[Federal Register Volume 64, Number 43 (Friday, March 5, 1999)]
[Proposed Rules]
[Pages 10579-10596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5444]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228 and 240
[Release Nos. 33-7649; 34-41118 International Series No. 1187; File No.
S7-7-99]
RIN: 3235-AH52
Financial Statements and Periodic Reports for Related Issuers and
Guarantors
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing financial reporting rules for issuers and
guarantors of guaranteed securities. We also are proposing an exemption
from periodic reporting for subsidiary issuers and guarantors of these
securities. These proposals would codify, in large part, the positions
the staff has developed through Staff Accounting Bulletin No. 53, later
interpretations, and the registration statement review process. We
intend for these rules to eliminate any uncertainty about which
financial statements and periodic reports subsidiary issuers and
guarantors must file.
DATES: We must receive your comments on or before May 4, 1999.
ADDRESSES: Please submit comment letters in triplicate to Jonathan G.
Katz, Secretary, U.S. Securities and Exchange Commission, Mail Stop 6-
9, 450 Fifth Street, N.W., Washington, D.C. 20549. You also may submit
comment letters electronically to the following e-mail address: comments@sec.gov. All comment letters should refer to File No. S7-XX-
99. If e-mail is used, include this file number on the subject line.
All comments received will be available for public inspection and
copying in the Commission's Public Reference Room at the same address.
Electronically submitted comments will be posted on
[[Page 10580]]
the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Regarding proposed Rule 12h-5, Michael
Hyatte, Julie Hoffman, or Kristina Schillinger at (202) 942-2900;
regarding the Regulation S-X and Regulation S-B proposals, Craig
Olinger at (202) 942-2960, both in the Division of Corporation Finance.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Rule 3-10 \1\
of Regulation S-X \2\ and Item 310 of Regulation SB.\3\ We are also
proposing new Rule 3-16 \4\ of Regulation S-X and new Rule 12h-5 \5\
under the Securities Exchange Act of 1934.\6\
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\1\ 17 CFR 210.3-10.
\2\ 17 CFR 210.1-01 through 12-29.
\3\ 17 CFR 228.310.
\4\ 17 CFR 210.3-16.
\5\ 17 CFR 240.12h-5.
\6\ 15 U.S.C. 78a et seq.
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I. Executive Summary
Over the past two decades, it has become increasingly common for a
parent company to raise capital through:
Offerings of its own securities that are guaranteed by one
or more of its subsidiaries; and
Offerings of securities by a subsidiary that are
guaranteed by the parent, and sometimes, one or more of the parent's
other subsidiaries.
Absent an exemption, the Securities Act of 1933 \7\ requires the
offering of both the guaranteed security and the guarantee to be
registered. Securities Act registration requires the disclosure of both
financial and non-financial information about the issuer of the
guaranteed security as well as any guarantors. Moreover, due to the
registration of the offer and sale of the guaranteed securities and the
guarantees, both the issuer and the guarantors become subject to
Section 15(d) \8\ of the Exchange Act of 1934. Section 15(d) requires
all Securities Act registrants to file Exchange Act periodic reports
for at least the fiscal year during which the Securities Act
registration statement became effective.
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\7\ 15 U.S.C. 77a et seq.
\8\ 15 U.S.C. 78o(d).
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There are circumstances, however, where full Securities Act and
Exchange Act disclosure by both the issuer and the guarantors may not
be useful to an investment decision and, therefore, may not be
necessary. For example, if a subsidiary with no independent assets or
operations issues debt securities guaranteed by its parent, full
disclosure of the subsidiary's financial information would be of little
value. Instead, investors would look to the financial status of the
parent which guaranteed the debt to evaluate the likelihood of payment.
As this example demonstrates, subsidiary issuers and guarantors
raise a number of practical issues under the Securities Act and the
Exchange Act. Included among these issues are:
What financial information must issuers of guaranteed
securities provide to potential investors;
What financial information must guarantors provide to
potential investors; and
What financial information must those issuers and
guarantors continue to provide to the secondary market.
In 1983, the staff addressed these issues in Staff Accounting
Bulletin No. 53.\9\ In the 15 years since we published SAB 53,
guaranteed securities have become significantly more complex. While the
basic analysis of SAB 53 remains sound, the staff has had to expand on
this analysis in response to registration statements and interpretive
requests that involve new and complex offering structures. In addition,
the staff has responded to an increasing number of requests for
exemptions from Exchange Act reporting. In 1997, nearly half of all
interpretive, no-action, or exemptive requests acted on by the Division
of Corporation Finance involved SAB 53.
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\9\ Securities Act Release No. SAB-53. 48 FR 28230 (June 13,
1983).
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The staff's interpretive structure has been effective in addressing
these issues. This approach was designed to properly balance the
issuer's obligation to disclose material information fully with the
investor's need for this information. We believe that the staff's
analysis will adapt well to future developments.
Therefore, we propose to codify, in large part, the staff's current
analysis regarding the obligations of issuers and guarantors. We
believe these rule proposals are needed because they would:
Eliminate uncertainty regarding financial statement
requirements;
Eliminate uncertainty regarding on-going reporting;
Eliminate the burden on these subsidiaries to seek
interpretive guidance regarding these requirements; \10\ and
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\10\ If we adopt today's proposals, issuers of guaranteed
securities and guarantors could still request an interpretive
position from the Division of Corporation Finance if proposed Rule
3-10 does not address their situation.
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Simplify the staff's interpretive structure by applying
one standard condensed consolidating financial information instead of
the current approach that requires more or less financial disclosure
based solely on the existence of non-guarantor subsidiaries.
We propose to revise Rule 3-10 of Regulation S-X to require
condensed consolidating financial information in all situations
involving a subsidiary issuer or subsidiary guarantor that is not a
finance subsidiary.\11\ This condensed financial information would be
included in Securities Act registration statements on a combined basis,
instead of being presented in separate financial statements for each
subsidiary. We also propose Exchange Act Rule 12h-5, which would exempt
from Exchange Act reporting requirements those subsidiary issuers and
guarantors that may omit financial statements under revised Rule 3-10.
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\11\ In connection with the proposed revision to Rule 3-10, we
also propose:
New Note 3 to Item 310 of Regulation S-B requiring small
business issuers to present financial information in accordance with
proposed Rule 3-10 for the fiscal periods they are required to
present; and
To move the financial statement requirement of affiliates whose
securities collateralize a registered issue from current Rule 3-10
and put it in proposed new Rule 3-16 of Regulation S-X.
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II. The Structure of This Release
We have separated this release into five main sections.
First, we describe how the Securities Act registration requirements
apply to offerings of guaranteed securities.
Second, we describe the current financial statement requirements
for issuers of guaranteed securities and guarantors. This description
begins with the basic requirements of Regulation S-X and addresses the
purpose and effect of SAB 53. It also discusses the positions the staff
has taken in interpreting basic issues regarding SAB 53, such as the
meaning of ``wholly owned subsidiary'' and ``full and unconditional
guarantee.'' \12\ Finally, we present the developments in the staff's
analysis that deal with complex securities and complex corporate
structures.
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\12\ This release discusses the meanings of a number of terms,
including ``finance subsidiary,'' ``debt security,'' ``wholly-owned
subsidiary,'' and ``full and unconditional guarantee,'' in the
context of SAB 53 and proposed Rule 3-10. Given the unique purpose
of SAB 53 and proposed Rule 3-10, the discussion in this release
applies only to today's proposals.
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Third, we describe the Exchange Act reporting obligations of
subsidiary issuers of guaranteed securities and guarantors. This
description addresses the statutory requirement of Section 15(d), the
SAB 53 discussion regarding Exchange Act reporting, and the staff's
current analysis.
Fourth, we describe our rule proposals regarding the financial
[[Page 10581]]
information and Exchange Act reporting requirements for subsidiary
issuers of guaranteed securities and guarantors.
Fifth, we include appendices at the end of this release to
demonstrate how the proposed rules would apply to a number of different
fact patterns. We hope that these appendices will increase your
understanding of the proposals and assist you in commenting on them.
III. Securities Act Registration Requirements for Offerings of
Guarantees
Guarantees of securities are securities themselves for purposes of
the Securities Act. As a result, offers and sales of both the
guaranteed security and the guarantee must either be registered under
the Securities Act or exempt from registration.
IV. Current Financial Statement Requirements for Subsidiary
Guarantors and Subsidiary Issuers of Guaranteed Securities
A. Regulation S-X Requirements
1. Guarantors
Rule 3-10 of Regulation S-X identifies which financial statements
guarantors must include in Securities Act registration statements,
Exchange Act registration statements, and Exchange Act reports.\13\
Rule 3-10 currently requires all guarantors to include the same
financial statements they would have to include if they were the
issuers of the guaranteed securities. Rule 3-10 applies equally to
parent guarantors and subsidiary guarantors.
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\13\ Rule 3-10 also prescribes financial statement requirements
for affiliates of reporting issuers when the securities of such
affiliates are the collateral for any class of the issuer's
registered securities. These requirements are outside the scope of
today's proposal. See Section VI.G. for a more complete discussion
of those requirements.
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2. Subsidiary Issuers of Guaranteed Securities
Regulation S-X requires subsidiary issuers of guaranteed securities
to file the same financial statements as any other issuer of
securities.
B. Modified Financial Statement Requirements in Staff Accounting
Bulletin No. 53
1. Purpose and Application of SAB 53
In 1983, in response to questions arising from the increased number
of guaranteed securities offerings, the Commission published Staff
Accounting Bulletin No. 53. The objective of SAB 53 was to elicit full
and fair disclosure regarding issuers and guarantors in a format that
was:
Meaningful to investors; and
Not unduly burdensome to registrants.
SAB 53 did not amend Rule 3-10 of Regulation S-X. Instead, it
described the approach the staff would take in its review of
registration statements for two types of offerings of guaranteed debt
securities:
Securities issued by a subsidiary that are guaranteed by
the parent of that subsidiary; and
Securities that are issued by a company and guaranteed by
a subsidiary of that company.
SAB 53 and the staff interpretations that followed recognize that
there is no need for complete financial statements from both the issuer
of the guaranteed security and the guarantor when:
The issuer is a wholly-owned subsidiary of the parent
guarantor; and
The guarantee is full and unconditional.
In this type of issuer/guarantor relationship, there is a unity of
financial risk between the two entities. As a result, the need for
separate financial disclosure is removed or reduced. We discuss these
two conditions below.
a. Meaning of ``Wholly-Owned'' in SAB 53. A subsidiary is ``wholly-
owned'' within the meaning of SAB 53 if all of its voting shares and
any outstanding securities convertible into its voting shares are
owned, directly or indirectly, by its parent.\14\ This meaning differs
from the general definition of ``wholly-owned subsidiary'' in Rule 1-
02(aa) of Regulation S-X.\15\ Regulation S-X regards a subsidiary as
wholly-owned if substantially all of its voting shares are held by its
parent.\16\
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\14\ A subsidiary may have outstanding securities convertible
into its voting shares if its parent owns all of the convertible
securities. Citizens Utilities Company (May 20, 1996).
\15\ 17 CFR 210.1-02(aa).
\16\ All securities of a subsidiary that confer the right to
elect directors or their functional equivalent annually, whether or
not those securities are equity or debt, must be held by the parent
to satisfy the ``wholly-owned'' test. This test is unaffected by the
existence of other securities that grant the right to vote in the
event of special circumstances, such as a default. See 17 CFR 210.1-
02(z) for the definition of ``voting shares.''
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Satisfaction of the stricter requirement under SAB 53 ensures that
there is no competing interest to the parent's ownership. Any outside
voting interest in the subsidiary breaks the financial unity between
the subsidiary and its parent that is needed to justify the special
relief granted in SAB 53.
b. Meaning of ``Full and Unconditional Guarantee'' in SAB 53.
(i) Guarantor's Payment Obligations Must be the Same as the
Issuer's. A guarantee is ``full and unconditional'' when the payment
obligations of the issuer and guarantor are essentially identical. When
an issuer fails to make a payment called for by the security, the
guarantor is obligated to make the scheduled payment immediately and,
if it doesn't, the holder of the security may take legal action
directly against the guarantor for payment. A guarantee is not full if
the amount of the guarantor's liability is less than the issuer's or,
should the issuer default, the guarantor's payment schedule differs
from the issuer's payment schedule. There can be no conditions, beyond
the issuer's failure to pay, to the guarantor's payment obligation. For
example, the holder cannot be required to then exhaust its remedies
against the issuer before seeking payment from the guarantor.
(ii) Guarantee Still May be Full and Unconditional Even if it Has a
Fraudulent Conveyance ``Savings Clause''. A guarantee can be full and
unconditional even if it includes a ``savings'' clause related to
bankruptcy and fraudulent conveyance laws. These savings clauses
prevent the guarantor from making an otherwise required payment if the
money needed to make that payment is first recoverable by other
creditors under bankruptcy or fraudulent conveyance laws. However, if
any clause places a specific limit on the amount of the guarantor's
regular payment obligation to avoid application of bankruptcy or
fraudulent conveyance laws, it is the staff's position that the
guarantee is not full and unconditional.
For example, the following savings clauses would not defeat the
full and unconditional nature of the guarantee:
The guarantor's obligation under the guarantee is limited
to ``the maximum amount that can be guaranteed without constituting a
fraudulent conveyance or fraudulent transfer under applicable
insolvency laws.''
The guarantee is enforceable ``to the fullest extent
permitted by law.''
The following savings clauses would defeat the full and
unconditional nature of the guarantee:
The guarantee is enforceable ``up to $XX.''
The guarantor guarantees the indebtedness ``up to $XX.''
The guarantee is ``limited to $XX, in order to prevent the
guarantor from violating applicable fraudulent conveyance or transfer
laws.''
The guarantee is enforceable ``up to XX% of the
guarantor's current assets.''
The guarantee is ``limited to XX% of the guarantor's
current assets in order to prevent the guarantor from violating
applicable fraudulent conveyance or transfer laws.''
[[Page 10582]]
The guarantee is enforceable ``so long as it would not
result in the subsidiary having less than $XX in net assets (or other
financial measure).''
(iii) Guarantee Still May Be Full and Unconditional Even if it has
Different Subordination Terms Than the Guaranteed Security. A guarantee
can be full and unconditional despite different subordination terms
between the guaranteed security and the guarantee.\17\ Although
different subordination terms mean security holders have different
rights in the priority of payment, both the issuer and the guarantor
remain fully liable to holders for all amounts due under the guaranteed
security.
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\17\ Williams Scotsman, Inc. (March 19, 1998).
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2. Modified Financial Statements Described in SAB 53
As we discussed above, SAB 53 indicated the staff's acceptance of
modified financial information for subsidiary issuers when:
The subsidiary issuer is a wholly-owned subsidiary of the
parent guarantor; and
The guarantee is full and unconditional.
If either of these conditions is not met, full financial statements
for subsidiary issuers of guaranteed securities must be included in the
registration statement.
If both of these conditions are met, SAB 53 states that the amount
of required financial information regarding the subsidiary issuer will
depend on whether the subsidiary has independent operations.
a. Subsidiary Issuer ``Essentially has no Independent
Operations''In this situation, SAB 53 states that the subsidiary is not
required to provide any separate financial statements because ``the
investor's investment decision is based on the credit worthiness of the
guarantor.'' This category was intended for finance subsidiaries. These
typically are subsidiaries that function as special purpose divisions
of the parent to raise capital or conduct financing. They typically
have no operations or assets other than those associated with their
financing activities.\18\
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\18\ This definition in consistent with the definition in Rule
3a-5 of the Investment Company Act of 1940, which provides that the
primary purpose of a finance subsidiary is to finance the business
operations of the parent or a company controlled by the parent.
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b. Subsidiary Has ``More than Minimal Independent Operations''. SAB
53 requires summarized financial information when the subsidiary issuer
has ``more than minimal independent operations.'' This summarized
financial information must meet the requirements of Rule 1-02(bb)(1) of
Regulation S-X.\19\
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\19\ 17 CFR 210.1-02(bb)(1).
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C. Evolution of SAB 53 Analysis
As companies have developed new structures for subsidiary issued
and guaranteed securities, the staff has expanded the analysis of SAB
53 through its processing of registration statements and exemptive
requests.\20\
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\20\ SAB 53 applies to both financial statement requirements in
Securities Act registration statements and the Exchange Act
reporting obligations of subsidiary guarantors and subsidiary
issuers of guaranteed securities. The staff applies the same
analysis to each of these situations. With regard to the Exchange
Act reporting obligations of these subsidiaries, SAB 53 instructs
issuers to file exemptive applications under Section 12(h) of the
Exchange Act. Early in the development of SAB 53 issues, the staff
began accepting these exemptive requests as ``no-action'' letters
instead of exemptive applications. this process continues today.
Throughout this release, when we discuss ``exemptive requests'' we
refer to both exemptive applications and ``no-action'' requests.
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1. Expansion of SAB 53 to Securities Other Than Debt
a. Preferred Equity Securities. SAB 53 only speaks of guaranteed
debt securities. However, the same principles used under SAB 53 apply
to preferred equity securities when the preferred securities have
payment terms substantially the same as debt--that is, the payment
terms mandate redemption and/or dividend payments. Like debt
securities, these preferred equity securities usually lack voting
rights.\21\
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\21\ Preferred equity securities normally carry very limited
voting rights, such as the right of holders to vote on matters
affecting their rights as shareholders or business combinations. The
right to elect directors is normally conferred only when the issuer
has failed to declare or pay a dividend required by the security.
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In order for a guarantor of preferred securities to be eligible for
SAB 53 relief, it must fully and unconditionally guarantee all of the
issuer's payment obligations under the certificate of designations or
other instrument that governs the preferred securities. The guarantor
must guarantee the payment, when due, of:
All accumulated and unpaid dividends that have been
declared on the preferred stock out of funds legally available for the
payment of dividends;
The redemption price, on redemption of the preferred
stock, including all accumulated and unpaid dividends; and
Upon liquidation of the issuer of the preferred stock, the
aggregate stated liquidation preference and all accumulated and unpaid
dividends, whether or not declared, without regard to whether the
issuer has sufficient assets to make full payment as required on
liquidation.
Some preferred stock guarantees limit the guarantor's redemption
and liquidation payments to the amount of funds or assets that are
legally available to the issuer of the preferred stock. These
guarantees would not be full and unconditional. For example, guarantees
that contain the following provisions would not be full and
unconditional:
The guarantor guarantees, on redemption of the preferred
stock, the redemption price, including all accumulated and unpaid
dividends, from funds legally available therefor under the (governing
instrument).
Upon liquidation of the issuer of the preferred stock,
guarantor agrees to pay the lesser of:
The aggregate stated liquidation preference and all
accumulated and unpaid dividends, whether or not declared; and
The amount of assets of the issuer of the preferred stock
legally available for distribution to holders of the preferred stock in
liquidation.
b. Trust Preferred Securities/Income Preferred Securities. In
recent years the markets have developed complex instruments called
trust preferred securities.\22\ Trust preferred securities generally
are issued by a special purpose business trust created by its
parent.\23\ The trust exists only to issue the preferred securities and
hold debt securities issued by its parent. Payment obligations of the
trust are ensured not by a single agreement called a guarantee, but
through several agreements and the terms of the debt securities it
holds. The agreements normally include a guarantee and an expense
undertaking from the parent, the trust indenture for the debt
securities the trust holds, and the trust declaration of the trust
itself.
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\22\ Other names for these securities include ``monthly income
preferred securities'' or ``quarterly income preferred securities.''
These securities generally are sold under proprietary names such as
MIPs or TOPRs.
\23\ These securities typically are issued by a business trust
but also may be issued by a limited partnership or a limited
liability corporation.
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The staff has agreed with the view that the bundle of rights
provided by these several agreements and the debt securities held by
the trust, usually called ``back-up undertakings,'' is the equivalent
of a full and unconditional guarantee of the trust's payment
obligations. Because the ``back-up undertakings'' place the investor in
the same position as if the parent company had fully and
unconditionally guaranteed the trust's payment obligations on the
preferred securities, the staff has agreed that the SAB 53 principles
may be applied.
[[Page 10583]]
2. Parent Issuer and Subsidiary Guarantor
Under the reasoning of SAB 53, any subsidiary guarantor would be
required to file full financial statements.\24\ As parent-issuer/
subsidiary-guarantor structures became more widely used, the staff
revised this position. The staff's response to a 1987 exemptive request
states that the staff would treat subsidiary guarantors the same as it
treats subsidiary issuers.\25\ Based on this position, a subsidiary
guarantor's financial reporting obligations could be modified in the
same manner as a subsidiary that issues debt securities that are
guaranteed by its parent.
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\24\ SAB 53 states: In the relatively infrequent situations
where a registration statement covers the issuance by a parent of a
security that is guaranteed by its subsidiary, the staff has
concluded that, as a general rule, financial statements for both
issuers would be material to the investment decision.
\25\ Anheuser-Busch Companies, Inc. (April 2, 1987).
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3. Use of Condensed Consolidating Financial Information
As stated above, the SAB 53 analysis does not require separate
financial statements if the subsidiary issuer or subsidiary guarantor
has no independent operations or assets, but it requires summarized
financial information when the subsidiary has more than minimal
independent operations or assets.\26\ Over time, the usefulness of
summarized financial information decreased as the corporate structures
used in offerings of guaranteed securities evolved and became more
complex.
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\26\ Summarized financial information, generally, consists of
summarized information as to the assets, liabilities and results of
operations of the entity. See 17 CFR 210.1-02(bb) for the specific
requirements of summarized financial information.
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For example, more complex guarantee structures raised the question
of how to deal with multiple guarantors. Some interpretive requests
involved more than 100 subsidiary guarantors. Other structures
presented to the staff involved a subsidiary issuer, a parent
guarantor, multiple subsidiary guarantors, and multiple subsidiaries
that were not guarantors.
The limited SAB 53 structure did not adequately accommodate these
new complexities. In some cases, strict application of the SAB 53
standard would have required more than 100 different sets of summarized
financial statements. Not only would that disclosure have been
burdensome on the registrant to provide, but it is unlikely to have
been useful to investors.
The summarized financial information requirement in Regulation S-X
was originally intended to inform investors about a registrant's equity
investments in unconsolidated affiliates. This type of financial
information is appropriate when the investment decision is based solely
on the financial condition of the parent company. The limited data will
show the general, indirect effect of the subsidiaries on that parent
company's financial condition. However, in adopting SAB 53, the staff
did not contemplate the widespread use of summarized data as the
primary financial information for decisions about the credit-worthiness
of a subsidiary's guarantee of registered debt. The staff also did not
contemplate more complex parent-subsidiary structures where investors
must assess the subsidiary's financial condition more completely and
independently of its parent company and of that parent's other
subsidiaries. For example, we believe investors focus on cash flow
information in credit decisions, but summarized financial information
includes no cash flow information.
Through interpretive requests and the review and comment process,
the staff developed a bifurcated approach to address the presentation
of useful financial information for guaranteed securities and the
guarantees. The first part of this approach relies on the inclusion of
``condensed consolidating financial information'' in lieu of summarized
financial information in situations where the presentation of financial
statements of the entities would be useful to an investor.\27\
Condensed consolidating financial information provides a more complete,
meaningful basis for investors to assess the debt-paying ability of
subsidiary issuers and guarantors.
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\27\ The staff has applied this standard to those situations
that do not involve a single subsidiary issuer or guarantor or that
do not involve a finance subsidiary issuer with the parent as the
sole guarantor involving finance subsidiaries. The staff first
accepted condensed consolidating financial information in connection
with its case-by-case review of registration statements for
offerings of securities with this structure. Consistent with the
earlier development of SAB 53 interpretation, the staff applied the
same analysis to exemptive requests for Exchange Act reporting.
Chicago & North Western Acquisition Corp. (February 6, 1990); EPIC
Properties, Inc. (March 13, 1992).
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Condensed consolidating financial information requires the columnar
presentation of each category of parent and subsidiary as issuer,
guarantor, or non-guarantor.\28\ These presentations more clearly
distinguish the assets, liabilities, revenues, expenses, and cash flows
of the entities that are legally obligated under the indenture from
those that are not. Summarized financial information may obscure these
distinctions, particularly if subsidiary guarantors themselves have
consolidated operating subsidiaries that are not guarantors.
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\28\ The staff permits subsidiary guarantors to combine
financial information in one column if their guarantees are joint
and several.
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Condensed consolidating information provides the same level of
detail about the financial position, results of operations, and cash
flows of subsidiary issuers and guarantors that investors are
accustomed to obtaining in interim financial statements of a
registrant. It facilitates analysis of trends affecting subsidiary
issuers and guarantors and the understanding of relationships among the
various components of a consolidated organization.
However, SAB 53 itself requires summarized financial information,
not condensed consolidating information. As we described above, the
staff developed the requirement for condensed consolidating financial
information through interpretive requests because summarized financial
information was not adequate financial disclosure for the new financing
structures not contemplated when the SAB was created. The second part
of the staff's approach to the presentation of financial statements
relies on the use of summarized financial information only in those
increasingly less frequent situations in which the SAB specifically
contemplated that financing structure.
V. Current Exchange Act Periodic Reporting Requirements
A. Exchange Act Reporting Requirements
The registration of an offering of a guarantee under the Securities
Act obligates the guarantor to file periodic reports with the
Commission. Exchange Act Section 15(d) requires separate annual and
interim reports from both the issuer and the guarantor of securities
offered under an effective Securities Act registration statement.
B. Modification of Exchange Act Reporting Requirements for Subsidiary
Guarantors and Subsidiary Issuers of Guaranteed Securities
SAB 53 only briefly addresses the Exchange Act reporting
obligations of subsidiary issuers of parent-guaranteed securities. In a
footnote, SAB 53 states:
Where the parent guarantor of an issuer subsidiary in either the
first [finance subsidiary issuer-no separate financial statements]
or second [operating subsidiary issuer-summarized financial
statements] category is a reporting company under the Exchange Act,
upon application to the Commission such a subsidiary would be
conditionally exempted pursuant to Section 12(h) of the Exchange Act
from reporting obligations under such Act.
[[Page 10584]]
Since the issuance of SAB 53, the staff of the Division of
Corporation Finance has responded to an increasing number of requests
for exemptions from Exchange Act reporting. The staff's analysis of
Exchange Act exemptive requests parallels its analysis under the
Securities Act of the financial statement requirements for subsidiary
guarantors and subsidiary issuers of guaranteed securities. If a
subsidiary issuer or guarantor need not include separate financial
statements under the SAB 53 analysis, an exemption from separate
reporting under the Exchange Act should also be available. Instead of
separate reporting for the subsidiary issuer or guarantor, the parent
will present in its annual and quarterly reports the same modified
information regarding the subsidiary as it presented in its Securities
Act registration statement.
VI. The Rule Proposals
We believe that the requirements for subsidiary issuer and
guarantor financial information should be set forth in Regulation S-X.
We also believe that the exemption from Exchange Act reporting should
be set forth in a rule that parallels the financial statement
requirements. We propose to codify, in large part, the staff's current
approach in these areas. We believe the proposals will provide
investors with meaningful and comparable financial information about
subsidiary issuers and guarantors.
We believe our proposals will provide significant benefits to
subsidiary issuers and guarantors of securities. First, they would
remove uncertainty about financial statement requirements. Second, they
should greatly reduce the number of exemptive requests registrants must
make to the Division of Corporation Finance. This would lessen the
administrative burden to registrants and the Division alike.
A. Application of Proposed Rule 3-10
As we discuss in Section IV.C.1. above, the staff has applied SAB
53 to debt and to preferred securities that have payment terms that are
substantially the same as debt. We propose the same scope for Rule 3-
10. These preferred securities would include trust preferred securities
and income preferred securities, as we describe in Section IV.C.1.b.
above.\29\
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\29\ See Example #23 of Appendix A for the information the
proposed rule would require the parent to include in its financial
statements with respect to these securities.
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We request your comment on the scope of the rule. Should it apply
to preferred securities with payment terms substantially the same as
debt or only to debt securities? Are there any other securities,
similar to debt, to which the proposed rule should apply? Are there any
categories of debt securities to which the rule should not apply?
Should it not apply to trust preferred securities and income preferred
securities such as MIPs and TOPRs? If so, is the level of disclosure
set forth in Exhibit A appropriate? Should we treat the parent's back-
up undertakings as a full and unconditional guarantee? Should the
parent's financial statements include any more or less disclosure about
the preferred securities?
B. Modified Financial Statement Reporting Requirements
First, we propose to restate the general rule that all issuers or
guarantors of registered securities must include full financial
statements. We then propose to allow modified financial information in
registration statements and periodic reports for five issuer/guarantor
situations:
A finance subsidiary issues securities that its parent
guarantees;
An operating subsidiary issues securities that its parent
guarantees;
A subsidiary issues securities that are guaranteed by its
parent and one or more other subsidiaries of its parent;
A parent issues securities that one of its subsidiaries
guarantees; and
A parent issues securities that are guaranteed by more
than one of its subsidiaries.
In these five situations, we propose the following two-part
analysis to determine whether modified financial information may be
provided for subsidiary issuers and guarantors. If the answer to both
questions is yes, modified financial information would be allowed:
Is the subsidiary issuer or guarantor wholly-owned by its
reporting parent?
Are all of the guarantees full and unconditional?
We propose to include in Rule 3-10 the same definitions of
``wholly-owned'' and ``full and unconditional guarantee'' that the
staff applies under SAB 53. The interpretations of wholly-owned in
Section IV.B.1.a. and Appendix C, and of full and unconditional in
Section IV.B.1.b. would be applied to these definitions.
We seek comment on whether the five categories listed above are
appropriate. Are there other categories of parent/subsidiary
relationships that we should separately address? We also seek comment
on the proposed definition of ``wholly-owned.'' Are there circumstances
in which the parent does not own 100% of the voting shares of its
subsidiary that should qualify for special treatment under proposed
Rule 3-10? For example, what if a foreign country requires directors to
own a certain percentage of a company's voting shares? \30\
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\30\ See, e.g., Crown Cork & Seal Company, Inc. (March 10,
1997). The staff agreed to a no-action request from a subsidiary
organized in the Republic of France even though it had more than one
voting shareholder. French law required the subsidiary to have a
total of seven shareholders and also required each director to own
at least one share. The staff noted that the subsidiary was wholly-
owned, except to the minimum extent necessary to satisfy the laws of
its home country.
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What if a subsidiary has outstanding securities convertible into
its voting shares not owned, directly or indirectly, by its parent?
What if those securities have been issued but are not yet exercisable?
What if a subsidiary has granted options to its employees that are
exercisable for its voting shares? What if the options have been
granted but are not yet exercisable?
We also request comment on the definition of ``wholly-owned'' as it
applies to subsidiaries that are trusts, limited partnerships, or
limited liability companies. Is there a more appropriate standard than
the direct or indirect ownership of 100% of the voting shares of the
subsidiary? ``Voting shares,'' as defined in Rule 1-02(z) of Regulation
S-X,\31\ include ``the sum of all rights, other than as affected by
events of default, to vote for election of directors and/or the sum of
all interests in an unincorporated person.'' Is this the proper
definition of voting shares and, therefore, ``wholly-owned,'' for these
types of subsidiaries?
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\31\ 17 CFR 228.1-02(z).
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We also request comment on whether the proposed definition of
``full and unconditional'' is appropriate. Should a guarantee be
considered full and unconditional when it contains a general fraudulent
conveyance savings clause that is not limited to a specific dollar or
percentage amount? Are there some circumstances in which a guarantee
should be considered full and unconditional even when it contains a
limitation of a specific dollar amount or percentage? Are there other
limitations on preferred stock guarantees that we have not mentioned
that would cause a guarantee not to be full and unconditional? Should
we treat the ``back-up undertakings'' that guarantee trust preferred
securities and income preferred securities as a full and unconditional
guarantee? Should different subordination terms between a guaranteed
security and the guarantee call into question the full and
unconditional character of the guarantee?
[[Page 10585]]
If either the guarantee is not full and unconditional or the
subsidiary issuer/guarantor is not wholly owned by its reporting
parent, then modified financial information would not be allowed. In
subsections 1 through 6, below, we assume that each of these conditions
has been met.
1. Finance Subsidiary Issuers
We propose to amend Rule 3-10 to codify SAB 53's treatment of
finance subsidiary issuers of securities that are guaranteed by the
parent company. Specifically, subsidiary issuers would not be required
to include any financial statements if:
The subsidiary has no independent assets or operations
other than those associated with the financing activities;
The parent of the issuer guarantees the securities;
No other subsidiaries of the parent guarantee the
securities;
The parent company's financial statements are filed for
the periods specified by Rules 3-01 and 3-02 of Regulation S-X; and
The parent company's financial statements include a
footnote stating that the issuer is a wholly-owned finance subsidiary
of the parent with no independent assets or operations and the parent
has fully and unconditionally guaranteed the securities.
2. Operating Subsidiary Issuers
We propose to amend Rule 3-10 to address specifically the structure
where the parent of a subsidiary with independent assets or operations
guarantees the securities issued by that subsidiary. Under SAB 53 and
current staff interpretations, this issuer may disclose only summarized
financial information instead of a full financial presentation.
Consistent with our view that condensed financial information is more
informative, we propose that these issuers need not include separate
financial statements if:
No subsidiaries of the parent guarantee the securities;
The parent company's financial statements are filed for
the periods specified by Rules 3-01 and 3-02 of Regulation S-X; and
The parent company's financial statement footnotes include
condensed consolidating financial information with a separate column
for:
The parent company,
The subsidiary issuer,
Any other subsidiaries of the parent on a combined basis,
Consolidating adjustments, and
The total consolidated amounts.
3. Subsidiary Issuer of Securities Guaranteed by Its Parent and One or
More Other Subsidiaries of That Parent
We propose to codify current staff interpretations for the
structure where a subsidiary issues securities and both its parent and
one or more other subsidiaries of the parent are guarantors. We propose
that these subsidiary issuers and guarantors need not include separate
financial statements if:
The guarantees are joint and several;
The parent company's financial statements are filed for
the periods specified by Rules 3-01 and 3-02 of Regulation S-X; and
The parent company's financial statement footnotes include
condensed consolidating financial information with a separate column
for:
The parent company,
The subsidiary issuer,
The guarantor subsidiaries on a combined basis,
The non-guarantor subsidiaries on a combined basis,
Consolidating adjustments, and
The total consolidated amounts.
This proposal would apply the same requirement for condensed
consolidating financial information to finance subsidiary issuers and
operating subsidiary issuers that are part of this structure.
4. Subsidiary Guarantor of Securities Issued by Its Parent
We propose to codify the current staff interpretation for the
structure where a parent company issues securities and one of its
subsidiaries guarantees those securities. We propose that the
subsidiary guarantor need not include separate financial statements if:
No other subsidiaries of that parent guarantee the
securities;
The parent company's financial statements are filed for
the periods specified by Rules 3-01 and 3-02 of Regulation S-X; and
The parent company's financial statement footnotes include
condensed consolidating financial information with a separate column
for:
The parent company,
The subsidiary guarantor,
Other subsidiaries of the parent on a combined basis,
Consolidating adjustments, and
The total consolidated amounts.
This proposal would apply the same requirement for condensed
consolidating financial information to finance subsidiary guarantors
and operating subsidiary guarantors that are part of this structure.
5. Multiple Subsidiary Guarantors of Securities Issued by Their Parent
We propose to codify the staff's position that when a parent
company issues securities and more than one of its subsidiaries
guarantees the securities, the subsidiary guarantors need not include
separate financial statements if:
The guarantees are joint and several;
The parent company's financial statements are filed for
the periods specified by Rules 3-01 and 3-02 of Regulation S-X; and
The parent company's financial statement footnotes include
condensed consolidating financial information with a separate column
for:
The parent company,
The subsidiary guarantors on a combined basis,
The non-guarantor subsidiaries on a combined basis,
Consolidating adjustments, and
The total consolidated amounts.
C. Recently Acquired Subsidiary Issuers or Guarantors
A special issue in the financial statement disclosure for issuers
and guarantors is the treatment of recently acquired subsidiaries.
Because these subsidiaries generally are not included in the
consolidated results of the parent company for all periods, condensed
consolidating financial information does not effectively present all
material information about these subsidiaries to investors.\32\
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\32\ Currently, Rule 3-10 and SAB 53 provide no relief for a
subsidiary issuer or guarantor for periods prior to its acquisition.
Literal application of Rule 3-10 would require three years of
audited financial statements, regardless of the significance of the
acquired subsidiary. The staff has administratively permitted
registrants to apply the significance tests in Rule 3-10(b) by
analogy, but that practice has provided limited relief and created a
number of implementation issues.
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We propose to require pre-acquisition financial statements for
significant, recently acquired subsidiary issuers and guarantors until
the condensed consolidating financial information would adequately
reflect their cash flows and results of operations. Specifically, we
propose to require separate audited financial statements for
significant, recently acquired subsidiary issuers and guarantors for
the subsidiary's most recent fiscal year. Unaudited financial
statements also must be filed for any interim period specified by Rules
3-01 and 3-02 of Regulation S-X.\33\
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\33\ 17 CFR 210.3-01 and 17 CFR 210.3-02.
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We propose to require pre-acquisition financial statements in
registration
[[Page 10586]]
statements only. We would not require them in Exchange Act periodic
reports.
This proposed treatment for recently acquired subsidiaries would
apply to any subsidiary issuer or guarantor:
That has not been included in the audited consolidated
results of the parent company for at least a nine-month period; and
Whose net book value or purchase price, whichever is
greater, equals 20% or more of the shareholders' equity of the parent
company on a consolidated basis.\34\
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\34\ This significance test would be computed by using amounts
for the subsidiary and parent as of the most recent fiscal year end
before the acquisition.
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We propose to measure the significance of recently acquired issuers
and guarantors by comparison to shareholders' equity of the parent
company rather than to the amount of the debt being registered. The
proposed measure is more consistent with the staff's overall approach
to analyzing issuer/guarantor structures, which focuses on the
relationship of subsidiary financial information to the parent
company's consolidated financial statements. The proposed measure
should be a more relevant indicator of the recently acquired
subsidiary's relative importance to the parent company. The proposed
measure should not cause financial statements to be filed for small
guarantors acquired by well-capitalized companies that issue relatively
small amounts of debt. Conversely, the proposed measure should result
in greater financial disclosure where the parent company is thinly
capitalized.
Is 20% of consolidated shareholders' equity the correct measure for
requiring the financial statements of a recently acquired subsidiary
that issues guaranteed securities or guarantees securities? Would a
larger percentage, such as 30%, 40%, 50%, be more appropriate? Would a
smaller percentage, such as 15%, 10%, or 5%, be more appropriate? Is
shareholders' equity the correct test for applying the requirement?
Should other factors be considered instead of, or in addition to,
shareholders' equity? If so, what other factors should be considered?
Is nine months the proper length of time for this analysis? Should it
be shorter, such as three or six months? Should it be longer, such as a
full fiscal year or two fiscal years?
D. Instructions for Condensed Consolidating Financial Information Under
Proposed Rule 3-10
To help ensure meaningful, consistent presentation of the condensed
consolidating financial information, we propose thirteen instructions
on how to prepare them. We propose to include these instructions in new
paragraph (i) of Rule 3-10. The proposed instructions are:
1. Present the financial information in sufficient detail to allow
investors to determine the assets, results of operations, and cash
flows of each of the consolidating groups.
2. Follow the general guidance in Rule 10-01 of Regulation S-X for
the form and content for condensed financial statements.
3. The financial information should be audited for the same periods
that the parent company financial statements are audited.
4. The parent company column should present investments in all
subsidiaries under the equity method.
5. All subsidiary issuer or guarantor columns should present
investments in non-guarantor subsidiaries under the equity method.
6. Provide separate columns for each guarantor by legal
jurisdiction if differences in domestic or foreign laws affect the
enforceability of the guarantees.
7. Include the following disclosures:
Each subsidiary issuer and/or guarantor is wholly owned by
the parent company;
All guarantees are full and unconditional; and
Where there is more than one guarantor, all guarantees are
joint and several.
8. Disclose any significant restrictions on the ability of the
parent company or any guarantor to obtain funds from its subsidiaries
by dividend or loan.
9. Provide the disclosures prescribed by Rule 4-08(e)(3) with
respect to the guarantors.
10. Disclose additional financial and narrative information about
each guarantor if the information would be material for investors to
evaluate the sufficiency of the guarantee.
11. The financial information shall include sufficient disclosures
to make the information presented not misleading.
12. Disclosure that would substantially duplicate disclosure
elsewhere in the parent's financial statements is not required.
13. Where the parent company's consolidated financial statements
are prepared on a comprehensive basis other than U.S. Generally
Accepted Accounting Principles, reconcile the information in each
column to U.S. Generally Accepted Accounting Principles to the same
extent specified by Item 17 of Form 20-F.
We request comment as to whether these instructions provide
sufficient guidance to prepare the financial statements. For example,
are the instructions too general or specific? Would further guidance be
helpful? Also, do the instructions elicit the appropriate level of
disclosure?
E. Condensed Consolidating Financial Information
Our proposals today adopt the first part of the staff's current
approach to the presentation of useful financial information: condensed
consolidating financial information. We propose to require condensed
consolidating financial information in all situations not involving a
finance subsidiary, as described above. We request comment on this
proposal. Is condensed consolidating financial information adequate for
current financing structures of guaranteed securities and guarantees?
Will condensed consolidating financial information adapt to the
developing financing structures? Are there situations in which
summarized financial information is adequate? Is there another type of
financial presentation that would be better suited for guaranteed
securities and guarantees than either condensed consolidating or
summarized financial information?
We propose to amend Item 310 of Regulation S-B to require small
business issuers to include the same financial information requirements
as in proposed Rule 3-10. We request comment on this proposal. Is it
appropriate to propose the same requirements, regardless of the size of
the issuer? Should there be different standards for small business
issuers? Is the corporate structure of small business issuers less
complex and, if so, do investors not need condensed consolidating
information?
F. Exchange Act Reporting
Currently, subsidiary issuers or guarantors that are not required
to include separate financial statements may seek an exemption from the
Exchange Act reporting requirements. As noted above, the volume of
these exemptive requests is significant. The staff's consideration of
these exemptive requests requires the same analysis we use in
determining the level of financial information required.
We propose new Rule 12h-5 to eliminate the need for these exemptive
requests and to remove uncertainty regarding the availability of an
exemption from Exchange Act reporting. As proposed, Rule 12h-5 would
exempt from Exchange Act reporting:
[[Page 10587]]
Any subsidiary issuer or subsidiary guarantor permitted to
omit financial statements by Rule 3-10; and
Any recently acquired subsidiary issuer or subsidiary
guarantor that would be permitted to omit financial statements by Rule
3-10, but for the requirement to provide pre-acquisition financial
statements under paragraph (g) of that rule.
As required by Rule 3-10, the parent company periodic reports would
include condensed consolidating financial information about the
subsidiary issuers and/or guarantors.\35\ The parent company periodic
reports must contain this information:
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\35\ In the case of finance subsidiaries, the parent company
financial statements would include the narrative information
required by proposed Rule 3-10(b)(4).
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For as long as the issuer and any guarantors would be
subject to reporting under Section 15(d) as a result of the securities
offering; and
If the guaranteed securities are registered under Section
12, for as long as the issuer and any guarantors would be subject to
reporting obligations under Section 13(a) as a result of the
registration of the guaranteed securities under Section 12.
These exemptions are the same as the staff currently provides in
its responses to exemptive requests. The staff grants these exemptions
because investors should be provided one source for all of the
necessary information regarding investment in those securities--the
parent company's periodic reports--and condensed information regarding
the subsidiaries within those reports is sufficient for a complete
understanding of the investment.
Under proposed Rule 12h-5, these subsidiary issuers and subsidiary
guarantors would be exempted automatically from Exchange Act reporting
requirements. As a result, there would be no need for them to request
exemptive relief from the Commission's staff.
We request comment on proposed Rule 12h-5. Should there be
additional requirements for the exemption from Exchange Act reporting?
For example, would it be appropriate to require the subsidiary to file
a Form 15 to inform us that it is not required to file Exchange Act
reports due to the Rule 12h-5 exemption? Would it be appropriate for
the subsidiary to file a Form 15 filing as a condition to the
exemption's availability? Would such a filing be useful information for
the public? Would such a filing be an undue burden on the subsidiary?
What should be required of subsidiaries that no longer qualify for the
exemption from Exchange Act reporting under proposed Rule 12h-5 because
they no longer satisfy the requirements of Rule 3-10 (for example, if
the guarantee is no longer full and unconditional or the subsidiary is
no longer wholly-owned)? For example, should they be required to file a
report on Form 8-K to notify investors that they will resume their
reports under the Exchange Act? Should some other form of notification
be required?
G. Financial Statements of Affiliates Whose Securities Collateralize
Registered Securities--Proposed Rule 3-16 of Regulation S-X
The financial statement requirements for affiliates whose
securities collateralize registered securities currently are combined
with the requirements for guarantors in Rule 3-10 of Regulation S-X. We
do not propose to amend the financial statement requirements for these
affiliates. Because our proposed amendments to Rule 3-10 would change
significantly the structure of that rule, we propose to move the
requirements for these affiliates into a rule that applies only to
them. This will avoid confusion and make the requirements easier to
understand. This proposed rule would be new Rule 3-16 of Regulation S-
X.\36\
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\36\ Under current Rule 3-10, the staff frequently is presented
with registration statements in which the registrants did not
recognize that the financial statement requirements for guarantors
may differ from the requirements for affiliates whose securities
collateralize the registered securities. This misunderstanding
causes significant issues in structuring securities and considering
on-going disclosure responsibilities.
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VII. Request for Comment
A. Request Regarding Specific Proposals
The Commission requests comments on all aspects of the proposed
amendments.
In addition, we request comment on the following questions:
If we adopt today's proposals, should there be a phase-in
period for parent companies that currently include only summarized
financial information? If so, why would such a phase-in be needed? How
long should that phase-in period be? Should it begin with the beginning
of the first fiscal year after adoption of the proposals?
A significant benefit that we seek in today's proposals is
the certainty issuers receive by having the disclosure and reporting
standards in Commission rules. Is there any additional means by which
we could provide this certainty? Are there any means by which
subsidiaries could be certain that they have met the standards in
proposed Rule 3-10 and, therefore, may rely upon the exemption in
proposed Rule 12h-5?
Today's proposals do not address the situation where a
parent company and one of its wholly-owned subsidiaries are co-obligors
on a debt or preferred security. In responses to the infrequent
exemptive requests on this issue, the staff has treated this as if it
were a subsidiary issuer/parent guarantor situation. Because this
situation may present unique issues, we would continue to have these
issuers contact the staff and request exemptive relief. Should we
include the co-obligor situation in Rule 3-10? Is the information
required by proposed Rule 3-10 sufficient in a co-obligor situation?
Should reporting relief be available when a guaranteed
security is in default? Should additional disclosures be required in
these circumstances?
Should there be an exception from condensed consolidating
information for subsidiary guarantors where:
(1) The parent company issuer has no independent assets or
operations,
(2) Substantially all assets and operations are in guarantor
subsidiaries, and
(3) The non-guarantor subsidiaries are inconsequential?
Should parent company only financial statements be permitted in these
circumstances instead of condensed consolidating information? Should
the parent company be the only Exchange Act reporting company in these
circumstances?
We request comment as to how the proposed rule should
apply to Foreign Private Issuers. For example, in reports on Form 6-K
that include interim period financial statements about the parent
company, should we require Foreign Private Issuers to include condensed
consolidating information about subsidiaries of the type that we would
require the parent to include in its annual report on Form 20-F? What
if the parent were required to file a Form 6-K due to financial
reporting requirements in its home country but the subsidiary did not
have a corresponding reporting obligation? Should the parent's reports
on Form 6-K still include condensed consolidating financial information
about the subsidiary in that event?
If we adopt today's proposals, will there be a need for
SAB 53? If so, for what purpose would SAB 53 be used? If not, should
SAB 53 be rescinded?
[[Page 10588]]
B. General Request Regarding Debt Offerings
Current rules and staff practices related to debt offerings focus
on the existence of registered guarantees. An issuer of debt securities
that are guaranteed by subsidiaries generally must provide additional
financial information about those subsidiaries. However, an issuer of
unguaranteed debt is generally not required to provide separate
financial information about its subsidiaries, even where substantially
all of the assets and operations of the consolidated group are held by
the subsidiaries. Current rules require narrative disclosure of the
nature and extent of material restrictions on the ability of the
subsidiaries to distribute funds to the parent company, but do not
require separate financial information about the subsidiaries or the
parent on an unconsolidated basis unless restricted net assets of the
subsidiaries exceed a specified level.\37\
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\37\ See Rule 4-08 of Regulation S-X (17 CFR 210.4-08) and Rule
12-04 of Regulation S-X [17 CFR 210.12-04].
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Some believe that the current rules and practices place a
disproportionate burden on issuers that attempt to provide additional
protection to debt holders through guarantees, in comparison to issuers
of unguaranteed debt. Others believe that narrative disclosures
regarding subsidiaries' ability to distribute funds to the issuer are
not sufficient to allow investors to interpret the issuer's
consolidated financial statements. Additional financial disclosure such
as condensed consolidating information or parent-only financial
statements would, they argue, enhance investors' ability to evaluate
the issuer's debt-paying capacity.
We are requesting comment on whether additional financial
disclosures should be required for offerings of debt that are not
guaranteed. Are the current requirements adequate? Should condensed
consolidating information, or parent-only information as contemplated
by Rule 12-04 of Regulation S-X, be required for all debt issuers that
have subsidiaries with assets and operations, even if there are no
subsidiary guarantors? Should other types of disclosure be required in
these circumstances?
We invite any interested persons to submit comments. Please submit
comment letters in triplicate to Jonathan G. Katz, Secretary, U.S.
Securities and Exchange Commission, Mail Stop 6-9, 450 Fifth Street,
N.W., Washington, D.C. 20549. You also may submit comment letters
electronically to the following e-mail address: rule-comments@sec.gov.
All comment letters should refer to File No. S7-XX-99. If e-mail is
used, include this file number on the subject line. The Commission will
consider these comments in complying with its responsibilities under
Sections 2(b) and 19(a) of the Securities Act and Sections 3(f) and
12(h) of the Exchange Act.
VIII. Costs and Benefits of the Proposed Rule Changes and Their
Effects on Efficiency, Competition, and Capital Formation
We are proposing financial reporting rules for issuers and
guarantors of guaranteed securities. We are also proposing an exemption
from periodic reporting for subsidiary issuers and guarantors of these
securities. Our rule proposals would, for the most part, codify the
positions the staff has developed through Staff Accounting Bulletin No.
53, later interpretations, and the registration statement review
process. The rule proposals deviate from current practice only in the
following two situations:
A subsidiary with more than minimal operations issues
securities, its parent guarantees the securities, and no subsidiary
guarantees the securities; and
A parent issues securities, a subsidiary with more than
minimal operations guarantees the securities, and no other subsidiary
guarantees the securities.
Those registrants currently are permitted to provide summarized
financial information instead of full financial statements. Under our
proposals, those registrants would be required to provide condensed
consolidating financial information instead of summarized financial
information.
Because the proposed rules are essentially codifying staff
position, we do not believe the proposed rules would impose substantial
regulatory costs on registrants. To illustrate this point, we note the
additional burdens these proposals would have on registrants who were
granted no-action relief in calendar year 1997. The Division provided
641 written responses to requests for no-action letters in 1997.
Shareholder proposal requests pursuant to Exchange Act Rule 14a-8
accounted for 343 of these responses. Of the 298 non-shareholder
proposal no-action responses, 140 were requests concerning SAB 53. Of
the 140 SAB 53 no-action responses the Division issued, 29 were
permitted to provide summarized financial statements. Under our
proposals, those 29 registrants would be required to provide condensed
consolidating financial information. We have estimated the average cost
of providing condensed consolidating information instead of summarized
financial information for each of those registrants to be approximately
$1000.\38\ Therefore, we estimate that the aggregate additional annual
cost to all registrants will be approximately $29,000 (29 registrants
x $1000 per registrant). We request your comments on the
reasonableness of our estimates.
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\38\ Depending on the number of subsidiaries, the complexity of
the financing structure, and other factors, the time required to
provide condensed consolidating financial information instead of
summarized financial information could vary significantly. Based on
consultation with an outside consultant, we estimate that, on
average, it would take an additional 16 hours to provide condensed
consolidating financial information in lieu of summarized financial
information. Assuming that the corporate staff preparing this
information are compensated at the rate of $63 per hour, we estimate
the cost of providing condensed consolidating information to be
approximately $1008 per registrant ($63 per hour x 16 hours).
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The costs of the proposed rules are counter-balanced by the
benefits to registrants and investors. First, we intend for these rules
to eliminate uncertainty about which financial statements and periodic
reports subsidiary issuers and guarantors must file. Second, the
proposed rules require financial information that is more helpful to an
investor in the two areas where summarized financial statements are
permitted today.\39\ Finally, because registrants would be required to
provide condensed consolidating financial information in all situations
in which they must provide separate financial information, the
investors will be able to compare the financial information among all
offerings.
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\39\ Condensed consolidating financial information requires the
columnar presentation of each category of parent and subsidiary as
issuer, guarantor, or non-guarantor. This more clearly distinguishes
the assets, liabilities, revenues, expenses, and cash flows of the
entities that are legally obligated under the indenture from those
that are not, particularly if subsidiary guarantors themselves have
consolidated operating subsidiaries that are not guarantors. Another
important element of credit decisions is cash flow information.
Condensed consolidating financial information requires this
information while summarized financial information does not.
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The proposed codification of current staff positions would also
benefit companies by eliminating the need to create, submit, and obtain
a no-action letter response from the Division. As stated above, in
1997, the Division issued responses to 140 requests for SAB 53 no-
action positions. Based on discussions with external legal counsel who
prepare no-action requests, we estimate that, on average, it takes 35
hours to prepare a request for a no-action letter. Assuming that the
external professional help costs $175 per hour,
[[Page 10589]]
the total cost for preparing a request for a no-action position is
approximately $6100 per request. Applying these figures to the number
of no-action letter requests to which we respond annually, we estimate
the number of attorney hours spent annually on creating a request for a
SAB 53 no-action position to be 4900 hours and the annual savings to
registrants to be approximately $850,000. We request your comment on
the reasonableness of our estimates.
Section 23(a) of the Exchange Act \40\ requires us to consider the
impact any new Exchange Act rule would have on competition. We do not
believe that the proposed rules would have any anti-competitive effects
since the proposed rules, to a large extent, simply codify the
reporting requirements to which registrants are already subject. In the
two situations in which the proposed rules require more than the
current staff positions, we do not believe the proposed requirement to
provide condensed consolidating financial information instead of
summarized financial information would cause any anti-competitive
effect. We request comment on whether the proposals, if adopted, would
have an adverse effect on competition or would impose a burden on
competition that is neither necessary nor appropriate in furthering the
purposes of the Exchange Act. In addition, Section 3(f) of the Exchange
Act requires us to consider adopting rules that require a public
interest finding to consider whether the proposed rule will promote
efficiency, competition and capital formation. We believe that the
proposed rule amendments will have a positive, but unquantifiable,
effect on efficiency, competition, and capital formation. We seek
comment on the intended benefits and how these changes would affect
competition, capital formation and market efficiency.
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\40\ 15 U.S.C. 78w(a)(2).
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For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, we also request information regarding the potential impact
of the proposals on the economy on an annual basis. Would the
amendments, if adopted, result or be likely to result in:
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation?
Commentators should provide empirical data to support their views.
Commenters are encouraged to provide views and data relating to any
costs or benefits associated with the rule proposal. In particular,
please identify any costs or benefits associated with the rule proposal
relating to the preparation of condensed consolidating financial
information instead of summarized financial information. Will the
proposal have no substantial effect as anticipated, or will the
proposal result in additional costs and benefits? Please describe and,
if possible, quantify any foreseeable significant effects.
IX. Regulatory Flexibility Act Certification
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b), the Chairman of the Commission has certified that the
proposal would not, if adopted, have a significant economic impact on a
substantial number of small entities. The proposed rules largely codify
the positions the staff has developed through Staff Accounting Bulletin
No. 53, later interpretations and the registration statement review
process. The rule proposals deviate from current practice only in the
following two situations:
A subsidiary with more than minimal operations issues
securities, its parent guarantees the securities, and no subsidiary
guarantees the securities; and
A parent issues securities, a subsidiary with more than
minimal operations guarantees the securities, and no other subsidiary
guarantees the securities.
Today, those registrants currently are permitted to provide
summarized financial information instead of full financial statements.
Under our proposals, those registrants would be required to provide
condensed consolidating financial information instead of summarized
financial information. As we discussed in our analysis of the costs and
benefits of the proposed rule changes above, the burden to provide
condensed consolidating information instead of summarized financial
information would not have a substantial effect on any registrant.
More specifically, we do not believe that our proposed rules would
have a substantial impact on small entities. In the last ten years, the
Division has responded to only one SAB 53 request in which the related
offering was registered on a small business issuer form, and that
company would not meet the definition of small business entity for
Regulatory Flexibility Act purposes.\41\ We include the certification
in this release as Attachment D and encourage written comments relating
to it. Commenters should describe the nature of any impact on small
entities and provide empirical data to support the extent of the
impact.
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\41\ In order to qualify to use small business issuer forms to
register an offering, the issuer must, among other things, have less
than $25 million in assets and no more than $25 million in public
float. Small business issuers who qualify to use small business
issuer registration forms may also elect to use standard
registration forms.
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X. Paperwork Reduction Act
We have submitted the proposals to the Office of Management and
Budget for review in accordance with the Paperwork Reduction Act of
1995, 44 U.S.C. 3501 et seq. Current Rule 3-10 requires full financial
statements for all guarantors or securities and for all affiliates of
those guarantors whose securities constitute a substantial portion of
the collateral. For those registrants who qualify, we anticipate that
proposed Rule 3-10 of Regulation S-X would reduce or eliminate the
existing information collection requirements that are associated with
current Rule 3-10. This information would potentially be required to be
presented in several Securities Act registration statements and
Exchange Act reports to assist investors in the determination of the
credit worthiness of a security.
The proposed rules will affect the inclusion of information in
Securities Act registration Forms S-1, F-1, S-4 and F-4 (OMB control
numbers 3235-0065, 3235-0258, 3235-0324, and 3235-0325, respectively).
We estimate that the proposed rules will increase the average burden
per form by approximately five minutes.\42\ The proposed rules also
will affect the inclusion of information in Exchange Act Forms 10-K and
10-Q (OMB control numbers 3235-0063 and 3235-0070). We estimate the
proposed rules will increase the average burden per form by
approximately three minutes and one minute, respectively.\43\
[[Page 10590]]
We estimated the increased burden hours for each form by dividing the
estimated aggregate increased burden for all forms, whether or not the
filers would be required to report under Rule 3-10, by the estimated
total number of filers. The burden for Regulation S-X (OMB control
number 3235-0009) will remain unchanged.
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\42\ To arrive at this number, we divided the estimated number
of companies that will have to provide condensed consolidating
financial information in lieu of summarized financial information
per year (29) by the estimated number of filings on these forms per
year (5653) and multipled that quotient (.00513) by the estimated
number of hours to convert financials (16).
\43\ To arrive at this number for Form 10-K, we divided the
estimated number of companies that will have to provide condensed
consolidating financial information in lieu of summarized financial
information per year (29) by the estimated number of filings on
these forms per year (10,329) and multipled that quotient (.00279)
by the estimated number of hours to convert financials (16). To
arrive at this number for Form 10-Q, we divided the estimated number
of companies that will have to provide condensed consolidating
financial information in lieu of summarized financial information
per year (29) by the estimated number of filings on these forms per
year (29,551) and multipled that quotient (.0009814) by the
estimated number of hours to convert financials (16).
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The proposed changes would not affect the retention period. The
filing of financial statements, as described in this release, is
mandatory. They are not kept confidential. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a correctly valid control number.
In accordance with 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
Evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of collection of information on those
who are to respond, including through the use of automated collection
techniques or other forms for information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the following persons:
Desk Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Room 3208, New Executive Office Building, Washington, D.C. 20503; and
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and refer to File No. S7-7-
99. The Office of Management and Budget is required to make a decision
concerning the collection of information between 30 and 60 days after
publication of this release in the Federal Register, so a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days of this publication.
XI. Statutory Bases
We propose the rule changes explained in this release pursuant to
sections 7,\44\ 10,\45\ and 19(a) \46\ of the Securities Act and
sections 12,\47\ 13,\48\ and 15(d) \49\ of the Exchange Act.
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\44\ 15 U.S.C. 77g.
\45\ 15 U.S.C. 77j.
\46\ 15 U.S.C. 77t.
\47\ 15 U.S.C. 78l.
\48\ 15 U.S.C. 78m.
\49\ 15 U.S.C. 78o(d).
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List of Subjects in 17 CFR Parts 210, 228 and 240
Reporting and recordkeeping requirements, Securities.
Text of the Proposed Rules
For the reasons set out in the preamble, the Securities and
Exchange Commission proposals to amend title 17, chapter II of the Code
of Federal Regulations as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
1. The authority citation for Part 210 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77aa(25),
77aa(26), 78j-i, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d),
79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-
37(a), unless otherwise noted.
2. Section 210.3-10 is revised to read as follows:
Sec. 210.3-10 Financial statements of guarantors, certain issuers of
guaranteed securities registered or being registered.
(a)(1) General rule. As a general rule, every issuer of a
registered security that is guaranteed and every guarantor of a
registered security must file the financial statements required for a
registrant by Regulation S-X.
(2) Operation of this rule. Paragraphs (b), (c), (d), (e), and (f)
of this section are exceptions to the general rule of paragraph (a)(1)
of this section. Paragraph (g) of this section is a special rule for
recently acquired issuers or guarantors that overrides each of these
exceptions. Only one paragraph can apply to a single issuer or
guarantor. Paragraph (h) of this section defines some of the terms used
in this section. Paragraph (i) of this section states the requirements
for preparing the condensed consolidating financial information
required by paragraphs (c), (d), (e), and (f) of this section.
(b) Finance subsidiary issuer of securities guaranteed by its
parent. When a company with no independent assets or operations issues
securities and its parent guarantees those securities, the registration
statement, annual report, or quarterly report need not include
financial statements of the issuer if:
(1) The issuer is wholly-owned by the parent guarantor;
(2) The guarantee is full and unconditional;
(3) No other subsidiaries of the parent guarantee the securities;
and
(4) The parent company's financial statements are filed for the
periods specified by Sec. Sec. 210.3-01 and 210.3-02 and include a
footnote stating that the issuer is a wholly-owned finance subsidiary
of the parent with no independent assets or operations and the parent
has fully and unconditionally guaranteed the securities.
(c) Operating subsidiary issuer of securities guaranteed by its
parent. When a company with independent assets or operations issues
securities and its parent guarantees those securities, the registration
statement, annual report, or quarterly report need not include
financial statements of the issuer if:
(1) The issuer is wholly-owned by the parent guarantor;
(2) The guarantee is full and unconditional;
(3) There are no subsidiaries of the parent that guarantee those
securities; and
(4) The parent company's financial statements are filed for the
periods specified by Secs. 210.3-01 and 210.3-02 and include, in a
footnote, condensed consolidating information for the same periods with
a separate column for the parent company, the subsidiary issuer, any
other subsidiaries of the parent on a combined basis, consolidating
adjustments, and the total consolidated amounts.
(d) Subsidiary issuer of securities guaranteed by its parent and
one or more other subsidiaries of that parent. When a company issues
securities and both its parent and one or more other subsidiaries of
that parent guarantee those securities, the registration statement need
not include financial statements of the issuer or the subsidiary
guarantor(s) if:
(1) The issuer and each of the subsidiary guarantors are wholly-
owned by the parent guarantor;
(2) The guarantees are full and unconditional;
(3) The guarantees are joint and several; and
(4) The parent company's financial statements are filed for the
periods specified by Secs. 210.3-01 and 210.3-02
[[Page 10591]]
and include, in a footnote, condensed consolidating financial
information for the same periods with a separate column for the parent
company, the subsidiary issuer, the guarantor subsidiaries on a
combined basis, the non-guarantor subsidiaries on a combined basis,
consolidating adjustments, and the total consolidated amounts.
(e) Subsidiary guarantor of securities issued by the parent of that
subsidiary. When a parent company issues securities and one subsidiary
of that issuer guarantees those securities, the registration statement
need not include financial statements of the subsidiary guarantor if:
(1) The subsidiary guarantor is wholly-owned by the parent issuer;
(2) The guarantee is full and unconditional;
(3) There are no other subsidiaries of that parent that guarantee
the securities; and
(4) The parent company's financial statements are filed for the
periods specified by Secs. 210.3-01 and 210.3-02 and include, in a
footnote, condensed consolidating financial information for the same
periods with a separate column for the parent company, the subsidiary
guarantor, any other subsidiaries of the parent on a combined basis,
consolidating adjustments, and the total consolidated amounts.
(f) Subsidiary guarantors of securities issued by the parent of
those subsidiaries. When a parent company issues securities and more
than one subsidiary of that issuer guarantees those securities, the
registration statement need not include financial statements of the
subsidiary guarantors if:
(1) Each of the subsidiary guarantors is wholly-owned by the parent
issuer;
(2) The guarantees are full and unconditional;
(3) The guarantees are joint and several; and
(4) The parent company's financial statements are filed for the
periods specified by Secs. 210.3-01 and 210.3-02 and include, in a
footnote, condensed consolidating financial information for the same
periods with a separate column for the parent company, the subsidiary
guarantors on a combined basis, the non-guarantor subsidiaries on a
combined basis, consolidating adjustments, and the total consolidated
amounts.
(g) Recently acquired issuers or guarantors. (1) The registration
statement of the parent company must include the financial statements
specified in paragraph (g)(2) of this section for any subsidiary that
otherwise would meet the conditions in paragraph (c), (d), (e), or (f)
of this section for omission of separate financial statements if:
(i) The subsidiary has not been included in the audited
consolidated results of the parent company for at least a nine month
period; and
(ii) The net book value or purchase price, whichever is greater, of
the subsidiary exceeds 20% of the shareholders' equity of the parent
company on a consolidated basis.
Instruction to paragraph (g)(1): The significance test of
paragraph (g)(1)(ii) of this section should be computed using
amounts for the subsidiary and parent as of the most recent fiscal
year end preceding the acquisition.
(2) Financial statements required--
(i) Audited financial statements for a subsidiary described in
paragraph (g)(1) of this section must be filed for at least the
subsidiary's most recent fiscal year. In addition, unaudited financial
statements must be filed for any interim periods specified in
Secs. 210.3-01 and 210.3-02.
(ii) The financial statements should conform to the requirements of
Regulation S-X, except that supporting schedules need not be filed.
(3) Acquisitions of a group of subsidiary issuers or guarantors
that are related prior to their acquisition shall be aggregated for
purposes of applying the 20% test in paragraph (g)(1)(ii) of this
section. Subsidiaries shall be deemed to be related prior to their
acquisition if:
(i) They are under common control or management;
(ii) The acquisition of one subsidiary is conditioned on the
acquisition of each subsidiary; or
(iii) The acquisition of each subsidiary is conditioned on a single
common event.
(4) Information required by this paragraph (g) of this section is
not required to be included in an annual report or quarterly report.
(h) Definitions. For the purposes of this section--
(1) A subsidiary is wholly-owned if all of its outstanding voting
shares are owned, either directly or indirectly, by the parent company.
If the subsidiary is not in corporate form, it is ``wholly-owned'' if
all of its outstanding ownership interests are owned, either directly
or indirectly, by the parent company.
(2) A guarantee is full and unconditional, if, when an issuer of a
guaranteed security has failed to make a scheduled payment, any holder
of the guaranteed security may immediately bring suit directly against
the guarantor for payment of all amounts due and payable.
(3) Annual report refers to annual reports on Form 10-K, Form 10-
KSB, or Form 20-F (Sec. Sec. 249.310, 249.310b, or 249.220f of this
chapter).
(4) Quarterly report refers to quarterly reports on Form 10-Q or
Form 10-QSB (Sec. Sec. 249.308a or 249.308b of this chapter).
(i) Instructions for preparation of the condensed consolidating
financial information required by paragraphs (c), (d), (e), and (f) of
this section.
(1) Present the financial information in sufficient detail to allow
investors to determine the assets, results of operations, and cash
flows of each of the consolidating groups;
(2) Follow the general guidance in Sec. 210.10-01 for the form and
content for condensed financial statements;
(3) The financial information should be audited for the same
periods that the parent company financial statements are audited;
(4) The parent company column should present investments in all
subsidiaries under the equity method;
(5) All subsidiary issuer or guarantor columns should present
investments in non-guarantor subsidiaries under the equity method;
(6) Provide separate columns for each guarantor by legal
jurisdiction if differences in domestic or foreign laws affect the
enforceability of the guarantees;
(7) Include the following disclosures:
(i) Each subsidiary issuer and/or guarantor is wholly owned by the
parent company;
(ii) All guarantees are full and unconditional; and
(iii) Where there is more than one guarantor, all guarantees are
joint and several;
(8) Disclose any significant restrictions on the ability of the
parent company or any guarantor to obtain funds from its subsidiaries
by dividend or loan;
(9) Provide the disclosures prescribed by Sec. 210.4-08(e)(3) with
respect to the guarantors;
(10) Disclose additional financial and narrative information about
each guarantor if the information would be material for investors to
evaluate the sufficiency of the guarantee;
(11) The financial information shall include disclosures sufficient
so as to make the information presented not misleading;
(12) Disclosure that would substantially duplicate disclosure
elsewhere in the parent's financial statements is not required; and
(13) Where the parent company's consolidated financial statements
are
[[Page 10592]]
prepared on a comprehensive basis other than U.S. Generally Accepted
Accounting Principles, reconcile the information in each column to U.S.
Generally Accepted Accounting Principles to the same extent specified
by Item 17 of Form 20-F (Sec. 249.220f of this chapter).
3. Section 210.3-16 is added to read as follows:
Sec. 210.3-16 Financial statements of affiliates whose securities
collateralize an issue registered or being registered.
(a) For each of the registrant's affiliates whose securities
constitute a substantial portion of the collateral for any class of
securities registered or being registered, there shall be filed the
financial statements that would be required if the affiliate were a
registrant and required to file financial statements. However,
financial statements need not be filed pursuant to this section for any
person whose statements are otherwise separately included in the filing
on an individual basis or on a basis consolidated with its
subsidiaries.
(b) For the purposes of this section, securities of a person shall
be deemed to constitute a substantial portion of collateral if the
aggregate principal amount, par value, or book value of the securities
as carried by the registrant, or the market value of such securities,
whichever is the greatest, equals 20 percent or more of the principal
amount of the secured class of securities.
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
4. The authority citation for part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37,
and 80b-11, unless otherwise noted.
5. Section 228.310 is amended by redesignating Note 3 as Note 4 and
adding new Note 3 to read as follows:
Sec. 228.310. (Item 310) Financial Statements.
Notes:
* * * * *
3. Financial statements for a subsidiary of a small business
issuer that issues securities guaranteed by the small business
issuer or guarantees securities issued by the small business issuer
should be presented as required by Rule 3-10 of Regulation S-X (17
CFR 210.3-10), except that the periods presented are those required
by paragraph (a) of this item.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
6. The authority citation for part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and
80b-11, unless otherwise noted.
* * * * *
7. Section 240.12h-5 is added to read as follows:
Sec. 240.12h-5 Exemption for subsidiary guarantors and subsidiary
issuers of guaranteed securities.
(a) Any issuer of a guaranteed security or guarantor of a security
that is permitted to omit financial statements by Sec. 210.3-10 of
Regulation S-X of this Chapter is exempt from the requirements of
Section 13(a) or 15(d) of the Act (15 U.S.C. 78m(a) or 78o(d)).
(b) Any issuer of a guaranteed security or guarantor of a security
that would be permitted to omit financial statements by Sec. 210.3-10
of Regulation S-X of this Chapter, except for the operation of
paragraph (g) of that section, is exempt from the requirements of
Section 13(a) or 15(d) of the Act (15 U.S.C. 78m(a) or 78o(d)).
Dated: February 26, 1999.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
Note: Appendices A, B, C, and D to the preamble will not appear
in the Code of Federal Regulations.
Appendix A--Applying the Proposed Rule to Specific Fact Patterns
In each of the following examples, assume that:
All guarantees are full and unconditional;
All guarantees are joint and several; and
All subsidiaries are wholly-owned.
Examples 1-3: Parent Issuer With No Operations
Example Number 1: All Subsidiaries Guarantee Securities
Parent company issues securities. The parent company is a
holding company with no independent operations. All of the parent
company's subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(f). That financial information would include a separate column
for: the parent company, the subsidiary guarantors on a combined
basis, consolidating adjustments, and the total consolidated
amounts.
Example Number 2: More Than One, but not All, of the Subsidiaries
Guarantee the Securities
Parent company issues securities. The parent company is a
holding company with no independent operations. More than one, but
not all, of the parent company's subsidiaries guarantee the
securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(f). That financial information would include a separate column
for: the parent company, the subsidiary guarantors on a combined
basis, the non-guarantor subsidiaries on a combined basis;
consolidating adjustments, and the total consolidated amounts.
Example No. 3: One Subsidiary Guarantees the Securities
Parent company issues securities. The parent company is a
holding company with no independent operations. One of the parent
company's subsidiaries guarantees the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(e). That financial information would include a separate column
for: the parent company, the subsidiary guarantor, the non-guarantor
subsidiaries on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Examples 4-6: Parent Issuer With Operations
Example No. 4: All Subsidiaries Guarantee the Securities
Parent company issues securities. In addition to its
subsidiaries, the parent company has independent operations. All of
the parent company's subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(f). That financial information would include a separate column
for: the parent company, the subsidiary guarantors on a combined
basis, consolidating adjustments, and the total consolidated
amounts.
Example No. 5: More Than One, but not All, of the Subsidiaries
Guarantee the Securities
Parent company issues securities. In addition to its
subsidiaries, the parent company has independent operations. More
than one, but not all, of the parent company's subsidiaries
guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(f). That financial information would include a separate column
for: the parent company, the subsidiary guarantors on a combined
basis, the non-guarantor subsidiaries on a combined basis,
consolidating adjustments, and the total consolidated amounts.
Example No. 6: One Subsidiary Guarantees the Securities
Parent company issues securities. In addition to its
subsidiaries, the parent company has independent operations. One of
the parent company's subsidiaries guarantees the securities.
[[Page 10593]]
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(f). That financial information would include a separate column
for: the parent company, the subsidiary guarantor, the non-guarantor
subsidiaries on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Examples 7-10: Finance Subsidiary Issuer. Parent Guarantees the
Securities and Has No Operations
Example No. 7: No Other Subsidiaries Guarantee the Securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. The parent company
has no independent operations. None of the parent company's other
subsidiaries guarantee the securities. Required financial
information: In accordance with proposed Rule 3-10(b), the only
required financial information would be the financial statements of
the parent company. Those financial statements would include a
footnote stating that the issuer is a wholly-owned finance
subsidiary of the parent with no independent assets or operations
and the parent has fully and unconditionally guaranteed the
securities.
Example No. 8: All Other Subsidiaries Guarantee the Securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. The parent company
has no independent operations. All of the parent company's other
subsidiaries guarantee the securities. Required financial
information: Condensed consolidating financial information prepared
in accordance with proposed Rule 3-10(d). That financial information
would include a separate column for: the parent company, the
subsidiary issuer, the subsidiary guarantors on a combined basis,
consolidating adjustments, and the total consolidated amounts.
Example No. 9: More than one, but not all, of the other subsidiaries
guarantee the securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. The parent company
has no independent operations. More than one, but not all, of the
parent company's other subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantors on a combined basis, the non-guarantor subsidiaries on a
combined basis, consolidating adjustments, and the total
consolidated amounts.
Example No. 10: One Other Subsidiary Guarantees the Securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. The parent company
has no independent operations. One of the parent company's other
subsidiaries guarantees the securities. Required financial
information: Condensed consolidating financial information prepared
in accordance with proposed Rule 3-10(d). That financial information
would include a separate column for: the parent company, the
subsidiary issuer, the subsidiary guarantor, the non-guarantor
subsidiaries on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Examples 11-14: Finance Subsidiary Issuer. Parent Guarantees the
Securities and Has Operations
Example No. 11: No Other Subsidiaries Guarantee the Securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. In addition to its
subsidiaries, the parent company has independent operations. None of
the parent company's other subsidiaries guarantee the securities.
Required financial information: In accordance with proposed Rule
3-10(b), the only required financial information would be the
financial statements of the parent company. Those financial
statements would include a footnote stating that the issuer is a
wholly-owned finance subsidiary of the parent with no independent
assets or operations and the parent has fully and unconditionally
guaranteed the securities.
Example No. 12: All Other Subsidiaries Guarantee the Securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. In addition to its
subsidiaries, the parent company has independent operations. All of
the parent company's other subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantors on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Example No. 13: More Than One, but not All, of the Other Subsidiaries
Guarantee the Securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. In addition to its
subsidiaries, the parent company has independent operations. More
than one, but not all, of the parent company's other subsidiaries
guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary guarantors on a combined
basis, the non-guarantor subsidiaries on a combined basis,
consolidating adjustments, and the total consolidated amounts.
Example No. 14: One Other Subsidiary Guarantees the Securities
A finance subsidiary issues securities. The ultimate parent of
that finance company guarantees those securities. In addition to its
subsidiaries, the parent company has independent operations. One of
the parent company's other subsidiaries guarantees the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantor, the non-guarantor subsidiaries on a combined basis,
consolidating adjustments, and the total consolidated amounts.
Examples 15-18: Operating Subsidiary Issuer. Parent Guarantees the
Securities and Has No Operations
Example No. 15: No Other Subsidiaries Guarantee the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating subsidiary guarantees those securities. The parent
company has no independent operations. None of the parent company's
other subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(c). That financial information would include a separate column
for: the parent company, the subsidiary issuer, any other
subsidiaries on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Example No. 16: All Other Subsidiaries Guarantee the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating subsidiary guarantees those securities. The parent
company has no independent operations. All of the parent company's
other subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantors on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Example No. 17: More Than One, But Not All, of the Other Subsidiaries
Guarantee the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating subsidiary guarantees those securities. The parent
company has no independent operations. More than one, but not all of
the parent company's other subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantors on a combined basis, the non-guarantor subsidiaries on a
combined basis, consolidating adjustments, and the total
consolidated amounts.
Example No. 18: One Other Subsidiary Guarantees the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating
[[Page 10594]]
subsidiary guarantees those securities. The parent company has no
independent operations. One of the parent company's other
subsidiaries guarantees the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantor, the non-guarantor subsidiaries on a combined basis,
consolidating adjustments, and the total consolidated amounts.
Examples 19-22: Operating Subsidiary Issuer. Parent Guarantees the
Securities and Has Independent Operations
Example No. 19: No Other Subsidiaries Guarantee the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating subsidiary guarantees those securities. In
addition to its subsidiaries, the parent company has independent
operations. None of the parent company's other subsidiaries
guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with Rule 3-10(c). That
financial information would include a separate column for: the
parent company, the subsidiary issuer, the non-guarantor
subsidiaries on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Example No. 20: All Other Subsidiaries Guarantee the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating subsidiary guarantees those securities. In
addition to its subsidiaries, the parent company has independent
operations. All of the parent company's other subsidiaries guarantee
the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantors on a combined basis, consolidating adjustments, and the
total consolidated amounts.
Example No. 21: More Than One, But Not All, of the Other Subsidiaries
Guarantee the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating subsidiary guarantees those securities. In
addition to its subsidiaries, the parent company has independent
operations. More than one, but not all, of the parent company's
other subsidiaries guarantee the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantors on a combined basis, the non-guarantor subsidiaries on a
combined basis, consolidating adjustments, and the total
consolidated amounts.
Example No. 22: One Other Subsidiary Guarantees the Securities
An operating subsidiary issues securities. The ultimate parent
of that operating subsidiary guarantees those securities. In
addition to its subsidiaries, the parent company has independent
operations. One of the parent company's other subsidiaries
guarantees the securities.
Required financial information: Condensed consolidating
financial information prepared in accordance with proposed Rule 3-
10(d). That financial information would include a separate column
for: the parent company, the subsidiary issuer, the subsidiary
guarantor, the non-guarantor subsidiaries on a combined basis,
consolidating adjustments, and the total consolidated amounts.
Example 23: Trust Preferred Securities
A wholly-owned special purpose business trust with no
independent operations issues trust preferred securities. The trust
loans the proceeds of the offering of the trust preferred securities
to its ultimate parent and the parent issues debentures to the
trust. The ultimate parent guarantees the trust preferred securities
through a series of ``back-up undertakings.'' In this situation, the
trust would be treated as a finance subsidiary under Rule 3-10(b),
so the only required financial information would be a narrative
discussion of the trust and the securities.
Required financial information: Parent would present the
preferred securities as a separate line item on its balance sheet
entitled ``Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Debentures of the
Company.''
Parent would include, in a footnote to its financial
statements, disclosure that the sole assets of the trust are the
parent's debentures.
Parent would specify in a footnote to its financial
statements the principal amount, interest rate and maturity date of
the debentures held by the trust.
Parent would include in an audited footnote to its
audited financial statements disclosure:
1. That the trust is wholly-owned;
2. That the sole assets of the trust are the parent's
debentures;
3. Of the principal amount, interest rate and maturity date of
the parent's debentures held by the trust; and
4. That, considered together, the ``back-up undertakings''
constitute a full and unconditional guarantee by the parent of the
trust's obligations under the preferred securities.
Appendix B--Applying the Proposed Rules to Subsidiary Guarantors That
Are Added or Deleted in the Future
The analysis regarding the financial information required in a
Securities Act registration statement is based solely on the
securities that are offered under that registration statement. You
should look at the registrants and the securities required to be
listed on the cover page of the registration statement when you
determine which financials statements you must include. A common
question involves how to treat guarantors that you add after the
registration statement becomes effective. The answer will relate to
three areas:
Securities Act treatment of the ``later-added''
guarantees;
Financial statement requirements for ``later-added''
guarantors; and
The separate Exchange Act reporting obligations of
those ``later-added'' guarantors.
The following examples involve the application of the proposed rules
to these three areas. In each of the following examples, assume
that:
All guarantees are full and unconditional;
All guarantees are joint and several; and
All subsidiaries are wholly-owned.
Example No. 1. Parent company registers an offering of its debt
securities under the Securities Act. More than one, but not all, of
its subsidiaries guarantee the securities. The indenture states that
the parent company may, without the approval of the debt holders,
add or delete subsidiary guarantors in the future. The securities
offering is not a shelf offering.
Financial information required in the Securities Act
registration statement: The registration statement would include
condensed consolidating financial information prepared in accordance
with proposed Rule 3-10(f). That financial information would include
a separate column for: the parent company, the subsidiary guarantors
as of the date the registration statement became effective on a
combined basis, the subsidiaries that were not guarantors as of the
date the registration statement became effective on a combined
basis, consolidating adjustments, and the total consolidated
amounts.
Treatment of future guarantees under the Securities Act: There
would be no Securities Act event at the time future guarantors are
added or deleted. The decision to add or delete guarantors would not
involve an investment decision by the debt holders. Therefore, there
would be no need to amend the registration statement after it became
effective.
Exchange Act reporting requirements of existing and future
guarantors: Proposed Rule 12h-5 would exempt the existing guarantors
from separately reporting under the Exchange Act. Because future
guarantors would not be registrants on a Securities Act registration
statement, they would have no separate reporting obligation under
Section 15(d) of the Exchange Act. Therefore, there would be no need
to provide an exemption for these future guarantors from the
requirements of Section 15(d).
Financial statement requirements in parent company's Exchange
Act reports: The financial statements in the parent company's
periodic reports would be the same as in the Securities Act
registration statement and there would continue to be condensed
consolidating financial information with the same columns of
information. However, as the companies that comprise each column
would change, the parent company would revise the makeup of that
column of information. For example, the guarantor subsidiaries
column and the non-guarantor subsidiaries column may reflect
different subsidiaries, depending on which
[[Page 10595]]
subsidiaries were in each category at that time. In each of its
Exchange Act reports, the parent company would look to which of its
subsidiaries was a guarantor as of the end of the period reflected
in that periodic report. A footnote to the condensed consolidating
financial information should discuss any changes in the composition
of the guarantors that comprise the guarantor column.
Example No. 2. Parent company files a Securities Act
registration statement relating to a shelf offering of its debt
securities. The registration statement states that more than one,
but not all, of its subsidiaries will guarantee the securities. The
registration statement includes each of the current subsidiary
guarantors as a co-registrant. The indenture states that the parent
company may, without the approval of the debt holders, add or delete
subsidiary guarantors in the future.
Financial information required in the Securities Act
registration statement: The registration statement would include
condensed consolidating financial information prepared in accordance
with proposed Rule 3-10(f). That financial information would include
a separate column for: the parent company, the subsidiary guarantors
as of the date the registration statement became effective on a
combined basis, the subsidiaries that were not guarantors as of the
date the registration statement became effective on a combined
basis, consolidating adjustments, and the total consolidated
amounts.
Treatment of future guarantees under the Securities Act: You
will have different answers depending on whether the guaranteed
securities have already been offered or whether they will be offered
after guarantors are added or deleted. For purposes of this
analysis, assume:
That the shelf registration statement registered the
offer and sale of $500 million in debt securities;
That the parent company sold $200 million of those
securities after the registration statement became effective; and
After that sale, the parent company elected to add or
delete subsidiary guarantors, both with respect to the $200 million
of securities it has sold and the $300 million of securities that it
may sell in the future.
For the same reasons as we discussed in Example No. 1, there
would not be a Securities Act registration event with respect to the
$200 million of securities that were already sold. However, the
registration statement would have to be updated to properly reflect
the subsidiary guarantors with respect to any offers or sales of the
remaining $300 million of securities. If new guarantors were added
to the registration statement, this update would relate to offers
and sales of guarantees that were not registered originally.
Therefore, this update could not be done through a post-effective
amendment. Instead, a new registration statement would be filed to
reflect the new guarantors. The parent company and the continuing
guarantors could rely on Rule 429 to combine this registration
statement with the original shelf registration statement. There
would be no additional fee. This new registration statement would
have to be filed before any offers of those guarantees could be made
and would have to be effective before any sales. Also, the new
registration statement would continue to include condensed
consolidating financial information in accordance with proposed Rule
3-10(f). However, because the companies that comprise each column
would have changed, the parent company would revise the makeup of
that column. For example, the guarantor subsidiaries column and the
non-guarantor subsidiaries column would reflect different
subsidiaries, depending on which subsidiaries were in each category
at that time. A footnote to the condensed consolidating financial
information should discuss any changes in the composition of the
guarantors that comprise the guarantor column.
Exchange Act reporting requirements of existing and future
guarantors: Proposed Rule 12h-5 would exempt the existing guarantors
from separately reporting under the Exchange Act. Because future
guarantors on the $200 million of securities that were already sold
would not be registrants on a Securities Act registration statement,
they would have no separate reporting obligation at that time.
Therefore, there would be no need to provide an exemption for these
future guarantors. However, if future guarantors were added to the
registration statement with respect to offers and sales of the $300
million of securities remaining on the registration statement, they
would have a separate reporting obligation when the registration
statement that included them as registrants became effective.
Proposed Rule 12h-5 would exempt these guarantors from the
requirements of Section 15(d).
Financial statement requirements in parent company's Exchange
Act reports: The financial information in the parent company's
periodic reports would be the same as in the Securities Act
registration statement and there would continue to be condensed
consolidating financial information with the same columns of
information. However, as the companies that comprise each column
would change, the parent company would revise the makeup of that
column of information. In each of its Exchange Act reports, the
parent company would look to which of its subsidiaries was a
guarantor as of the end of the period reflected in that periodic
report. A footnote to the condensed consolidating financial
information should discuss any changes in the composition of the
guarantors that comprise the guarantor column.
Appendix C--What does ``wholly-owned'' mean under proposed Rule 3-10?
Example No. 1. Parent company own 100% of the voting shares of
SubA. SubA owns 100% of the voting shares of Sub1.
Is SubA a wholly-owned subsidiary of the parent company? Yes.
Is Sub1 a wholly-owned subsidiary of SubA? Yes.
Is Sub1 an indirect, wholly-owned subsidiary of the parent
company? Yes.
Example No. 2. Parent company own 100% of the voting shares of
SubA. SubA owns 99% of the voting shares of Sub1. The remaining 1%
of the voting shares of Sub1 is owned by a party that is not a
wholly-owned subsidiary of the parent company.
Is SubA a wholly-owned subsidiary of the parent company? Yes.
Is Sub1 a wholly-owned subsidiary of SubA? No.
Is Sub1 an indirect, wholly-owned subsidiary of the parent
company? No.
Example No. 3. Parent company owns 99% of the voting shares of
SubA. The remaining 1% of the voting shares of SubA are owned by a
party that is not a wholly-owned subsidiary of the parent company.
SubA owns 100% of the voting shares of Sub1.
Is SubA a wholly-owned subsidiary of the parent company? No.
Is Sub1 a wholly-owned subsidiary of SubA? Yes.
Is Sub1 an indirect, wholly-owned subsidiary of the parent
company? No.
Example No. 4. Parent company owns 100% of the voting shares of
SubA and 100% of the voting shares of SubB. SubA owns 60% of the
voting shares of Sub1 and SubB owns 40% of the voting shares of
Sub1.
Is SubA a wholly-owned subsidiary of the parent company? Yes.
Is SubB a wholly-owned subsidiary of the parent company? Yes.
Is Sub1 a wholly-owned subsidiary of SubA? No.
Is Sub1 a wholly-owned subsidiary of SubB? No.
Is Sub1 an indirect, wholly-owned subsidiary of the parent
company? Yes.
Example No. 5. Parent company owns 100% of the voting shares of
SubA.
Parent company also owns 60% of the voting shares of Sub1. SubA
owns 40% of the voting shares of Sub1.
Is SubA a wholly-owned subsidiary of the parent company? Yes.
Is Sub1 a wholly-owned subsidiary of SubA? No.
Is Sub1 an indirect, wholly-owned subsidiary of the parent
company? Yes.
Example No. 6. Parent company owns 99% of the voting shares of
SubA. As required by the law in its home country, a director of SubA
owns the remaining 1% of the voting shares of SubA. SubA owns 100%
of the voting shares of Sub1.
Is SubA a wholly-owned subsidiary of the parent company? No.
Is Sub1 a wholly-owned subsidiary of SubA? No.
Is Sub1 an indirect, wholly-owned subsidiary of the parent
company? No.
Note: This position is different than current staff
interpretations.
Example No. 7. Parent company owns 100% of the voting shares of
SubA. SubA has outstanding securities convertible into its voting
shares. These convertible securities are held by a party that is not
a wholly-owned subsidiary of the parent.
Is SubA a wholly-owned subsidiary of the parent company? No.
Example No. 8. Parent company owns 100% of the voting shares of
SubA. SubA has outstanding securities convertible into the parent
company's voting shares. These convertible securities are held by a
party that is not a wholly-owned subsidiary of the parent.
[[Page 10596]]
Is SubA a wholly-owned subsidiary of the parent company? Yes.
Example No. 9. Parent company owns 100% of the voting shares of
SubA. SubA has outstanding options exercisable into its voting
shares. These options are held by a party that is not a wholly-owned
subsidiary of the parent.
Is SubA a wholly-owned subsidiary of the parent company? No.
Example No. 10. Parent company owns 100% of the voting shares of
SubA. SubA has outstanding options exercisable into the parent
company's voting shares. These convertible securities are held by a
party that is not a wholly-owned subsidiary of the parent.
Is SubA a wholly-owned subsidiary of the parent company? Yes.
Example No. 11. Parent company owns 100% of the common stock of
SubA. SubA has a class of preferred stock outstanding. That
preferred stock is 100% owned by a party that is not a wholly-owned
subsidiary of the parent company. The common equity has full voting
rights. The preferred stock is non-voting.
Is SubA a wholly-owned subsidiary of the parent company? Yes.
Appendix D--Regulatory Flexibility Act Certification
I, Arthur Levitt, Chairman of the Securities and Exchange
Commission, hereby certify pursuant to 5 U.S.C. 605(b) that proposed
amendments to Rule 3-10 of Regulation S-X and Item 310 of Regulation
S-B, as well as new Rule 3-16 of Regulation S-X and new Exchange Act
Rule 12h-5, if adopted, will not have a significant economic impact
on a substantial number of small entities. The amendments and new
rules largely codify the positions the staff has developed through
Staff Accounting Bulletin No. 53, later interpretations and the
registration statement review process. Since the registrants already
follow these standards, the proposed amendments would not impose a
significant impact. Additionally, a review of Division responses to
SAB 53 exemptive requests over the last ten years indicates that
only one request related to an offering that was registered on a
small business form, and that company would not meet the definition
of small business entity for Regulatory Flexibility Act purposes.
Accordingly, the proposed amendments and new rules would not have a
significant economic impact on a substantial number of small
entities.
Dated: February 26, 1999.
Arthur Levitt,
Chairman.
[FR Doc. 99-5444 Filed 3-4-99; 8:45 am]
BILLING CODE 8010-01-U
