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

    Several commenters expressed support for the overarching principle
that the consolidated financial statements of the registrant are the
most relevant information for investors when making investment
decisions about that registrant's securities that are collateralized by
securities of its affiliates.\367\
---------------------------------------------------------------------------

    \367\ See, e.g., letters from Cravath, Davis Polk, EY, FEI, and
Nareit.
---------------------------------------------------------------------------

B. Overview of the Proposed and Final Amendments

1. Proposed Amendments
    The proposed rule would replace the existing requirement--that a
registrant provide separate financial statements for each affiliate
whose securities are pledged as collateral--with a requirement that a
registrant provide financial and non-financial disclosures about the
affiliate(s) and the collateral arrangement as a supplement to the
registrant's consolidated financial statements. Similar to the proposed
disclosures for issuers and guarantors of guaranteed securities
discussed above, the proposed amendments would give registrants the
flexibility to provide the proposed disclosures inside or outside the
registrant's audited annual and unaudited interim financial statements
in registration statements covering the offer and sale of the
collateralized securities and any related prospectus, as well as annual
and quarterly Exchange Act periodic reports required to be filed during
the fiscal year in which the first bona fide sale of the subject
securities is completed.\368\ Accordingly, the disclosure requirements
in Rule 3-16 would have been amended and relocated to proposed Rule 13-
02 and Rule 3-16 would have been removed and reserved.
---------------------------------------------------------------------------

    \368\ See Section V.F, ``Location of Disclosures and Audit
Requirement,'' below.
---------------------------------------------------------------------------

    Additionally, instead of requiring disclosure only when the pledged
securities meet or exceed a numerical threshold relative to the
securities registered or being registered under the existing rule's
``substantial portion'' test, the proposed amendments would require the
specified disclosures unless they are not material to holders of the
collateralized security. Further, the proposed changes would have
required disclosure of any additional information about the collateral
arrangement and each affiliate whose security is pledged as collateral
that would be material to making an investment decision with respect to
the collateralized security. The proposed amendments, comments
received, and final amendments are discussed further below.
2. Comments on the Proposed Amendments
    Comments on the proposed amendments were generally supportive.
Several commenters supported the proposed amendments to replace
existing Rule 3-16 with simplified financial and non-financial
disclosures about the affiliates and collateral

arrangements.\369\ Some commenters asserted the proposed amendments to
Rule 3-16 would benefit investors, who would receive information
critical to making informed decisions in a simpler format, as well as
registrants by reducing the costs of conducting these types of debt
offerings.\370\ Several commenters indicated that the requirements of
existing Rule 3-16 were overly burdensome and have caused many issuers
to structure transactions to avoid application of existing Rule 3-16,
by either avoiding pledges of an affiliate's securities or pursuing
unregistered offerings where separate financial statements are not
included.\371\ One commenter who expressed general support for the
Commission's effort to amend Rule 3-16 recommended that the Commission
eliminate Rule 3-16 without amending or replacing it.\372\ This
commenter asserted that other disclosure requirements and market
incentives were sufficient to cause registrants to disclose relevant
material information in offerings of debt secured by securities of
affiliates.
---------------------------------------------------------------------------

    \369\ See, e.g., letters from Davis Polk, Dell, EY, FEI, Grant
Thornton, Nareit, NYC Bar, PWC, and Sullivan & Cromwell.
    \370\ See, e.g., letters from Davis Polk, EY, and FEI.
    \371\ See letters from Cravath, Davis Polk, Dell, NYC Bar, and
PWC.
    \372\ See letter from Cravath.
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3. Final Amendments
    After considering the public comments, we are adopting the
amendments largely as proposed, with modifications. Although one
commenter recommended eliminating rather than amending or replacing
existing Rule 3-16, as supported by several other commenters, the final
amendments replace the requirement to provide separate financial
statements of an affiliate with financial and non-financial disclosures
about the affiliate(s) and collateral arrangement(s). We agree with
those commenters that asserted such a change will benefit investors who
would receive information critical to making informed decisions in a
simpler format, as well as registrants by reducing offering costs.\373\
These amended financial and non-financial disclosures will be included
in new Rule 13-02 \374\ and are discussed below.\375\
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    \373\ See, e.g., letters from Davis Polk, EY, and FEI.
    \374\ The disclosures specified in proposed Rule 13-02(a) would
be required ``[f]or each class of security registered or being
registered . . .'' As a technical modification, final Rule 13-02(a)
has been revised to require the disclosures specified therein
``[f]or each security subject to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and for each security the offer and
sale of which is being registered under the Securities Act of 1933,
. . .''
    \375\ As a transitional matter, the final amendments do not
eliminate existing Rule 3-16, which will continue to be applicable
to registered collateralized securities with collateral release
provisions issued and outstanding as of the effective date of the
final amendments. See Section VI.B ``Rule 3-16 Collateral Release
Provisions.''
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C. Financial Disclosures

1. Level of Detail
a. Proposed Amendments
    Existing Rule 3-16 requires separate financial statements of each
affiliate whose securities constitute a substantial portion of the
collateral. These affiliates whose securities are pledged as collateral
are almost always consolidated subsidiaries of the registrant, and
their financial information is thus already reflected in the
registrant's consolidated financial statements. Proposed Rule 13-
02(a)(4) would require Summarized Financial Information, a widely
understood and common set of requirements, for each such affiliate,
which would include select balance sheet and income statement line
items.\376\ Disclosure of additional line items of financial
information beyond what is specified in proposed Rule 13-02(a)(4) would
have been required by proposed Rule 13-02(a)(5) if material to an
investment decision. For example, if a material amount of reported
revenues of the affiliate(s) are derived from transactions with related
parties, such as other subsidiaries of the registrant whose securities
are not pledged as collateral, disclosure of such related party
revenues would be required.
---------------------------------------------------------------------------

    \376\ As with proposed Rule 13-01(a)(4), Summarized Financial
Information would be the information specified in Rule 1-02(bb)(1)
of Regulation S-X.
---------------------------------------------------------------------------

    The proposed rule did not include a financial statement requirement
for when the affiliate is either a non-subsidiary controlled affiliate
of the registrant or a controlling affiliate of the issuer, because
practice has demonstrated that affiliates whose securities are pledged
as collateral are almost always consolidated subsidiaries of the
registrant. In the rare circumstances where the affiliate is not a
consolidated subsidiary of the registrant, proposed Rule 13-02(a)(5)
would have required the registrant to disclose any other quantitative
or qualitative information that would be material to making an
investment decision with respect to the collateralized security.\377\
Because the unconsolidated affiliate's financial information is not
included in the registrant's consolidated financial statements, the
Commission indicated in the Proposing Release that it would expect
disclosure beyond what is specified in proposed Rule 13-02(a)(1)
through (4) to be provided in these circumstances.\378\ In this regard,
separate financial statements of the unconsolidated affiliate may be
necessary if material to an investment decision.\379\
---------------------------------------------------------------------------

    \377\ See Section V.E, ``When Disclosure is Required.''
    \378\ See Section V.C,1 of the Proposing Release.
    \379\ See proposed Rule 13-02(a)(5). See also 17 CFR 210.3-13
(``Rule 3-13 of Regulation S-X'').
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Several commenters generally supported the proposal to replace the
separate financial statements of an affiliate required by existing Rule
3-16 with Summarized Financial Information.\380\ Some commenters
asserted that the proposed amendment would reduce a registrant's costs
and burdens \381\ while still providing investors with clear and
sufficient information.\382\
---------------------------------------------------------------------------

    \380\ See, e.g., letters from Cravath, Davis Polk, EY, and FEI.
    \381\ See, e.g., letters from Davis Polk, EY, FEI, and PWC.
    \382\ See letters from EY and FEI.
---------------------------------------------------------------------------

    One commenter urged the Commission to adopt an even more simplified
and flexible approach, based on the commenter's assertion that
offerings pursuant to Rule 144A include less detail than what is
required in Summarized Financial Information.\383\ This commenter
recommended that the final rule only require quantitative disclosure of
revenue, operating income, assets, and liabilities of the relevant
affiliates as a group.
---------------------------------------------------------------------------

    \383\ See letter from NYC Bar.
---------------------------------------------------------------------------

    Additionally, although they mostly agreed with the proposed
amendment to replace the separate financial statements of an affiliate
with less detailed financial information, a few commenters stressed
that the Commission should require more information than is called for
by Summarized Financial Information.\384\ One commenter indicated that
the final rule should include the balance sheet and income statement
information of the collateralizing subsidiaries in a level of detail
similar to that specified in Article

10 of Regulation S-X.\385\ Another commenter recommended that the
Commission require additional disclosures regarding intercompany and
related-party transactions to accompany and thereby enhance the
transparency of the Summarized Financial Information when securities of
affiliates are pledged as collateral in a manner similar to its
recommendations for the level of detail in the proposed amendments to
Rule 3-10.\386\
---------------------------------------------------------------------------

    \384\ See, e.g., letters from EY and PWC.
    \385\ See letter from PWC.
    \386\ See letter from EY. In its comments on the level of detail
in the proposed amendments to Rule 3-10, the commenter recommended
requiring disclosure of investments held by the obligated group in
non-obligated subsidiaries, intercompany or related-party
transactions between the obligated and non-obligated groups, and
when the obligated group includes variable interest entities, a
cross-reference to the relevant disclosures in the consolidated
financial statements.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting amendments in substantially the form proposed, but
with modifications in response to comments received. As described
above, one commenter recommended different and more limited information
than what is required by Summarized Financial Information and another
recommended more detailed information. However, and consistent with our
rationale for the corresponding requirement in the final amendments to
Rule 13-01(a)(4) discussed above,\387\ we agree with those commenters
that supported requiring Summarized Financial Information. We believe
the select balance sheet and income statement line items that
Summarized Financial Information requires are focused on the
information that is most likely to be material to an investment
decision and should be less burdensome for registrants to prepare than
Rule 3-16 Financial Statements. Under the final amendments, disclosure
of additional line items of financial information beyond the line items
specified in Summarized Financial Information is required if necessary
to comply with Rule 13-02(a)(6) and (7).\388\
---------------------------------------------------------------------------

    \387\ See discussion in Section III.C.2.a.i.(C), ``Level of
Detail.''
    \388\ Proposed Rule 13-02(a)(1) through (4) set forth proposed
requirements to disclose specific financial and non-financial
information. Proposed Rule 13-02(a)(5), which would have required
disclosure of ``any other quantitative or qualitative information
that would be material to making an investment decision with respect
to the collateralized security,'' was included to require disclosure
about the collateral arrangements and affiliates whose securities
are pledged that would be material but was not otherwise already
required by the specified proposed financial and non-financial
disclosures. Instead of proposed Rule 13-02(a)(5), the final
amendments include Rules 13-02(a)(6) and (7), which require
disclosure of ``[a]ny financial and narrative information about each
such affiliate if the information would be material for investors to
evaluate the pledge of the affiliate's securities as collateral''
and ``[s]ufficient information so as to make the financial and non-
financial information presented not misleading,'' respectively. See
discussion within Section V.E.3, ``When Disclosure is Required.''
---------------------------------------------------------------------------

    Although the Commission requested comment on whether the final
rules should specifically address the rare circumstances where the
affiliate is not a consolidated subsidiary of a registrant, we did not
receive any comments. As such, consistent with the proposal, the final
rule does not include requirements specific to non-subsidiary
affiliates, such as a non-subsidiary controlled affiliate of the
registrant or a controlling affiliate of the issuer. However, and also
consistent with the proposal, in the rare circumstances where the
affiliate is not a consolidated subsidiary of the registrant, Rules 13-
02(a)(6) and (7) would require the registrant to provide any financial
and narrative information about each such affiliate if the information
would be material for investors to evaluate the pledge of the
affiliate's securities as collateral and sufficient information so as
to make the financial and non-financial information presented not
misleading.\389\ Because the unconsolidated affiliate's financial
information is not included in the registrant's consolidated financial
statements, in these circumstances disclosure beyond what is specified
in Rule 13-02(a)(1) through (4) may need to be provided. In this
regard, separate financial statements of the unconsolidated affiliate
may be necessary to satisfy the requirements of Rules 13-02(a)(6) and
(7).\390\
---------------------------------------------------------------------------

    \389\ See Section V.E, ``When Disclosure is Required.''
    \390\ See also Rule 3-13 of Regulation S-X.
---------------------------------------------------------------------------

    The Proposing Release included an example of when incremental
disclosure of related party revenues would be required under the
proposed rule.\391\ Specifically, if a material amount of reported
revenues of the affiliate(s) are derived from transactions with related
parties, such as other subsidiaries of the registrant whose securities
are not pledged as collateral, disclosure of such related party
revenues would be required. Instead of including this as an example of
when disclosure would be required under Rule 13-02(a)(6) and (7), we
agree with the commenter that recommended including a requirement to
separately disclose intercompany and related-party transactions in
addition to Summarized Financial Information, which the commenter
asserted would enhance the transparency of the Summarized Financial
Information.\392\ Accordingly, as adopted, Rule 13-02(a)(4)(iii)
requires an affiliate's amounts due from, amounts due to, and
transactions with certain entities not included in that affiliate's
Summarized Financial Information to be presented in separate line
items, to the extent material. Such entities include the registrant,
any of the registrant's subsidiaries not included in the Summarized
Financial Information of the affiliate,\393\ and related parties. For
example, material revenue transactions between an affiliate and a
separate non-pledged subsidiary of the registrant that is not included
in that affiliate's financial information (i.e., the non-pledged
subsidiary would not be a consolidated subsidiary of the affiliate)
must be presented in a separate line item. If the transaction was
between the affiliate and another affiliate whose securities are
pledged, and those affiliates' Summarized Financial Information is
presented on a combined basis pursuant to Rule 13-02(a)(4)(i), separate
presentation of the transaction is not required as it will be required
to be eliminated in accordance with Rule 13-02(a)(4)(ii).\394\ We
expect clearly establishing this expectation as a stated requirement
will assist in the preparation of the disclosures and provide useful
information to investors, and agree with one commenter that such
separate disclosure enhances the transparency of the Summarized
Financial Information presented.\395\
---------------------------------------------------------------------------

    \391\ See Section V.C.1 of the Proposing Release. Such
disclosure would have been required by proposed Rule 13-02(a)(5).
    \392\ See letter from EY. This commenter suggested flexibility
to provide these disclosures as either explanatory notes or separate
line items. Based on the nature of these items, and to drive
consistency in the disclosures between registrants, Rule 13-
02(a)(4)(iii) requires the amounts to be in separate line items.
    \393\ These entities include, for example, other affiliates
whose securities are pledged as collateral but whose Summarized
Financial Information required by Rule 13-02(a)(4) is presented
separately from the affiliate in question, as well as other
subsidiaries of the registrant that are not subsidiaries of the
affiliate.
    \394\ See Section V.C.2, ``Presentation on a Combined Basis.''
    \395\ See letter from EY.
---------------------------------------------------------------------------

    Lastly, for the same reasons described in connection with the
corresponding requirement in final Rule 13-01(a)(4),\396\ final Rule
13-02(a)(4) includes a requirement to briefly describe the basis of
presentation applicable to each of the required financial disclosures
therein. In addition to simplifying the final rule, we believe this
requirement will better inform users about the form and content of the
disclosures provided pursuant to final Rule 13-02(a)(4).\397\ We
believe

such disclosure enhances the understandability of the financial
information provided.
---------------------------------------------------------------------------

    \396\ See Section III.C.2.a.i.(C), ``Level of Detail.''
    \397\ Such disclosure could state, for example, that the
financial information presented is that of the affiliates whose
securities are pledged as collateral for the registered securities.
If applicable, the disclosure could also state, for example: That
the financial information of affiliates is presented on a combined
basis; intercompany balances and transactions between affiliates
have been eliminated; that the affiliate's amounts due from, amounts
due to, and transactions with the registrant, any of the
registrant's subsidiaries not included in the summarized financial
information of the affiliate(s) subsidiaries, and related parties
have been presented in separate line items; and that financial
information of certain identified affiliates has been presented
separately due to disclosed facts and circumstances applicable to
those subsidiaries (as required by Rule 13-02(a)(4)(iv)).
---------------------------------------------------------------------------

2. Presentation on a Combined Basis
a. Proposed Amendments
    The existing test used to determine whether the securities of an
affiliate constitute a ``substantial portion'' of the collateral for
securities registered or being registered is required to be performed
for each affiliate whose securities are pledged. In the Proposing
Release, the Commission noted that the existing requirements can result
in potentially confusing disclosure about the extent of
collateral.\398\ For example, when the securities of a registrant's
subsidiary (``Subsidiary A'') are pledged as collateral and the
securities of an entity consolidated by Subsidiary A (``Subsidiary B'')
are also pledged, separate Rule 3-16 Financial Statements may be
required for both Subsidiary A and Subsidiary B. In such a scenario,
Subsidiary B's assets, liabilities, operations, and cash flows would be
included twice (i.e., in the financial statements of both Subsidiary A
and Subsidiary B). The proposed amendments would permit a registrant to
disclose the financial information of consolidated affiliates on a
combined rather than individual basis. Proposed Rule 13-02(a)(4) would
require intercompany transactions between affiliates presented on a
combined basis to be eliminated. Unlike the proposed amendments to Rule
13-01, because the securities pledged as collateral are an equity
interest in that pledgor affiliate, the financial information of all
subsidiaries that would be consolidated by that affiliate would be
included in the Summarized Financial Information presented pursuant to
proposed Rule 13-02(a)(4), even if the securities of those subsidiaries
are not pledged as collateral.\399\
---------------------------------------------------------------------------

    \398\ See Section V of the Proposing Release.
    \399\ Proposed Rule 13-01 would prohibit combining the financial
information of non-issuer and non-guarantor subsidiaries of issuers
and guarantors with that of issuers and guarantors in the Proposed
Alternative Disclosures in order to distinguish the financial
information of entities that are legally obligated to pay from those
that are not. Proposed Rule 13-02 relates to pledged residual equity
interests in affiliates as opposed to guarantees to pay, and as
such, no similar prohibition is necessary.
---------------------------------------------------------------------------

    The proposed rule took into consideration that there may be
circumstances where separate financial information about certain
affiliates is material to an investment decision. Accordingly, when the
information provided in response to proposed Rule 13-02 is applicable
to one or more, but not all, affiliates, proposed Rule 13-02(a)(4)
would require separate disclosure of Summarized Financial Information
for the affiliates to which it is applicable. For example, if
securities of one, but not all, of the affiliates that are pledged as
collateral are subject to a contractual or statutory delay from being
transferred to the holder of the collateralized security in the event
of default, disclosure of these facts and circumstances would be
required by proposed Rule 13-02(a)(2). In that case, proposed Rule 13-
02(a)(4) would require separate disclosure of the Summarized Financial
Information specified in proposed Rule 13-02(a)(4) for that affiliate.
    Generally, a pledge of an affiliate's securities as collateral
includes all of the outstanding ownership interests in that affiliate,
which are held directly or indirectly by the entity issuing the debt
securities. There could be circumstances where either the pledge of
collateral does not include all of the outstanding ownership interests
in the affiliate held by the issuing entity, or certain ownership
interests in the affiliate are held by a third party and therefore
unpledged. In such cases, disclosure of these facts and circumstances
would be required by proposed Rule 13-02(a)(5), which would have
required disclosure of any other quantitative or qualitative
information that would be material to making an investment decision
with respect to the collateralized security. If such circumstances were
applicable to one or more, but not all, affiliates, proposed Rule 13-
02(a)(4) would require separate disclosure of Summarized Financial
Information for the affiliates to which it is applicable.
b. Comments on the Proposed Amendments
    The majority of comments we received on the proposed amendments
supported permitting issuers to disclose the financial information of
the group of consolidated affiliates whose securities are pledged on a
combined rather than individual basis.\400\ One commenter contended
that providing this type of disclosure would allow issuers to focus on
disclosure that is material and important to investors for making an
informed investment decision.\401\
---------------------------------------------------------------------------

    \400\ See, e.g., letters from Cravath, Davis Polk, Dell, NYC
Bar, and PWC.
    \401\ See letter from Dell.
---------------------------------------------------------------------------

    Consistent with its comments on proposed Rule 13-01(a)(4), one
commenter asserted the proposed amendment that would require
registrants to separately present the Summarized Financial Information
for an affiliate if the required qualitative disclosures differed
within the group of affiliates was overly prescriptive.\402\ This
commenter recommended permitting greater flexibility in such instances,
such as allowing a registrant to present Summarized Financial
Information for the aggregate group with supplemental qualitative or
quantitative disclosure regarding material differences within the
group.
---------------------------------------------------------------------------

    \402\ See letter from EY.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the public comments, we are adopting the
amendments substantially as proposed with modifications, including
separating certain requirements within proposed Rule 13-02(a)(4) into
distinct subparagraphs for clarity.
    As supported by several commenters, we are adopting the proposed
amendment that permits the supplemental financial disclosures of
affiliates specified in Rule 13-02(a)(4) to be provided on a combined
basis. Specifically, Rule 13-02(a)(4)(i) will permit the Summarized
Financial Information of each affiliate whose securities are pledged as
collateral that is consolidated in the registrant's consolidated
financial statements to be presented on a combined basis, and Rule 13-
02(a)(4)(ii) will require that intercompany balances and transactions
between affiliates whose information is presented on a combined basis
to be eliminated.\403\ We agree with the commenter that stated that the
ability to provide the financial information on a combined basis would
allow registrants to focus on disclosure that is material and important
to investors without omitting information investors need for

an informed investment decision.\404\ Consistent with the proposed
amendments, unlike the final amendments to Rule 13-01, because the
securities pledged as collateral are an equity interest in that pledgor
affiliate, the financial information of all subsidiaries that would be
consolidated by that affiliate will be included in the Summarized
Financial Information presented pursuant to Rule 13-02(a)(4), even if
the securities of those subsidiaries are not pledged as
collateral.\405\
---------------------------------------------------------------------------

    \403\ Proposed Rule 13-02(a)(4) would have required, in part,
that ``[i]ntercompany transactions between affiliates whose
summarized financial information is presented on a combined basis
shall be eliminated.'' While we are adopting the amendments
substantially as proposed, final Rule 13-02(a)(4)(ii) clarifies that
intercompany ``balances'' must also be eliminated in this regard.
    \404\ See letter from Dell.
    \405\ Rule 13-01(a)(4)(iii) requires the financial information
of non-issuer and non-guarantor subsidiaries of issuers and
guarantors to be excluded from the financial information of issuers
and guarantors in order to distinguish the financial information of
entities that are legally obligated to pay from those that are not.
Rule 13-02 relates to pledged residual equity interests in
affiliates as opposed to guarantees to pay, and as such, no similar
prohibition is necessary.
---------------------------------------------------------------------------

    We are adopting, substantially as proposed, the requirement that
when information provided in response to Rule 13-02 is applicable to
one or more, but not all, affiliates, separate disclosure of Summarized
Financial Information for the affiliates to which the information
applies is required. This requirement is stated in Rule 13-
02(a)(4)(iv). For clarity, the final rule includes an example of
disclosure required by Rule 13-02 that would trigger separate
disclosure for the affected affiliates.\406\ The example is disclosure
that is required by Rule 13-02(a)(3): ``the trading market for the
affiliate's security pledged as collateral or a statement that there is
no market.'' Consistent with the corresponding requirement in final
Rule 13-01(a)(4)(iv), we believe a registrant should consider
materiality \407\ and exercise judgment in determining the appropriate
level of aggregation of affiliates based on the nature of the
disclosure. In this regard, it may be useful to consider quantitative
factors, such as the financial significance of the affected affiliates,
and qualitative factors, such as the nature of the facts and
circumstances applicable to the affiliates. For example, if the trading
market for an affiliate's security is the same as some but not all
affiliates, and such similar affiliates represent a substantial portion
of the Summarized Financial Information of the combined affiliates,
aggregation of the Summarized Financial Information of such affiliates
may be appropriate depending on the facts and circumstances.
Conversely, it may not be appropriate to aggregate the Summarized
Financial Information of such affiliates where the trading markets for
the securities are different.
---------------------------------------------------------------------------

    \406\ This example is being included to clarify one situation
requiring separate presentation of the Summarized Financial
Information applicable to some but not all affiliates.
    \407\ The disclosures specified in Rule 13-02(a) are required to
the extent material. Rules 13-02(a)(6) and (7) require disclosure of
``[a]ny financial and narrative information about each such
affiliate if the information would be material for investors to
evaluate the pledge of the affiliate's securities as collateral,''
and ``[s]ufficient information so as to make the financial and non-
financial information presented not misleading,'' respectively. See
discussion within Section V.E.3, ``When Disclosure is Required.''
---------------------------------------------------------------------------

    One commenter stated its belief that requiring separate
presentation of the Summarized Financial Information applicable to
affected affiliates under proposed Rule 13-02(a)(4) is overly
prescriptive.\408\ Consistent with final amendments to Rule 13-
01(a)(4)(iv), while we do believe separate disclosure of Summarized
Financial Information for the affected affiliates would be appropriate
in most cases, we also agree with this commenter's suggestion that it
could be acceptable to present Summarized Financial Information for the
combined affiliates with supplemental qualitative and/or quantitative
disclosure to inform investors about the disclosures affecting one or
more, but not all affiliates. Accordingly, Rule 13-02(a)(4)(iv)
permits, in limited circumstances, narrative disclosure to be provided
in lieu of the separate Summarized Financial Information of the
affected affiliates to which the paragraph otherwise requires. The
limited circumstances when a narrative may be provided are when such
separate financial information applicable to the affected affiliates
can be easily explained and understood. For example, if certain terms
and conditions of the collateral arrangement are applicable to one
affiliate, and that affiliate constitutes a similar percentage of the
combined group of affiliates' assets, liabilities, and operations,
narrative disclosure may be permissible depending on the facts and
circumstances. In other circumstances, such as if that affiliate's
financial significance to the combined group of affiliates is not
easily explained (e.g., the affiliate constitutes varying proportions
of each line item within the combined group of affiliates' Summarized
Financial Information), narrative disclosure would not be sufficient.
---------------------------------------------------------------------------

    \408\ See letter from EY.
---------------------------------------------------------------------------

    As described in the Proposing Release, generally, a pledge of an
affiliate's securities as collateral includes all of the outstanding
ownership interests in that affiliate, which are held directly or
indirectly by the entity issuing the debt securities. There could be
circumstances where either the pledge of collateral does not include
all of the outstanding ownership interests in the affiliate held by the
issuing entity, or certain ownership interests in the affiliate are
held by a third party and therefore unpledged. In such cases,
disclosure of these facts and circumstances would be required by Rules
13-02(a)(6) and (7) if material for investors to evaluate the pledge of
the affiliate's securities as collateral, or so as to make the
financial and non-financial information presented not misleading.\409\
If such circumstances are applicable to one or more, but not all,
affiliates, Rule 13-02(a)(4)(iv) would require separate disclosure of
Summarized Financial Information for the affiliates to which it is
applicable.
---------------------------------------------------------------------------

    \409\ Supra note 388.
---------------------------------------------------------------------------

3. Periods to Present
a. Proposed Amendments
    Proposed Rule 13-02(a)(4) would require the disclosure of
Summarized Financial Information as of, and for, the most recently
ended fiscal year and interim period included in the registrant's
consolidated financial statements. Under the existing rule, Rule 3-16
Financial Statements are not required in quarterly reports, such as on
Form 10-Q.\410\ The proposed rule would require disclosure in quarterly
filings, such as Form 10-Q. Because Item 1 of Part I of Form 10-Q
requires a registrant to provide the information required by Rule 10-01
of Regulation S-X, the Commission proposed adding Rule 10-01(b)(10) to
require compliance with proposed Rule 13-02.
---------------------------------------------------------------------------

    \410\ See Section III.A.6 of the 2000 Release.
---------------------------------------------------------------------------

b. Comments on the Proposed Amendments
    Comments on the proposed amendments were mixed. A few commenters
supported providing the disclosure of the Summarized Financial
Information as of, and for, the most recently ended fiscal year and
interim period included in the registrant's consolidated financial
statements.\411\ However, some commenters suggested that the Commission
should not require interim disclosures unless there had been a material
change since the most recent annual period.\412\ Two of these
commenters contended that this change would be consistent with Article
10 of Regulation S-X.\413\ One commenter

stated that interim reporting would be burdensome and costly.\414\ This
commenter asserted annual disclosure should be sufficient for investors
to make informed investment decisions.
---------------------------------------------------------------------------

    \411\ See letters from Grant Thornton and NYC Bar.
    \412\ See letters from Deloitte, EY, FEI, and PWC.
    \413\ See letters from Deloitte and PWC.
    \414\ See letter from SIFMA.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the comments received, we are adopting the
amendments as proposed, with one clarification. As adopted, consistent
with final Rule 13-01(a)(4)(v), final Rule 13-02(a)(4)(v) requires the
financial disclosures to be provided as of and for the most recently
ended fiscal year and year-to-date interim period included in the
registrant's consolidated financial statements.
    We are not adopting the approach some commenters recommended, which
would have required the most recent interim period in limited
circumstances, such as when there had been a material change since the
most recent annual period. We continue to believe, as the Commission
stated in the Proposing Release, that the most recent interim period
should be provided so that investors can make decisions based on the
most recent information available.\415\ Furthermore, while we
acknowledge the concerns about the burden to provide interim
information in all cases, consistent with our rationale for the
corresponding requirement in the final amendments to Rule 13-
01(a)(4)(v),\416\ we believe the adopted approach will significantly
reduce burdens on issuers while providing investors with the
information they need to make informed investment decisions. For
similar reasons, we are adopting the proposal that requires the amended
disclosures in quarterly filings, such as Form 10-Q. To accomplish
this, because Item 1 of Part I of Form 10-Q requires a registrant to
provide the information required by Rule 10-01 of Regulation S-X, we
have added Rule 10-01(b)(10) to require compliance with Rule 13-02.
Proposed Rule 13-02(a)(4) did not specify that the required interim
period was only for the most recent year-to-date period. In certain
filings, such as a registrant's Form 10-Q for its second and third
fiscal quarters, both year-to-date and quarter-to-date interim
financial statements are required to be presented for the registrant.
To avoid any such confusion, and consistent with the proposed rule's
intent and suggestions from certain commenters,\417\ the final rule's
interim period requirement has been revised to clarify that only the
most recent year-to-date interim period is required.
---------------------------------------------------------------------------

    \415\ See Section V.C.3 of the Proposing Release.
    \416\ See discussion in Section III.C.2.a.iii.(C), ``Periods to
Present.''
    \417\ See, e.g., letters from EY, FEI, and PWC.
---------------------------------------------------------------------------

D. Non-Financial Disclosures

1. Proposed Amendments
    Under the existing rule, a registrant is not required to provide
non-financial disclosures about the affiliates and the collateral
arrangement unless they would be included as part of the Rule 3-16
Financial Statements. In addition to proposing amendments to the
financial information required about the affiliates whose securities
are pledged as collateral, the proposed rule would also require
specific non-financial disclosures to be provided. Proposed Rules 13-
02(a)(1) through (3) would require certain non-financial disclosures
about the securities pledged as collateral, each affiliate whose
securities are pledged, the terms and conditions of the collateral
arrangement, and whether a trading market exists for the pledged
securities. While the proposed requirements comprised the items the
Commission believed would most likely be material to an investor, there
could be additional facts and circumstances specific to particular
affiliates that would be material to holders of the collateralized
security. In that case, proposed Rule 13-02(a)(5) would have required
disclosure of those facts and circumstances.\418\ Additionally, when a
non-financial disclosure is applicable to one or more, but not all,
affiliates, proposed Rule 13-02(a)(4) would require separate disclosure
of Summarized Financial Information for the affiliates to which it is
applicable.\419\
---------------------------------------------------------------------------

    \418\ See discussion in Section V.E, ``When Disclosure is
Required.''
    \419\ See discussion in Section V.C.2, ``Presentation on a
Combined Basis.''
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Comments on the proposed amendments were generally supportive. Some
commenters generally supported the proposed rule's requirement to
provide, to the extent material, certain non-financial disclosures
about the securities pledged as collateral, each affiliate whose
securities are pledged, the terms and conditions of the collateral
arrangement, and whether a trading market exists for the pledged
securities.\420\ One asserted that such disclosure would be helpful to
investors.\421\
---------------------------------------------------------------------------

    \420\ See letters from Davis Polk, FEI, and NYC Bar.
    \421\ See letter from Davis Polk.
---------------------------------------------------------------------------

    One commenter, however, stated that it was not clear why a
description of the security pledged as collateral and disclosure of
each affiliate whose security is pledged would be meaningful to an
investor in the context of financial disclosures.\422\ This commenter
recommended that the Commission consider requiring such disclosures be
included as an exhibit to the filing similar to the list of
subsidiaries required by Item 601.
---------------------------------------------------------------------------

    \422\ See letter from PWC.
---------------------------------------------------------------------------

3. Final Amendments
    After considering the comments received, we are adopting the
amendments largely as proposed with modifications based on comments
received. Consistent with the Proposing Release, we believe these
requirements will result in enhanced narrative disclosures that would
improve investor understanding of the affiliates and the collateral
arrangement(s) and make the financial disclosures they accompany easier
to understand. While the adopted non-financial disclosures are composed
of the items we believe are most likely to be material to an investor,
disclosure of additional facts and circumstances is required if
necessary to comply with Rule 13-02(a)(6) and (7).\423\ Additionally,
when a non-financial disclosure is applicable to one or more, but not
all, affiliates, Rule 13-02(a)(4)(iv) requires, to the extent it is
material, separate disclosure of Summarized Financial Information for
the affiliates to which the non-financial disclosure applies.\424\
---------------------------------------------------------------------------

    \423\ Supra note 388.
    \424\ See discussion in Section V.C.2, ``Presentation on a
Combined Basis.''
---------------------------------------------------------------------------

    Consistent with the final amendments to Rule 13-01 and our related
rationale,\425\ while we are not adopting one commenter's \426\
suggestion that disclosure of the identification of the security
pledged as collateral only be required upon registration of the
collateralized securities and the related prospectuses, we are adopting
the commenter's alternative suggestion that this disclosure be included
in an exhibit to the subject filing.\427\ Due to this

change, we have revised Rule 13-02(a)(1) to require a description of
the securities pledged as collateral and the affiliates whose
securities are pledged as collateral. We believe this approach will
provide the information to investors in a more efficient manner and
make the accompanying financial and non-financial disclosures easier to
understand.
---------------------------------------------------------------------------

    \425\ See discussion in Section III.C.2.b.iii, ``Non-Financial
Disclosures.''
    \426\ See letter from PWC.
    \427\ See amended Item 601(a) and new Item 601(b)(22) of
Regulation S-K. A registrant will be required to list, under an
appropriately captioned heading that identifies the associated
securities, each of its affiliates whose security is pledged as
collateral for the registrant's security registered or being
registered. For each affiliate, the security or securities pledged
as collateral must also be identified. An affiliate need not be
listed more than once so long as its role as affiliate whose
security is pledged as collateral for a registrant's security is
clearly indicated with respect to each applicable security.
Similarly, if an affiliate required to be identified in this exhibit
is also required to be identified as an issuer, co-issuer, or
guarantor of a guaranteed security in this exhibit, the entity need
not be listed more than once so long as its role as issuer, co-
issuer, or guarantor of a guaranteed security and/or as affiliate
whose security is pledged as collateral for a registrant's security
is clearly indicated with respect to each applicable security. This
exhibit will be required in Forms S-1, S-3, S-4, SF-1, SF-3, S-11,
F-1, F-3, F-4, 10, 10-Q, and 10-K. In addition, we are making
corresponding revisions to the exhibit requirements of Form 20-F by
creating new Exhibit 17 within Item 19, and Form 1-A by creating new
Exhibit 17 within Item 17. This exhibit will also be required in
Forms 1-K and 1-SA. See discussion in Section V.H.3.c, ``Offerings
pursuant to Regulation A''.
---------------------------------------------------------------------------

E. When Disclosure Is Required

1. Proposed Amendments
    As discussed above,\428\ existing Rule 3-16 requires separate
financial statements for each affiliate whose securities are pledged as
collateral when those securities constitute a ``substantial portion''
of the collateral. If the numerical thresholds specified in the rule
are not met, no disclosure is required. At the same time, if the
numerical thresholds are met, Rule 3-16 Financial Statements may be
required even though the affiliate represents an insignificant portion
of the registrant's consolidated financial statements. The proposed
rule would replace this test with one based on materiality, similar to
the framework in proposed Rule 13-01.\429\ Under this approach,
investors would be provided with disclosure where it is material,
whereas under the existing rule, no disclosure would be provided unless
the collateral represented a ``substantial portion.''
---------------------------------------------------------------------------

    \428\ See Section IV, ``Rule 3-16 of Regulation S-X.''
    \429\ Whether a disclosure specified in proposed Rule 13-02 may
be omitted or whether additional disclosure would have been required
by proposed Rule 13-02(a)(5), as discussed below, depends on whether
it would be material to a reasonable investor. See Section
III.C.2.c.iii, ``When Disclosure is Required,'' above.
---------------------------------------------------------------------------

    Proposed Rule 13-02(a) would have required the disclosures
specified in proposed Rule 13-02(a)(1) through (4) to the extent
material to holders of the collateralized security. For example, under
the proposed rule, if the Summarized Financial Information of the
combined affiliates required by proposed Rule 13-02(a)(4) is not
materially different from corresponding amounts in the registrant's
consolidated financial statements, the information could be omitted.
While the disclosures specified in proposed Rule 13-02(a)(1) through
(4) could have been omitted if not material to holders of the
collateralized security, for clarity, proposed Rule 13-02(a)(4) would
have required the registrant to include a statement that the financial
disclosures have been omitted and disclose the reason(s) why the
disclosures are not material.
    Conversely, there may be additional information about the
collateral arrangement and affiliates beyond the financial disclosures
specified in proposed Rule 13-02(a)(4) or the non-financial disclosures
specified in proposed Rules 13-02(a)(1) through (3) that would be
material to holders of the collateralized security. Accordingly,
proposed Rule 13-02(a)(5) would have required disclosure of any
quantitative or qualitative information that would be material to
making an investment decision with respect to the collateralized
security. For example, additional financial information beyond what is
required by Summarized Financial Information would have been required
if that information is material to an investment decision in the
collateralized security.
2. Comments on the Proposed Amendments
    Comments on the proposals were mixed. Several commenters generally
supported replacing existing Rule 3-16's ``substantial portion'' test
with a principles-based materiality standard.\430\ Two commenters
asserted that the existing ``substantial portion'' test could lead to
registrants disclosing information that is not essential to making an
informed investment decision.\431\ One of these commenters contended
that moving to a materiality standard under the proposed amendments
would only require registrants to incur the cost to provide the
required disclosure when doing so would be helpful to investors.\432\
However, a few commenters supported some type of numerical threshold
for establishing whether disclosure would be deemed not material.\433\
One commenter suggested establishing a 50% numerical threshold as a
non-exclusive safe harbor at or below which the share collateral would
be deemed not material and above which the registrant must evaluate
materiality.\434\ The other commenter suggested retaining existing Rule
3-16's 20% threshold in the form of a safe harbor, such that any
collateral arrangement that does not trigger the existing rule would be
deemed not material for the purposes of the new rule.\435\
---------------------------------------------------------------------------

    \430\ See, e.g., letters from CII, Cravath, Davis Polk,
Deloitte, EY, and FEI.
    \431\ See letters from Davis Polk and Dell.
    \432\ See letter from Davis Polk.
    \433\ See letters from NYC Bar and SIFMA.
    \434\ See letter from SIFMA.
    \435\ See letter from NYC Bar.
---------------------------------------------------------------------------

    Consistent with comments received in connection with the
corresponding requirement in proposed Rule 13-01(a)(5),\436\ a number
of commenters opposed proposed Rule 13-02(a)(5), which would have
required disclosure of any information that would be material to making
an investment decision with respect to the collateralized
security.\437\ One commenter expressed concern that this requirement
possibly went beyond the Commission's existing materiality
standard.\438\ Some commenters asserted that the proposed requirement
would cause uncertainty for issuers and auditors as they seek to apply
and assess the adequacy of the disclosures.\439\ One commenter asserted
that the proposed requirement would override all other relevant
disclosure obligations; \440\ another commenter questioned whether the
Commission was proposing to modify the overall materiality assessment
in its disclosure framework; \441\ and a third commenter stated its
belief that in addition to creating litigation risk, the proposed rule
could extend the duty to disclose material information beyond
information specific to the guarantee, such as pending merger
negotiations and other potential transactions.\442\ However, one
commenter supported this proposed requirement ``because it would
provide relevant information, not otherwise explicitly required by the
[p]roposed [r]ule, which would likely render the disclosures taken as a
whole to be more useful for investment decisions.'' \443\
---------------------------------------------------------------------------

    \436\ See Section III.C.2.c.ii, ``When Disclosure is Required.''
    \437\ See, e.g., letters from ABA, BDO, CAQ, Cravath, Davis
Polk, Deloitte, EY, KPMG, PWC, Shearman, and Sullivan & Cromwell.
    \438\ See letter from ABA.
    \439\ See, e.g., letters from BDO, CAQ, EY, and PWC.
    \440\ See letter from Cravath.
    \441\ See letter from Deloitte.
    \442\ See letter from Shearman.
    \443\ See letter from CII.
---------------------------------------------------------------------------

    Consistent with comments received in connection with the
corresponding requirement in proposed Rule 13-01(a)(4),\444\ some
commenters opposed the requirement in proposed Rule 13-

02(a)(4) that would require issuers to disclose, if the required
financial disclosures were omitted because they were not material, a
statement to that effect and the reasons therefore.\445\ Some
commenters asserted that such disclosure would not be useful to
investors,\446\ could possibly result in an increase in liability,\447\
and was counter to the Commission's objective of focusing on material
disclosures and providing a principles-based framework.\448\ One
commenter suggested that the Commission should make clear that, if the
proposal were adopted, issuers would only need to make a simple
statement that management does not believe the information is
material.\449\ In contrast, one commenter specifically supported this
part of proposed Rule 13-02(a)(4), asserting that the requirement would
provide clarity about which disclosures were omitted and why.\450\
---------------------------------------------------------------------------

    \444\ See Section III.C.2.c.ii, ``When Disclosure is Required.''
    \445\ See letters from Cravath, EY, KPMG, and SIFMA.
    \446\ See letters from Debevoise and KPMG.
    \447\ See letters from Debevoise and SIFMA.
    \448\ See letter from Debevoise.
    \449\ See letter from SIFMA.
    \450\ See letter from CII.
---------------------------------------------------------------------------

    One commenter expressed concern that there could be uncertainty
over the application of proposed Rule 13-02 because of possible overlap
in disclosure requirements when a subsidiary is a guarantor, in which
case proposed Rules 3-10 and 13-01 would apply, and also has securities
pledged as collateral, in which case proposed Rule 13-02 would
apply.\451\ This commenter suggested that the Commission clarify that
proposed Rule 13-02 would apply only to the extent proposed Rules 3-10
and 13-01 would not be applicable because investors would generally
consider the guarantee to be more valuable than pledged securities.
---------------------------------------------------------------------------

    \451\ See letter from NYC Bar.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the amendments largely as proposed with
modifications based on comments received. As supported by several
commenters,\452\ the final amendments replace existing Rule 3-16's
``substantial portion'' numerical thresholds with a requirement to
provide all disclosures specified in the final rule, unless such
information is not material.\453\ Whereas proposed Rule 13-02(a)
required the proposed financial and non-financial disclosures ``to the
extent material to holders of the collateralized security,'' the final
rule has been revised to require the financial and non-financial
disclosures ``to the extent material,'' which is discussed in further
detail below. A few commenters suggested including numerical thresholds
in the rule for determining whether financial information may be
omitted.\454\ We are not adopting this suggestion, as we agree with
those commenters that supported the proposal to require information the
registrant believes is material to investors. In these circumstances,
and consistent with our rationale for the corresponding requirement in
the final amendments to Rule 13-01(a),\455\ we believe requiring
disclosure to the extent material provides investors with information
useful to an investment decision and avoids certain potential
challenges associated with numerical thresholds.\456\
---------------------------------------------------------------------------

    \452\ See, e.g., letters from CII, FedEx, FEI, Nareit, and
Sullivan & Cromwell.
    \453\ Whether a disclosure specified in proposed Rule 13-02 may
be omitted, as discussed below, depends on whether it would be
material to a reasonable investor. See Section III.C.2.c, ``When
Disclosure is Required,'' above.
    \454\ See letters from NYC Bar and SIFMA.
    \455\ See discussion in Section III.C.2.c.iii, ``When Disclosure
is Required.''
    \456\ For example, one commenter asserted that the existing
rule's ``substantial portion'' test could lead to registrants
disclosing information that is not essential to making an informed
investment decision. See letter from Dell.
---------------------------------------------------------------------------

    We are not adopting the suggestion by one commenter that we require
compliance with Rule 13-02 only to the extent Rules 3-10 and 13-01 do
not apply.\457\ This suggestion was based on the commenter's belief
that there could be uncertainty over the application of proposed Rule
13-02 because of what the commenter views as possible overlaps in
disclosure requirements when a subsidiary is a guarantor, in which case
proposed Rules 3-10 and 13-01 would apply, and also has securities
pledged as collateral, in which case proposed Rule 13-02 would apply.
This commenter asserted that investors would generally consider the
guarantee to be more valuable than pledged securities. However, we do
not agree that disclosure about only the guarantee should be required
in such circumstances. Where a subsidiary is an issuer or guarantor of
a guaranteed security and its securities also are pledged as
collateral, each are separate credit enhancements for which different
disclosure may be necessary. We believe that requiring compliance with
both rules in these circumstances will help to ensure that material
information is provided to investors about each credit enhancement.
---------------------------------------------------------------------------

    \457\ See letter from NYC Bar.
---------------------------------------------------------------------------

    The proposed rule sets forth financial and non-financial
disclosures that were focused on information the Commission expected
were most likely to be material. It also included proposed Rule 13-
02(a)(5), which would have required disclosure of ``any other
quantitative or qualitative information that would be material to
making an investment decision with respect to the collateralized
security.'' The intent of this proposed requirement was to elicit
disclosure about the affiliate(s) and the collateral arrangement(s)
that would be material but was not otherwise specifically required by
the proposed financial and non-financial disclosures. As described
above, comments on this proposed requirement were consistent with those
received on the corresponding requirement in proposed Rule 13-01(a)(5).
While one commenter supported this proposed requirement, many others
did not.
    In response to the comments received, instead of proposed Rule 13-
02(a)(5), we are adopting Rules 13-02(a)(6) and (7), which are similar
to the disclosures required by final Rule 13-01(a)(6) and (7) but
tailored to apply to collateral arrangements. In this regard, whereas
final Rule 13-01(a)(6) requires disclosure of any information that
would be material for investors to evaluate the ``sufficiency of the
guarantee,'' final Rule 13-02(a)(6) requires disclosure of ``[a]ny
financial and narrative information about each such affiliate if the
information would be material for investors to evaluate the pledge of
the affiliate's securities as collateral.'' Similarly, final Rule 13-
02(a)(7) is consistent with final Rule 13-01(a)(7), requiring
disclosure of ``[s]ufficient information so as to make the financial
and non-financial information presented not misleading.'' For the same
reasons cited in adopting final Rule 13-01(a)(6) and (7),\458\ we
believe these requirements capture the disclosures the proposed rule
was intended to elicit while addressing the concerns raised by
commenters as discussed above. Notwithstanding these requirements in
the final rule, Securities Act Rule 408(a) and Exchange Act Rule 12b-20
require a registrant to disclose, in addition to the information
expressly required to be included, such further material information,
if any, as may be necessary to make the required statements, in the
light of the circumstances under which they are made not misleading.
While some commenters indicated these requirements provide sufficient
investor protections,\459\ we believe the

requirements in final Rule 13-02(a)(6) and (7), in addition to these
other requirements, will help to ensure that material information is
provided to investors.
---------------------------------------------------------------------------

    \458\ See discussion in Section III.C.2.c.iii, ``When Disclosure
is Required.''
    \459\ See, e.g., letters from Deloitte and EY.
---------------------------------------------------------------------------

    Based on comments received on proposed Rule 13-02(a)(5), we have
also revised Rule 13-02(a) for clarity, consistent with revisions to
Rule 13-01(a).\460\ Proposed Rule 13-02(a) would have required
disclosures ``to the extent material to holders of the collateralized
security'' and was not intended to introduce a nuanced or different
materiality analysis specific to these disclosure requirements. A
registrant's responsibility to determine whether the disclosures
specified in Rule 13-02 are material is not different from how it
assesses materiality in connection with other information it files with
the Commission. Accordingly, final Rule 13-02 has been revised to
require the financial and non-financial disclosures ``to the extent
material.''
---------------------------------------------------------------------------

    \460\ See discussion in Section III.C.2.c.iii, ``When Disclosure
is Required.''
---------------------------------------------------------------------------

    Proposed Rule 13-02(a)(4) would have required, if the financial
disclosures specified in proposed Rule 13-02(a)(4) were omitted because
they are not material, disclosure of a statement to that effect and the
reasons therefore. Most of the commenters that discussed this proposed
requirement did not support it.\461\ In response to these comments, and
for the same reasons cited in adopting final amendments to the
corresponding requirement in final Rule 13-01,\462\ we are not adopting
this requirement as proposed. Instead, we are adopting an approach that
should help address concerns \463\ about the need for greater certainty
as to the circumstances when omission of financial disclosures may be
appropriate, while continuing to provide investors with the basic
reasons as to why the financial information was omitted. As adopted,
Rule 13-02(a)(4)(vi) identifies two scenarios, which we believe are the
most common situations under which the financial information would not
be material. If the scenario is applicable and disclosed, the
registrant could then omit the financial disclosures. The two scenarios
are:
---------------------------------------------------------------------------

    \461\ See, e.g., letters from Cravath, EY, KPMG, and SIFMA.
    \462\ See discussion in Section III.C.2.c.iii, ``When Disclosure
is Required.''
    \463\ See, e.g., letter from Shearman.
---------------------------------------------------------------------------

    (1) The assets, liabilities and results of operations of the
combined affiliates whose securities are pledged as collateral are not
materially different than the corresponding amounts presented in the
consolidated financial statements of the registrant; \464\ and
---------------------------------------------------------------------------

    \464\ This scenario is contained in Rule 13-02(a)(4)(vi)(A).
---------------------------------------------------------------------------

    (2) The combined affiliates whose securities are pledged as
collateral have no material assets, liabilities or results of
operations.\465\
---------------------------------------------------------------------------

    \465\ This scenario is contained in Rule 13-02(a)(4)(vi)(B).
---------------------------------------------------------------------------

    Similar to the corresponding amendments to Rule 13-01,\466\ while
we believe these scenarios encompass most of the situations under which
the required financial information would not be material, these
scenarios are not intended to be exclusive. As discussed below, there
may be other circumstances in which it would be appropriate to omit the
required financial information on the basis that it is not material.
---------------------------------------------------------------------------

    \466\ See discussion in Section III.C.2.c.iii, ``When Disclosure
is Required.''
---------------------------------------------------------------------------

    In the first scenario, we believe financial information of the
combined affiliates would not be material to an investor as it is not
materially different than that of the consolidated registrant.\467\ If
the related scenario was disclosed, investors would not need
supplemental financial information as it would largely duplicate the
corresponding information in the registrant's consolidated financial
statements. In the second scenario, we believe disclosure that the
combined group of affiliates has no material assets, liabilities or
results of operations obviates the need for supplemental disclosures as
an investor would know such information would not be material.
---------------------------------------------------------------------------

    \467\ Rule 13-02(a)(4)(vi) clarifies that this scenario does not
apply where separate disclosure of the Summarized Financial
Information of one or more, but not all affiliates, is required by
Rule 13-02(a)(4)(iv).
---------------------------------------------------------------------------

    While we believe these scenarios generally capture the situations
under which the financial information would not be material and may be
omitted, there may be other scenarios under which the registrant may
conclude Summarized Financial Information is not necessary. These
scenarios would be evaluated under the general materiality provision of
Rule 13-02(a). Based on this analysis, if a registrant determines that
not all of the required financial information is material, the
information that is not material may be omitted without additional
disclosure or explanation. Thus, under the final rule, the registrant
could either rely on one of the identified scenarios, if applicable, to
omit information that is not material, or make its own assessment based
upon a consideration of other relevant facts and circumstances.\468\ We
believe this approach will preserve the principles-based nature of Rule
13-02 while providing greater certainty for issuers, and appropriate
transparency for investors, regarding the information required to be
disclosed.
---------------------------------------------------------------------------

    \468\ To provide clarity to an issuer that its ability to omit
the Summarized Financial Information required by final Rule 13-
02(a)(4) is not limited to the four scenarios discussed herein,
final Rule 13-02(a)(4)(vi) states: ``Notwithstanding that a
registrant may omit this summarized financial information if not
material . . . ''
---------------------------------------------------------------------------

F. Location of Disclosures and Audit Requirement

1. Proposed Amendments
    Similar to the proposed disclosures for issuers and guarantors of
guaranteed securities discussed above,\469\ the proposed amendments
would give registrants the flexibility to provide the proposed
disclosures inside or outside the registrant's audited annual and
unaudited interim financial statements in registration statements
covering the offer and sale of the collateralized securities and any
related prospectus, as well as annual and quarterly Exchange Act
periodic reports required to be filed during the fiscal year in which
the first bona fide sale of the subject securities is completed.
---------------------------------------------------------------------------

    \469\ See Section III.C.2.d.i, ``Location of Revised Alternative
Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

    Accordingly, the note to proposed Rule 13-02(a) would have allowed
the registrant to provide the disclosures required by this section in a
footnote to its consolidated financial statements or, alternatively, in
MD&A in the registration statement covering the offer and sale of the
subject securities and any related prospectus, and in Exchange Act
reports on Form 10-K, Form 20-F, and Form 10-Q required to be filed
during the fiscal year in which the first bona fide sale of the subject
securities is completed. If not otherwise included in the consolidated
financial statements or in MD&A, the registrant would be required to
include the disclosures in its prospectus immediately following ``Risk
Factors,'' if any, or otherwise, immediately following pricing
information described in Item 503(c) of Regulation S-K.\470\ The
registrant, however, would be required to provide the disclosures in a
footnote to its consolidated financial statements in its annual and
quarterly reports beginning with its annual report filed on Form 10-K
or Form 20-F for the fiscal year during which the first bona fide sale
of

the subject securities is completed. If the registrant provides the
proposed disclosures in its financial statements, the disclosures would
be subject to annual audit, interim review, internal control over
financial reporting, and XBRL tagging requirements.\471\ These proposed
amendments would also apply to foreign private issuers and issuers
offering securities pursuant to Regulation A and the forms applicable
to such entities.\472\
---------------------------------------------------------------------------

    \470\ As described above, subsequent to the issuance of the
Proposing Release, the Commission amended and relocated the
requirements previously contained in Item 503(c) of Regulation S-K
to new Item 105 of Regulation S-K.
    \471\ See Section III.C.2.d, ``Location of Revised Disclosures
and Audit Requirement.''
    \472\ See Section V.H, ``Application of Amendments to Certain
Types of Issuers,'' below.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    Comments on the proposed amendments were mixed, and several
commenters expressed views on these proposed amendments that were
similar to their views on the corresponding proposed location and audit
requirement for disclosures about issuers and guarantors of guaranteed
securities discussed above.\473\ Some commenters stated that the
proposed disclosures should be permitted to be presented outside the
registrant's consolidated financial statements in all cases, not just
in the registration statement and Forms 10-K and 10-Q required to be
filed during the fiscal year in which the first bona fide sale of the
subject securities is completed.\474\ A few commenters asserted that
not requiring the proposed disclosures to be audited would reduce costs
\475\ and possibly allow issuers to more quickly register these
securities and access capital markets.\476\ A few commenters stated
that requiring an audit of the proposed disclosures would provide
little marginal benefit to investors,\477\ and one of these commenters
argued that this proposed requirement would discourage issuers from
pursuing registration of the original offering of the securities.\478\
---------------------------------------------------------------------------

    \473\ See Section III.C.2.d.ii, ``Location of Revised
Alternative Disclosures and Audit Requirement.''
    \474\ See, e.g., letters from Cravath, Davis Polk, SIFMA, and
Sullivan & Cromwell.
    \475\ See letters from Davis Polk and Sullivan & Cromwell.
    \476\ See letters BDO and Davis Polk.
    \477\ See letters from Davis Polk, and Sullivan & Cromwell.
    \478\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

    Other commenters, however, asserted that the flexibility to
determine the location of the proposed disclosures under the proposed
amendments could lead to investor confusion about the location of the
disclosures,\479\ and uncertainty as to the level of audit assurance
that applied to the disclosures.\480\ One commenter contended that the
proposed disclosures should be required to be presented in a single
location to avoid inconsistencies in the location and varied reliance
by investors.\481\ Another commenter stated that companies should not
have the option to choose where their disclosures will appear, and that
reported disclosures should be consistently reported in the same
location.\482\
---------------------------------------------------------------------------

    \479\ See letter from PWC.
    \480\ See letter from KPMG.
    \481\ See letter from KPMG.
    \482\ See letter from XBRL US, Inc.
---------------------------------------------------------------------------

    One commenter did not support locating the proposed disclosures
outside the financial statements.\483\ This commenter argued that many
investors place significant value on having required disclosures
subject to annual audit and/or interim review, internal control over
financial reporting, and XBRL tagging requirements, and not subject to
the forward-looking statements safe harbor.
---------------------------------------------------------------------------

    \483\ See letter from CII.
---------------------------------------------------------------------------

    Other commenters, however, recommended the disclosures be located
outside the financial statements in all cases.\484\ One of these
commenters recommended the disclosures be required in the liquidity and
capital resources section of the MD&A or in a separate section
following ``Risk Factors'' as is currently done in the Rule 144A market
and has been accepted by the investor community.\485\ This commenter
also observed that if disclosure outside the financial statements is
sufficient at the time of the initial investment decision, it should be
sufficient for future periods. The other commenter observed the
Proposed Alternative Disclosures would be better presented in a
discussion about a parent's liquidity in the MD&A as opposed to in the
financial statements given the objective of the disclosures to provide
an investor in a debt security with information about the related
guarantee.\486\
---------------------------------------------------------------------------

    \484\ See letters from NYC Bar and PWC.
    \485\ See letter from NYC Bar.
    \486\ See letter from PWC.
---------------------------------------------------------------------------

    Some commenters emphasized that, even if the proposed disclosures
are allowed to be located outside of the financial statements, these
disclosures would be derived from the same internal accounting records
used to prepare the registrant's audited consolidated financial
statements \487\ and would be subject to the registrant's disclosure
controls and procedures.\488\
---------------------------------------------------------------------------

    \487\ See letter from Davis Polk.
    \488\ See letters from Cravath and EY.
---------------------------------------------------------------------------

    Some commenters asserted that underwriters will likely request
independent auditors to provide comfort on financial information
provided outside the consolidated financial statements in connection
with registered offerings.\489\ Two of these commenters indicated this
would involve performing limited procedures on such information under
PCAOB Auditing Standard 6101, Letters for Underwriters and Certain
Other Requesting Parties.\490\ One commenter suggested that such
procedures may not result in a decrease in effort or cost for either
auditors or registrants,\491\ while the other commenter stated that
while the scope and time required to perform such procedures is less
than an audit, the auditor involvement may delay the time to market for
underwritten offerings.\492\ Another commenter noted that the proposed
rules would cause issuers to incur costs related to the incremental
procedures necessary for such comfort procedures but investors would
lose the benefit arising out of the audit of the disclosures.\493\
---------------------------------------------------------------------------

    \489\ See, e.g., letters from BDO, EY, Grant Thornton, and KPMG.
    \490\ See letters from BDO and KPMG.
    \491\ See letter from KPMG.
    \492\ See letter from BDO.
    \493\ See letter from Grant Thornton.
---------------------------------------------------------------------------

    A few commenters suggested that because the proposed disclosures
would be relevant only to the investors of the subject security, if
these disclosures were required to be audited, this information should
be included in an audited supplemental schedule that could be filed as
an exhibit to the filing, similar to the supplemental schedules
required under Article 12 of Regulation S-X.\494\
---------------------------------------------------------------------------

    \494\ See letters from EY and PWC.
---------------------------------------------------------------------------

3. Final Amendments
    After considering comments received, we are adopting the amendments
largely as proposed, with modifications. As discussed above, while one
commenter did not support locating the disclosures outside the
financial statements, others recommended the disclosures be located
outside the financial statements in all cases. We continue to believe,
however, and for the same reasons cited in adopting the corresponding
final amendments to Rule 3-10,\495\ that it is appropriate to provide
registrants the flexibility to select the location of the disclosures,
including locating them outside the registrant's consolidated financial
statements. In this regard, and consistent with the views of several
commenters, we expect not requiring the disclosures to be audited will
reduce costs and allow issuers to register the

subject securities and access capital markets faster, which may
encourage more such registered offerings.\496\
---------------------------------------------------------------------------

    \495\ See discussion in Section III.C.2.d.iii, ``Location of
Revised Alternative Disclosures and Audit Requirement.''
    \496\ See supra note 269.
---------------------------------------------------------------------------

    Accordingly, and consistent with the proposed rule, final Rule 13-
02(b) \497\ permits the registrant to provide the disclosures required
by final Rule 13-02(a) in a footnote to its consolidated financial
statements or alternatively, in MD&A. If the disclosures are not
otherwise included in the consolidated financial statements or in MD&A,
the final rule requires the registrant to include the disclosures in
its prospectus immediately following ``Risk Factors,'' if any, or
otherwise, immediately following pricing information described in Item
105 of Regulation S-K.\498\
---------------------------------------------------------------------------

    \497\ Whereas this requirement was included in a note to
proposed Rule 13-02(a), the final rule includes it in a separate
paragraph, Rule 13-02(b).
    \498\ 17 CFR 229.105. As described above, subsequent to the
issuance of the Proposing Release, the Commission amended and
relocated the requirements previously contained in Item 503(c) of
Regulation S-K to new Item 105 of Regulation S-K. The final
amendments have been revised to reflect this change.
---------------------------------------------------------------------------

    As discussed above, some commenters asserted that the flexibility
to determine the location of the proposed disclosures under the
proposed amendments could lead to investor confusion about the location
of the disclosures and uncertainty as to the level of assurance
applied. While the proposed rule provided flexibility on where to
locate the disclosures, we believe the locations where disclosures may
be provided are clearly specified, and that investors generally
understand the levels of assurance applied to disclosures included
inside or outside the registrant's consolidated financial statements.
If provided in the registrant's consolidated financial statements, the
disclosures must be included in a footnote. If provided outside the
registrant's consolidated financial statements, they must be included
in MD&A, or in other specified locations if the registrant's
consolidated financial statements and MD&A are not otherwise included
in the filing.\499\ Consistent with the proposed rule, if the
registrant elects to provide the amended disclosures in a footnote to
its audited consolidated financial statements, the disclosures must be
audited. Conversely, the disclosures need not be audited if the
registrant provides them outside the audited consolidated financial
statements. Also consistent with the proposed rule, the final rule
specifies the locations where disclosures must be provided. Similar to
the proposed amendments to Rule 3-10, a few commenters recommended
that, if audited, the information be included in a supplemental
schedule similar to the ones required by Article 12 of Regulation S-X.
We are not adopting this suggestion for the same reasons cited in
connection with final amendments to Rule 3-10.\500\
---------------------------------------------------------------------------

    \499\ These circumstances include when the consolidated
financial statements and MD&A are included in previously filed
reports that are incorporated by reference. In such instances, the
disclosures are required to be provided in specified prominent
locations.
    \500\ See discussion in Section III.C.2.d.iii, ``Location of
Revised Alternative Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

    Under the proposed rule, although the registrant would initially
have the flexibility to locate the disclosures outside of its
consolidated financial statements in the subject registration statement
and certain periodic reports filed thereafter, the registrant would
have been required to provide the disclosures in a footnote to its
consolidated financial statements starting with its annual report filed
on Form 10-K for the fiscal year during which the first bona fide sale
of the subject securities is completed. Comments on this proposed
requirement were consistent with the corresponding proposed change to
Rule 3-10, albeit from fewer commenters. Consistent with our rationale
for the corresponding final amendments to Rule 3-10,\501\ and as
recommended by several commenters, we are not adopting this
requirement. Under the final rule, the registrant will have flexibility
to locate the disclosures in a footnote to its consolidated financial
statements or in the locations specified in Rule 13-02(b) in all of its
filings.
---------------------------------------------------------------------------

    \501\ See Section III.C.2.d.iii, ``Location of Revised
Alternative Disclosures and Audit Requirement.''
---------------------------------------------------------------------------

G. Recently Acquired Affiliates Whose Securities Are Pledged as
Collateral

1. Proposed Amendments
    Existing Rule 3-16 does not contain a specific requirement to
provide pre-acquisition financial information of recently acquired
affiliates whose securities are pledged as collateral. However, if a
recently acquired affiliate meets the substantial portion threshold in
the existing rule, financial statements for periods prior to the date
of acquisition by the registrant are required to be filed.
    In connection with the proposed amendments to the pre-acquisition
financial statement requirement for recently acquired subsidiary
issuers and guarantors, while the proposed rule would contain no
specific requirement, the Commission stated in the Proposing Release
that information about recently acquired subsidiaries would be required
if material to an investment decision in the guaranteed security
pursuant to proposed Rule 13-01(a)(5).\502\ Similarly, no specific
requirement was included in proposed Rule 13-02, but information about
recently acquired affiliates would have been required if material to an
investment decision in the collateralized security pursuant to proposed
Rule 13-02(a)(5).
---------------------------------------------------------------------------

    \502\ See Section III.C.2.e of the Proposing Release.
---------------------------------------------------------------------------

2. Comments on the Proposed Amendments
    We received no public comments specific to pre-acquisition
financial information of recently acquired affiliates. However, we
considered comments received in connection with the proposed amendments
to Rule 3-10(g).\503\ As it related to the proposed amendments to Rules
3-10 and 13-01, one commenter encouraged the Commission ``not to
perpetuate separate disclosure rules in this context for recently
acquired subsidiaries.'' \504\ One commenter recommended that the
Commission should consider requiring Summarized Financial Information
of a recently acquired guarantor in registration statements if the
guarantor is not already included in the Summarized Financial
Information of the obligated group (i.e., it is acquired after the most
recent balance sheet date) and if the guarantor had a material effect
on the financial capacity of the obligated group.\505\ Another
commenter indicated that the existing disclosure requirements under ASC
805-10-50 would continue to provide sufficient information related to
material subsidiaries acquired and their impact on the consolidated
entity.\506\
---------------------------------------------------------------------------

    \503\ See Section III.C.2.e.ii, ``Recently Acquired Subsidiary
Issuers and Guarantors.''
    \504\ See letter from Cravath.
    \505\ See letter from EY.
    \506\ See letter from T-Mobile.
---------------------------------------------------------------------------

3. Final Amendments
    Under the proposed rule, information about such recently acquired
affiliates would have been required if material to an investment
decision in the collateralized security pursuant to proposed Rule 13-
02(a)(5).\507\ The disclosures required by Rule 13-01 and 13-02 are
similar in many respects, and we believe such similarities should

extend to pre-acquisition financial information of recently acquired
affiliates. After considering the comments received, we are adopting
amendments requiring disclosure similar to what is required for
recently acquired subsidiary issuers and guarantors by new Rule 13-
01(a)(5). Our rationale for these amendments is consistent with our
rationale for adopting the amendments to new Rule 13-01(a)(5).\508\ To
that end, in certain circumstances (discussed below), pre-acquisition
Summarized Financial Information for recently acquired affiliates will
be required to be provided in a Securities Act registration statement
\509\ filed in connection with the offer and sale of the subject
collateralized security. Similar to the amendments to final Rule 13-
01(a)(5), the pre-acquisition Summarized Financial Information will be
required when a registrant has acquired a significant ``business''
after the date of its most recent balance sheet included in its
consolidated financial statements, and that acquired business and/or
one or more of its subsidiaries are affiliates whose securities are
pledged as collateral. Whether a ``business'' has been acquired will be
determined in accordance with the guidance set forth in Sec.  210.11-
01(d), and the registrant would also need to treat acquisitions of
related businesses as a single business acquisition in a manner
consistent with Sec.  210.3-05(a)(3). An acquired business will be
deemed significant if it meets any of the conditions specified in the
definition of significant subsidiary in Sec.  210.1-02(w), substituting
20 percent for 10 percent each place it appears therein, based on a
comparison of the most recent annual financial statements of the
acquired business and the registrant's most recent annual consolidated
financial statements filed at or prior to the date of acquisition. To
simplify compliance and provide certainty as to when disclosure is
required, these significance tests are the same tests used to determine
whether pre-acquisition financial statements are required for an
acquired business pursuant to Rule 3-05 of Regulation S-X.
---------------------------------------------------------------------------

    \507\ The requirements applicable to recently acquired
affiliates whose securities are pledged as collateral have been
included in final Rule 13-02(a)(5). Proposed Rule 13-02(a)(5) would
have required disclosure of ``any other quantitative or qualitative
information that would be material to making an investment decision
with respect to the collateralized security.'' Instead of this
proposed requirement, the final amendments include Rules 13-02(a)(6)
and (7). See discussion within Section V.E.3, ``When Disclosure is
Required.''
    \508\ See Section III.C.2.e.iii, ``Recently Acquired Subsidiary
Issuers and Guarantors.''
    \509\ This requirement is only applicable to Securities Act
registration statements. In subsequent Exchange Act reports,
financial information of a recently acquired affiliate whose
securities are pledged as collateral will be included in the
financial information of affiliates required by final Rule 13-
02(a)(4).
---------------------------------------------------------------------------

    Generally, under the final rule, a registrant will be required to
provide pre-acquisition Summarized Financial Information of a recently
acquired affiliate for those acquisitions where it will be required to
provide pre-acquisition financial statements of the acquired business
pursuant to Rule 3-05 of Regulation S-X.\510\ We recognize that not all
of the entities that comprise an acquired business may be affiliates
whose securities are pledged. Accordingly, the required Summarized
Financial Information will only be for those entities acquired that are
affiliates whose securities are pledged, and follows the form and
content prescribed in new Rule 13-02(a)(4). We also recognize that the
pre-acquisition Summarized Financial Information may be required in
advance of when pre-acquisition financial statements are required
pursuant to Rule 3-05 of Regulation S-X.\511\ However, we believe
investors in a registered debt offering should be provided with
information about affiliates whose securities are pledged in advance of
an investment decision, and we note that the level of detail required
is far less than pre-acquisition financial statements required by Rule
3-05.
---------------------------------------------------------------------------

    \510\ See discussion in Section III.C.2.e.iii, ``Recently
Acquired Subsidiary Issuers and Guarantors.''
    \511\ For example, Rule 3-05(b)(4) of Regulation S-X in part
permits, in certain circumstances, pre-acquisition financial
statements of an acquired business to be omitted from a registration
statement if the significance of the acquisition does not exceed 50%
and the registration statement is declared effective no more than 74
calendar days after consummation of the acquisition. Note that
filing requirements in Items 2.01 and 9.01 of Form 8-K may differ.
---------------------------------------------------------------------------

H. Application of Amendments to Certain Types of Issuers

    Rule 3-16's requirements apply to several categories of issuers,
including foreign private issuers, SRCs, and issuers offering
securities pursuant to Regulation A. The proposed amendments would also
apply to these types of issuers, because, for the reasons discussed
above, we believe investors would benefit from the simplified and
improved disclosures that would result from the proposed amendments and
the cost of providing the disclosures would be reduced for these types
of issuers.
1. Foreign Private Issuers
a. Proposed Amendments
    Foreign private issuers are required to comply with existing Rule
3-16. Under the proposal, Rule 3-16 would be eliminated and foreign
private issuers would be required to comply with the disclosures
specified in proposed Rule 13-02. Accordingly, Instruction 1 to Item 8
of Form 20-F would be amended to specifically require compliance with
proposed Rule 13-02.
b. Comments on Proposed Amendments
    We received one comment on this aspect of the proposed amendments.
The commenter recommended that the Commission confirm that the periods
covered under the Summarized Financial Information would be required to
track only those covered by a foreign private issuer's consolidated
financial statements.\512\
---------------------------------------------------------------------------

    \512\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

c. Final Amendments
    After considering public comments, we are adopting the proposed
amendments with modifications. For clarity, as the final amendments do
not delete existing Rule 3-16, Instruction 1 to Item 8 of Form 20-F
will be amended to make reference to required compliance with Rule 3-
16.\513\ Consistent with the proposal, that instruction also will be
modified to require compliance with proposed Rule 13-02.
---------------------------------------------------------------------------

    \513\ This instruction cites rules under which a foreign private
issuer may be required to provide financial statements or financial
information for entities other than the issuer. This instruction,
however, does not currently make reference to Rule 3-16. As the
proposed and final amendments make reference to new Rule 13-02, for
clarity, the instruction has been revised to also make reference to
Rule 3-16.
---------------------------------------------------------------------------

    One commenter requested the Commission confirm the periods of
Summarized Financial Information that foreign private issuers would be
required to present.\514\ Consistent with our response to a similar
comment on proposed Rule 13-01, as specified in Rule 13-02(a)(4)(v), a
registrant is required to disclose the Summarized Financial Information
as of and for the most recently ended fiscal year and, if applicable,
year-to-date interim period, included in the registrant's consolidated
financial statements.
---------------------------------------------------------------------------

    \514\ See letter from Sullivan & Cromwell.
---------------------------------------------------------------------------

    Lastly, for the same reasons described above,\515\ we have created
new Exhibit 17 within Item 19 of Form 20-F, which will require the
identification of each affiliate whose security is pledged as
collateral, as well as the identification of the security or securities
pledged as collateral.
---------------------------------------------------------------------------

    \515\ See discussion in Section V.D.3, ``Non-Financial
Disclosures.''
---------------------------------------------------------------------------

2. Smaller Reporting Companies
a. Proposed Amendments
    Note 4 to Rule 8-01 of Regulation S-X requires financial statements
to be presented as required by Rule 3-16 for an SRC's affiliate whose
securities constitute a substantial portion of the

collateral for securities registered or being registered, except that
the periods presented are those required by Rule 8-02 of Regulation S-
X. As the proposed amendments would have eliminated Rule 3-16 and
required the disclosures specified in proposed Rule 13-02, SRCs would
be required to comply with proposed Rule 13-02. A corresponding change
to Note 4 to Rule 8-01 was therefore proposed. Additionally, as
proposed Rule 13-02(a)(4) specifies the periods of Summarized Financial
Information that would be required to be presented, no reference to the
periods required by Rule 8-02 of Regulation S-X in Note 4 to Rule 8-01
is necessary and would be removed. Lastly, because Item 1 of Part I of
Form 10-Q permits a SRC to provide the information required by Rule 8-
03 of Regulation S-X if it does not provide the information required by
Rule 10-01, the Commission proposed adding Rule 8-03(b)(8) to require
compliance with proposed Rule 13-02.
b. Comments on Proposed Amendments
    We did not receive any comments that addressed this aspect of the
proposed amendments.
c. Final Amendments
    We are adopting the proposed amendments with modifications. We
believe that investors in smaller reporting companies will benefit from
the simplified disclosures that will result from the amendments and
that the cost of providing the disclosures will be reduced for smaller
reporting companies. As the final amendments do not delete existing
Rule 3-16, we are not adopting the proposed amendment that would have
eliminated the reference to that requirement in Note 4 to Rule 8-01,
nor are we eliminating the reference to the periods required in such
financial statements. We are, however, adopting the proposed change
that requires compliance with Rule 13-02, but with slightly different
wording than proposed. The final amendments to Note 4 to Rule 8-01
establish that the requirements of final Rules 3-16 and 13-02 are
applicable if a smaller reporting company's securities registered or
being registered are collateralized by the securities of the smaller
reporting company's affiliates,\516\ and that the periods presented for
purposes of compliance with final Rule 3-16 are those required by Rule
8-02. Finally, as proposed, because Item 1 of Part I of Form 10-Q
permits an SRC to provide the information required by Rule 8-03 of
Regulation S-X if it does not provide the information required by Rule
10-01, we have added Rule 8-03(b)(7) to require compliance with Rule
13-02.\517\
---------------------------------------------------------------------------

    \516\ Because the final amendments do not eliminate existing
Rule 3-16, which will continue to be applicable to registered
collateralized securities with collateral release provisions issued
and outstanding as of the effective date of the final amendments,
amended Note 4 to Rule 8-01 states, for clarity, that final Rule 13-
02 must be followed unless amended Rule 3-16 applies. See Section
VI.B ``Rule 3-16 Collateral Release Provisions.''
    \517\ Proposed Rule 8-03(b)(8) would have sequentially followed
existing Rule 8-03(b)(6) of Regulation S-X [17 CFR 210.8-03(b)(6)]
and proposed Rule 8-03(b)(7). As described within Section III.D.2
``Smaller Reporting Companies,'' subsequent to the issuance of the
Proposing Release, the Commission eliminated Rule 8-03(b)(6). The
final amendments have been revised to reflect this change. The
requirements in proposed Rule 8-03(b)(8) have been included in new
Rule 8-03(b)(7), which follows new Rule 8-03(b)(6).
---------------------------------------------------------------------------

3. Offerings Pursuant to Regulation A
a. Proposed Amendments
    In connection with offerings made pursuant to Regulation A, Forms
1-A and 1-K direct a Regulation A Issuer to comply with Rule 3-16 for
the same periods as the Regulation A Issuer's financial statements and
specifies the applicable audit requirements. Accordingly, the proposed
rule would have replaced the existing requirement in those forms that
Regulation A Issuers comply with Rule 3-16 with a requirement to
provide the disclosures specified in proposed Rule 13-02 and specify
the location of the disclosures, similar to the proposed note to Rule
13-02(a) but consistent with the requirements of Regulation A.\518\
Additionally, consistent with the discussion above about requiring
registrants to comply with proposed Rule 13-02 in filings made on Form
10-Q, a requirement to comply with proposed Rule 13-02 would be added
to Form 1-SA.
---------------------------------------------------------------------------

    \518\ If a Regulation A Issuer elects to provide the proposed
disclosures in its audited financial statements, such disclosures
would be required to be audited.
---------------------------------------------------------------------------

b. Comments on Proposed Amendments
    We did not receive any comments that addressed this aspect of the
proposed amendments.
c. Final Amendments
    We are adopting the proposed amendments with modifications. We
believe that investors in Regulation A offerings will benefit from the
simplified disclosures that will result from the amendments and that
the cost of providing the disclosures will be reduced for Regulation A
Issuers. As the final amendments do not delete existing Rule 3-16, we
are not adopting the proposed amendment that would have eliminated the
existing requirement in Forms 1-A and 1-K that Regulation A Issuers
comply with Rule 3-16. We are, however, adopting the proposed change to
those forms that requires compliance with Rule 13-02, but with slightly
different wording than proposed. The final amendments to Forms 1-A and
1-K establish that the requirements of final Rules 3-16 and 13-02 are
applicable if a Regulation A Issuer's securities qualified or being
qualified pursuant to Regulation A are collateralized by the securities
of the issuer's affiliates.\519\ We are also adopting the proposed
requirement specifying the location of the disclosures, similar to Rule
13-02(b) but consistent with the requirements of Regulation A.
Consistent with the discussion above about requiring registrants to
comply with Rule 13-02 in filings made on Form 10-Q, a requirement to
comply with Rule 13-02 has been added to Form 1-SA. Lastly, for the
same reasons described above,\520\ we have created new exhibit 17
within Item 17 of Form 1-A, which will require the identification of
each affiliate whose security is pledged as collateral, as well as the
identification of the security or securities pledged as collateral.
This exhibit will also be required in Form 1-K by Item 8(b) of Part II
of that form, and in Form 1-SA by Item 4(b) of that form.
---------------------------------------------------------------------------

    \519\ Because the final amendments do not eliminate existing
Rule 3-16, which will continue to be applicable to registered
collateralized securities with collateral release provisions issued
and outstanding as of the effective date of the final amendments,
amended Forms 1-A and 1-K state, for clarity, that final Rule 13-02
must be followed unless amended Rule 3-16 applies. See Section VI.B
``Rule 3-16 Collateral Release Provisions.''
    \520\ See discussion in Section V.D.3, ``Non-Financial
Disclosures.''
---------------------------------------------------------------------------

VI. Transition to Final Amendments and Rule 3-16 Collateral Release
Provisions

A. Transition to Final Amendments

    A number of commenters recommended that the Commission provide
transition guidance or a phase-in period for proposed Rules 13-01 and
13-02.\521\ In response to these concerns, we are providing the
following transition period for compliance to mitigate any potential
burdens that issuers may experience in transitioning to the final
amendments:
---------------------------------------------------------------------------

    \521\ See letters from BDO, CAQ, Cravath, Deloitte, EY, FedEx,
Grant Thornton, KPMG, NYC Bar, PWC, and Shearman.
---------------------------------------------------------------------------

    For Securities Act registration statements: \522\
---------------------------------------------------------------------------

    \522\ This transition period is also applicable to filings made
in connection with offerings of securities pursuant to Regulation A,
including Form 1-A and post-qualification amendments thereto.

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

     Any registration statement that is first filed on or after
January 4, 2021, must comply with the final amendments; and
     Any post-effective amendment filed on or after January 4,
2021, to include either the registrant's latest audited financial
statements in the registration statement or to update the prospectus
under Section 10(a)(3) must comply with the final amendments.
    For Exchange Act registration statements:
     Any registration statement that is first filed on or after
January 4, 2021, must comply with the final amendments.
    For Exchange Act periodic reports: \523\
---------------------------------------------------------------------------

    \523\ This transition period is also applicable to periodic
reporting pursuant to Rule 257 of Regulation A, including Forms 1-K
and 1-SA.
---------------------------------------------------------------------------

     If the reporting company was required to comply with the
final amendments in a registration statement, all Exchange Act periodic
reports for periods ending after that registration statement became
effective must comply with the final amendments; and
     For all other Exchange Act reporting companies, the annual
report on Form 10-K or Form 20-F, as applicable, for fiscal years
ending after January 4, 2021, and quarterly reports on Form 10-Q for
quarterly periods ending after January 4, 2021, must comply with the
final amendments.\524\
---------------------------------------------------------------------------

    \524\ For example, a registrant with a fiscal year ending on
January 31st would be required to comply with the final amendments
in its Form 10-K for its fiscal year ended January 31, 2021, and
subsequent quarterly reports on Form 10-Q starting with its Form 10-
Q for the quarterly period ended April 30, 2021. As another example,
a registrant with a fiscal year ending on December 31st would be
required to comply with the final amendments in its Forms 10-Q for
quarterly periods ended March 31, 2021, June 30, 2021, and September
30, 2021, and in its Form 10-K for its fiscal year ended December
31, 2021.
---------------------------------------------------------------------------

    Voluntary compliance with the final amendments in advance of
January 4, 2021, will be permitted. After voluntary compliance,
subsequent Exchange Act or Regulation A periodic reports must comply
with the final rules.

B. Rule 3-16 Collateral Release Provisions

    As described in the Proposing Release,\525\ 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.
Some commenters observed that in many registered debt offerings, the
indenture will contain such collateral release provisions.\526\
Commenters expressed concern that, depending on the wording of such
collateral release provisions in previously issued indentures, the
proposed elimination of existing Rule 3-16 and new requirements in
proposed Rule 13-02 could change the collateral available to holders of
these debt securities, causing unintended credit consequences.\527\
---------------------------------------------------------------------------

    \525\ See Section II of the Proposing Release.
    \526\ See letters from Cravath, NYC Bar, PWC, and Shearman.
    \527\ See supra note 526.
---------------------------------------------------------------------------

    In response to these comments, so as not to change the amount of
collateral available to investors in previously issued debt securities
that include collateral release provisions, the final amendments will
not apply to existing collateralized debt securities with such
provisions. To accomplish this, the final amendments do not eliminate
existing Rule 3-16 as was proposed. Instead, Rule 3-16 has been amended
to include a scope paragraph stating that the requirements of Rule 3-16
apply to each registered security issued and outstanding before January
4, 2021 for which the registrant has not previously been required to
provide Rule 3-16 Financial Statements.\528\ While we recognize that
these investors will not receive the disclosures required by Rule 13-
02, their investment decision in such securities presumably
contemplated the release of collateral were it to exceed the
substantial portion threshold, and we note that these investors have
historically not received supplemental information. In contrast to
those indentures with collateral release provisions, the new
disclosures will apply to existing collateralized debt securities that
do not contain such provisions. To accomplish this, final Rule 13-02
includes a scope paragraph stating that the requirements of new Rule
13-02 apply to each registered security issued and outstanding before
January 4, 2021, for which the registrant has previously been required
to provide Rule 3-16 Financial Statements. Finally, any collateralized
debt securities issued on or after the compliance date of the final
amendments must comply with new Rule 13-02, which is clearly stated in
the scope paragraph to final Rule 13-02.
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    \528\ A registrant that has issued securities with collateral
release provisions would not have been required to provide Rule 3-16
Financial Statements. Requiring continued compliance with the
requirements of existing Rule 3-16 will allow such collateral
release provisions to operate as intended and not change the amount
of collateral available to investors.
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VII. Other Matters

    If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
    Pursuant to the Congressional Review Act,\529\ the Office of
Information and Regulatory Affairs has designated these rules a ``major
rule,'' as defined by 5 U.S.C. 804(2).
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    \529\ 5 U.S.C. 801 et seq.
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VIII. Economic Analysis

A. Introduction

    As discussed above, we are adopting amendments to the financial
disclosure requirements in Rules 3-10 and 3-16 of Regulation S-X to
improve those requirements for both investors and registrants. These
amendments may result in simplified disclosures that highlight
information that is material to investment decisions. They may also
serve to reduce existing regulatory burdens that otherwise inhibit
registrants from engaging in registered debt offerings that are backed
by guarantees or pledges of affiliate securities as collateral and may
unnecessarily restrict the set of investment opportunities available to
some investors. The discussion below addresses the potential economic
effects of the final amendments, including the likely benefits and
costs, as well as the likely effects on efficiency, competition, and
capital formation, measured against a baseline that includes both
current regulatory requirements and current market practices. We also
discuss the potential economic effects of certain alternatives to the
amendments. Throughout this analysis, we draw on academic studies and
incorporate public comments, where appropriate.
    We are mindful of the costs and benefits of our rules. Section 2(b)
of the Securities Act, Section 3(f) of the Exchange Act, Section 2(c)
of the Investment Company Act, and Section 202(c) of the Investment
Advisers Act require us, when engaging in rulemaking that requires us
to consider or determine whether an action is necessary or appropriate
in (or, with respect to the Investment Company Act, consistent with)
the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition, and
capital formation.\530\ Additionally, Exchange Act Section 23(a)(2)
requires us, when adopting rules under the Exchange Act, to consider,
among other things, the impact that any new rule would have on
competition and not to

adopt any rule that would impose a burden on competition that is not
necessary or appropriate in furtherance of the Exchange Act.\531\
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    \530\ 15 U.S.C. 77b(b), 78c(f), 80a-2(c), and 80b-2(c).
    \531\ 15 U.S.C. 78w(a)(2).
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B. Baseline and Affected Parties

    The existing regulatory requirements of Rules 3-10 and 3-16 under
Regulation S-X are described above \532\ and have prompted registrants
to adopt disclosure and business practices specifically designed to
comply with or avoid these requirements. We analyze the economic
effects of the final amendments by assessing their impact on affected
parties as compared to the current disclosure regime, including both
existing disclosure requirements and available exemptions, where
applicable.
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    \532\ See Section II for Rule 3-10 and Section IV for Rule 3-16.
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    The parties that are likely to be affected by these amendments
include issuers and guarantors of guaranteed debt securities, issuers
of debt securities collateralized by securities of those issuers'
affiliate(s), and investors in each of these types of securities.\533\
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    \533\ While the amendments would apply to registered closed end
funds and business development companies (``BDCs''), and could
thereby affect registered investment advisers, based on staff
experience, we believe closed end funds and BDCs are unlikely to
engage in the activities addressed by the final amendments.
Accordingly, we also we believe the amendments are unlikely to
affect registered investment advisers.
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1. Market Participants
    The first main group of market participants affected by the
amendments consists of issuers and guarantors of guaranteed debt
securities and issuers of debt securities collateralized by securities
of those issuers' affiliate(s). These issuers will be affected because
the disclosures called for by the amendments will differ from the
content and format of disclosures currently required to be presented in
registered debt offerings and in certain ongoing reporting.
Additionally, issuers and guarantors of guaranteed debt securities may
be affected by amendments to the eligibility conditions that must be
met to omit the separate financial statements of subsidiary issuers and
guarantors of guaranteed debt securities. The amendments may also alter
the capital raising decisions of potential issuers.
    The second group of market participants affected by the amendments
consists of investors in these securities. These investors can be
divided into three main categories: (1) Qualified Institutional Buyers
(``QIBs''); \534\ (2) institutional investors (other than QIBs); and
(3) non-institutional (retail) investors. In addition to the change in
content and location of the disclosed information presented to them,
which is discussed below in Section VII.C.1.b, the impact on these
investors will also depend on whether there is a change in the number
of registered debt offerings by new issuers, issuers that would have
offered debt securities under Rule 144A before the amendments,\535\ or
both, as a result of the amendments.
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    \534\ 17 CFR 230.144A(a)(1).
    \535\ Only QIBs can participate in Rule 144A offerings; retail
and institutional investors other than QIBs are unable to
participate in such offerings.
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    Currently, there are four options that issuers typically consider
in deciding whether and how to issue guaranteed or collateralized debt
securities. First, issuers may offer and sell guaranteed and/or
collateralized debt securities in a registered securities offering and
provide the required disclosures and any separate financial statements
under existing Rules 3-10 and 3-16. Second, issuers may opt to offer
the debt securities in transactions that rely on Rule 144A's safe
harbor exemption from Securities Act registration, with guarantees or
pledges of affiliate securities as collateral and registration rights.
This may allow issuers to access the capital markets more quickly
because they would not have to provide the disclosures required by
existing Rules 3-10 and 3-16 at the time of the Rule 144A offering.
Issuers do, however, have to provide the disclosures and financial
statements required by existing Rules 3-10 and 3-16 when the
unregistered debt securities are exchanged for debt securities issued
in a registered offering. Third, issuers may opt to offer the debt
securities in transactions that rely on Rule 144A's safe harbor
exemption from Securities Act registration, with guarantees or pledges
of affiliate securities as collateral, but without registration rights.
Under this approach, issuers do not have to provide the disclosures or
financial statements required by existing Rules 3-10 and 3-16, but
issuers and investors are not afforded the benefits of registration.
Fourth, issuers may structure a registered offering without including
guarantees or pledges of affiliated securities as collateral. In this
case, while issuers do not have to provide disclosures or financial
statements required by existing Rules 3-10 and 3-16, they may incur a
higher cost of capital than if they had structured their debt
securities offerings with these credit enhancements. Issuers in this
category may decide not to offer these credit enhancements because the
cost of providing the required disclosures exceeds the premium that
must be paid to issue the debt on an unsecured basis.
    Collateralized debt offerings are often structured to include
collateral release provisions, which automatically reduce the amount of
pledged collateral that investors might receive in the event of default
if it would trigger the existing requirement for a registrant to file
Rule 3-16 Financial Statements. To the extent the practice of
structuring these offerings in this manner changes as a result of the
final amendments, investors may experience both a change in the number
of investment opportunities in collateralized debt, as well as a change
in the information presented to them in registered offerings.
2. Market Conditions
    To provide context for debt securities offerings likely to be
impacted by the final amendments, Table 1 provides estimates of the
number and dollar amount of all registered debt offerings and Rule 144A
debt offerings per year since 2013.\536\ The dollar volume of
registered debt and Rule 144A offerings generally appears to be higher
in recent years (i.e., 2016, 2017, 2018) than in earlier years (i.e.,
2013, 2014, 2015), which may be a result of improving macroeconomic
conditions and a low interest rate environment.\537\
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    \536\ These estimates are based on staff analysis of data from
the Mergent database. Data specific to offerings of guaranteed
securities and offerings of securities collateralized by the
securities of an issuer's affiliate(s) is unavailable. We begin our
sample in the post-financial crisis timeframe in order to exclude
capital raising concerns, liquidity shocks, and other constraints
that are exogenous to our baseline analysis. For perspective, the
amount of funding obtained through the registered debt market on an
annual basis is much larger than that obtained through the
registered equity market. See Access to Capital and Market Liquidity
Report.
    \537\ See id.

                      Table 1--Registered Debt and Rule 144A Debt Offerings From 2013--2018
----------------------------------------------------------------------------------------------------------------
                                                          Registered debt                    Rule 144A
                                                 ---------------------------------------------------------------
                      Year                           Number of       $ Amount        Number of       $ Amount
                                                    offerings *        (bil)        offerings *        (bil)
----------------------------------------------------------------------------------------------------------------
2013............................................           1,509           1,052             969             512
2014............................................           1,597           1,113             920             530
2015............................................           1,560           1,206             808             575
2016............................................           1,639           1,329             785             526
2017............................................           1,853           1,298             995             657
2018............................................           1,671           1,132             871             658
----------------------------------------------------------------------------------------------------------------
Source: DERA staff analysis.
* The number of registered offerings and amounts raised do not include registered exchanges of debt securities
  previously issued pursuant to an exemption from Securities Act registration, such as Rule 144A. Based on staff
  analysis of Commission filings on Forms S-4 and F-4, there was an average of 129 registered exchange offers
  per year between 2013 and 2018, seeking an average (median) amount of proceeds of approximately $146 billion
  ($140 billion) per year. These estimates are based on information disclosed at the time of initial filing;
  actual offering amounts may have differed upon effectiveness of the registration statement. Debt securities
  with registration rights are usually issued under Rule 144A and, thus, may also be included in the columns
  summarizing Rule 144A offerings. One study estimates that approximately 98% of high-yield Rule 144A bonds and
  40% of investment-grade Rule 144A bonds have registration rights. See Miles Livingston & Lei Zhou, The Impact
  of Rule 144A Debt Offerings Upon Bond Yields and Underwriter Fees, 31 Fin. Mgmt. 5 (2002).

    According to studies examining registered debt offerings and debt
offerings made under Rule 144A, the two types of debt offerings have
distinct characteristics. Issuers offering debt securities under Rule
144A have, on average, lower credit quality and higher information
asymmetry than registered debt offerings.\538\ These conditions may
increase the likelihood that investors require guarantees and
collateral from these issuers relative to investment grade issuers who
may not need such credit enhancements. This is consistent with studies
that have found the cost of capital associated with debt offerings made
under Rule 144A to be higher than the cost of capital in registered
debt offerings.\539\ According to these studies, there are two main
benefits of Rule 144A offerings: (1) The speed of issuance, given the