[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Proposed Rules]
[Pages 49630-49689]
[FR Doc No: 2018-19456]

Vol. 83

Tuesday,

No. 191

October 2, 2018

Part II

 Securities and Exchange Commission

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17 CFR Parts 210, 229, 239, et al.

Financial Disclosures About Guarantors and Issuers of Guaranteed
Securities and Affiliates Whose Securities Collateralize a Registrant's
Securities; Proposed Rule

Federal Register / Vol. 83 , No. 191 / Tuesday, October 2, 2018 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 239, 240, and 249

[Release No. 33-10526; 34-83701; File No. S7-19-18]
RIN 3235-AM12

Financial Disclosures About Guarantors and Issuers of Guaranteed
Securities and Affiliates Whose Securities Collateralize a Registrant's
Securities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to the financial disclosure
requirements for guarantors and issuers of guaranteed securities
registered or being registered, and issuers' affiliates whose
securities collateralize securities registered or being registered in
Regulation S-X to improve those requirements for both investors and
registrants. The proposed changes are intended to provide investors
with material information given the specific facts and circumstances,
make the disclosures easier to understand, and reduce the costs and
burdens to registrants. In addition, by reducing the costs and burdens
of compliance, issuers may be encouraged to offer guaranteed or
collateralized securities on a registered basis, thereby affording
investors protection they may not be provided in offerings conducted on
an unregistered basis. Finally, by making it less burdensome and less
costly for issuers to include guarantees or pledges of affiliate
securities as collateral when they structure debt offerings, the
proposed revisions may increase the number of registered offerings that
include these credit enhancements, which could result in a lower cost
of capital and an increased level of investor protection.

DATES: Comments should be received on or before December 3, 2018.

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

Electronic Comments

     Use our internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an email to [email protected]. Please include
File Number S7-19-18 on the subject line.

Paper Comments

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

All submissions should refer to File Number S7-19-18. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method of submission. We will post all comments on our website (http://www.sec.gov/rules/other.shtml). Comments also are available for website
viewing and printing in our Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make publicly
available.
    We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Jarrett Torno, Assistant Chief
Accountant, at<PHONE_NUMBER>, or John Fieldsend, Special Counsel, at
(202) 551-3430, in the Division of Corporation Finance, 100 F Street
NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing to amend
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    \1\ 17 CFR 210.1-01 through 210.13.02.
    \2\ 17 CFR 229.10 through 229.1208.
    \3\ 15 U.S.C. 77a et seq.
    \4\ 15 U.S.C. 78a et seq.

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          Commission reference                CFR citation  (17 CFR)
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Regulation S-X: \1\
  Rule 3-10............................  210.3-10
  Rule 3-16............................  210.3-16
  Rule 8-01............................  210.8-01
  Rule 8-03............................  210.8-03
  Rule 10-01...........................  210.10-01
  Rule 13-01...........................  210.13-01
  Rule13-02............................  210.13-02
Regulation S-K: \2\
  Item 504.............................  229.504
  Item 1100............................  229.1100
  Item 1112............................  229.1112
  Item 1114............................  229.1114
  Item 1115............................  229.1115
Securities Act of 1933 (Securities
 Act): \3\
  Form F-1.............................  239.31
  Form F-3.............................  239.33
  Form 1-A.............................  239.90
  Form 1-K.............................  239.91
  Form 1-SA............................  239.92
Securities Exchange Act of 1934
 (Exchange Act): \4\
  Rule 12h-5...........................  240.12h-5
  Form 20-F............................  249.220f
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Table of Contents

I. Introduction
    A. Background
    B. Scope of Proposals
II. Rule 3-10 of Regulation S-X
    A. Background
    B. Overview of the Existing Requirements
    C. Parent Company Financial Statements
    D. 100% Owned
    E. Full and Unconditional Guarantees
    F. Exceptions
    G. Consolidating Information
    H. Securities to Which Rule 3-10 Applies
    I. Recently-Acquired Subsidiary Issuers and Guarantors
    J. Exchange Act Reporting Requirements
III. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule
13-01
    A. Overarching Principle
    B. Overview of the Proposed Amendments
    C. Conditions To Omit the Financial Statements of a Subsidiary
Issuer or Guarantor
    1. Eligibility Conditions
    a. Parent Company Financial Statements Condition
    b. Consolidated Subsidiary Condition
    c. Debt or Debt-Like Securities Condition
    d. Eligible Issuer and Guarantor Structures Condition
    i. Role of Parent Company
    (A) Parent Company Obligation Is Not Limited or Conditional
    (B) Parent Company as Issuer or Co-Issuer
    (C) Parent Company as Full and Unconditional Guarantor
    ii. Role of Subsidiary Guarantors
    (A) Subsidiary Guarantee Release Provisions
    iii. Treatment of Currently Eligible Issuer and Guarantor
Structures Under Proposed Rule 3-10
    (A) Finance Subsidiary Issuer of Securities Guaranteed by Its
Parent Company
    (B) Obligated Parent Company and Single Obligated Subsidiary
    (C) Obligated Parent Company and Multiple Obligated Subsidiaries
    2. Disclosure Requirements
    a. Financial Disclosures
    i. Level of Detail
    ii. Presentation on a Combined Basis
    iii. Periods to Present
    b. Non-Financial Disclosures
    c. When Disclosure Is Required
    d. Location of Proposed Alternative Disclosures and Audit
Requirement
    e. Recently-Acquired Subsidiary Issuers and Guarantors
    f. Continuous Reporting Obligation
    D. Application of Proposed Amendments to Certain Types of
Issuers
    1. Foreign Private Issuers
    2. Smaller Reporting Companies

    3. Offerings Pursuant to Regulation A
    4. Issuers of Asset-Backed Securities--Third Party Financial
Statements
IV. Rule 3-16 of Regulation S-X
V. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
    A. Overarching Principle
    B. Overview of the Proposed Changes
    C. Financial Disclosures
    1. Level of Detail
    2. Presentation on a Combined Basis
    3. Periods to Present
    D. Non-Financial Disclosures
    E. When Disclosure Is Required
    F. Application of Proposed Amendments to Certain Types of
Issuers
    1. Foreign Private Issuers
    2. Smaller Reporting Companies
    3. Offerings Pursuant to Regulation A
VI. General Request for Comment
VII. Economic Analysis
    A. Introduction
    B. Baseline and Affected Parties
    1. Market Participants
    2. Market Conditions
    C. Anticipated Economic Effects
    1. Proposed Amendments to Rule 3-10 and Partial Relocation to
Rule 13-01
    a. Eligibility Conditions To Omit Financial Statements of
Subsidiary Issuer or Guarantor
    b. Disclosure Requirements
    i. Financial and Non-Financial Disclosures
    ii. When Disclosure Is Required
    iii. Location of Proposed Alternative Disclosures and Audit
Requirement
    iv. Recently Acquired Subsidiary Issuers and Guarantors
    v. Continuous Reporting Obligation
    2. Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02
    a. Financial Disclosures
    i. Level of Detail
    ii. Presentation on a Combined Basis
    iii. Periods to Present
    b. Non-Financial Disclosures
    c. When Disclosure Is Required
    D. Anticipated Effects on Efficiency, Competition, and Capital
Formation
    E. Consideration of Reasonable Alternatives
    1. Alternative to Proposed Amendments to Existing Rule 3-10
    2. Alternatives Common to Proposed Amendments to Existing Rule
3-10 and Existing Rule 3-16
    F. Request for Comment
VIII. Paperwork Reduction Act
    A. Background
    B. Summary of the Proposed Amendments Impact on Collection of
Information
    1. Rule 3-10
    2. Rule 3-16
    C. Burden and Cost Estimates for the Proposed Amendments
    D. Request for Comment
IX. Small Business Regulatory Enforcement Fairness Act
X. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposing Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rules
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
XI. Statutory Authority
Text of Proposed Rule and Form Amendments

I. Introduction

A. Background

    We are proposing changes to the disclosure requirements in Rules 3-
10 and 3-16 of Regulation S-X to better align those requirements with
the needs of investors and to simplify and streamline the disclosure
obligations of registrants. Rule 3-10 requires financial statements to
be filed for all issuers and guarantors of securities that are
registered or being registered, but also provides several exceptions to
that requirement. These exceptions are typically available for
individual subsidiaries of a parent company \5\ when certain conditions
are met and the consolidated financial statements of that parent
company are filed. Rule 3-16 requires a registrant to provide separate
financial statements for each affiliate whose securities constitute a
substantial portion of the collateral for any class of registered
securities as if the affiliate were a separate registrant. The changes
we are proposing include amending both rules and relocating part of
Rule 3-10 and all of Rule 3-16 to new Rules 13-01 and 13-02 in
Regulation S-X, respectively.\6\ These changes are intended to provide
investors with the information that is material given the specific
facts and circumstances, make the disclosures easier to understand, and
reduce the costs and burdens to registrants.
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    \5\ The identity of the parent company depends on the particular
corporate structure. See additional discussion in Section II.C,
``Parent Company Financial Statements Condition.''
    \6\ Proposed Rules 13-01 and 13-02 would contain financial and
non-financial disclosure requirements for certain types of
securities registered or being registered that, while material to
investors, need not be included in the audited and unaudited
financial statements.
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    This proposal results from an ongoing, comprehensive evaluation of
our disclosure requirements.\7\ As part of that evaluation, in
September 2015, the Commission issued a Request for Comment on the
Effectiveness of Financial Disclosures About Entities Other Than the
Registrant (``Request for Comment'').\8\ The Request for Comment sought
feedback on, among other things, the financial disclosure requirements
in Regulation S-X for certain entities other than the registrant,
including the requirements in Rules 3-10 and 3-16. More specifically,
the Commission solicited comment on how investors use the disclosures
required by these rules to make investment decisions; the challenges
that registrants face in providing the required disclosures; and
potential changes to these requirements that could enhance the
information provided to investors and promote efficiency, competition,
and capital formation.
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    \7\ The staff, under its Disclosure Effectiveness Initiative, is
reviewing the disclosure requirements in Regulations S-K and
Regulation S-X and is considering ways to improve the disclosure
regime for the benefit of both companies and investors. The goal is
to comprehensively review the requirements and make recommendations
on how to update them to facilitate timely, material disclosure by
companies and shareholders' access to that information.
    \8\ Release No. 33-9929 (Sept. 25, 2015) [80 FR 59083 (Oct. 1,
2015)].
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    In response, we received approximately 50 comment letters.\9\ About
half of these comment letters addressed Rule 3-10,\10\ and nearly as
many addressed Rule 3-16.\11\ Additionally, prior to issuing the
Request for Comment, one comment letter was submitted, in response to
the staff's Disclosure Effectiveness Initiative, that addressed Rules
3-10 and 3-16.\12\ These comments were

considered carefully in developing these proposals.
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    \9\ Comments that we received in response to the Request for
Comment are available at https://www.sec.gov/comments/s7-20-15/s72015.shtml. References to comment letters in this release refer to
the comments on the Request for Comment unless otherwise specified.
    \10\ See, e.g., letters from Association of the Bar of the City
of New York (Nov. 30, 2015) (``AB-NYC''); Anuradha RK (Nov. 23,
2015) (``Anuradha''); BDO USA, LLP (Dec. 7, 2015) (``BDO''); Cahill
Gordon & Reindel LLP (Nov. 30, 2015) (``Cahill''); California Public
Employees' Retirement System (Nov. 30, 2015) (``CalPERS''); Center
for Audit Quality (Nov. 25, 2015) (``CAQ''); CFA Institute (Mar. 2,
2016) (``CFA''); Comcast Corporation (Dec. 11, 2015) (``Comcast'');
Covenant Review, LLC (Nov. 30, 2015) (``Covenant''); Davis Polk &
Wardwell LLP (Nov. 30, 2015) (``Davis Polk''); Deloitte & Touche LLP
(Nov. 23, 2015) (``DT''); Ernst & Young LLP (Nov. 20, 2015)
(``EY''); FedEx Corporation (``Nov. 30, 2015) (``FedEx''); General
Motors Company (Nov. 30, 2015) (``GM''); Grant Thornton LLP (Dec. 1,
2015) (``Grant''); Headwaters Incorporated (Nov. 30, 2015)
(``Headwaters''); KPMG LLP (Nov. 30, 2015) (``KPMG''); Medtronic plc
(Nov. 30, 2015) (``Medtronic''); Noble Corporation plc (Dec. 1,
2015) (``Noble-UK''); PricewaterhouseCoopers LLP (Nov. 30, 2015)
(``PwC''); RSM US LLP (Nov. 30, 2015) (``RSM''); Securities Industry
and Financial Markets Association (Nov. 30, 2015) (``SIFMA'');
Simpson Thacher & Bartlett LLP (Nov. 30, 2015) (``Simpson''); U.S.
Chamber of Commerce, Center for Capital Markets Competitiveness
(Nov. 30, 2015) (``Chamber''); and WhiteWave Foods Company (Nov. 30,
2015) (``WhiteWave'').
    \11\ See, e.g., letters from Anuradha, BDO, Cahill, CalPERS,
CAQ, CFA, Covenant, Davis Polk, DT, EY, KPMG, PwC, SIFMA, and
Chamber.
    \12\ See letter from Disclosure Effectiveness Working Group of
the Federal Regulation of Securities Committee and the Law and
Accounting Committee of the Business Law Section of the American Bar
Association (Nov. 14, 2014) (``ABA-Committees''), https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
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B. Scope of Proposals

    We are proposing changes to the disclosure requirements contained
in Rules 3-10 and 3-16. These rules represent a discrete, but
important, subset of the Regulation S-X disclosure requirements.\13\
Both rules affect disclosures made in connection with registered debt
offerings \14\ and subsequent periodic reporting.\15\ We believe that
revising these rules would reduce the cost of compliance for
registrants and encourage potential issuers to conduct registered debt
offerings or private offerings with registration rights. The proposed
amendments would benefit investors by simplifying and streamlining the
disclosure provided to them about registered transactions and improve
transparency in the market to the extent more offerings are
registered.\16\ In addition, if the proposed changes reduce the burden
associated with providing guarantees or pledges of affiliate securities
as collateral,\17\ investors may benefit from access to more registered
offerings that are structured to include such enhancements and,
accordingly, the additional protections that come with Section 11
liability for disclosures made in those offerings.
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    \13\ Until 2000, the disclosure requirements for guarantors and
issuers of guaranteed securities registered or being registered and
those for affiliates whose securities collateralized securities
registered or being registered were included in the same rule. The
Commission separated those disclosure requirements in 2000 because
of the significant change made to the structure and substance of the
disclosure requirements for guarantors and issuers of guaranteed
securities registered or being registered. See Financial Statements
and Periodic Reports for Related Issuers and Guarantors, Release No.
33-7878 (Aug. 4, 2000) [65 FR 51691 (Aug. 24, 2000)] (``2000
Release''). The Commission kept these new disclosure requirements in
Rule 3-10 and moved the disclosure requirements for affiliates whose
securities collateralize securities registered or being registered
to new Rule 3-16. The substance of the requirements moved to Rule 3-
16 were unchanged. See Separate Financial Statements Required by
Regulation S-X, Release No. 33-6359 (Nov. 6, 1981) [46 FR 56171
(Nov. 16, 1981)].
    \14\ In practice, pledges of affiliate securities as collateral
are almost always for debt securities. However, the requirements of
Rule 3-16 are applicable to any security registered or being
registered, whether or not in the form of debt.
    \15\ The proposed amendments will not affect the presentation of
registrants' consolidated financial statements prepared in
accordance with U.S. GAAP or International Financial Reporting
Standards (``IFRS'') as issued by the International Accounting
Standards Board in registration statements and Exchange Act periodic
reports, such as Form 10-K. The proposed amendments are focused on
the supplemental information about subsidiary issuers and guarantors
as well as affiliates whose securities are pledged as collateral.
    \16\ In a recent report to Congress, the Commission's Division
of Economic Risk Analysis determined that capital raising activity
in the registered debt market was approximately $1.3 trillion in
2016. See U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis,
Access to Capital and Market Liquidity 96 (Aug. 2017) [hereinafter
Access to Capital and Market Liquidity Report], https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-2017.pdf. In
2016, debt offerings under Securities Act Rule 144A raised
approximately $562.8 billion, based on staff analysis of data from
the SDC Platinum (Thomson Reuters) database.
    \17\ Currently, registrants often structure debt agreements to
release affiliate securities pledged as collateral if the disclosure
requirements of Rule 3-16 would be triggered, thereby depriving
investors of that collateral protection. See additional discussion
below. Registrants may cease structuring offerings to release such
collateral if disclosure burdens are reduced by the proposed
amendments, which would benefit investors.
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II. Rule 3-10 of Regulation S-X

A. Background

    A guarantee of a debt or debt-like security (``debt security'')
\18\ is a separate security under the Securities Act \19\ and, as a
result, offers and sales of these guarantees \20\ must be either
registered or exempt from registration. If the offer and sale is
registered, the issuer of the debt security and the guarantor \21\ must
each file its own audited annual and unaudited interim \22\ financial
statements required by Regulation S-X. Additionally, the offer and sale
of the securities pursuant to a Securities Act registration statement
causes the issuer and guarantor to become subject to reporting under
Section 15(d) of the Exchange Act.\23\ Reporting under Section 15(d)
requires filing periodic reports that include audited annual and
unaudited interim financial statements for at least the fiscal year in
which the related Securities Act registration statement became
effective.\24\
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    \18\ Rule 3-10 exceptions are available to issuers and
guarantors of guaranteed securities that are ``debt or debt-like.''
The 2000 Release stated, in part, ``[t]he characteristics that
identify a guaranteed security as debt or debt-like for this purpose
are: the issuer has a contractual obligation to pay a fixed sum at a
fixed time; and where the obligation to make such payments is
cumulative, a set amount of interest must be paid.'' See Section
III.A.4 of the 2000 Release and additional discussion in Section
II.H, ``Securities to which Rule 3-10 Applies.''
    \19\ See Section 2(a)(1) of the Securities Act.
    \20\ These securities, while separately identified in the
Securities Act, are typically purchased by investors together with
the related debt security and are held together while outstanding.
    \21\ The issuer and guarantor structures contemplated by Rule 3-
10 can comprise multiple issuers and multiple guarantors. For
example, a parent can co-issue a security with one of its
subsidiaries that several of its other subsidiaries guarantee.
    \22\ A foreign private issuer need only provide interim period
disclosure in certain registration statements.
    \23\ See 15 U.S.C. 78o(d).
    \24\ The duty to file under Section 15(d) is automatically
suspended as to any fiscal year, other than the fiscal year within
which the registration statement became effective, if, at the
beginning of such fiscal year, the securities of each class to which
the registration statement relates are held of record by less than
300 persons. See Section 15(d)(1) of the Exchange Act.
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    When the Commission amended Rule 3-10 in 2000, it recognized that
``[t]here are circumstances, however, where full Securities Act and
Exchange Act disclosure by both the issuer and the guarantors may not
be useful to an investment decision and, therefore, may not be
necessary.'' \25\ Common examples are when: (1) A parent company offers
its own securities that its subsidiary guarantees; and (2) a subsidiary
offers securities that its parent company fully and unconditionally
guarantees. In these and similar situations, in which a parent company
and one or more of its subsidiaries serve as issuers and/or guarantors
of guaranteed securities, we believe the disclosure requirements
generally have been guided by an overarching principle: The
consolidated financial statements of the parent company are the
principal source of information for investors when evaluating the debt
security and its guarantee together.\26\ This principle is grounded in
the idea that the investment is in the consolidated enterprise when:
(1) The parent company is fully obligated as either issuer or full and
unconditional guarantor of the security; \27\ (2) the parent company
controls each subsidiary issuer and guarantor, including having the
ability to direct all debt-paying activities; \28\ and (3) the
financial information of each subsidiary issuer and guarantor is
included as part of the consolidated financial statements of the parent
company.\29\ In these

circumstances, we believe full Securities Act and Exchange Act
disclosures for each subsidiary issuer and guarantor are generally not
material for an investor to make an informed investment decision about
a guaranteed security. Instead, we believe information included in the
consolidated disclosures about the parent company, as supplemented with
details about the issuers and guarantors, is sufficient. These
disclosures help an investor understand how the consolidated entities
within the enterprise support the obligation.
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    \25\ See Section I of the 2000 Release.
    \26\ Parent company consolidated financial statements must be
filed in all instances where the omission of financial statements of
subsidiary issuers and guarantors are permitted under existing Rule
3-10. See paragraph (4) in each of Rules 3-10(b)-(f).
    \27\ Typically, all of a parent company's subsidiaries support
the parent company's debt-paying ability. However, in the event of
default, the holders of debt without the benefit of guarantees are
comparatively disadvantaged. In the event of default, a holder of a
debt security issued by a parent company can make claims for payment
directly against the issuer and guarantors. The assets of non-issuer
and non-guarantor subsidiaries typically would be accessible only by
the holder indirectly through a bankruptcy proceeding. In such a
proceeding, without a direct guarantee, the claims of the holder
would be structurally subordinate to the claims of other creditors,
including trade creditors of the non-issuer and non-guarantor
subsidiaries.
    \28\ Debt-paying activities typically include, but are not
limited to, the use of the subsidiary issuer's and guarantor's
assets and the timing and amount of distributions.
    \29\ A parent company that prepares its financial statements in
accordance with U.S. Generally Accepted Accounting Principles
(``U.S. GAAP''), would apply Accounting Standards Codification
(``ASC'') 810, Consolidation, in determining whether to consolidate
a subsidiary issuer or guarantor. A parent company that qualifies as
a foreign private issuer and prepares its financial statements in
accordance with IFRS would apply IFRS 10, Consolidated Financial
Statements.
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B. Overview of the Existing Requirements

    Rule 3-10(a) states the general rule that every 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. The rule also sets forth five exceptions
to this general rule.\30\ Each exception specifies conditions that must
be met, including, in each case, that the parent company provide
certain disclosures (``Alternative Disclosures''). If the conditions
are met, separate financial statements of each qualifying subsidiary
issuer and guarantor may be omitted. Only one of the five exceptions
can apply to any particular offering and the subsequent Exchange Act
reporting.
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    \30\ See Rules 3-10(b)-(f) of Regulation S-X. See Section II.F,
``Exceptions,'' below.
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    Two primary conditions, included in each of the exceptions, must be
satisfied for a subsidiary issuer or guarantor to be eligible to omit
its separate financial statements:
     Each subsidiary issuer and guarantor must be ``100%
owned'' by the parent company; and
     each guarantee must be ``full and unconditional.''
    The form and content of the Alternative Disclosures are determined
based on the facts and circumstances and can range from a brief
narrative to highly-detailed condensed consolidating financial
information (``Consolidating Information''). 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. The parent company,
however, must continue to provide the Alternative Disclosures for as
long as the guaranteed securities are outstanding.\31\
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    \31\ See Section III.C.1 of the 2000 Release and additional
discussion in Section II.J, ``Exchange Act Reporting Requirements.''
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    Recently acquired subsidiary issuers and guarantors are addressed
separately within Rule 3-10. Rule 3-10(g) \32\ requires the Securities
Act registration statement of a parent company filed in connection with
issuing guaranteed debt securities to include one year of audited, and,
if applicable, unaudited interim pre-acquisition financial statements
for recently-acquired subsidiary issuers and guarantors that are
significant and have not been reflected in the parent company's audited
results for at least nine months of the most recent fiscal year.
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    \32\ Rule 3-10(g) of Regulation S-X.
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C. Parent Company Financial Statements

    Each of the exceptions in Rule 3-10 requires the parent company to
file its financial statements, but Rule 3-10 does not address when an
issuer or guarantor is, in fact, the ``parent company'' because, as
noted in the 2000 Release, the identity of the parent company will vary
based on the particular corporate structure.\33\ The 2000 Release
identified three conditions that must be met before an entity can be
considered the ``parent company'' for purposes of Rule 3-10, including
that the entity owns 100% of each subsidiary issuer or guarantor
directly or indirectly.\34\
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    \33\ See Section III.A.6. of the 2000 Release.
    \34\ The three conditions for an entity to be considered the
``parent company'' are that the entity: (1) Is an issuer or
guarantor of the subject securities; (2) is an Exchange Act
reporting company, or will become one as a result of the subject
Securities Act registration statement; and (3) owns 100% of each
subsidiary issuer or guarantor directly or indirectly. See id. A
number of examples illustrating when an entity is or is not the
parent company were included in an appendix to the 2000 Release. See
id. at Appendix C.
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D. 100% Owned

    Rule 3-10(h)(1) defines a subsidiary as ``100% owned'' if all of
its outstanding voting shares are owned, either directly or indirectly,
by its parent company. A subsidiary not in corporate form is ``100%
owned'' if the sum of all interests are owned, either directly or
indirectly, by its parent company, except that the following are not
included in the sum of all interests owned: (1) Securities that are
guaranteed by its parent, and, if applicable, other 100%-owned
subsidiaries of its parent; and (2) securities that guarantee
securities issued by its parent and, if applicable, other 100%-owned
subsidiaries of its parent.\35\ This condition was adopted so the risks
associated with an investment in the parent company and its subsidiary
would be ``identical.'' \36\ A subsidiary issuer or guarantor with any
third party ownership interest would fail to meet this condition and
not be eligible for an exception in Rule 3-10. This condition would
also not be met if a subsidiary issued securities convertible into its
voting securities to someone other than the parent company.\37\
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    \35\ The 2000 Release states that ``[u]nincorporated entities
operate differently than corporations. For example, in a limited
liability corporation, the ability to vote can be separated from the
ability to manage the financial affairs of the entity.'' See Section
III.A.1.a.ii of the 2000 Release. In recognition of such
differences, separate definitions of 100% owned were included in
existing Rule 3-10(h)(1) for corporate and non-corporate entities.
    \36\ See Section III.A.1.a.i.(A) of the 2000 Release.
    \37\ See id.
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E. Full and Unconditional Guarantees

    Rule 3-10(h)(2) defines a guarantee as ``full and unconditional''
if, when an issuer of a guaranteed security has failed to make a
scheduled payment, the guarantor is obligated to make the scheduled
payment immediately and, if the guarantor does not, any holder of the
guaranteed security may immediately bring suit directly against the
guarantor for payment of all amounts due and payable. There can be no
conditions, beyond the issuer's failure to pay, to the guarantor's
payment obligation.\38\ The condition that all guarantees be ``full and
unconditional'' was adopted to limit the availability of Alternative
Disclosures to situations where the

payment obligations of the issuer and guarantor are essentially
identical.\39\
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    \38\ For example, a guarantee is not full and unconditional if
it is not operative until some time after default or if the amount
the guarantor is obligated to pay differs from the amount the issuer
must pay. As the payment obligation does not fall uniformly across
the issuer and related guarantors before enforceability of the
guarantee, each party in that structure must provide separate
financial statements. See Section III.A.1.b.i. of the 2000 Release.
However, a guarantee can meet the full and unconditional condition
if it has a fraudulent conveyance ``savings clause,'' such as the
guarantee being limited to the maximum amount that can be guaranteed
without constituting a fraudulent conveyance or fraudulent transfer
under applicable insolvency laws, or if the guarantee is enforceable
to the fullest extent of the law. See Section III.A.1.b.ii. of the
2000 Release. Additionally, a guarantee can be full and
unconditional even if it has different subordination terms than the
guaranteed securities. For example, a parent company's guarantee can
be full and unconditional if the subsidiary's debt obligation ranks
senior to all of its other debt and the parent company's guarantee
ranks junior to other debt obligations of the parent company. While
different subordination terms may mean the guaranteed security
holders have different rights in the priority of payment with
respect to the issuer and guarantor, both the issuer and guarantor
remain fully liable to holders for all amounts due under the
guaranteed security. See Section III.A.1.b.iii. of the 2000 Release.
    \39\ See Section III.A.1.b of the 2000 Release.
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F. Exceptions

    Each of the five exceptions in the existing rule contains
conditions that, if satisfied, permit registrants to omit separate
financial statements of the subject subsidiary issuers and guarantors.
These five exceptions are:
    (1) A finance subsidiary \40\ issues securities that its parent
company guarantees; \41\
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    \40\ Rule 3-10(h)(7) of Regulation S-X (``A subsidiary is a
finance subsidiary if it has no assets, operations, revenues or cash
flows other than those related to the issuance, administration and
repayment of the security being registered and any other securities
guaranteed by its parent company.'').
    \41\ See Rule 3-10(b) of Regulation S-X.
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    (2) an operating subsidiary issues securities that its parent
company guarantees; \42\
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    \42\ See Rule 3-10(c) of Regulation S-X.
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    (3) a subsidiary issues securities that its parent company and one
or more other subsidiaries of its parent company guarantee; \43\
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    \43\ See Rule 3-10(d) of Regulation S-X.
---------------------------------------------------------------------------

    (4) a parent company issues securities that one of its subsidiaries
guarantees; \44\ or
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    \44\ See Rule 3-10(e) of Regulation S-X.
---------------------------------------------------------------------------

    (5) a parent company issues securities that more than one of its
subsidiaries guarantees.\45\
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    \45\ See Rule 3-10(f) of Regulation S-X.
---------------------------------------------------------------------------

    In addition to the two primary conditions discussed above,
depending on which exception is applicable, additional conditions must
be satisfied, including providing Alternative Disclosures in the
footnotes to the parent company's consolidated financial statements. In
most cases, the Alternative Disclosures consist of Consolidating
Information. However, there are three situations in which the
Alternative Disclosures consist of a brief narrative.\46\ These three
situations are:
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    \46\ The content of the brief narrative is specified within each
of the exceptions based on the applicable facts and circumstances.
For example, if the conditions are met, 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.''
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     The subsidiary is a finance subsidiary, and the parent
company is the only guarantor of the securities;
     the parent company of the subsidiary issuer has no
independent assets or operations,\47\ the parent company guarantees the
securities, no subsidiary of the parent company guarantees the
securities, and any subsidiaries of the parent company other than the
issuer are minor; \48\ and
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    \47\ Rule 3-10(h)(5) of Regulation S-X (``A parent company has
no independent assets or operations if each of its total assets,
revenues, income from continuing operations before income taxes, and
cash flows from operating activities (excluding amounts related to
its investment in its consolidated subsidiaries) is less than 3% of
the corresponding consolidated amount.'').
    \48\ Rule 3-10(h)(6) of Regulation S-X (``A subsidiary is minor
if each of its total assets, stockholders' equity, revenues, income
from continuing operations before income taxes, and cash flows from
operating activities is less than 3% of the parent company's
corresponding consolidated amount.'').
---------------------------------------------------------------------------

     the parent company issuer has no independent assets or
operations and all of the parent company's subsidiaries, other than
minor subsidiaries, guarantee the securities.

G. Consolidating Information

    When the brief narrative disclosure is not permitted, Rule 3-10
requires the inclusion of Consolidating Information in the financial
statements. Consolidating Information is detailed financial information
consisting of a columnar footnote presentation of each category of
parent and subsidiaries as issuer, co-issuers, guarantor(s), or non-
guarantor(s) that sums to the consolidated amounts. The presentation
must include all major captions of the balance sheet, income statement,
and cash flow statement that are required to be shown separately in
interim financial statements prepared under 17 CFR 210.10-1 (``Article
10'' of Regulation S-X'').\49\ In order to distinguish the assets,
liabilities, operations, and cash flows of the entities that are
legally obligated to make payments under the guarantee from those that
are not, the columnar presentation must show: (1) A parent company's
investments in all consolidated subsidiaries based upon its
proportionate share of their net assets; \50\ and (2) subsidiary issuer
and guarantor investments in certain consolidated subsidiaries using
the equity method of accounting.\51\
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    \49\ Rule 10-01(a) of Regulation S-X.
    \50\ See Rule 3-10(i)(3) of Regulation S-X.
    \51\ See Rule 3-10(i)(5) of Regulations S-X. Investments in the
following subsidiaries are required to be presented under the equity
method within Consolidating Information: non-guarantor subsidiaries;
subsidary issuers or subsidiary guarantors that are not 100% owned
and/or whose guarantee is not full and unconditional; subsidiary
guarantors whose guarantee is not joint and several with the
guarantees of other subsidiaries; and subsidiary guarantors with
differences in domestic or foreign laws that affect the
enforceability of the guarantees. The equity method is used
primarily to ensure that a subsidiary guarantor does not
consolidate, within this presentation, its own non-guarantor
subsidiary. The equity method of accounting is described in ASC 323.
Investments--Equity Method and Joint Ventures, for registrants that
apply U.S. GAAP and in International Accounting Standards (``IAS'')
28, Investments in Association and Joint Ventures, for foreign
private issuers that apply IFRS.
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    Consolidating Information must be provided as of, and for, the same
periods as the parent company's consolidated financial statements and
must be audited for the same periods that the parent company financial
statements are required to be audited.\52\ In addition to requiring
disclosures about restricted net assets,\53\ as well as certain types
of restrictions on the ability of the parent company or any guarantor
to obtain funds from their subsidiaries,\54\ the instructions specify
that the disclosure may not omit information about each guarantor that
would be material for investors to evaluate the sufficiency of the
guarantee, and that the disclosure must include sufficient information
so as to make the financial information presented not misleading.
---------------------------------------------------------------------------

    \52\ Rule 3-10(i)(2) of Regulation S-X.
    \53\ Rule 3-10(i)(10) of Regulation S-X.
    \54\ Rule 3-10(i)(9) of Regulation S-X.
---------------------------------------------------------------------------

H. Securities to Which Rule 3-10 Applies

    The exceptions to the general rule in existing Rules 3-10(b)
through (f) are available only to issuers and guarantors of debt
securities.\55\ In the 2000 Release, the Commission explained the
circumstances under which a guaranteed security should be considered
``debt or debt-like'' and described certain characteristics of such a
security. Generally, the substance of the security's obligation will
dictate eligibility for Rule 3-10 rather than the form or title of the
security. The characteristics that identify a guaranteed security as
debt or debt-like are: (1) The issuer has a contractual obligation to
pay a fixed sum at a fixed time; and (2) where the obligation to make
such payments is cumulative, a set amount of interest must be paid.\56\
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    \55\ The 2000 Release states that ``modified financial
information permitted by paragraphs (b)-(f) will be available only
for guaranteed debt and debt-like instruments.'' See Section
III.4.b.i. of the 2000 Release. As discussed below, we are proposing
to state this requirement in the rule for clarity.
    \56\ The Commission provided implementation guidance for certain
types of securities such as preferred securities, trust preferred
securities, and convertible debt or debt-like securities. See
Section III.4.b.i and ii of the 2000 Release.
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I. Recently-Acquired Subsidiary Issuers and Guarantors

    If a parent company acquires a new subsidiary issuer or guarantor
that otherwise qualifies for one of the

exceptions in Rules 3-10(c) through (f), the parent company may be
required to provide one year of audited pre-acquisition financial
statements of the newly-acquired issuer or guarantor and, if
applicable, unaudited interim financial statements. This requirement is
triggered when: (1) A parent company acquires the new subsidiary during
or subsequent to one of the periods for which financial statements are
presented in a Securities Act registration statement filed in
connection with the offer and sale of the debt securities; (2) the
subsidiary is deemed significant; and (3) the subsidiary is not
reflected in the audited consolidated results of the parent company for
at least nine months of the most recent fiscal year.\57\ A subsidiary
is significant if its net book value or purchase price, whichever is
greater, is 20 percent or more of the principal amount of the
securities being registered.\58\ The financial statements of the
recently-acquired subsidiary must conform to the requirements of
Regulation S-X because, as an issuer of a security or provider of a
guaranty, it is an issuer. These include the requirement that an audit
be performed in accordance with the standards of the Public Company
Accounting Oversight Board (``PCAOB'') by an auditor registered with
the PCAOB.\59\
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    \57\ Rule 3-10(g)(1) of Regulation S-X.
    \58\ Rule 3-10(g)(1)(ii) of Regulation S-X.
    \59\ In certain circumstances, pre-acquisition financial
statements of a recently-acquired subsidiary that were previously
provided by a parent company may not meet the requirements of Rule
3-10(g). For example, a parent company may provide on Form 8-K pre-
acquisition financial statements of a subsidiary required by 17 CFR
210.3-05 (``Rule 3-05 of Regulation S-X'') that may be audited in
accordance with U.S. generally accepted auditing standards or
audited by an auditor not registered with the PCAOB. If the parent
company later files a registration statement for the offer and sale
of its securities that are guaranteed by that same recently acquired
subsidiary, those previously filed pre-acquisition financial
statements would not meet the requirements of Rule 3-10(g). The
parent company would then be required to file pre-acquisition
financial statements of that recently acquired subsidiary guarantor
audited in accordance with the standards of the PCAOB by an auditor
registered with the PCAOB, or request pre-filing relief from the
staff.
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J. Exchange Act Reporting Requirements

    Issuers and guarantors availing themselves of an exception that
allows for the Alternative Disclosures in lieu of separate financial
statements are exempt from Exchange Act reporting by Exchange Act Rule
12h-5. The parent company, however, must continue to provide the
Alternative Disclosures for as long as the guaranteed securities are
outstanding.\60\ This obligation continues even if the subsidiary
issuers and guarantors could have suspended their reporting obligations
under 17 CFR 240.12h-3 (``Rule 12h-3'') or Section 15(d) of the
Exchange Act,\61\ had they chosen not to avail themselves of a Rule 3-
10 exception and reported separately from the parent company.
---------------------------------------------------------------------------

    \60\ See Section III.C.1 of the 2000 Release and Rule 3-10(a).
    \61\ See 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    A subsidiary issuer or guarantor that initially meets the
requirements but subsequently ceases to satisfy Rule 12h-5 must begin
separately reporting under the Exchange Act. It must present the
financial statements required by Regulation S-X in a separate periodic
report at the time the next report is due and may no longer rely on its
parent company's provision of Alternative Disclosures in the parent
company's periodic reports.

III. Proposed Amendments to Rule 3-10 and Partial Relocation to Rule
13-01

A. Overarching Principle

    We believe that investors in guaranteed securities would be best
served by continuing to adhere to the overarching principle upon which
existing Rule 3-10 is based, namely that investors in guaranteed debt
securities rely primarily on the consolidated financial statements of
the parent company and supplemental details about the subsidiary
issuers and guarantors when making investment decisions.\62\ Although
the existing rules provide investors with information about issuers of
guaranteed debt and guarantors of those securities, our experience
since the adoption of these rules in 2000 suggests the requirements
could be improved for the benefit of both investors and registrants
while adhering to the overarching principle. In this regard, the
existing rules impose certain eligibility restrictions and disclosure
requirements that may require unnecessary detail, thereby shifting
investor focus away from the consolidated enterprise towards individual
entities or groups of entities and may pose undue compliance burdens
for registrants. For example, a parent company is not eligible, under
the existing rule, to provide the Alternative Disclosures if a
subsidiary issuer or guarantor is 99% instead of 100% owned by its
parent company. As another example, the use of a brief narrative
instead of Consolidating Information is not available if the total
assets of either the parent company or non-issuer and non-guarantor
subsidiaries of the parent company exceed 3% of the parent company's
consolidated total assets. In both cases, slight variations from the
conditions set forth in the rule lead to substantially different
disclosure outcomes despite the investments being substantially the
same. More broadly, the volume of the Consolidating Information and
level of detail required can undermine the overarching principle.
Consolidating Information typically occupies multiple pages of a parent
company's financial statements, is composed of detailed information
that may not be material for investors in making an investment
decision, and could distract from the financial information of the
obligated entities that is most likely to be material. In addition,
according to one commenter, debt agreements are often structured to
either meet or avoid the requirements of Rule 3-10, which may result in
a guarantor structure that is less beneficial to investors.\63\ Another
commenter stated that the ``burdensome requirements'' of the existing
rule ``[lead] to issuers electing to do more unregistered as opposed to
registered deals.'' \64\ We are proposing amendments to address the
challenges posed by the current rules in an effort to improve the
disclosures to investors, encourage more registered offerings, and
facilitate debt structures where the provision of guarantees is less
burdensome.
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    \62\ See discussion in Section II.A, ``Background.''
    \63\ See letter from DT.
    \64\ See letter from Davis Polk.
---------------------------------------------------------------------------

B. Overview of the Proposed Amendments

    Under the proposed amendments, the rules would continue to permit
the omission of separate financial statements of subsidiary issuers and
guarantors when certain conditions are met and the parent company
provides supplemental financial and non-financial disclosure about the
subsidiary issuers and/or guarantors and the guarantees (``Proposed
Alternative Disclosures''). Similar to the existing rule, proposed Rule
3-10 would provide the conditions that must be met in order to omit
separate subsidiary issuer or guarantor financial statements. Proposed
Rule 13-01 would specify the disclosure requirements for the
accompanying Proposed Alternative Disclosures. The proposed amendments
would:
     Replace the condition that a subsidiary issuer or
guarantor be 100% owned by the parent company with a condition that it
be consolidated in the parent company's consolidated financial
statements;
     replace Consolidating Information with summarized
financial information,

as defined in 17 CFR 210.1-02,\65\ (``Summarized Financial
Information'') of the issuers and guarantors (together, ``Obligor
Group''), which may be presented on a combined basis, and reduce the
number of periods presented;
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    \65\ Rule 1-02(bb)(1) of Regulation S-X.
---------------------------------------------------------------------------

     expand the qualitative disclosures about the guarantees
and the issuers and guarantors;
     eliminate quantitative thresholds for disclosure and
require disclosure of additional information that would be material to
holders of the guaranteed security;
     permit the Proposed Alternative Disclosures to be provided
outside the footnotes to the parent company's audited annual and
unaudited interim consolidated financial statements in the registration
statement covering the offer and sale of the subject securities and any
related prospectus, and in certain Exchange Act reports filed shortly
thereafter;
     require that the Proposed Alternative Disclosures be
included in the footnotes to the parent company's consolidated
financial statements for annual and quarterly reports beginning with
the annual report for the fiscal year during which the first bona fide
sale of the subject securities is completed;
     eliminate the requirement to provide pre-acquisition
financial statements of recently-acquired subsidiary issuers and
guarantors; and
     require the Proposed Alternative Disclosures for as long
as the issuers and guarantors have an Exchange Act reporting obligation
with respect to the guaranteed securities rather than for so long as
the guaranteed securities are outstanding.
    The proposed amendments would simplify and streamline the rule
structure in several ways. Most significantly, under proposed Rules 3-
10(a) and 3-10(a)(1) there would be only a single set of eligibility
criteria that would apply to all issuer and guarantor structures
instead of having separate sets of criteria in each of the five
exceptions in existing Rules 3-10(b) through (f). Similarly, the
requirements for the Proposed Alternative Disclosures would be included
in a single location within proposed Rule 13-01, rather than spread
among the multiple paragraphs of existing Rule 3-10. We believe these
changes would simplify the rule structure and facilitate compliance.
Request for Comment
    1. Would the proposed amendments to existing Rule 3-10 result in an
increase in the number of registered debt offerings that include
guarantees? Why or why not? How would increasing the number of
registered debt offerings that include guarantees affect investors and
issuers?
    2. What factors do issuers consider when deciding whether to engage
in a registered debt offering or an offering in the private market? Do
issuers structure registered debt offerings to not include guarantees
because of concerns about compliance with existing Rule 3-10? If so,
what are the specific concerns? Are issuers choosing to engage in
private debt offerings that include guarantees? If so, what exemptions
or safe harbors are issuers using? If these issuers are relying on 17
CFR 230.144A (``Rule 144A''), do these offerings typically include
registration rights, or are they offered pursuant to Rule 144A without
registration rights? Why or why not?
    3. To what type of investors are issuers of registered debt
offerings selling or marketing their securities--Qualified
Institutional Buyers (``QIBs''), other institutional investors, or
retail investors? What is the typical investor break down in this
regard?
    4. What factors do issuers consider in determining whether to
structure a debt offering to include guarantees, and how are they
considered?
    5. How do investors use the Alternative Disclosures under existing
Rule 3-10? For example, how do retail investors, institutional
investors, or third parties, such as financial analysts, use the
information? How would these investors use the Proposed Alternative
Disclosures?
    6. Would the proposed amendments to existing Rule 3-10 improve the
disclosures provided to investors? If so, how? Are there other changes
to the rule that we should consider that would improve disclosures to
investors? If so, what are they and how would they improve disclosure?
    7. Would the proposed amendments to existing Rule 3-10 make the
rule less burdensome and, thereby, encourage issuers to structure debt
offerings to include guarantees? Are there other changes to the rule
that we should consider that would reduce compliance burdens for
issuers but continue to provide the material information investors need
to make informed investment decisions?
    8. Would the proposed amendments to existing Rule 3-10 remove
disclosures that investors or financial analysts rely on? If so, which
disclosures? Would the removal of such disclosures have an effect on
investor participation in registered debt offerings that include
guarantees?
    9. What effects do registered debt offerings have on the covenants
contained in the related indentures? Do private debt offerings
typically contain more or fewer covenants in the related indentures?
Why or why not? Would an issuer's offering of debt contain more
covenants if offered privately than if offered publicly? Why or why
not? What effects would the proposed rules have on the covenants
contained in the related indentures?
    10. Are there alternative approaches to disclosures about
guarantors and guarantees that would benefit investors? If so, what are
they and why? How would investors use the disclosures under these
alternative approaches?

C. Conditions To Omit the Financial Statements of a Subsidiary Issuer
or Guarantor

    Under the proposed rules, the financial statements of a subsidiary
issuer or guarantor could be omitted if the eligibility conditions
contained in proposed Rules 3-10(a) and 3-10(a)(1) are met and the
Proposed Alternative Disclosures specified in proposed Rule 13-01 are
provided in the filing, as required by proposed Rule 3-10(a)(2). As
proposed, the eligibility conditions would be that:
     The consolidated financial statements of the parent
company have been filed;
     the subsidiary issuer or guarantor is a consolidated
subsidiary of the parent company;
     the guaranteed security is a debt security; and
     one of the following eligible issuer and guarantor
structures is applicable:
    [cir] The parent company issues the security or co-issues the
security, jointly and severally, with one or more of its consolidated
subsidiaries; or
    [cir] a consolidated subsidiary issues the security or co-issues
the security with one or more other consolidated subsidiaries of the
parent company, and the security is guaranteed fully and
unconditionally by the parent company.
1. Eligibility Conditions
a. Parent Company Financial Statements Condition
    Proposed Rule 3-10 would continue to require the filing of the
parent company's consolidated financial statements. Additionally, under
the proposed amendments, ``parent company'' would still be defined as
in the 2000 Release, with one change. The first two conditions would
continue to be that the entity is: (1) An issuer or guarantor of the
securities; and (2) an Exchange Act reporting company, or will become
one as a result of the subject Securities Act registration

statement. However, the third condition, that the entity owns, directly
or indirectly, 100% of each subsidiary issuer and guarantor, would no
longer be required for an entity to be considered the parent
company.\66\ Instead, the third condition would be that the entity
consolidates each subsidiary issuer and guarantor in its consolidated
financial statements.\67\ For clarity, the definition of ``parent
company'' would be included in proposed Rule 3-10(b)(1), stating that
the parent company is the entity that meets the three aforementioned
conditions.
---------------------------------------------------------------------------

    \66\ See Section III.A.6. of the 2000 Release.
    \67\ See Section III.C.1.b, ``Consolidated Subsidiary,'' below.
---------------------------------------------------------------------------

    Consistent with the note to existing Rule 3-10(a)(2), the financial
statements of an entity that is not an issuer or guarantor of the
registered security could not be substituted for those of the parent
company. For example, it would not be appropriate to file, in
substitution for the financial statements of the parent company,
financial statements of an entity that files Exchange Act reports but
is not an issuer or guarantor of the securities being registered even
if the financial statements of that entity are virtually identical to
those of the parent company, because the security holders cannot
enforce payment of the obligation against that particular entity.
Because we have included the definition of parent company in proposed
Rule 3-10(b)(1), which clearly states that the parent company must be
an issuer or guarantor of the guaranteed security, we do not believe
the note to existing Rule 3-10(a)(2) is necessary and have removed it
from the proposed rule.
Request for Comment
    11. Is the proposed definition of ``parent company'' included in
proposed Rule 3-10(b)(1) sufficiently clear? Why or why not? Are there
other modifications to the proposed definition of ``parent company''
that would be appropriate? If so, what are they and why should they be
included?
    12. Are there other definitions of ``parent company'' that may
differ from our proposed definition? If so, which definitions and what
are the similarities or differences? How would any such differences
affect issuers' ability to apply our rule? Should we make any
modifications to the proposed definition of ``parent company'' in light
of those other definitions?
    13. Should the proposed rule include a requirement similar to the
note to existing Rule 3-10(a)(2) that the financial statements of an
entity that is not an issuer or guarantor of the registered security
could not be substituted for those of the parent company, or does the
proposed definition of ``parent company'' render such a requirement
unnecessary?
b. Consolidated Subsidiary Condition
    The 2000 Release states that the Commission was adopting the
existing rule's definition of 100% owned ``because it assures investors
in the guaranteed securities that there is no competing common equity
interest in the assets or revenues of the subsidiary. This allows
investors to evaluate the creditworthiness of the parent and subsidiary
as a single, indivisible business.'' \68\ The Commission explained that
the risks associated with an investment in a parent company and its
subsidiary issuers and/or guarantors would need to be identical to
justify the use of the Alternative Disclosures in lieu of separate
financial statements of each of those subsidiaries, and if a third
party holds an interest in a subsidiary, those risks are not
identical.\69\
---------------------------------------------------------------------------

    \68\ See Section III.A.1.a.i.(A) of the 2000 Release.
    \69\ See id.
---------------------------------------------------------------------------

    A number of commenters suggested that existing Rule 3-10's 100%-
owned condition be replaced,\70\ suggesting various alternative
conditions.\71\ One commenter recommended permitting guarantor
subsidiaries to be majority-owned instead of 100% owned, explaining
that any risks associated with a minority investor could be addressed
through disclosure,\72\ and another stated that ``as long as a
registrant controls the subsidiary, a third party minority equity
interest in the subsidiary's assets and earnings would not affect the
subsidiary's creditworthiness from a debt holder's perspective.'' \73\
One commenter recommended retaining the requirement.\74\
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    \70\ See, e.g., letters from ABA-Committees, AB-NYC, Chamber,
Comcast, EY, and SIFMA.
    \71\ For example, some commenters recommended permitting
subsidiary issuers and guarantors to be ``wholly-owned'' by the
parent company as that term is defined in Rule 1-02(aa) of
Regulation S-X, which states ``[t]he term wholly owned subsidiary
means a subsidiary substantially all of whose outstanding voting
shares are owned by its parent and/or the parent's other wholly
owned subsidiaries.'' See letters from ABA-Committees, AB-NYC, and
EY.
    \72\ See letter from SIFMA.
    \73\ See letter from Comcast.
    \74\ See letter from CalPERS.
---------------------------------------------------------------------------

    We continue to believe that a subsidiary issuer or guarantor should
be controlled by the parent company and consolidated into the financial
statements of the parent company to be eligible to omit its financial
statements. However, having considered commenters' suggestions and our
experience since the adoption of the existing rule, it appears that the
existence of non-controlling ownership interests in the subsidiary
issuer or guarantor does not necessarily mean that separate financial
statements are warranted.
    We note that the existence of non-controlling interest holders
generally does not alter the fundamental nature of the investment such
that it should be evaluated similar to multiple investments in
different issuers. Specifically, we believe that where a parent company
is obligated as issuer or full and unconditional guarantor of a
guaranteed security and it controls and includes the subsidiary
issuer(s) and guarantor(s) in its consolidated financial statements,
there is sufficient financial unity between the parent company and the
related subsidiary with respect to the guaranteed debt security such
that the consolidated financial statements of that parent company and
the Proposed Alternative Disclosures would enable investors to evaluate
and sufficiently assess the risks associated with an investment in such
guaranteed debt security. In the event of default on the debt security,
there could be circumstances where non-controlling interest holders may
have the potential to influence certain matters affecting payments to
holders of the guaranteed debt security. However, as one commenter
suggested,\75\ such risks, when material, can be addressed through
disclosures tailored to those facts and circumstances \76\ rather than
requiring separate financial statements of the subsidiary issuer or
guarantor.
---------------------------------------------------------------------------

    \75\ See letter from SIFMA.
    \76\ See proposed Rules 13-01(a)(3) and (4).
---------------------------------------------------------------------------

    Proposed Rule 3-10(a) would require the subsidiary issuer or
guarantor to be a consolidated subsidiary of the parent company
pursuant to the relevant accounting standards already in use.\77\ This
proposed change would eliminate the distinction between subsidiaries in
corporate form and those in other than corporate form, applying a
consistent eligibility condition across entities. Also, certain
subsidiary issuers and guarantors that are currently not eligible to
omit their financial statements under existing Rule 3-10, such as
consolidated subsidiary issuers or guarantors that have issued
securities convertible into

their own voting shares, would be eligible to omit their financial
statements. The proposed amendments would instead require the parent
company to provide disclosures that address the material risks, if any,
associated with non-controlling interests in the subsidiary issuer or
guarantor, including any risks arising from securities issued by the
subsidiary that may be convertible into voting shares and may cause the
percentage of non-controlling interest to increase, and to separately
provide Summarized Financial Information attributable to those
subsidiaries.
---------------------------------------------------------------------------

    \77\ For example, a parent company that prepares its financial
statements in accordance with U.S. GAAP would apply ASC 810,
Consolidation, and a parent company that qualifies as a foreign
private issuer and prepares its financial statements in accordance
with IFRS would apply IFRS 10, Consolidated Financial Statements.
---------------------------------------------------------------------------

    Specifically, proposed Rule 13-01(a)(3) would require, to the
extent material, a description of any factors that may affect payments
to holders of the guaranteed security, such as the rights of a non-
controlling interest holder. In addition, proposed Rule 13-01(a)(4)
would require separate disclosure of Summarized Financial Information
for subsidiary issuers and guarantors affected by those factors. For
example, if, through its ability to exercise significant influence \78\
over a subsidiary guarantor, a non-controlling interest holder could
materially affect payments to holders of the guaranteed security, the
parent company would be required to disclose those factors and the
Summarized Financial Information attributable to that subsidiary
guarantor. Because this disclosure would highlight the material
repayment risks and financial information associated with consolidated
issuers and guarantors with non-controlling interests, it may no longer
be necessary to categorically prohibit such issuers and guarantors from
being eligible to omit their financial statements under proposed Rule
3-10.
---------------------------------------------------------------------------

    \78\ See ASC 323, Investments--Equity Method and Joint Ventures.
Representation on the board of directors, participation in policy-
making processes, and extent of ownership by an investor in relation
to the concentration of other shareholdings are among the ways
listed in ASC 323-10-15-6 that may indicate the ability to exercise
significant influence over operating and financial policies of an
investee.
---------------------------------------------------------------------------

Request for Comment
    14. Should the proposed rule use consolidation of the subsidiary
issuer or guarantor under the applicable accounting standards as an
eligibility condition? If not, what relationship between the parent
company and subsidiary issuer or guarantor should the proposed rule use
and why?
    15. Would using consolidation of the subsidiary issuer or guarantor
under the applicable accounting standards as an eligibility condition
allow investors or financial analysts to adequately understand the
credit risk of such subsidiary issuer or guarantor? Would the proposed
use of consolidation allow investors or financial analysts to
adequately understand these credit risks in lieu of the subsidiary
issuer or guarantor's financial statements? Why or why not?
    16. Should the proposed condition that each issuer and guarantor be
a consolidated subsidiary of the parent company be limited such that it
would not be available to certain types of entities? If so, what
entities and why? For example, should an entity be ineligible if it is
consolidated in the parent company's financial statements for reasons
other than the parent company holding the majority of voting interests?
\79\
---------------------------------------------------------------------------

    \79\ Such circumstances may arise when, in accordance with ASC
810, Consolidation, the entity is a variable interest entity and the
parent company is its primary beneficiary.
---------------------------------------------------------------------------

    17. Should a consolidated subsidiary that has issued and
outstanding debt that is convertible into its own voting shares not be
eligible to omit its financial statements under the proposed rule? Why
or why not? Should a consolidated subsidiary that has issued and
outstanding debt that is convertible into its own voting shares, which,
upon conversion, would result in the parent company losing control of
that subsidiary, not be eligible to omit its financial statements under
the proposed rule? Why or why not? Should a consolidated subsidiary
that has issued and outstanding debt that is convertible into its own
voting shares, which, upon conversation, would result in the parent
company owning less than a particular percentage of the voting shares
of that subsidiary, not be eligible to omit its financial statements
under the proposed rule? If so, what should that percentage be and why?
    18. Would any entities that meet the 100%-owned condition under
existing Rule 3-10 not meet the proposed condition that an issuer or
guarantor be a consolidated subsidiary of the parent company? If so,
what are they and why would they not meet this condition?
c. Debt or Debt-Like Securities Condition
    As discussed above,\80\ the exceptions in existing Rules 3-10(b)
through (f) are available only to issuers and guarantors of debt
securities. We continue to believe the exceptions provided in Rule 3-10
should only be available for guaranteed debt and guaranteed preferred
securities that have payment terms that are substantially the same as
debt. In order to provide clarity, proposed Rule 3-10(a)(1) would state
explicitly that the guaranteed security must be ``debt or debt-like.''
---------------------------------------------------------------------------

    \80\ See Section II.H, ``Securities to which Rule 3-10
Applies.''
---------------------------------------------------------------------------

    For additional clarity, proposed Rule 3-10(b)(2) would specify when
a guaranteed security would be considered ``debt or debt-like.''
Consistent with the guidance provided in the 2000 Release,\81\ a
guaranteed security would be considered ``debt or debt-like'' under the
proposed rule if:
---------------------------------------------------------------------------

    \81\ See Section III.A.4 of the 2000 Release.
---------------------------------------------------------------------------

     The issuer has a contractual obligation to pay a fixed sum
at a fixed time; and
     where the obligation to make such payments is cumulative,
a set amount of interest must be paid.
    As is currently the case, the substance of the security's
obligation will determine the availability of relief under Rule 3-10
rather than the form or title of the security. Accordingly, the
proposed rule would clarify consistent with the 2000 Release,\82\ that:
---------------------------------------------------------------------------

    \82\ See Section III.A.4.b.i of the 2000 Release.
---------------------------------------------------------------------------

     Neither the form of the security nor its title will
determine whether a security is debt or debt-like. Instead, the
substance of the obligation created by the security will be
determinative; and
     The phrase ``set amount of interest'' is not intended to
mean ``fixed amount of interest. '' Floating and adjustable rate
securities, as well as indexed securities, may meet the criteria
specified in paragraph (b)(2)(ii) as long as the payment obligation is
set in the debt instrument and can be determined from objective indices
or other factors that are outside the discretion of the obligor.
Request for Comment
    19. Should the proposed rule expressly state that the guaranteed
security must be ``debt or debt-like'' and include a definition of that
term? Why or why not?
    20. Should we modify the proposed definition of ``debt or debt-
like''? If so, why, and how should it be modified?
    21. Should we provide any additional guidance or instructions to
the proposed definition of ``debt or debt-like''? If so, why, and what
additional guidance or instructions would be appropriate?
d. Eligible Issuer and Guarantor Structures Condition
    Under the existing rule, an issuer and guarantor structure is
eligible if it matches one of the specific issuer and guarantor
structures in Rule 3-10(b) through (f). If an issuer or guarantor
structure does not match one of those

specific issuer and guarantor structures, it is ineligible, and the
subsidiary issuers and guarantors must file separate financial
statements. Eligibility would still be based on qualifying issuer and
guarantor structures under the proposed amendments to Rule 3-10.
However, the proposed amendments would simplify and streamline the
existing rule by replacing the specific issuer and guarantor structures
permitted under the five exceptions in existing Rules 3-10(b) through
(f) with a broader two-category framework. Under this framework, an
issuer and guarantor structure would be eligible if:
     The parent company issues the security or co-issues the
security, jointly and severally, with one or more of its consolidated
subsidiaries;\83\ or
---------------------------------------------------------------------------

    \83\ Proposed Rule 3-10(a)(1)(i).
---------------------------------------------------------------------------

     a consolidated subsidiary issues the security, or co-
issues it with one or more other consolidated subsidiaries of the
parent company, and the security is guaranteed fully and
unconditionally by the parent company.\84\
---------------------------------------------------------------------------

    \84\ Proposed Rule 3-10(a)(1)(ii).
---------------------------------------------------------------------------

    In a change from the existing exceptions, the status of subsidiary
guarantors would not be specified in the proposed categories of
eligible issuer and guarantor structures. Although one or more other
subsidiaries of the parent company may, and we expect often would,
guarantee the security, we believe the eligibility of an issuer and
guarantor structure should depend on the role of the parent company.
Accordingly, as discussed further in Section III.C.1.d.ii, ``Role of
Subsidiary Guarantors'' below, separate financial statements of
consolidated subsidiary guarantors may be omitted for each issuer and
guarantor structure that is eligible under the proposed rule if the
other conditions of proposed Rule 3-10 are met.
i. Role of Parent Company
    Under the proposed amendments, the parent company's role as issuer,
co-issuer, or full and unconditional guarantor with respect to the
guaranteed security would determine whether the issuer and guarantor
structure is eligible. Below we further describe conditions that a
parent company must meet under the proposed rule.
(A) Parent Company Obligation Is Not Limited or Conditional
    Because the parent company's consolidated financial statements
serve as the primary source of information for investors, we believe
the parent company's obligation as either issuer or guarantor of the
guaranteed security should not be conditional or limited. If the parent
company's obligation was limited or conditional, focusing on the parent
company's financial statements may not be sufficient for investors to
evaluate the investment. For example, if a subsidiary issued securities
guaranteed by its parent company, but that parent company's obligation
under the guarantee's terms was less than the subsidiary's obligation,
the parent company's financial statements supplemented with the
Proposed Alternative Disclosures would not be sufficient. Instead, the
separate financial statements of the subsidiary issuer would likely be
material for investors to make an informed investment decision.
Therefore, under the proposed amendments, the ability to provide the
Proposed Alternative Disclosures in lieu of separate subsidiary issuer
and guarantor financial statements would only be available when the
parent company's obligation is not limited or conditional.
Request for Comment
    22. Should the eligibility of an issuer and guarantor structure
under the proposed rule require the parent company's obligation not to
be limited or conditional? Why or why not?
    23. Are there circumstances where the parent company's consolidated
financial statements are not the primary source of information for
investors in these situations? If so, what are those circumstances, and
what other sources of information would be material in making an
investment decision?
    24. Should the eligibility of an issuer and guarantor structure
continue to depend on the status of subsidiary guarantors? If so, in
what way? If not, why not?
(B) Parent Company as Issuer or Co-Issuer
    Under the first category of eligible issuer and guarantor
structures in proposed Rule 3-10(a)(1)(i), the parent company must
issue the security or co-issue the security, jointly and severally,
with one or more of its consolidated subsidiaries. When acting as the
sole issuer, the parent company would be fully and unconditionally
obligated for the full amount of any scheduled payments when they come
due. Also, the parent company would be permitted to co-issue a security
with one or more of its consolidated subsidiaries, but all co-issuers
would be required to be jointly and severally liable under the
guaranteed security. This would obligate each of the parent company and
its subsidiary co-issuers to all legal responsibilities of an issuer,
including making scheduled payments on the debt security in full when
they come due. Under this category of eligible issuer and guarantor
structures, the parent company would control each consolidated co-
issuer, the financial information of the subsidiary co-issuer(s) would
be reflected in the consolidated financial statements of the parent
company, and the parent company would be fully and unconditionally
obligated to make payments in full when due under the guaranteed
security. As such, we believe the parent company's consolidated
financial statements would serve as the primary source of information
for investors in these circumstances and, if all other eligibility
conditions of the proposed rule were satisfied, that separate financial
statements of the subsidiary co-issuers would be unnecessary.
Supplemental information about the subsidiary co-issuer(s) would be
included in the Proposed Alternative Disclosures.
Request for Comment
    25. Should this first category of eligible issuer and guarantor
structures under the proposed rule require the parent company to issue
or co-issue the security, jointly and severally, with one or more of
its consolidated subsidiaries? Why or why not?
    26. Are there other conditions that should be included in this
first permissible category of eligible issuer and guarantor structures?
If so, what are they and why would they be appropriate?
    27. If the parent company co-issues the guaranteed security with
one or more of its consolidated subsidiaries, is separate financial
information about issuer entities material to an investment decision?
If so, why?
(C) Parent Company as Full and Unconditional Guarantor
    Under the second category of eligible issuer and guarantor
structures in proposed Rule 3-10(a)(1)(ii), a debt security issued by a
parent company's consolidated subsidiary, or co-issued by more than one
of the parent company's consolidated subsidiaries, must be fully and
unconditionally guaranteed by that parent company. For purposes of the
proposed rule, whether the parent company's guarantee is ``full and
unconditional'' would be determined in the same manner as in existing
Rule 3-10(h)(2) and the 2000 Release \85\ and would be included in
proposed Rule 3-10(b)(3). Under this category of eligible issuer and
guarantor structures, the

parent company would control each consolidated subsidiary issuer, the
financial information of the subsidiary issuer(s) would be reflected in
the consolidated financial statements of the parent company, and the
parent company would be fully and unconditionally obligated to make
payments in full when due under the guaranteed security. In these
circumstances, we believe the parent company's financial statements
would serve as the primary source of information for investors and, if
all other eligibility conditions of the proposed rule were satisfied,
that separate financial statements of the subsidiary issuers would be
unnecessary. Supplemental information about the subsidiary issuer(s) or
co-issuer(s) would be included in the Proposed Alternative Disclosures.
---------------------------------------------------------------------------

    \85\ See Section III.A.1.b of the 2000 Release.
---------------------------------------------------------------------------

Request for Comment
    28. Should this second category of eligible issuer and guarantor
structures under the proposed rule require parent company to fully and
unconditionally guarantee the debt security that is either issued by
that parent company's consolidated subsidiary, or co-issued by more
than one of that parent company's consolidated subsidiaries? Why or why
not?
    29. Are there other conditions that should be included in this
second permissible category of eligible issuer and guarantor
structures? If so, what are they and why would they be appropriate?
    30. Should we retain the existing definition of ``full and
unconditional''? Why or why not?
ii. Role of Subsidiary Guarantors
    As noted above,\86\ one or more consolidated subsidiaries of the
parent company could, and we expect often would, guarantee the
securities in either of the two proposed eligible categories of issuer
and guarantor structures. Existing Rule 3-10(b) through (f) specify the
permissible roles of subsidiary guarantors in an issuer and guarantor
structure and also impose certain conditions, such as the guarantees
being full and unconditional and, where there are multiple guarantees,
being joint and several.\87\ A few commenters specifically addressed
the conditions that subsidiary guarantees be ``full and unconditional''
and ``joint and several.'' One commenter recommended the elimination of
these conditions. According to this commenter, investors place less
reliance on a guarantee that is not full and unconditional as a source
of credit, and accordingly, financial statements of such a guarantor
are even less important to an investor and should not be required.\88\
Instead, the commenter recommended requiring separate disclosure of
those subsidiaries providing lesser guarantees. Another commenter
stated that the existing condition should remain unchanged.\89\
---------------------------------------------------------------------------

    \86\ See Section III.C.1.d, ``Eligible Issuer and Guarantor
Structures Condition.''
    \87\ Where there are multiple subsidiary guarantors, and the
guarantee of one or more subsidiaries is not joint and several with
other subsidiary guarantors, or as applicable, with the parent
company's guarantee, note 4 to existing Rule 3-10(d) and note 3 to
existing Rule 3-10(f) permit the use of Consolidating Information in
lieu of providing separate financial statements of that subsidiary
guarantor so long as each subsidiary whose guarantee is not joint
and several is included in a separate column of the Consolidating
Information.
    \88\ See letter from SIFMA.
    \89\ See letter from CalPERS.
---------------------------------------------------------------------------

    The 2000 Release stated that the Commission was adopting the
definition of ``full and unconditional,'' which was applicable to the
guarantees of both subsidiaries and the parent company, with the
intention of limiting the availability of the Alternative Disclosures
to those situations where the payment obligations of the issuer and
guarantor are essentially identical.\90\ We continue to believe it is
necessary for the guarantee of a parent company to be full and
unconditional in order to rely on its consolidated financial statements
as the primary source of information for investors. However, our
experience since adoption of the existing rule in 2000 suggests that
limitations or conditions on a subsidiary guarantee should not preclude
the use of the Proposed Alternative Disclosures when the consolidated
subsidiary guarantor is controlled by the parent company and the
subsidiary guarantor's financial information is included in the parent
company's consolidated financial statements. Instead, similar to
existing Rule 3-10's approach to subsidiary guarantees that are not
joint and several,\91\ we believe such limitations and conditions on a
subsidiary's guarantee could be highlighted for investors through
incremental financial and non-financial disclosure in the Proposed
Alternative Disclosures rather than requiring separate financial
statements of the subsidiary guarantor.
---------------------------------------------------------------------------

    \90\ See Section III.A.1.b of the 2000 Release.
    \91\ Each of existing Rules 3-10(d)(3) and 3-10(f)(3) specify
that all guarantees must be joint and several as a condition to
permit the omission of the separate financial statements of
subsidiary guarantors. However, if all other conditions of the
applicable exception paragraph are met, Note 4 to existing Rule 3-
10(d) and Note 3 to existing Rule 3-10(f) permit the omission of the
separate financial statements of a subsidiary guarantor whose
guarantee is not joint and several so long as the Consolidating
Information includes a separate column for each such subsidiary
guarantor.
---------------------------------------------------------------------------

    Under the proposed rule, because the role of the parent company
determines whether an issuer and guarantor structure is eligible, the
role of subsidiary guarantors would be irrelevant for determining
overall eligibility. As a result, the subsidiary guarantors' role in
the issuer and guarantor structure would not need to be specified and
the aforementioned conditions (the guarantees being full and
unconditional and, where there are multiple guarantees, being joint and
several) would no longer be imposed on subsidiary guarantors.
Regardless, as stated in proposed Rule 3-10(a), if a subsidiary
guarantor is consolidated in its parent company's consolidated
financial statements, and the other conditions of proposed Rule 3-10
are met, including providing the disclosures about that subsidiary and
its guarantee as specified in proposed Rule 13-01, the subsidiary's
financial statements could be omitted.
    The role of subsidiary guarantors and their guarantees would affect
the required disclosure under the proposed rule. For example, the
subsidiary guarantors would be required to be identified pursuant to
proposed Rule 13-01(a)(1), and if the guarantees of those subsidiaries
were not full and unconditional, disclosure of the limitations and
conditions would be required by proposed Rule 13-01(a)(2), to the
extent material.\92\ Furthermore, proposed Rule 13-01(a)(4) would
require separate disclosure of Summarized Financial Information
applicable to subsidiary guarantors whose guarantees were not full and
unconditional, to the extent material.\93\
---------------------------------------------------------------------------

    \92\ See discussion in Section III.C.2.b, ``Non-Financial
Disclosures.''
    \93\ See discussion in Section III.C.2.a.ii, ``Presentation on a
Combined Basis.''
---------------------------------------------------------------------------

Request for Comment
    31. Would the proposed changes improve the disclosures for
investors? Why or why not?
    32. Proposed Rule 3-10(a)(1)(ii) specifies only that the parent
company guarantee must be full and unconditional. Should the
requirement that a guarantee be full and unconditional also extend to
subsidiary guarantors? Why or why not?
    33. Where there is more than one subsidiary guarantor, or when the
parent company and one or more of its subsidiaries guarantees the
security, should all guarantees be joint and several to be eligible to
omit separate financial statements of subsidiary guarantors? Why or why
not?

(A) Subsidiary Guarantee Release Provisions
    One of the conditions a subsidiary guarantor must meet under the
existing rule is that its guarantee must be full and unconditional. A
subsidiary's guarantee may have the characteristics of a full and
unconditional guarantee at its inception except that there may be
contractual provisions permitting the subsidiary to be released from
that guarantee under certain circumstances. Such release provisions
could cause the subsidiary's guarantee to fail to meet the requirement
that the guarantee be full and unconditional because the potential
elimination of the guarantee is a condition beyond the issuer's failure
to pay. The staff has previously provided guidance that, under certain
circumstances, a subsidiary whose guarantee could be released should be
able to rely on existing Rule 3-10 so long as all other required
conditions of the rule are met.\94\ Several commenters recommended
codifying this staff guidance into our rules.\95\ As noted above,\96\
because the nature of the guarantee of a subsidiary guarantor does not
affect whether the issuer and guarantor structure is eligible under the
proposed rule, a subsidiary guarantee would no longer be required to be
full and unconditional. As such, the existence of subsidiary guarantee
release provisions would not prevent that subsidiary guarantor from
omitting its financial statements. However, to the extent material,
such release provisions would be required to be disclosed pursuant to
proposed Rule 13-01(a)(2) \97\ and separate disclosure of Summarized
Financial Information applicable to that subsidiary guarantor would be
required by proposed Rule 13-01(a)(4).\98\
---------------------------------------------------------------------------

    \94\ See U.S. Sec. & Exch. Comm'n, Div. of Corp. Fin., Financial
Reporting Manual Section 2510.5, https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf (last updated Dec. 1, 2017).
These circumstances include, for example, when: (1) the subsidiary
is sold or sells all of its assets; (2) the subsidiary is declared
``unrestricted'' for covenant purposes; (3) the subsidiary's
guarantee of other indebtedness is terminated or released; (4) the
requirements for legal defeasance or covenant defeasance or to
discharge the indenture have been satisfied; (5) the rating on the
parent's debt securities is changed to investment grade; or (6) the
parent's debt securities are converted or exchanged into equity
securities. The staff guidance also indicates that subsidiary
guarantees with such release provisions should not be characterized
as full and unconditional without disclosure describing any
qualifications to the subsidiary guarantees (e.g., the circumstances
in which they could be released). If the proposed changes described
herein are adopted, this staff interpretation would no longer be
applicable.
    \95\ See, e.g., letters from ABA-Committees, AB-NYC, and EY.
    \96\ See Section III.C.1.d.ii, ``Role of Subsidiary
Guarantors.''
    \97\ See discussion in Section III.C.2.b, ``Non-Financial
Disclosures.''
    \98\ See discussion in Section III.C.2.a.ii, ``Presentation on a
Combined Basis.''
---------------------------------------------------------------------------

Request for Comment
    34. Should the proposed rule specify that subsidiary guarantees
must be full and unconditional except that certain subsidiary release
provisions would be expressly permitted? If so, why? In this regard,
which release provisions should be permitted in the proposed rule and
why would they be appropriate?
iii. Treatment of Currently Eligible Issuer and Guarantor Structures
Under Proposed Rule 3-10
    The proposed amendments are not intended to reduce the types of
entities or structures that would be able to rely on proposed Rule 3-
10. We expect issuer and guarantor structures that are currently
eligible under existing Rule 3-10 to be eligible under the two proposed
categories of eligible issuer and guarantor structures. As shown in the
table below, issuer and guarantor structures that currently fall under
existing Rules 3-10(b), (c), or (d) would be eligible to omit their
financial statements under the eligible categories in proposed Rules 3-
10(a)(1)(i) or (ii), depending on the role of the parent company as
either co-issuer or full and unconditional guarantor of the guaranteed
security. Issuer and guarantor structures that currently fall under
existing Rules 3-10(e) or (f), wherein the parent company is the sole
issuer of the guaranteed security, would be able to rely on the first
category in proposed Rule 3-10(a)(1)(i). We discuss the proposed
amendments in greater detail below.

------------------------------------------------------------------------
             Existing Rule                        Proposed Rule
------------------------------------------------------------------------
Rules 3-10(b), 3-10(c), and 3-10(d)....  Rule 3-10(a)(1)(i), if the
                                          subsidiary co-issued the
                                          security, jointly and
                                          severally, with its parent.
                                         Rule 3-10(a)(1)(ii), if the
                                          subsidiary issued the security
                                          that is fully and
                                          unconditionally guaranteed by
                                          its parent.
Rules 3-10(e) and 3-10(f)..............  Rule 3-10(a)(1)(i).
------------------------------------------------------------------------

(A) Finance Subsidiary Issuer of Securities Guaranteed by Its Parent
Company
    Existing Rule 3-10(b) applies when a ``finance subsidiary,'' as
that term is defined in existing Rule 3-10(h)(7), issues securities
guaranteed by its parent company. This exception was included to
address situations where a parent company directs one of its
subsidiaries to issue debt securities that the parent company
guarantees, and that subsidiary ``has no assets, operations, revenues,
or cash flows other than those related to the issuance, administration,
and repayment of the security and any other securities guaranteed by
its parent.'' \99\ In such cases, the Commission has determined that
detailed financial information about the finance subsidiary is unlikely
to be material to an investment decision. Instead, an investor would
look to the consolidated financial statements of the parent company
that guaranteed the debt to evaluate the investment in the guaranteed
security and generally not need additional information other than a
brief narrative describing the arrangement.
---------------------------------------------------------------------------

    \99\ See Section III.A.6 of the 2000 Release.
---------------------------------------------------------------------------

    Because the proposed amendments to Rule 3-10 do not focus on the
role and nature of the subsidiary as a condition to eligibility, the
proposed amendments would no longer require a subsidiary issuer or
guarantor to be designated as a ``finance subsidiary'' in any
particular circumstances. Likewise, the proposed amendments would
remove the definition of ``finance subsidiary'' from the existing rule,
since it is not otherwise used in Regulation S-X. However, a finance
subsidiary used to issue a debt security guaranteed by the parent
company, would be addressed by proposed Rule 3-10(a)(1)(ii) or, if the
security were to be co-issued, jointly and severally, with its parent,
proposed Rule 3-10(a)(1)(i) would apply. We believe eliminating the
provisions that apply only to finance subsidiaries, together with the
other proposed changes, would simplify the rules while

ensuring that they remain appropriately available for finance
subsidiary arrangements. Furthermore, we generally expect detailed
financial disclosures about those subsidiaries would not be material,
given the nature and amounts of those subsidiaries' assets and
operations.\100\ While a parent company would be permitted to omit
immaterial detailed financial disclosures, all other disclosures
required by proposed Rule 13-01, such as the non-financial disclosures
specified in proposed Rule 13-01(a)(1) though (3), would be required,
to the extent material.
---------------------------------------------------------------------------

    \100\ See discussion and example within Section III.C.2.c,
``When Disclosure is Required.''
---------------------------------------------------------------------------

Request for Comment
    35. Should we eliminate the ``finance subsidiary'' exception as
proposed? Would the proposed elimination of the ``finance subsidiary''
exception under existing Rule 3-10(b) result in supplemental financial
information about the finance subsidiary and its parent company being
required under the proposed rule where it would not be required under
the existing rule? If so, in what circumstances? Would such financial
information be material to investors? Why or why not?
(B) Obligated Parent Company and Single Obligated Subsidiary
    Existing Rule 3-10(c) applies when an ``operating subsidiary''
issues securities guaranteed by its parent company. Existing Rule 3-
10(h)(8) defines an ``operating subsidiary'' to differentiate it from a
``finance subsidiary.'' Since the proposed amendments would remove the
``finance subsidiary'' distinction and definition, proposed Rule 3-10
likewise would no longer need to refer to or define ``operating
subsidiary.'' The operating subsidiary structure of existing Rule 3-
10(c) would be covered in the issuer and guarantor structure in
proposed Rule 3-10(a)(1)(ii) if the security were to be issued by the
subsidiary or proposed Rule 3-10(a)(1)(i) if the security were to be
co-issued, jointly and severally, with its parent company as
contemplated in existing Note 3 to Rule 3-10(c).
    Existing Rule 3-10(e) applies to a single subsidiary guarantor of
securities issued by the parent company of that subsidiary. This
structure would be included in the issuer and guarantor structure in
proposed Rule 3-10(a)(1)(i). As discussed above,\101\ the requirement
in the existing rule that the subsidiary guarantor's guarantee be full
and unconditional would not be a condition of eligibility under the
proposed rule, but disclosure of any material limitations or conditions
to the subsidiary guarantee would be required pursuant to proposed Rule
13-01(a)(2).
---------------------------------------------------------------------------

    \101\ See Sections III.C.1.d.ii, ``Role of Subsidiary
Guarantors.''
---------------------------------------------------------------------------

(C) Obligated Parent Company and Multiple Obligated Subsidiaries
    Existing Rule 3-10(d) applies to a subsidiary that issues
securities guaranteed by its parent company and one or more other
subsidiaries of that parent company. Existing Rule 3-10(f) applies to
multiple subsidiary guarantors of securities issued by the parent
company of those subsidiaries. Both of these existing exceptions
involve more than one of the parent company's subsidiaries that are
obligated as guarantor or issuer of the guaranteed security, and
require that all guarantees be joint and several as well as full and
unconditional. For issuer and guarantor structures currently included
in Rule 3-10(d), proposed Rule 3-10(a)(1)(ii) would apply if the
guaranteed security were issued by a subsidiary and proposed Rule 3-
10(a)(1)(i) would apply if the guaranteed security were co-issued,
jointly and severally, with its parent company as contemplated in
existing Note 3 to Rule 3-10(d). Proposed Rule 3-10(a)(1)(i) would
apply to parent company issuer and subsidiary guarantor structures
currently included in Rule 3-10(f).
    As discussed above,\102\ while subsidiaries' guarantees would no
longer be required to be full and unconditional or joint and several,
and would not affect whether an issuer and guarantor structure is
eligible under the proposed rule, the terms and conditions of the
subsidiary guarantee, including any limitations and conditions, would
be required to be disclosed as part of proposed Rule 13-01(a)(2), to
the extent material.
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    \102\ See Section III.C1.d.ii, ``Role of Subsidiary
Guarantors.''
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    Finally, under existing Rule 3-10, issuer and guarantor structures
that include more than one subsidiary co-issuer do not explicitly fall
into the existing exceptions. Currently, under those circumstances, a
registrant would generally seek pre-filing relief from the Commission
staff.\103\ Multiple subsidiary co-issuers should not change the
analysis as to what financial statement disclosures should be provided
to investors, because, consistent with the other proposed eligible
issuer and guarantor structures, the parent company controls each
consolidated co-issuer, the financial information of the subsidiary co-
issuers would be reflected in the consolidated financial statements of
the parent company, and the parent company would be fully and
unconditionally obligated to make payments in full when due under the
guaranteed security. Therefore, proposed Rule 3-10(a)(1)(i) would apply
to such structures if the subsidiaries co-issued the guaranteed
securities jointly and severally with the parent company. Proposed Rule
3-10(a)(1)(ii) would apply if the parent company is a full and
unconditional guarantor of securities co-issued by the subsidiaries.
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    \103\ Upon request, pursuant to its delegated authority under 17
CFR 210.3-13 (``Rule 3-13 of Regulation S-X''), the staff has
permitted the omission of separate subsidiary issuer and guarantor
financial statements for issuer and guarantor structures that
included more than one subsidiary co-issuer, provided the other
conditions of existing Rule 3-10 were met.
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Request for Comment
    36. Would any issuer and guarantor structures that are currently
eligible under existing Rule 3-10 no longer be eligible under the
proposed amendments? If so, what specific structures would not be
eligible and why?
    37. Should any issuer and guarantor structures that would be
eligible under the proposed categories be disallowed? Should any issuer
and guarantor structures that are ineligible under the proposed
categories be allowed? If so, which ones and why?
2. Disclosure Requirements
    Under existing Rule 3-10, one of the conditions to omitting
separate financial statements of a subsidiary issuer or guarantor is
providing the Alternative Disclosures in the footnotes to the parent
company's consolidated financial statements. We are proposing to retain
the requirement to provide Alternative Disclosures, with modifications,
as we believe the disclosures are an important supplement to the
consolidated parent company disclosures. If the eligibility conditions
in proposed Rule 3-10(a) and (a)(1) are satisfied, a parent company
must include the Proposed Alternative Disclosures specified in proposed
Rule 13-01 in the relevant filing, but could omit the separate
financial statements of subsidiary issuers and guarantors.\104\ The
proposed amendments would streamline and simplify the rule by including
the Proposed Alternative Disclosures in a single location within
proposed Rule 13-01 rather than having such requirements in multiple
paragraphs.

The proposed amendments are described below.
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    \104\ This requirement is specified in proposed Rule 3-10(a)(2).
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a. Financial Disclosures
    The Consolidating Information currently required by existing Rule
3-10 provides highly-detailed financial information about individual
issuers and guarantors or groups of issuers and guarantors within the
consolidated parent company, as well as non-guarantor subsidiaries.
    Several commenters cited various challenges registrants face in
preparing Consolidating Information, such as the complexities of the
disclosures; that registrants' books and records often are not
maintained on a basis that facilitates the preparation of the
disclosures; that extensive manual processes are often necessary; and
the difficulty, time, and costs to prepare the disclosures.\105\ A
number of commenters \106\ suggested aligning the disclosure
requirements of Rule 3-10 with disclosure practices of issuers and
guarantors in the private debt markets that comply with Securities Act
Rule 144A.\107\ Some commenters stated that the type of information
included in debt offerings under Rule 144A, which is less detailed than
what is required by Consolidating Information, provides all the
material information necessary for investors to make informed
investment decisions.\108\ For example, one commenter stated that the
typical offering memorandum in a Rule 144A offering includes revenues,
operating income (or a similar metric) when available, assets and
liabilities of the issuers and guarantors as a consolidated group, and
the non-guarantor subsidiaries as a consolidated group.\109\ Another
commenter stated that it was ``not aware of a single Rule 144A offering
that has ever included [Rule 3-10]. . .financial statements that were
not otherwise already available'' and that the Consolidating
Information is ``routinely omitted in unregistered offerings.'' \110\
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    \105\ See letters from ABA-Committees, Anuradha, BDO, Cahill,
CAQ, DT, EY, FedEx, GM, Grant, Headwaters, KPMG, Medtronic, and
Noble-UK.
    \106\ See letters from ABA-Committees, Davis Polk, EY, PwC, and
SIFMA.
    \107\ The majority of private debt offerings are conducted using
Rule 144A, and 99% of Rule 144A offerings are debt offerings.
Additionally, although most Regulation D offerings are equity
offerings, a significant number include debt securities. See Access
to Capital and Market Liquidity Report, at p. 38; Scott Bauguess et
al., U.S. Sec. & Exch. Comm'n, Div. of Econ. & Risk Analysis,
Capital Raising in the U.S.: An Analysis of the Market for
Unregistered Securities Offerings, 2009-2014 (Oct. 2015), https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html.
    \108\ See, e.g., letters from ABA-Committees, Cahill, and Davis
Polk.
    \109\ See letter from Cahill.
    \110\ See letter from Davis Polk.
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    Prior to the adoption of existing Rule 3-10 in 2000, under Staff
Accounting Bulletin No. 53 (1983) (``SAB 53''), subsidiary issuers were
``permitted to include summarized financial information,'' \111\ which
was presented for each subsidiary issuer or guarantor and did not
exclude the financial information of non-guarantor subsidiaries
consolidated by those subsidiary issuers and guarantors. In discussing
its reasons in the 2000 Release for requiring Consolidating Information
instead of summarized financial information, the Commission highlighted
that the summarized financial information in SAB 53 did not allow for
the more complete and independent assessment of a subsidiary's
financial condition that may be necessary in the case of ``more
complex'' guarantee structures.\112\ Additionally, the Commission noted
that SAB 53 disclosures could result in a high number of sets of
summarized financial information, which would be burdensome for the
parent company and would not likely be useful to investors.\113\
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    \111\ See Section III.A.3.a of the 2000 Release.
    \112\ In the 2000 Release, the Commission stated that SAB 53
``did not contemplate more complex guarantee structures where
investors must assess the subsidiary's financial condition more
completely and independently of its parent company and other
subsidiaries of its parent company,'' and also stated that
``summarized financial information is inadequate for this purpose.
For example, although cash flow information is significant in
assessing creditworthiness, summarized financial information
includes no cash flow information.'' See id.
    \113\ In discussing the use of the summarized financial
information in SAB 53 to address disclosures involving multiple
guarantors, the Commission, in the 2000 Release, stated ``[m]any
structures presented to the staff involved a subsidiary issuer, a
parent company guarantor, multiple subsidiary guarantors, and
multiple subsidiaries that are not guarantors. Other structures
involved more than 100 subsidiary guarantors. [SAB 53 disclosures in
such structures would have included]. . .more than 100 sets of
summarized financial information. Not only would that disclosure
have been burdensome for the registrant to provide, it is unlikely
to have been useful to investors.'' See Section III.A.3.a of the
2000 Release. Other reasons cited by the Commission for requiring
Consolidating Information in the 2000 Release are discussed in
Sections III.C.2.a.i, ``Level of Detail,'' and III.C.2.a.ii,
``Presentation on a Combined Basis,'' below.
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    In considering changes to the existing Rule 3-10 disclosure
requirements, we have sought to improve the disclosure provided to
investors by focusing on the material information needed to make an
informed investment decision while reducing the cost and burdens for
registrants in providing the information. Our experience since the
adoption of the existing Rule 3-10 in 2000 suggests that the level of
information required by Consolidating Information, although detailed,
could be better focused on what is material to an investment decision.
Additionally, we believe that many of the reasons for requiring
Consolidating Information instead of summarized financial information
highlighted by the Commission in the 2000 Release could be addressed
without requiring the use of Consolidating Information, thereby
addressing the concerns noted above regarding the burdens associated
with issuers' preparation of Consolidating Information.
    Accordingly, as discussed below,\114\ the financial disclosure
requirements in proposed Rule 13-01 are tailored to the type of
material information, in addition to the parent company's consolidated
financial statements, that we believe investors in registered offerings
need to make informed investment decisions about guaranteed debt
securities. In seeking to identify the material information investors
need, we have considered commenters' suggestion that we look to the
disclosures provided in the Rule 144A debt markets. In this regard, we
note that the proposed disclosures would be more detailed than that
typically provided in exempt offerings, in which investors have the
ability to request additional information from potential issuers when
they deem it necessary, such as additional financial information about
the issuers and guarantors or qualitative disclosures pertaining to the
issuer and guarantor structure. Under the proposed revisions,
registrants would:
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    \114\ See Section III.C.2.a.i, ``Level of Detail.''
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     Be required to provide Summarized Financial Information
rather than Consolidating Information;
     be required to provide disclosure about the Obligor Group
without financial information of non-obligated entities (financial
information of each issuer and guarantor could be combined into a
single column); and
     be permitted to reduce the number of periods presented.
    As a result of the proposed revisions, the instructions for
preparing Consolidating Information in existing Rule 3-10(i) would be
eliminated.
i. Level of Detail
    Unless a brief narrative is permitted, existing Rule 3-10 requires
Consolidating Information, which includes all major captions of the
balance sheet, income statement, and cash flow statement that Article
10 of Regulation S-X requires to be shown

separately in interim financial statements. As noted above, a number of
commenters recommended reducing the level of detail in financial
disclosures by replacing the Consolidating Information with summarized
financial information in the notes to the parent company's financial
statements.\115\
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    \115\ See letters from BDO, CAQ, DT, EY, Grant, and KPMG.
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    The Commission stated in the 2000 Release that Consolidating
Information ``provides the same level of detail about the financial
position, results of operations, and cash flows of subsidiary issuers
and subsidiary guarantors that investors are accustomed to obtaining in
interim financial statements of a registrant.'' \116\ In our
experience, this level of detail about subsidiary issuers and
guarantors occupies multiple pages of a parent company's financial
statements, potentially obscuring important information contained
therein.\117\ We believe the required supplemental financial
information about issuers and guarantors should instead be focused on
the information that is most likely to be material to an investment
decision. If additional line items beyond those specifically required
are material to an investment decision, they would be required to be
disclosed as well. Proposed Rule 13-01(a)(4) would therefore require
Summarized Financial Information, which would include select balance
sheet and income statement line items. Disclosure of additional line
items of financial information beyond what is specified in proposed
Rule 13-01(a)(4) would be required by proposed Rule 13-01(a)(5), to the
extent they are material to an investment decision. For example, if a
material amount of reported revenues of the obligated entities are
derived from transactions with related parties, such as other non-
issuer and non-guarantor subsidiaries of the parent company, disclosure
of such related party revenues would be required. This Summarized
Financial Information and any additional disclosures that would be
required based on materiality would supplement the parent company's
consolidated financial statements and would simplify compliance and
reduce costs for preparers, while providing investors with more
streamlined and easier to understand financial information that is
material to an investment decision.
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    \116\ See Section III.A.3.a of the 2000 Release.
    \117\ See also letter from BDO (``In some cases, the value of
the alternative disclosure may be overshadowed by its multi-column
voluminous nature.'').
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    While investors are provided cash flow information at the parent
company consolidated level, supplemental cash flow information about
subsidiary issuers and guarantors is not typically included in
disclosures provided in the Rule 144A debt markets.\118\ This leads us
to believe that investors in a registered offering look primarily to a
parent company's consolidated cash flow information to assess
creditworthiness where the parent is the primary obligor or its
guarantor obligation is full and unconditional. Based on this
observation, and the difficulties and significant costs associated with
the preparation of cash flow information for inclusion in Consolidating
Information highlighted by several commenters,\119\ supplemental cash
flow information would not be a required disclosure under the proposed
rule.
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    \118\ See letters from ABA-Committees, Cahill, Davis Polk, and
PwC.
    \119\ See, e.g., letter from GM (``There are many challenges
when preparing the Consolidating Information, in particular the
consolidating statement of cash flows. Our underlying books and
records are not based on a guarantor/non-guarantor structure, and
due to a centralized cash management function numerous intercompany
transactions exist. These factors complicate the preparation of
Consolidating Information prepared `as if' the registrant was a
stand-alone entity. These intercompany transactions require
extensive analysis and manual reclassification adjustments to permit
the preparation of the Consolidating Information, resulting in
excessive complexity and effort relative to the limited benefits of
providing this information to investors.''). See also letters from
ABA-Committees, CAQ, Grant, KPMG, and PwC.
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Request for Comment
    38. Should the Proposed Alternative Disclosures require Summarized
Financial Information rather than Consolidating Information? Would the
Summarized Financial Information, along with the other disclosures
required by proposed Rule 13-01, provide the financial information
investors need to make an informed investment decision with respect to
the guaranteed security?
    39. How would issuers and investors be affected by requiring
Summarized Financial Information? Are there particular items in
Consolidating Information that investors need to make informed
investment decisions that would not be provided separately through
Summarized Financial Information? Is there any such financial
information that underwriters would still require? If so, what would be
the effect on the costs associated with the offering?
    40. Would additional line items of financial information beyond
what would be required by Summarized Financial Information help
investors make informed investment decisions? If so, what line items
and why? For example, should the proposed rule specifically require
supplemental summarized cash flow information resulting from operating,
financing, and investing activities? Would issuers face challenges in
providing such information?
    41. Do investors need summarized cash flow information about
issuers and guarantors in addition to the parent company's consolidated
cash flow statements to make informed investment decisions about
guaranteed securities? If so, how is it used? If not, why not?
ii. Presentation on a Combined Basis
    Consolidating Information distinguishes the assets, liabilities,
operations, and cash flows of each category of parent and subsidiaries
as issuer, guarantor, or non-guarantor. Comments varied with respect to
whether and how the financial information of the entities in the
issuers and guarantors should be grouped. Some commenters suggested
permitting disclosure of financial information of either the Obligor
Group or the non-obligated entities as groups,\120\ other commenters
recommended requiring disclosure of both groups separately,\121\ and
another commenter suggested several possible groupings.\122\ Other
commenters stated that investors use the existing Rule 3-10 disclosures
to evaluate separately the likelihood of payment by the issuer and
guarantors.\123\
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    \120\ See, e.g., letters from BDO and EY.
    \121\ See, e.g., letters from CAQ and KPMG.
    \122\ This commenter suggested the Commission consider
summarized financial information related only to: (1) The issuers
separately and the combined guarantor subsidiaries separately; (2)
the issuers and guarantors on a combined basis; or (3) the guarantor
subsidiaries. See letter from DT.
    \123\ See, e.g., letters from CalPERS and CFA.
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    The Commission observed in the 2000 Release that there were