates the need for supplemental
disclosures as an investor would know such information would not be
material. The third and fourth scenarios involve finance subsidiary
issuers or finance subsidiaries that co-issue securities with the
parent company. These last two scenarios, which are generally
consistent with existing Rule 3-10(b) narrative disclosures involving
finance subsidiaries,\227\ inform investors that the finance subsidiary
issuer or co-issuer has no independent material debt-paying ability and
has no material assets or operations other than those related to the
issuance, administration, and repayment of the guaranteed security such
that supplemental financial disclosures are not material.
---------------------------------------------------------------------------

    \226\ Rule 13-01(a)(4)(vi) clarifies that this scenario does not
apply where separate disclosure of the Summarized Financial
Information of one or more, but not all issuers and/or guarantors,
is required by Rule 13-01(a)(4)(iv).
    \227\ See discussion above in Section III.C.1.d.iii. As one of
the conditions to omit the financial statements of the finance
subsidiary issuer under existing Rule 3-10(b), the parent company
must provide the narrative disclosure in paragraph (4) of existing
Rule 3-10(b), which is that ``the issuer is a 100%-owned finance
subsidiary of the parent company and the parent company has fully
and unconditionally guaranteed the securities. The footnote also
must include the narrative disclosures specified in paragraphs
(i)(9) and (i)(10) of this section.'' The Note to existing Rule 3-
10(b) states that ``[p]aragraph (b) is available if a subsidiary
issuer satisfies the requirements of this paragraph but for the fact
that, instead of the parent company guaranteeing the security, the
subsidiary issuer co-issued the security, jointly and severally,
with the parent company. In this situation, the narrative
information required by paragraph (b)(4) must be modified
accordingly.''
---------------------------------------------------------------------------

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

general materiality provision of Rule 13-01(a). Based on this analysis,
if a parent company determines that not all of the required financial
information is material, the information that is not material may be
omitted without additional disclosure or explanation. Thus, under the
final rule, the parent company could either rely on one of the
identified scenarios, if applicable, to omit information that is not
material, or make its own assessment based upon a consideration of
other relevant facts and circumstances.\228\ We believe this approach
will preserve the principles-based nature of Rule 13-01 while providing
greater certainty for issuers, and appropriate transparency for
investors, regarding the information required to be disclosed.
---------------------------------------------------------------------------

    \228\ To provide clarity to an issuer that its ability to omit
the Summarized Financial Information required by final Rule 13-
01(a)(4) is not limited to the four scenarios discussed herein,
final Rule 13-01(a)(4)(vi) states: ``Notwithstanding that a parent
company may omit this summarized financial information if not
material . . .''
---------------------------------------------------------------------------

    Two commenters encouraged the Commission to expressly provide that
the Proposed Alternative Disclosures need not be provided at the time
of effectiveness so long as they are provided prior to an offering of
the guaranteed securities,\229\ with one of these commenters suggesting
that we amend 17 CFR 230.430B(a) \230\ to cover information required by
proposed Rule 13-01.\231\ We are not amending Rule 430B as suggested.
Issuers meeting the definition of Well-Known Seasoned Issuer (``WKSI'')
are currently afforded significant flexibility under Rule 430B(a),
which would include the flexibility to omit the information specified
in Proposed Rule 13-01 at effectiveness so long as the information is
added when the shelf registration statement is amended to identify
subsidiary issuers and guarantors.\232\ We acknowledge that non-WKSI
issuers are not similarly able to omit this information but note that
WKSIs are afforded substantially greater latitude in registering and
marketing securities.\233\
---------------------------------------------------------------------------

    \229\ See letters from Cravath and PWC.
    \230\ Securities Act Rule 430B(a).
    \231\ See letter from Cravath.
    \232\ See Securities Act Rule 430B(a) and Securities Offering
Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3,
2005)] (``Securities Offering Reform'') at text accompanying note
520.
    \233\ See Securities Offering Reform at note 220.
---------------------------------------------------------------------------

d. Location of Revised Alternative Disclosures and Audit Requirement
i. Proposed Amendments
    The primary source of financial information provided to investors--
the consolidated financial statements of the parent company--is
required to be audited as specified in Regulation S-X.\234\ The
Proposed Alternative Disclosures would provide incremental detail as a
supplement to the parent company's audited annual and unaudited interim
consolidated financial statements to facilitate an analysis of the
parts of the consolidated enterprise that are obligated to make
payments as issuers or guarantors. The proposed rule would provide
parent companies with the flexibility to provide the Proposed
Alternative Disclosures inside or outside of the consolidated financial
statements in registration statements covering the offer and sale of
the guaranteed debt securities and any related prospectus, as well as
annual and quarterly Exchange Act periodic reports required to be filed
during the fiscal year in which the first bona fide sale of the subject
securities is completed. If a parent company elects to provide the
Proposed Alternative Disclosures outside its audited financial
statements, the disclosures would be required in specified prominent
locations in its offering documents and periodic reports.
---------------------------------------------------------------------------

    \234\ Rules 3-01 and 3-02 of Regulation S-X.
---------------------------------------------------------------------------

    Accordingly, the note to proposed Rule 13-01(a) would have allowed
the parent company to provide the Proposed Alternative Disclosures in a
footnote to its consolidated financial statements or, alternatively, in
MD&A,\235\ in the registration statement covering the offer and sale of
the subject securities and any related prospectus, and in Exchange Act
reports on Forms 10-K and 10-Q \236\ required to be filed during the
fiscal year in which the first bona fide sale of the subject securities
is completed. If a parent company were to elect to provide the
disclosures in its audited financial statements, the Proposed
Alternative Disclosures would be required to be audited.\237\ If not
otherwise included in the consolidated financial statements or in the
MD&A, the parent company would be required to include the Proposed
Alternative Disclosures in its prospectus immediately following ``Risk
Factors,'' if any, or otherwise, immediately following pricing
information described in 17 CFR 229.503(c) (``Item 503(c) of Regulation
S-K'').\238\ Beginning with the parent company's annual report filed on
Form 10-K for the fiscal year during which the first bona fide sale of
the subject securities is completed, however, the parent company would
have been required to provide the Proposed Alternative Disclosures in a
footnote to its consolidated financial statements in its annual and
quarterly reports. These proposed amendments would also apply to
foreign private issuers and issuers offering securities pursuant to
Regulation A and the forms applicable to such entities.\239\
---------------------------------------------------------------------------

    \235\ See 17 CFR 229.303 (Item 303 of Regulation S-K).
    \236\ These proposed amendments also would apply to foreign
private issuers and issuers offering securities pursuant to 17 CFR
230.251 through 230.263 (``Regulation A'') and the forms applicable
to such entities. See Section III.D, ``Application of Proposed
Amendments to Certain Types of Issuers,'' below.
    \237\ Regardless of where the Proposed Alternative Disclosures
are presented in the filing, U.S. GAAP requires disclosure in the
financial statements of the pertinent rights and privileges of the
various securities outstanding. See ASC 470-10-50-5 and ASC 505-10-
50-3.
    \238\ Subsequent to the issuance of the Proposing Release, the
Commission amended and relocated the requirements previously
contained in Item 503(c) to 17 CFR 229.105 [new Item 105 of
Regulation S-K]. See FAST Act Modernization and Simplification of
Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674
(Apr. 2, 2019)].
    \239\ See Section III.D, ``Application of Amendments to Certain
Types of Issuers,'' below.
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ii. Comments on the Proposed Amendments
    Comments on the proposed amendments were mixed. A few commenters
generally supported the flexibility under the proposed amendments for
the parent company to provide the Proposed Alternative Disclosures in
specified locations outside its consolidated financial statements in
the subject registration statement and Forms 10-K and 10-Q required to
be filed during the fiscal year in which the first bona fide sale of
the debt securities is completed, but would have required the parent
company to provide the disclosures in a footnote to its consolidated
financial statements in its annual and quarterly reports starting with
its annual report filed on Form 10-K for the fiscal year during which
the first bona fide sale of the debt securities is completed.\240\
---------------------------------------------------------------------------

    \240\ See letters from Ball Corp., Nareit, and WTW. While one
commenter expressed support for the proposed amendment that would
allow locating the disclosures outside the footnotes of the
financial statements in certain instances, the commenter stated its
belief that having a requirement for the disclosures to be audited
creates additional cost over an area of accounting and disclosure
where there is limited focus from the investment community. See
letter from WTW.
---------------------------------------------------------------------------

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

the subject securities is completed.\241\ One commenter suggested that
the existing rule's requirement that the disclosures be included in the
audited financial statements has driven would-be registered debt
issuers to the Rule 144A debt market,\242\ an effect other commenters
asserted would continue if the Proposed Alternative Disclosures were
required to be included in the consolidated financial statements in
subsequent Exchange Act reports.\243\ Several commenters asserted that
not requiring these disclosures to be audited would reduce costs \244\
and possibly allow issuers to more quickly register guaranteed debt
securities and access capital markets.\245\ A few commenters stated
that requiring an audit of the Proposed Alternative Disclosures would
provide little marginal benefit to investors.\246\
---------------------------------------------------------------------------

    \241\ See, e.g., letters from ABA, Cravath, Davis Polk, Dell,
Freeport, SIFMA, Simpson Thacher and Sullivan & Cromwell.
    \242\ See letter from Cravath.
    \243\ See letters from Dell and Sullivan & Cromwell.
    \244\ See, e.g., letters from ABA, Ball Corp., Cravath, Davis
Polk, Dell, Freeport, SIFMA, Simpson Thacher, Sullivan & Cromwell,
and WTW.
    \245\ See, e.g., letters ABA, BDO, Cravath, Davis Polk, Dell,
and Simpson Thacher.
    \246\ See, e.g., letters from Davis Polk, Dell, Freeport, and
Sullivan & Cromwell.
---------------------------------------------------------------------------

    Other commenters, however, asserted that the flexibility to
determine the location of the Proposed Alternative Disclosures under
the proposed amendments could lead to investor confusion about the
location of the disclosures,\247\ and uncertainty as to the level of
audit assurance that applied to the disclosures.\248\ One commenter
contended that the Proposed Alternative Disclosures should be required
to be presented in a single location to avoid inconsistencies in the
location and varied reliance by investors.\249\ Another commenter
stated that companies should not have the option to choose where their
disclosures will appear, and that reported disclosures should be
consistently reported in the same location.\250\
---------------------------------------------------------------------------

    \247\ See letters from Deloitte, FedEx, and PWC.
    \248\ See letters from Deloitte and KPMG.
    \249\ See letter from KPMG.
    \250\ See letter from XBRL US, Inc.
---------------------------------------------------------------------------

    One commenter did not support locating the Proposed Alternative
Disclosures outside the financial statements,\251\ and another
suggested either requiring the Proposed Alternative Disclosures to be
audited or limiting unaudited disclosures to underwritten
offerings.\252\ One of these commenters argued that many investors
place significant value on having required disclosures subject to
annual audit and/or interim review, internal control over financial
reporting, and XBRL tagging requirements, and not being subject to the
forward-looking statements safe harbor.\253\ Another commenter did not
express a view on where the disclosures should be located, but
indicated that investors may benefit from having the disclosures in the
financial statements because they would be subject to audit and interim
review requirements.\254\
---------------------------------------------------------------------------

    \251\ See letter from CII.
    \252\ See letter from BDO.
    \253\ See letter from CII.
    \254\ See letter from CAQ.
---------------------------------------------------------------------------

    Other commenters, however, recommended the disclosures be located
outside the financial statements in all cases.\255\ One of these
commenters argued presentation outside the financial statements in all
cases was appropriate as the Proposed Alternative Disclosures are
supplementary to the financial statements.\256\ This commenter asserted
that this change would reduce costs of preparing the disclosures by
allowing the information to be unaudited, and noted that the
disclosures would still be subject to the parent company's disclosure
controls and procedures and required certifications. Another of these
commenters recommended the disclosures be required in the liquidity and
capital resources section of the MD&A or in a separate section
following ``Risk Factors'' as is currently done in the Rule 144A market
and has been accepted by the investor community.\257\ This commenter
also observed that if disclosure outside the financial statements is
sufficient at the time of the initial investment decision, it should be
sufficient for future periods. Yet another of these commenters observed
the Proposed Alternative Disclosures would be better presented in a
discussion about a parent's liquidity in the MD&A as opposed to in the
financial statements given the objective of the disclosures to provide
an investor in a debt security with information about the related
guarantee.\258\
---------------------------------------------------------------------------

    \255\ See, e.g., letters from FedEx, NYC Bar and PWC.
    \256\ See letter from FedEx.
    \257\ See letter from NYC Bar.
    \258\ See letter from PWC.
---------------------------------------------------------------------------

    Some commenters emphasized that, even if the Proposed Alternative
Disclosures are allowed to be located outside of the financial
statements, these disclosures would be derived from the same internal
accounting records used to prepare the parent company's audited
consolidated financial statements \259\ and would be subject to the
parent company's disclosure controls and procedures \260\ and
certification by the parent company's principal executive and principal
financial officers.\261\
---------------------------------------------------------------------------

    \259\ See letters from Davis Polk and Freeport.
    \260\ See letters from Cravath and EY.
    \261\ See letter from FedEx.
---------------------------------------------------------------------------

    Some commenters asserted that underwriters will likely request
independent auditors to provide comfort on financial information
provided outside the consolidated financial statements in connection
with registered offerings.\262\ Two of these commenters indicated this
would involve performing limited procedures on such information under
Public Company Accounting Oversight Board (``PCAOB'') Auditing Standard
6101, Letters for Underwriters and Certain Other Requesting
Parties.\263\ One commenter suggested that such procedures may not
result in a decrease in effort or cost for either auditors or
registrants,\264\ while the other commenter stated that while the scope
and time required to perform such procedures is less than an audit, the
auditor involvement may delay the time to market for underwritten
offerings.\265\ Another commenter noted that the proposed rules would
cause issuers to incur costs related to the incremental procedures
necessary for such comfort procedures but investors would lose the
benefit arising out of the audit of the disclosures.\266\ Another
commenter recommended that, if the final rules allow issuers the
flexibility to determine the location of the Proposed Alternative
Disclosures, the Commission should provide examples to clarify when the
Proposed Alternative Disclosures must be in the financial
statements.\267\
---------------------------------------------------------------------------

    \262\ See, e.g., letters from BDO, EY, Grant Thornton, KPMG, and
Windstream.
    \263\ See letters from BDO and KPMG.
    \264\ See letter from KPMG.
    \265\ See letter from BDO.
    \266\ See letter from Grant Thornton.
    \267\ See letter from Deloitte.
---------------------------------------------------------------------------

    Some commenters suggested that because the Proposed Alternative
Disclosures would be relevant only to the investors of the guaranteed
security, if these disclosures were required to be audited, this
information should be included in an audited supplemental schedule that
could be filed as an exhibit to the filing, similar to the supplemental
schedules required under 17 CFR 210.12-01 through 210.12-29 (``Article
12 of Regulation S-X'').\268\
---------------------------------------------------------------------------

    \268\ See letters from CAQ, EY, and PWC.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering comments received, we are adopting the amendments
largely as proposed, with modifications. As discussed above, while a
few

commenters either did not support locating the disclosures outside the
financial statements or suggested limiting unaudited disclosures to
underwritten offerings, others recommended the disclosures be located
outside the financial statements in all cases. We continue to believe,
however, that it is appropriate to provide parent companies the
flexibility to select the location of the disclosures, including
locating them outside the parent company's consolidated financial
statements. In this regard, and consistent with the views of several
commenters, we expect not requiring the disclosures to be audited will
reduce costs and allow issuers to register guaranteed debt securities
and access capital markets faster, which may encourage more such
registered offerings.\269\ Although we appreciate that some investors
may place a value on having financial information subject to annual
audit and/or interim review and other requirements that flow from
including disclosures in the parent company's financial statements, the
proposed flexibility afforded to the parent company in selecting the
location of the Proposed Alternative Disclosures, including locating
them outside the parent company's audited financial statements, took
into account the nature of those disclosures as a supplement to the
parent company's consolidated financial statements. We also agree with
those commenters who observed that, even if the Revised Alternative
Disclosures are located outside the financial statements, they would be
derived from the same internal accounting records and subject to the
parent company's disclosure controls and procedures and management
certification requirements.
---------------------------------------------------------------------------

    \269\ We acknowledge that underwriters may request independent
auditors to provide comfort on financial information provided
outside the financial statements for registered offerings, which
could limit the expected cost savings and delay the time to market.
However, providing this flexibility will enable issuers and
underwriters the option to present this supplemental information
outside the financial statements when it is cost- and time-effective
to do so and therefore may reduce frictions associated with
registered offerings of guaranteed debt securities. We also observe,
as one commenter noted, that the scope and time required to perform
comfort procedures is less than an audit. See letter from BDO.
---------------------------------------------------------------------------

    Accordingly, and consistent with the proposed rule, final Rule 13-
01(b) \270\ permits the parent company to provide the Revised
Alternative Disclosures in a footnote to its consolidated financial
statements or alternatively, in MD&A. If the disclosures are not
otherwise included in the consolidated financial statements or in MD&A,
the final rule requires the parent company to include the disclosures
in its prospectus immediately following ``Risk Factors,'' if any, or
otherwise, immediately following pricing information described in Item
105 of Regulation S-K.\271\
---------------------------------------------------------------------------

    \270\ Whereas this requirement was included in a note to
proposed Rule 13-01(a), the final rule includes it in a separate
paragraph, Rule 13-01(b).
    \271\ 17 CFR 229.105. As described above, subsequent to the
issuance of the Proposing Release, the Commission amended and
relocated the requirements previously contained in Item 503(c) of
Regulation S-K to new Item 105 of Regulation S-K. The final
amendments have been revised to reflect this change.
---------------------------------------------------------------------------

    As discussed above, some commenters suggested that the proposed
flexibility in selecting the location of the disclosure may cause
investors confusion about the location and level of assurance applied.
While the proposed rule provided flexibility on where to locate the
disclosures, we believe the locations where disclosures may be provided
are clearly specified and that investors generally understand the
levels of assurance applied to disclosures included inside or outside
the parent company's consolidated financial statements. If provided in
the parent company's consolidated financial statements, consistent with
existing Rule 3-10, the disclosures must be included in a footnote. If
provided outside the parent company's consolidated financial
statements, they must be included in MD&A, or in other specified
locations if the parent company's consolidated financial statements and
MD&A are not otherwise included in the filing.\272\ Consistent with the
proposed rule, if the parent company elects to provide the Revised
Alternative Disclosures in a footnote to its audited consolidated
financial statements, the Revised Alternative Disclosures must be
audited. Conversely, the Revised Alternative Disclosures need not be
audited if the parent company provides them outside the audited
consolidated financial statements. A few commenters recommended that,
if audited, the information be included in a supplemental schedule
similar to the ones required by Article 12 of Regulation S-X. Under the
existing rule, a parent company must include the Alternative
Disclosures in financial statements footnotes but has discretion over
where to locate them. We are not aware of any practice issues
associated with this discretion, and believe investors understand how
to locate the disclosures and understand the level of audit assurance
associated with the disclosures if included in the financial statement
footnotes. We are therefore not adopting this suggestion.
---------------------------------------------------------------------------

    \272\ These circumstances include when the consolidated
financial statements and MD&A are included in previously filed
reports that are incorporated by reference. In such instances, the
disclosures are required to be provided in specified prominent
locations.
---------------------------------------------------------------------------

    Under the proposed rule, although the parent company would
initially have the flexibility to locate the disclosures outside of its
consolidated financial statements in the subject registration statement
and certain periodic reports filed thereafter, the parent company would
have been required to provide the disclosures in a footnote to its
consolidated financial statements starting with its annual report filed
on Form 10-K for the fiscal year during which the first bona fide sale
of the subject securities is completed. A number of commenters did not
support this proposed requirement, and stated that the disclosures
should be permitted to be presented outside of the parent company's
consolidated financial statements in all cases, as described above.
Some commenters asserted that it was incongruous for a heightened
compliance obligation to apply after an offering,\273\ and others
expressed the view that if audited information is not necessary for an
investment decision, it is not necessary thereafter.\274\ One commenter
noted that this requirement is disproportionally burdensome on repeat
issuers of debt securities,\275\ and another asserted that eliminating
this proposed requirement would allow issuers to provide their
disclosure in a consistent location and avoid unnecessarily providing
it in different locations.\276\
---------------------------------------------------------------------------

    \273\ See, e.g., letters from Cravath, Freeport, and Simpson
Thacher.
    \274\ See, e.g., letters from Davis Polk and PWC.
    \275\ See letter from Simpson Thacher.
    \276\ See letter from ABA.
---------------------------------------------------------------------------

    We considered responses to the Commission's request for comment on
the potential benefits or concerns for investors and issuers with
either permitting the parent company to provide the proposed
disclosures outside its financial statements in the proposed
circumstances or permitting the parent company to provide the proposed
disclosures outside its financial statements in all circumstances.
Having considered these comments, and in light of the benefits of the
proposed flexibility discussed above, we are persuaded that there is no
reason to limit this flexibility to the subject registration statement
and certain periodic reports filed thereafter. Thus, under the final
rule, 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,
consistent with the recommendations of many commenters.
e. Recently Acquired Subsidiary Issuers and Guarantors
i. Proposed Amendments
    The proposed rule would eliminate the requirement in existing Rule
3-10(g) to provide pre-acquisition audited financial statements of a
recently acquired subsidiary issuer or guarantor in certain
circumstances.\277\ Although the proposed rule would not require
specific disclosures about recently-acquired subsidiary issuers and
guarantors, information about these recently acquired subsidiaries
would have been required if material to an investment decision in the
guaranteed security pursuant to proposed Rule 13-01(a)(5).
---------------------------------------------------------------------------

    \277\ See Section II.I of the Proposing Release for a detailed
description of the pre-acquisition financial statements requirements
of existing Rule 3-10(g).
---------------------------------------------------------------------------

    Due to the proposed deletion of Rule 3-10(g), the Commission also
proposed a conforming change to remove paragraph (b) of Rule 12h-
5.\278\
---------------------------------------------------------------------------

    \278\ If the proposed removal of paragraph (b) of existing Rule
12h-5 was adopted, a subsidiary issuer or guarantor that was
previously required to provide pre-acquisition financial statements
pursuant to existing Rule 3-10(g) but was exempt from Exchange Act
reporting by paragraph (b) of existing Rule 12h-5 would continue to
be exempt from Exchange Act reporting through proposed Rule 12h-5.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Many commenters expressed general support for the proposed
elimination of Rule 3-10(g).\279\ Several of these commenters contended
that existing Rule 3-10(g) was burdensome and that existing 17 CFR
210.3-05 \280\ already requires disclosure of pre-acquisition financial
statements of a significant acquired business.\281\ One commenter
asserted that the existing Rule 3-10(g) requirements often results in
more detailed disclosure being provided for recently acquired entities
than for other subsidiary issuers and guarantors.\282\ Another
commenter maintained that the requirements of existing Rule 3-10(g)
caused it to alter guarantor structures in certain debt offerings.\283\
---------------------------------------------------------------------------

    \279\ See, e.g., letters from Cravath, Davis Polk, Dell, EY,
FEI, Nareit, and T-Mobile.
    \280\ Rule 3-05 of Regulation S-X.
    \281\ See, e.g., letters from Cravath, Davis Polk, Dell, FEI,
and Nareit.
    \282\ See letter from FEI.
    \283\ See letter from T-Mobile. This commenter stated that the
resources needed to compile the information necessary to meet the
disclosure requirements of Regulation S-X and availability of the
information related to pre-acquisition financial statements of
recently acquired subsidiaries have directly resulted in alterations
to the contemplated guarantor structure in its debt offerings where
it would have been unable to provide the required disclosures,
resulting in the exclusion of guarantees that would have otherwise
been made available to investors.
---------------------------------------------------------------------------

    In response to the Commission's request for comment whether some
other type of disclosure about recently acquired subsidiary issuers and
guarantors should be required instead of pre-acquisition financial
statements, one commenter recommended that the Commission consider
requiring Summarized Financial Information of a recently acquired
guarantor in registration statements if the guarantor is not already
included in the Summarized Financial Information of the Obligor Group
(i.e., it is acquired after the most recent balance sheet date) and if
the guarantor had a material effect on the financial capacity of the
obligated group.\284\ Some commenters noted that although the proposed
amendments would not include a requirement similar to existing Rule 3-
10(g), information about recently acquired subsidiaries would be
required if material to an investment decision in the guaranteed
security under proposed Rule 13-01(a)(5).\285\ One commenter encouraged
the Commission ``not to perpetuate separate disclosure rules in this
context for recently acquired subsidiaries.'' \286\ Another commenter
indicated that the existing disclosure requirements under ASC 805,
Business Combinations, would continue to provide sufficient information
related to material subsidiaries acquired and their impact on the
consolidated entity.\287\
---------------------------------------------------------------------------

    \284\ See letter from EY.
    \285\ See letters from Cravath and Nareit.
    \286\ See letter from Cravath.
    \287\ See letter from T-Mobile.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the public comments, we are adopting the proposed
changes with certain modifications. We agree with those commenters that
supported the proposed elimination of the pre-acquisition financial
statements requirement of existing Rule 3-10(g), most of which cited
the burdensome nature of the requirement and that existing Rule 3-05 of
Regulation S-X already requires pre-acquisition financial statements of
significant acquired business as reasons not to include such a
requirement in the final rules.\288\ Accordingly, as proposed, the
final rule will not include such a requirement.
---------------------------------------------------------------------------

    \288\ See, e.g., letters from Cravath, Davis Polk, Dell, FEI,
and Nareit.
---------------------------------------------------------------------------

    Under the proposed rule, although the requirement to provide pre-
acquisition financial statements of recently acquired subsidiary
issuers and guarantors in existing Rule 3-10(g) would be eliminated,
information about such recently acquired subsidiaries would have been
required if material to an investment decision in the guaranteed
security pursuant to proposed Rule 13-01(a)(5).\289\ As described
above, we received limited comments specific to this requirement, with
one commenter opposing separate disclosure rules for recently acquired
subsidiary issuers and guarantors in this context \290\ and another
stating that existing disclosures required by U.S. GAAP were
sufficient.\291\ However, we agree with another commenter \292\ that
suggested Summarized Financial Information for recently acquired
subsidiary guarantors should be included in registration statements if
the guarantor is not already included in the Summarized Financial
Information of the Obligor Group.\293\ In this regard, under the
proposed and final amendments, a subsidiary issuer or guarantor
acquired after the parent company's most recent balance sheet date
would not be included in the Summarized Financial Information specified
in Rule 13-01(a)(4).\294\ To address this potential information gap,
and similar to the commenter's suggestion, the final rule requires, in
certain circumstances (discussed below), pre-acquisition Summarized
Financial Information for recently acquired subsidiary issuers and
guarantors to be provided in a Securities Act registration statement
\295\ filed in

connection with the offer and sale of the subject guaranteed security.
---------------------------------------------------------------------------

    \289\ The requirements applicable to recently acquired
subsidiary issuers and guarantors have been included in final Rule
13-01(a)(5). Proposed Rule 13-01(a)(5) would have required
disclosure of ``any other quantitative or qualitative information
that would be material to making an investment decision with respect
to the guaranteed security.'' Instead of this proposed requirement,
the final amendments include Rules 13-01(a)(6) and (7). See
discussion in Section III.C.2.c, ``When Disclosure is Required.''
    \290\ See letter from Cravath.
    \291\ See letter from T-Mobile.
    \292\ See letter from EY.
    \293\ While this commenter's suggestion only referred to
recently acquired subsidiary guarantors, we believe this information
need similarly extends to recently acquired subsidiary issuers.
    \294\ Unless disclosure is otherwise required (e.g., the parent
company provides disclosure pursuant to ASC 805, Business
Combinations, or IFRS 3, Business Combinations, as applicable, or
pre-acquisition financial statements are required due to the
acquisition exceeding 50% significance under Rule 3-05 of Regulation
S-X), an investor may not receive information about a subsidiary
issuer or guarantor acquired after the balance sheet date.
Additionally, such disclosures do not take into consideration that
only certain entities within an acquired business may be obligated
as issuers or guarantors.
    \295\ Consistent with existing Rule 3-10(g), this requirement is
only applicable to Securities Act registration statements. In
subsequent Exchange Act reports, financial information of a recently
acquired subsidiary issuer or guarantor will be included in the
financial information of issuers and guarantors required by final
Rule 13-01(a)(4).
---------------------------------------------------------------------------

    When considering pre-acquisition financial information
requirements, we believe issuers benefit from certainty as to when such
information is required.\296\ We also believe that the pre-acquisition
Summarized Financial Information required by the final rule should be
consistent with what Rule 13-01(a)(4) requires for existing issuers and
guarantors, as we do not see a basis for requiring varying levels of
detail in this context.\297\ Accordingly, final Rule 13-01(a)(5) will
require pre-acquisition Summarized Financial Information when a parent
company has acquired a significant ``business'' after the date of its
most recent balance sheet included in its consolidated financial
statements,\298\ and that acquired business and/or one or more of its
subsidiaries are obligated as issuers and/or guarantors.\299\ Whether a
``business'' has been acquired will be determined in accordance with
the guidance set forth in 17 CFR 210.11-01(d),\300\ and the parent
company would also need to treat acquisitions of related businesses as
a single business acquisition in a manner consistent with Rule 3-
05(a)(3). An acquired business will be deemed significant if it meets
any of the conditions specified in the definition of significant
subsidiary in Rule 1-02(w),\301\ substituting 20 percent for 10 percent
each place it appears therein, based on a comparison of the most recent
annual financial statements of the acquired business and the parent
company's most recent annual consolidated financial statements filed at
or prior to the date of acquisition. To simplify compliance and provide
certainty as to when disclosure is required, these significance tests
are the same tests used to determine whether pre-acquisition financial
statements are required for an acquired business pursuant to Rule 3-05
of Regulation S-X.\302\
---------------------------------------------------------------------------

    \296\ As described above, information about recently acquired
subsidiaries would have been required under the proposed rule if
material to an investment decision in the guaranteed security.
Unlike disclosure that relates solely to the Obligor Group, 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. A numerical threshold-based significance test provides
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 is costly. Also, where a
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 the acquired business have subsequently
been 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 in the case of
these disclosures could be less costly for parent companies and
result in more consistent disclosure to investors where transactions
are of economic significance.
    \297\ As pointed out by one commenter, the pre-acquisition
financial statements required by existing Rule 3-10(g) result in
more detail for recently acquired entities than for other subsidiary
issuers and guarantors. See letter from FEI.
    \298\ Under the final amendments, pre-acquisition financial
information of recently acquired subsidiary issuers and/or
guarantors will not be required for acquisitions that occur before
the date of the parent company's most recent balance sheet included
in the parent company's financial statements. By contrast, under
existing Rule 3-10(g), pre-acquisition financial statements are
required if such subsidiary issuers and/or guarantors have not yet
been included in the parent company's audited consolidated financial
statements for nine months and the acquisition is significant.
    \299\ In our experience, recently acquired subsidiary issuers
and guarantors would typically be considered a business because
separate entities, subsidiaries, or divisions are presumed to be
businesses.
    \300\ Rule 11-01(d).
    \301\ 17 CFR 210.1-02(w).
    \302\ Rule 3-05 provides for use of a 20% significance
threshold, rather than the 10% threshold indicated in Rule 1-02(w).
We note that the Commission has proposed amendments to the
significance tests used in Rule 3-05 of Regulation S-X. See
Amendments to Financial Disclosures About Acquired and Disposed
Businesses, Release No. 34-85765 (May 3, 2019) [84 FR 24600 (May 28,
2019)]. Certain of these proposed amendments would affect the tests
used to determine whether an acquired business is significant. If
these significance tests are amended, the trigger for determining
whether pre-acquisition financial information about recently
acquired subsidiary issuers and guarantors would also change. We
believe the alignment of these significance tests simplifies
compliance for issuers while providing material information about
recently acquired subsidiary issuers and guarantors for investors.
---------------------------------------------------------------------------

    Generally, under the final rule, a parent company will be required
to provide pre-acquisition Summarized Financial Information of a
recently acquired issuer or guarantor for those acquisitions where it
will be required to provide pre-acquisition financial statements of the
acquired business pursuant to Rule 3-05 of Regulation S-X.\303\ We
recognize that not all of the entities that compose an acquired
business may be issuers and/or guarantors. Accordingly, the required
Summarized Financial Information will only be for those entities
acquired that are issuers or guarantors, and follows the form and
content prescribed in new Rule 13-01(a)(4). We also recognize that the
pre-acquisition Summarized Financial Information may be required in
advance of when pre-acquisition financial statements are required
pursuant to Rule 3-05 of Regulation S-X.\304\ However, we believe
investors in a registered debt offering should be provided with
information about issuers and guarantors in advance of an investment
decision, and we note that the level of detail required is far less
than pre-acquisition financial statements required by Rule 3-05. In
sum, while the adopted approach differs from the more principles-based
approach in the proposal, we believe it will continue to alleviate
burdens on issuers while providing greater certainty about when pre-
acquisition financial information should be provided by identifying
specific circumstances in which such information is likely to be
material to an investment decision.
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    \303\ There may be some circumstances where a registrant is
required to provide this pre-acquisition Summarized Financial
Information of a recently acquired issuer or guarantor, but is not
required to provide pre-acquisition financial statements of the
acquired business pursuant to Rule 3-05 of Regulation S-X. For
example, a parent company that is a foreign private issuer that
consummates an acquisition of a significant business after the date
of the most recent balance sheet presented would be required to
provide pre-acquisition Summarized Financial Information of a
recently acquired issuer or guarantor pursuant to new Rule 13-
01(a)(5), but may be able to omit the pre-acquisition financial
statements of a greater than 20% but less than 50% significant
acquired business from its registration statement pursuant to Rule
3-05(b)(4) and from any subsequent Exchange Act filings.
    \304\ For example, Rule 3-05(b)(4) of Regulation S-X in part
permits, in certain circumstances, pre-acquisition financial
statements of an acquired business to be omitted from a registration
statement if the significance of the acquisition does not exceed 50%
and the registration statement is declared effective no more than 74
calendar days after consummation of the acquisition. We note that
filing requirements in Items 2.01 and 9.01 of Form 8-K may differ.
---------------------------------------------------------------------------

    We also are adopting the conforming change to remove paragraph (b)
of Exchange Act Rule 12h-5, as proposed.\305\
---------------------------------------------------------------------------

    \305\ A subsidiary issuer or guarantor that was previously
required to provide pre-acquisition financial statements pursuant to
existing Rule 3-10(g) but was exempt from Exchange Act reporting by
paragraph (b) of existing Exchange Act Rule 12h-5 will continue to
be exempt from Exchange Act reporting through amended Rule 12h-5.
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f. Continuous Reporting Obligation
i. Proposed Amendments
    An issuer of securities is required to file Exchange Act reports
with the Commission under Section 13(a), with respect to any class of
securities registered pursuant to Sections 12(b) or 12(g), or for any
class of securities for which it has a reporting obligation under
Section 15(d) of the Exchange

Act.\306\ Section 12(b) registration is required only for so long as
the class of securities is listed for trading on a national securities
exchange.\307\ An issuer incurs a Section 15(d) reporting obligation
for each class of securities that is the subject of a Securities Act
registration statement that becomes effective.\308\ Section 15(d)(1)
\309\ provides that if, at the beginning of any subsequent fiscal year,
the securities of any class to which the registration statement relates
are held of record by fewer than 300 persons, or in the case of a bank,
a savings and loan holding company,\310\ or bank holding company,\311\
by fewer than 1,200 persons, the registrant's Section 15(d) reporting
obligation is automatically suspended with respect to that class.\312\
Title 17 CFR 240.12h-3 (``Rule 12h-3'') permits registrants to suspend
a Section 15(d) reporting obligation at any time during a fiscal year
provided the conditions of the rule are met.\313\ A foreign private
issuer likewise may terminate its Exchange Act reporting obligation
regarding a class of equity securities under either Section 12(g) or
Section 15(d) if it complies with the conditions of 17 CFR 240.12h-6
(``Rule 12h-6'').\314\ Similarly, the periodic and current reporting
requirements applicable to an issuer that has filed an offering
statement for a Tier 2 offering that has been qualified pursuant to
Regulation A \315\ may be suspended if the issuer complies with the
requirements of 17 CFR 230.257(d) (``Rule 257(d)'').\316\
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    \306\ Section 12(g) registration is triggered when an issuer
exceeds specified asset and ownership thresholds and only applies to
equity securities.
    \307\ Accordingly, Section 12(b) reporting obligations are
terminated when, for example, the class is delisted by the exchange
or the registrant determines to no longer list the securities on a
national securities exchange.
    \308\ 15 U.S.C. 78 j(a)(3).
    \309\ 15 U.S.C. 78o(d)(1).
    \310\ As that term is defined in Section 10 of the Home Owners'
Loan Act, 12 U.S.C. 1461.
    \311\ As that term is defined in Section 2 of the Bank Holding
Company Act of 1956, 12 U.S.C. 1841.
    \312\ The automatic statutory suspension of an issuer's Section
15(d) reporting obligation is not available as to any fiscal year in
which the issuer's Securities Act registration statement becomes
effective.
    \313\ Rule 12h-3 provides that the duty to file reports under
Section 15(d) for a class of securities is suspended immediately
upon the filing of a certification on Form 15, provided that the
issuer has fewer than 300 holders of record, fewer than 500 holders
of record where the issuer's total assets have not exceeded $10
million on the last day of each of the preceding three years, or, in
the case of a bank, a savings and loan holding company, or a bank
holding company, 1,200 holders of record; the issuer has filed its
Section 13(a) reports for the most recent three completed fiscal
years, and for the portion of the year immediately preceding the
date of filing the Form 15 or the period since the issuer became
subject to the reporting obligation; and a registration statement
has not become effective or was required to be updated pursuant to
Exchange Act Section 10(a)(3) during the fiscal year.
    \314\ Rule 12h-6 permits the termination of Exchange Act
reporting regarding a class of equity securities under either
Section 12(g) or Section 15(d) of the Exchange Act by a foreign
private issuer if the U.S. average daily trading volume of the
subject class of securities has been no greater than 5 percent of
the average daily trading volume of that class of securities on a
worldwide basis for a recent 12-month period; and the issuer has
been an Exchange Act reporting company for at least one year, has
filed or submitted all Exchange Act reports required for this
period, and has filed at least one Exchange Act annual report; has
not sold its securities in a registered offering in the United
States, except for specified offerings, during the preceding 12
months (except for exempted securities offerings); and has
maintained a listing on one or more exchanges for at least a year in
a foreign jurisdiction that, either singly or together with one
other foreign jurisdiction, constitutes the primary trading market
for the issuer's subject class of securities. The proposed and final
amendments also apply to foreign private issuers. See Section
III.D.1, ``Foreign Private Issuers,'' below.
    \315\ 17 CFR 230.251-230.263.
    \316\ Rule 257(d) permits A Tier 2 issuer that has filed all
reports required by Regulation A for the shorter of: (1) The period
since the issuer became subject to such reporting obligation, or (2)
its most recent three fiscal years and the portion of the current
year preceding the date of filing Form 1-Z to immediately suspend
its ongoing reporting obligation under Regulation A at any time
after completing reporting for the fiscal year in which the offering
statement was qualified, if the securities of each class to which
the offering statement relates are held of record by fewer than 300
persons (1,200 persons for a bank or bank holding company) and
offers or sales made in reliance on a Tier 2 offering statement are
not ongoing. See generally, Securities Act Rules 257(d)(2) through
(4). The proposed and final amendments apply to issuers offering
securities pursuant to Regulation A and the forms applicable to such
entities. See Section III.D.3, ``Offerings pursuant to Regulation
A,'' below.
---------------------------------------------------------------------------

    The Commission explained in the 2000 Release that the parent
company must continue to provide the Alternative Disclosures in its
periodic reports for as long as the subject securities are
outstanding.\317\ This disclosure requirement continues to apply to the
parent company even if the reporting obligation of its subsidiary
issuer or guarantor with respect to the subsidiary's guaranteed
securities or subsidiary's guarantees could be suspended under either
Section 15(d) or Rule 12h-3 of the Exchange Act.
---------------------------------------------------------------------------

    \317\ See Section III.C.1 of the 2000 Release (``The parent
company periodic reports must include the modified financial
information permitted by paragraphs (b) through (f) of Rule 3-10.
The parent company periodic reports must contain this information
for as long as the subject securities are outstanding.'').
---------------------------------------------------------------------------

    The Commission proposed that a parent company be permitted to cease
providing the Proposed Alternative Disclosures if the corresponding
subsidiary issuer's or guarantor's Section 15(d) obligation is
suspended automatically by operation of Section 15(d)(1) or through
compliance with Rule 12h-3. To implement this change, the proposed rule
would eliminate the statement in existing Rule 3-10(a) that ``[e]very
issuer of a registered security that is guaranteed and every guarantor
of a registered security must file the financial statements required
for a registrant by Regulation S-X.'' As proposed, if a subsidiary
issuer or guarantor is required to file financial statements required
by Regulation S-X with respect to the guarantee or guaranteed security,
the subsidiary may omit such financial statements if it complies with
conditions set forth in proposed Rule 3-10. The parent company would be
able to cease providing the Proposed Alternative Disclosures for a
subsidiary issuer or guarantor that is not required to file financial
statements required by Regulation S-X with respect to the guarantee or
guaranteed security.
    As described above, Section 12(b) registration is required for so
long as a class of securities is listed for trading on a national
securities exchange. As a continued condition of eligibility to omit
the financial statements of a subsidiary issuer or guarantor under the
proposed rule, a parent company would be required to continue providing
the Proposed Alternative Disclosures for so long as the subsidiary
issuer or guarantor has a Section 12(b) reporting obligation with
respect to the guarantee or guaranteed security. If the subsidiary
issuer's or guarantor's reporting obligation with respect to the
guarantee or guaranteed security is terminated under Section 12(b), the
parent would be permitted to cease providing the Proposed Alternative
Disclosures once the subsidiary issuer's and guarantor's Section 15(d)
obligation is suspended automatically by operation of Section 15(d)(1)
or through compliance with Rule 12h-3.
    Under the proposed rule and consistent with the 2000 Release,\318\
if a subsidiary issuer or guarantor with an Exchange Act reporting
obligation for the guaranteed securities would initially be eligible to
omit its financial statements, because it would meet the requirements
of proposed Rule 3-10 and could rely on proposed Rule 12h-5, but later
ceased to satisfy those requirements, that subsidiary would then be
required to begin filing Exchange Act reports for the period during
which it ceased to satisfy the requirements of proposed Rule 3-10.
Also, the subsidiary would be required to present the financial
statements that are required by Regulation S-X at the time a report is
due, and would not be

able to present the Proposed Alternative Disclosures that proposed Rule
3-10 would have allowed it to present for historical periods.
---------------------------------------------------------------------------

    \318\ See Section III.C.3. of the 2000 Release.
---------------------------------------------------------------------------

ii. Comments on the Proposed Amendments
    Comments on the proposed amendments were generally supportive. Many
commenters supported eliminating the existing Rule 3-10 requirement
that the parent company provide continuous reporting of the Alternative
Disclosures for as long as the guaranteed securities are outstanding if
the parent company elects to provide the Alternative Disclosures in
lieu of separate financial statements of eligible subsidiary issuers
and guarantors.\319\ One of these commenters stated that it ``supports
the Commission's proposal to harmonize the treatment of the duration of
the continuing reporting requirements so registrants that meet the
criteria for presenting alternative disclosures and elect to do so are
not unfairly burdened compared to those that elect to file separate
audited annual and unaudited interim financial statements.'' \320\
Another 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.'' \321\ Some
commenters suggested that eliminating these requirements would reduce
burdens on issuers.\322\
---------------------------------------------------------------------------

    \319\ See, e.g., letters from Cravath, Davis Polk, FedEx,
Freeport, Nareit, PWC, and Sullivan & Cromwell.
    \320\ See letter from Freeport.
    \321\ See letter from Cravath.
    \322\ See, e.g., letters from Cravath, Freeport, Nareit, and
Sullivan & Cromwell.
---------------------------------------------------------------------------

    Two commenters opposed eliminating existing Rule 3-10's continuous
reporting requirement and suggested that the Commission retain the
requirement.\323\ These commenters argued that the Proposed Alternative
Disclosures would be important to investors, and therefore the
Commission should require continuous reporting for as long as the
securities were outstanding.\324\ One of these commenters contended
that a failure to provide continuous reporting could result in a
ratings withdrawal by a nationally recognized statistical rating
organization (``NRSRO'') that tracks the security, and asserted that
many investors cannot invest in securities without a rating.\325\
---------------------------------------------------------------------------

    \323\ See letters from CII and Credit Roundtable.
    \324\ See letters from CII and Credit Roundtable.
    \325\ See letter from Credit Roundtable.
---------------------------------------------------------------------------

    A few commenters asserted that requiring continuous reporting when
an issuer's reporting obligation could be suspended is an anomaly.\326\
One commenter indicated that the requirement is not needed because it
has become commonplace for issuers to tailor contractual reporting
obligations to meet the perceived needs of investors.\327\
---------------------------------------------------------------------------

    \326\ See letters from Cravath and Davis Polk.
    \327\ See letter from Cravath.
---------------------------------------------------------------------------

iii. Final Amendments
    After considering the comments received as well as the benefits and
burdens of continued Exchange Act reporting when a subsidiary issuer or
guarantor would otherwise be able to suspend its reporting obligations,
we are eliminating, as proposed, the requirement that the parent
company must continue to provide the Alternative Disclosures in its
periodic reports for as long as the subject securities are outstanding.
Instead, the parent company will be permitted to cease providing the
Alternative Disclosures if the corresponding subsidiary issuer's or
guarantor's Section 15(d) obligation is suspended automatically by
operation of Section 15(d)(1) or through compliance with Rule 12h-3,
thereby harmonizing the existing rule with the statutory reporting
regime and the Commission's rules that govern when an issuer may
terminate or suspend reporting. We agree with those commenters who
stated that requiring continuous reporting when a subsidiary issuer's
or guarantor's reporting obligation could be suspended is an anomaly
and that eliminating such requirements would reduce burdens on issuers.
We also do not believe it is necessary to require the parent company to
continue providing the Revised Alternative Disclosures when the
corresponding reporting obligations of its subsidiary issuers and
guarantors with respect to the guaranteed security have been suspended
or terminated. For similar reasons, we are making conforming amendments
to provide analogous relief with respect to subsidiary issuers or
guarantors that meet the definition of foreign private issuer and
terminate their reporting obligations through compliance with Rule 12h-
6, and subsidiary issuers or guarantors that have filed an offering
statement for a Tier 2 offering that has been qualified pursuant to
Regulation A and suspend their reporting obligations through compliance
with Rule 257(d). In these circumstances, we see no reason why
reporting obligations should be different for parent companies of these
types of subsidiary issuers and guarantors.
    Although these amendments may result in fewer entities providing
the Revised Alternative Disclosures in periodic reports, if continued
reporting is necessary due to the necessity of maintaining a rating for
the debt security by a NRSRO or for other reasons, debt issuers and
investors are free to negotiate the terms of debt instruments,
including with respect to information to be provided about subsidiary
issuers and guarantors, and to include the reporting requirements in
the indentures governing the debt as they have done in the past.\328\
Also, as described above, a parent company would continue to be
required to provide the Revised Alternative Disclosures with respect to
securities that are traded on a national securities exchange. Today's
amendments do not change this requirement.
---------------------------------------------------------------------------

    \328\ See letter from Cravath.
---------------------------------------------------------------------------

    Lastly, under the final amendments, consistent with the Proposing
Release and the 2000 Release,\329\ if a subsidiary issuer or guarantor
with an Exchange Act reporting obligation for the guaranteed securities
were initially eligible to omit its financial statements, because it
met the requirements of amended Rule 3-10 and could rely on amended
Rule 12h-5, but later ceased to satisfy those requirements, that
subsidiary will be required to begin filing Exchange Act reports for
the period during which it ceased to satisfy the requirements of
amended Rule 3-10. In addition, the subsidiary is required to present
the financial statements that are required by Regulation S-X at the
time a report is due and is not able to present the Revised Alternative
Disclosures that amended Rule 3-10 would have allowed it to present for
historical periods.
---------------------------------------------------------------------------

    \329\ See Section III.C.3. of the 2000 Release.
---------------------------------------------------------------------------

D. Application of Amendments to Certain Types of Issuers

    Rule 3-10's requirements apply to several categories of issuers,
including foreign private issuers,\330\ smaller reporting companies
(``SRCs''),\331\ and issuers offering securities pursuant to Regulation
A. The proposed amendments also would apply to these types of issuers.
In certain circumstances, Rule 3-10 also applies to the financial
information of third parties

provided by issuers of asset-backed securities (``ABS'').
---------------------------------------------------------------------------

    \330\ See 17 CFR 230.405 and 240.3b-4 (defining ``foreign
private issuer'').
    \331\ See 17 CFR 230.405 and 240.12b-2 (defining ``smaller
reporting company'').
---------------------------------------------------------------------------

1. Foreign Private Issuers
a. Proposed Amendments
    Under the proposal, foreign private issuers would continue to be
required to comply with Rule 3-10, and would also be required to comply
with proposed Rule 13-01. As foreign private issuers would be required
to provide the disclosures specified in proposed Rule 13-01,
Instruction 1 to Item 8 of Form 20-F would be amended to specifically
require compliance with proposed Rule 13-01. The Commission also
proposed amendments to conform Forms F-1 and F-3 to the streamlined
structure of proposed Rule 3-10(a). General Instruction I.B of Form F-1
and the note to General Instruction I.A.5 of Form F-3 contain
eligibility requirements for the use of these forms applicable to
issuers and guarantors of guaranteed securities that are majority-owned
subsidiaries. Rather than the current form language stating that Rule
3-10 specifies the financial statements that are required, the
Commission proposed to amend these forms to instead state that the
requirements of Rule 3-10 are applicable to financial statements for
those subsidiary issuers or guarantors.
    Existing Rule 3-10(a)(3) includes a reference, solely for
convenience, directing foreign private issuers to Item 8.A of Form 20-F
rather than having them go first to Rules 3-01 and 3-02 of Regulation
S-X to determine the periods for which financial statements are
required.\332\ The Commission proposed to simplify the rule by deleting
this reference.
---------------------------------------------------------------------------

    \332\ Rule 3-01(h) of Regulation S-X and Rule 3-02(d) of
Regulation S-X direct foreign private issuers to Item 8.A of Form
20-F.
---------------------------------------------------------------------------

    Also, existing Rule 3-10(i)(12) requires a parent company that
prepares its financial statements on a comprehensive basis other than
U.S. GAAP or IFRS as issued by the International Accounting Standards
Board to reconcile Consolidating Information to U.S. GAAP. Although the
reconciliation requirement would be eliminated, proposed Rule 13-
01(a)(5) would have required the parent company to disclose any other
quantitative or qualitative information that would be material to
making an investment decision with respect to the guaranteed security.
b. Comments on the Proposed Amendments
    One commenter agreed that the proposed amendments should apply to
foreign private issuers.\333\ This commenter also recommended that the
Commission confirm that the periods covered under the Summarized
Financial Information would be required to track only those covered by
a foreign private issuer's consolidated financial statements.\334\
Another commenter suggested that, if the final amendments require
interim reporting by issuers, the Commission should address the
application of those requirements to foreign private issuers.\335\
---------------------------------------------------------------------------

    \333\ See letter from Sullivan & Cromwell.
    \334\ See letter from Sullivan & Cromwell.
    \335\ See letter from Deloitte.
---------------------------------------------------------------------------

    One commenter opposed the proposal to eliminate the requirement
that foreign private issuers using an accounting framework other than
U.S. GAAP or IFRS reconcile that framework with U.S. GAAP.\336\ This
commenter maintained reconciliation promotes accounting discipline and
thoroughness of the financial information. This commenter also
contended that reconciliation was a key tool in educating investors
about substantive differences between U.S. GAAP and other accounting
standards. Another commenter expressed concern that eliminating the
reconciliation requirement could result in investors receiving less
consistent and relevant information, and that its elimination appears
to contradict the view that the Summarized Financial Information is
material to investors.\337\
---------------------------------------------------------------------------

    \336\ See letter from CII.
    \337\ See letter from KPMG.
---------------------------------------------------------------------------

c. Final Amendments
    After considering public comments, we are adopting the amendments
as proposed. Accordingly, foreign private issuers will be required to
comply with amended Rule 3-10 as well as new Rule 13-01.
    A few commenters requested the Commission confirm or address the
periods of Summarized Financial Information that foreign private
issuers would be required to present.\338\ As specified in Rule 13-
01(a)(4)(v), a parent company is required to disclose the Summarized
Financial Information as of and for the most recently ended fiscal year
and, if applicable, year-to-date interim period, included in the parent
company's consolidated financial statements.
---------------------------------------------------------------------------

    \338\ See letters from Deloitte and Sullivan & Cromwell.
---------------------------------------------------------------------------

    Although a few commenters opposed or expressed concern about the
proposed elimination of the existing Rule 3-10(i)(12) requirement for a
parent company that prepares its financial statements on a
comprehensive basis other than U.S. GAAP or IFRS as issued by the
International Accounting Standards Board to reconcile Consolidating
Information to U.S. GAAP, we are eliminating this requirement as
proposed. Because of the supplemental nature of the Revised Alternative
Disclosures and the requirement in Item 18 of Form 20-F that the parent
company's consolidated financial statements be reconciled to U.S. GAAP,
we do not believe continuing to include a requirement to reconcile the
financial information in the Revised Alternative Disclosures to U.S.
GAAP is necessary. Although the reconciliation requirement would be
eliminated, we note that Rules 13-01(a)(6) and (7) \339\ require the
parent company to disclose additional financial information about each
guarantor if the information would be material for investors to
evaluate the sufficiency of the guarantee, as well as sufficient
information so as to make the financial and non-financial information
presented not misleading.
---------------------------------------------------------------------------

    \339\ See discussion in Section III.C.2.c, ``When Disclosure is
Required.''
---------------------------------------------------------------------------

    For the same reasons described above,\340\ we have created new
Exhibit 17 within Item 19 of Form 20-F, which will require the
identification of each subsidiary that is a guarantor, issuer, or co-
issuer of each guaranteed security that the parent company issues or
guarantees.
---------------------------------------------------------------------------

    \340\ See discussion in Section III.C.2.b.iii, ``Non-Financial
Disclosures.''
---------------------------------------------------------------------------

    When a Canadian parent company and one or more subsidiaries
register the offer and sale of guaranteed securities under the
multijurisdictional disclosure system (``MJDS''),\341\ the parent
company and the subsidiaries incur reporting obligations under Section
15(d).\342\ When a subsidiary issuer or subsidiary guarantor is also
eligible to register the offer and sale of its security under the
MJDS,\343\ the financial

statements that would appear in the registration statement and in any
annual report on Form 40-F \344\ filed by the Canadian parent company
would not be affected by amended Rule 3-10 or new Rule 13-01. Instead,
the disclosure would be in accordance with Canadian disclosure
standards. When a subsidiary issuer or subsidiary guarantor is not
eligible to register the offer and sale of its security under the
MJDS,\345\ however, the requirements of amended Rule 3-10 will be
applicable to financial statements of that subsidiary.
---------------------------------------------------------------------------

    \341\ The MJDS was adopted by the Commission to permit eligible
Canadian issuers to satisfy the Commission's registration and
reporting requirements by providing disclosure documents prepared in
accordance with the requirements of Canadian securities regulatory
authorities. See Multijurisdictional Disclosure and Modifications to
the Current Registration and Reporting System for Canadian Issuers,
Release No. 33-6902 (June 21, 1991) [56 FR 30036 (July 1, 1991)].
    \342\ 17 CFR 240.12h-4 (Exchange Act Rule 12h-4), however,
exempts an issuer that has registered the offer and sale of
securities under the Securities Act on Forms F-7, F-8 and F-80 from
Section 15(d)'s Exchange Act reporting obligations, provided that
the issuer is exempt from the obligations of Section 12(g) of the
Exchange Act pursuant to 17 CFR 240.12g3-2(b) (Rule 12g3-2(b)). See
Exchange Act Rule 12h-4.
    \343\ General Instruction I.H of Form F-10 permits majority-
owned subsidiaries to register the offer and sale of securities on
that form if various conditions are met.
    \344\ 17 CFR 249.240f.
    \345\ This situation arises when the subsidiary issuer or
subsidiary guarantor is not incorporated in Canada. In this
situation, registrants have filed the registration statement on a
combined form (e.g., Form F-10/S-4), depending on what registration
form the subsidiary is eligible to use.
---------------------------------------------------------------------------

2. Smaller Reporting Companies
a. Proposed Amendments
    Note 3 to Rule 8-01 of Regulation S-X requires compliance with
existing Rule 3-10 if the subsidiary of an SRC issues securities
guaranteed by the SRC or the subsidiary guarantees securities issued by
the SRC, except that the periods presented are those required by 17 CFR
210.8-02.\346\ Because the subsidiary issuer or guarantor is itself a
registrant, it is required to file financial statements meeting the
requirements of Regulation S-X. Such financial statements may be
prepared in accordance with 17 CFR 210.8-01 through 210.8-08 \347\ so
long as the subsidiary issuer or guarantor qualifies as an SRC.\348\
Consistent with the existing rule, if the conditions of proposed Rule
3-10 are satisfied, the subsidiary issuer's or guarantor's financial
statements could be omitted. While the substance of this requirement
would not change, the Commission proposed amendments to Note 3 to Rule
8-01 to conform it to the streamlined structure of proposed Rule 3-
10(a). Rather than stating that the subsidiary issuer or guarantor of
the SRC issuer or guarantor must present financial statements as
required by existing Rule 3-10, Note 3 to Rule 8-01 would instead state
that the requirements of proposed Rule 3-10 are applicable to financial
statements of the subsidiary issuer or guarantor. In addition, the
Commission proposed to add a sentence to Note 3 to Rule 8-01 to require
an SRC to provide the disclosures specified in proposed Rule 13-01.
Lastly, because Item 1 of Part I of Form 10-Q permits an SRC to provide
the information required by Rule 8-03 of Regulation S-X if it does not
provide the information required by Rule 10-01, the proposed rule would
add Rule 8-03(b)(7) to require compliance with Rules 3-10 and 13-01.
---------------------------------------------------------------------------

    \346\ Rule 8-02 of Regulation S-X.
    \347\ Article 8 of Regulation S-X.
    \348\ 17 CFR 229.10(f).
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    One commenter agreed that the proposed amendments should apply to
SRCs.\349\ Another commenter supported the proposed amendments to Note
3 to Rule 8-01 of Regulation S-X to conform it to the streamlined
structure of proposed amendments Rule 3-10(a).\350\
---------------------------------------------------------------------------

    \349\ See letter from Sullivan & Cromwell.
    \350\ See letter from ABA.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the public comments, we are adopting the
amendments as proposed. We believe that investors in smaller reporting
companies will benefit from the simplified disclosures that will result
from the amendments and that the cost of providing the disclosures will
be reduced for smaller reporting companies. We are amending Note 3 to
Rule 8-01 which, rather than stating that the subsidiary issuer or
guarantor of the SRC issuer or guarantor must present financial
statements as required by existing Rule 3-10, will state that the
requirements of Rule 3-10 are applicable to financial statements of the
subsidiary issuer or guarantor. The final amendments also add a
sentence to Note 3 to Rule 8-01 to require an SRC to provide the
disclosures specified in proposed Rule 13-01. Finally, because Item 1
of Part I of Form 10-Q permits an SRC to provide the information
required by Rule 8-03 of Regulation S-X if it does not provide the
information required by Rule 10-01, we have added Rule 8-03(b)(6) \351\
to require compliance with Rules 3-10 and 13-01.
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    \351\ Proposed Rule 8-03(b)(7) would have sequentially followed
existing 17 CFR 210.8-03(b)(6) [Rule 8-03(b)(6) of Regulation S-X].
Subsequent to the issuance of the Proposing Release, the Commission
eliminated Rule 8-03(b)(6). See Disclosure Update and
Simplification, Release No. 33-10532 (Aug. 17, 2018) [83 FR 50204
(Oct. 4, 2018)]. The final amendments have been revised to reflect
this change. The requirements in proposed Rule 8-03(b)(7) have been
included in new Rule 8-03(b)(6).
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3. Offerings pursuant to Regulation A
a. Proposed Amendments
    In connection with offerings made pursuant to Regulation A, Forms
1-A,\352\ 1-K,\353\ and 1-SA \354\ direct an entity (``Regulation A
Issuer'') to present financial statements of a subsidiary that issues
securities guaranteed by the parent company or guarantees securities
issued by the parent company as required by Rule 3-10 for the same
periods as the Regulation A Issuer's financial statements,\355\ because
under these circumstances such subsidiary issuers or guarantors would
themselves be Regulation A Issuers. Consistent with existing
requirements, if the conditions of proposed Rule 3-10 are satisfied,
the subsidiary issuer's or guarantor's financial statements could be
omitted. While the substance of this requirement would not change, the
Commission proposed amendments to Forms 1-A, 1-K, and 1-SA to conform
the requirements to the streamlined structure of proposed Rule 3-10(a).
Rather than stating that the subsidiary issuer or guarantor of the
parent company must present financial statements as required by
existing Rule 3-10, Forms 1-A, 1-K, and 1-SA would instead state that
the requirements of proposed Rule 3-10 are applicable to financial
statements of the subsidiary issuer or guarantor. Additionally, the
proposed amendments would modify each form to require the disclosures
specified in proposed Rule 13-01 and specify the location of the
disclosures, similar to the proposed note to Rule 13-01(a) but
consistent with the requirements of Regulation A. However, if a parent
company elects to provide the disclosures in its audited financial
statements, the Proposed Alternative Disclosures would be required to
be audited.
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    \352\ 17 CFR 239.90.
    \353\ 17 CFR 239.91.
    \354\ 17 CFR 239.92.
    \355\ Forms 1-A and 1-K also specify the audit requirements
applicable to financial statements of other entities, which includes
those of subsidiary issuers and guarantors of an issuer offering
guaranteed securities pursuant to Regulation A. The Commission did
not propose any changes to these audit requirements for
circumstances where the separate financial statements of subsidiary
issuers and guarantors are filed.
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b. Comments on the Proposed Amendments
    One commenter expressed support for applying the proposed
amendments to Regulation A issuers.\356\
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    \356\ See letter from Sullivan & Cromwell.
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c. Final Amendments
    After considering the public comments, we are adopting the
amendments as proposed with minor technical modifications. We believe
that investors in Regulation A offerings will benefit from the
simplified disclosures that will result from the amendments and that
the cost of providing the disclosures will be reduced for Regulation A
Issuers.

    Rather than stating that the subsidiary issuer or guarantor of the
parent company must present financial statements as required by
existing Rule 3-10, Forms 1-A, 1-K, and 1-SA have been amended to state
that the requirements of Rule 3-10 are applicable to financial
statements of the subsidiary issuer or guarantor. The final amendments
also modify each form to require the disclosures specified in Rule 13-
01 and specify the location of the disclosures, similar to Rule 13-
01(b) but consistent with the requirements of Regulation A. However, if
a parent company elects to provide the disclosures in its audited
financial statements, the Revised Alternative Disclosures will be
required to be audited.
    The final amendments also include a technical modification to
address the definition of the ``parent company'' as it relates to
issuers under Regulation A. One element of the definition of ``parent
company'' in amended Rule 3-10(b)(1)(ii) is that the parent company
``is, or as a result of the subject Securities Act registration
statement will be, an Exchange Act reporting company.'' As a result,
strict application of this definition would exclude Regulation A
Issuers that are not and will not become Exchange Act reporting
companies (i.e., those issuers only report pursuant to Regulation A).
As stated in the Proposing Release, we believe these amendments should
apply to Regulation A Issuers. Accordingly, we are adopting a technical
modification to Forms 1-A, 1-K, and 1-SA to clarify the applicability
of the definition of parent company as it relates to Regulation A
Issuers.
    In addition, as described above, subsidiary issuers and guarantors
that are permitted to omit their separate financial statements under
Rule 3-10 are also automatically exempt from Exchange Act reporting
under Exchange Act Rule 12h-5. Regulation A does not currently provide
for a similar exemption from reporting under the Rule 257(b) reporting
requirements for subsidiary issuers and guarantors. As a further
technical modification, to ensure consistency in the treatment of
subsidiary issuers and guarantors under the Exchange Act and Regulation
A, we are adding a new paragraph to Rule 257(b) of Regulation A
specifying that subsidiary issuers and guarantors that are permitted to
omit their separate financial statements from Forms 1-A, 1-K and 1-SA
through the application of Rule 3-10 are automatically exempt from the
periodic and current reporting requirements of Rule 257(b) of
Regulation A. Consistent with Rule 12h-5, a subsidiary issuer or
guarantor that later ceases to satisfy the requirements of Rule 3-10
(e.g., it ceases to be a consolidated subsidiary of the parent
company), would then be required to begin filing reports under Rule
257(b) for the period during which it ceased to satisfy the
requirements of Rule 3-10.
    Lastly, for the same reasons described above,\357\ we have created
new Exhibit 17 within Item 17 of Form 1-A, which will require the
identification of each subsidiary that is a guarantor, issuer, or co-
issuer of each guaranteed security qualified or being qualified under
Regulation A that the parent company issues or guarantees. This exhibit
will also be required in Form 1-K by Item 8(b) of Part II of that form,
and in Form 1-SA by Item 4(b) of that form.
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    \357\ See discussion in Section III.C.2.b.iii, ``Non-Financial
Disclosures.''
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4. Issuers of Asset-Backed Securities--Third Party Financial Statements
a. Proposed Amendments
    The disclosure items for issuers of ABS, set forth in 17 CFR
229.1100 through 229.1125,\358\ specify circumstances when an ABS
issuer must provide financial information for certain third parties
\359\ in its filings. For example, under Regulation AB, financial
information about significant obligors of pool assets and guarantors of
those pool assets may be required. In lieu of providing the financial
information of certain unrelated significant obligors, if certain
conditions are met, Item 1100(c)(2) of Regulation AB permits the ABS
issuer to reference the significant obligor's Exchange Act reports (or,
for certain circumstances, its parent's Exchange Act reports) on file
with the Commission. One of these conditions is that the significant
obligor meets one of the categories of eligible significant obligors
specified in Item 1100(c)(2)(ii) of Regulation AB. Of these eligible
categories, two relate to pool assets guaranteed by a parent or
subsidiary of the significant obligor, as outlined in Items
1100(c)(2)(ii)(C) and (D). For these two categories, Item
1100(c)(2)(ii) permits an ABS issuer to reference Exchange Act reports
containing the parent's consolidated financial statements if the
information requirements of Rule 3-10 of Regulation S-X and certain
other conditions are satisfied.
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    \358\ Regulation AB.
    \359\ These third parties include: (1) Significant obligors of
pool assets, (17 CFR 229.1112(b)); (2) entities that provide credit
enhancement and other support, except for certain derivative
instruments, (17 CFR 229.1114(b)(2)); and (3) certain derivative
instrument counterparties, (17 CFR 229.1115(b)). Depending on the
specified measures of significance, the financial information
required for these third parties ranges from selected financial data
required by 17 CFR 229.301 (Item 301 of Regulation S-K) to audited
financial statements meeting the requirements of Regulation S-X
(except Rule 3-05 of Regulation S-X and 17 CFR 210.11-01 through
210.11-03 (Article 11 of Regulation S-X)).
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    The Commission proposed conforming amendments to Items
1100(c)(2)(ii)(C) and (D) of Regulation AB because of the proposal to
relocate the disclosure requirements associated with issuers and
guarantors of guaranteed securities to proposed Rule 13-01. Thus,
rather than refer to the information requirements of Rule 3-10, Items
1100(c)(2)(ii)(C) and (D) would instead state that disclosures
specified in proposed Rule 13-01 must be provided in the reports to be
referenced and that financial statements of the subsidiary third party
or subsidiary guarantor, as applicable, may be omitted if the
requirements of proposed Rule 3-10 are satisfied. The function of the
eligible categories in Items 1100(c)(2)(ii)(C) and (D) would not change
under the proposed revisions.
    Additionally, the Commission proposed conforming amendments to
Items 1112, 1114, and 1115 of Regulation AB and Item 504 of Regulation
S-K because the citations to Regulation S-X in those item requirements
refer to Regulation S-X as encompassing ``Sec. Sec.  210.1-01 through
210.12-29.'' Those citations would be updated to include proposed Rules
13-01 and 13-02 of Regulation S-X.
b. Comments on the Proposed Amendments
    We did not receive any comments that addressed the proposed
conforming amendments to Regulation AB.
c. Final Amendments
    We are adopting the amendments as proposed. Under the final
amendments, rather than referring to the information requirements of
Rule 3-10, Items 1100(c)(2)(ii)(C) and (D) instead state that
disclosures specified in Rule 13-01 must be provided in the reports to
be referenced and that financial statements of the subsidiary third
party or subsidiary guarantor, as applicable, may be omitted if the
requirements of Rule 3-10 are satisfied. The function of the eligible
categories in Items 1100(c)(2)(ii)(C) and (D) will not change due to
these revisions. Further, we have made conforming amendments to Items
1112, 1114, and 1115 of Regulation AB and Item 504 of Regulation S-K
because the citations to Regulation S-X in those item requirements
refer to Regulation S-X as encompassing ``Sec. Sec.  210.1-01 through
210.12-29.'' These citations

have been updated to include Rules 13-01 and 13-02 of Regulation S-
X.\360\
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    \360\ Similar to the conforming amendments that update
references to Regulation S-X to include new Rules 13-01 and 13-02,
we have also made a similar conforming amendment to Item
1100(c)(2)(ii)(F) of Regulation AB. Item 1100(c)(2)(ii)(F) of
Regulation AB referred to Regulation S-K, but the related citation
extended only from Sec. Sec.  229.10 through 229.1208. As Regulation
S-K extends from Sec. Sec.  229.10 through 229.1305, we have made a
corresponding conforming change.
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IV. Rule 3-16 of Regulation S-X

    Rule 3-16 contains requirements for affiliates whose securities are
pledged as collateral for securities registered or being registered.
Existing Rule 3-16 requires a registrant to provide separate annual and
interim \361\ financial statements for each affiliate whose securities
constitute a ``substantial portion'' of the collateral for any class of
securities registered or being registered as if the affiliate were a
separate registrant (``Rule 3-16 Financial Statements'').\362\ Rule 1-
02(b) of Regulation S-X defines an ``affiliate'' by stating that an
``affiliate of, or a person affiliated with, a specific person is a
person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the
person specified'' (emphasis in original).\363\ In practice, affiliates
whose securities collateralize a registered security are almost always
consolidated subsidiaries of that registrant.
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    \361\ Rule 3-16 Financial Statements are not required in
quarterly reports, such as on Form 10-Q. See Section III.A.6. of the
2000 Release.
    \362\ Rule 3-16(a) of Regulation S-X. These financial statements
are required to be provided for the periods required by Rules 3-01
and 3-02 of Regulation S-X.
    \363\ Rule 1-02(b) of Regulation S-X.
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    Whether an affiliate's portion of the collateral is a ``substantial
portion'' is determined by comparing the highest amount among the
aggregate principal amount, par value, book value, or market value of
the affiliate's securities to the principal amount of the securities
registered or being registered. If the highest of those values equals
or exceeds 20 percent of the principal amount of the securities
registered or being registered for any fiscal year presented by the
registrant, Rule 3-16 Financial Statements are required.\364\
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    \364\ Rule 3-16(b) of Regulation S-X.
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    The requirements in existing Rule 3-16 have remained unchanged for
many years,\365\ and we proposed changes to improve the disclosures
required by the rule.
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    \365\ See Separate Financial Statements Required by Regulation
S-X, Release No. 33-6359 (Nov. 6, 1981) [46 FR 56171 (Nov. 16,
1981)].
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V. Amendments to Rule 3-16 and Partial Relocation to Rule 13-02

A. Overarching Principle

    The final amendments to Rule 3-10 are based on the principle that
investors in guaranteed securities rely primarily on the consolidated
financial statements of the parent company as supplemented by details
about the subsidiary issuers and guarantors when making investment
decisions. Similarly, the final amendments to Rule 3-16 are based on
our belief that the investors in securities that are collateralized by
securities of a registrant's affiliate(s) rely primarily on the
consolidated financial statements of the registrant and supplemental
details about the affiliate(s) whose securities are pledged when making
investment decisions. The pledge of collateral is a residual equity
interest that could potentially be foreclosed upon only in the event of
default and almost always relates to an affiliate whose financial
information is already included in the registrant's consolidated
financial statements.\366\ While we believe information about the
affiliate(s) whose securities are pledged as collateral is material for
an investor to consider potential outcomes in the event of foreclosure,
we believe that separate financial statements of each such affiliate
are not material in most situations. Rather, we believe the nature and
extent of disclosures about the affiliate(s) and the related collateral
arrangement should be consistent with the supplemental nature of the
information and better balanced with the cost of providing such
disclosures.
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    \366\ Generally, in the event of default, the holders of debt
without the benefit of a pledge of collateral are comparatively
disadvantaged. In the event of default, a holder of a debt security
can make claims for payment directly against the issuer. Unpledged
assets of an issuer's subsidiaries would generally only be
indirectly accessible to the holder through bankruptcy proceedings,
subordinate to direct claims against those subsidiaries or their
assets. A debt security that is secured by a pledge of collateral
typically allows a holder to make direct claims to that collateral
in the event of default.