[Federal Register Volume 61, Number 74 (Tuesday, April 16, 1996)]
[Proposed Rules]
[Pages 16672-16674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9183]
[[Page 16671]]
_______________________________________________________________________
Part II
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 210, et al.
Market Risk Inherent in Derivative Financial Instruments, Other
Financial Instruments, and Derivative Commodity Instruments; Proposed
Rules
Federal Register / Vol. 61, No. 74 / Tuesday, April 16, 1996 /
Proposed Rules
[[Page 16672]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 228, 229 and 249
[Release Nos. 33-7280; 34-37086; File No. S7-10-96]
RIN 3235-AG77
Safe Harbor for Disclosure of Qualitative and Quantitative
Information About Market Risk Inherent in Derivative Financial
Instruments, Other Financial Instruments, and Derivative Commodity
Instruments
AGENCY: Securities and Exchange Commission.
ACTION: Rule Proposals.
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SUMMARY: The Securities and Exchange Commission (``Commission'') today
is proposing amendments that would apply the safe harbor provisions
recently added to the Securities Act of 1933 and Securities Exchange
Act of 1934 by the Private Securities Litigation Reform Act of 1995 to
specified disclosures made pursuant to proposed Item 305 of Regulation
S-K or proposed Item 9A of Form 20-F.
DATES: Comments should be received on or before May 20, 1996.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Comments also may be submitted
electronically at the following E-mail address: rule-comments @
sec.gov. All comment letters should refer to File No. S7-10-96; this
file number should be included in the subject line if E-mail is used.
Comment letters will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Electronically submitted comment letters will be posted on
the Commission's Internet Web Site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Elizabeth M. Murphy, Special Counsel,
(202) 942-2910, Division of Corporation Finance, Securities and
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 3-7, Washington,
D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
proposed Item 305 of Regulation S-K 1 and proposed Item 9A of Form
20-F,2 as well as to Item 10 of Regulation S-B.3
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\1\ 17 CFR Part 229.
\2\ 17 CFR 249.220f.
\3\ 17 CFR 228.10.
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I. EXECUTIVE SUMMARY AND BACKGROUND
On December 28, 1995, the Commission issued a release 4
proposing amendments that would, among other things, require
registrants to provide disclosure of qualitative and quantitative
information about market risk inherent in derivative financial
instruments, other financial instruments, and derivative commodity
instruments (``Derivatives Proposing Release''). This disclosure would
be required pursuant to proposed new Item 305 of Regulation S-K and
proposed new Item 9A of Form 20-F.
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\4\ Release No. 33-7250 (December 28, 1995) [61 FR 578]. The
period for comment on the proposals issued in that release was
extended from May 7, 1996 to May 20, 1996 in Release No. 33-7281
issued on April 9, 1996.
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The Derivatives Proposing Release indicated that it is the
Commission's intention that disclosures made pursuant to the proposed
new items be made subject to a safe harbor, and stated that a release
would be forthcoming to propose an appropriate safe harbor in light of
the recently enacted Securities Litigation Reform Act of 1995
(``Litigation Reform Act'').5 The Litigation Reform Act, among
other changes, added new Section 27A 6 to the Securities Act of
1933 (``Securities Act'') 7 and new Section 21E 8 to the
Securities Exchange Act of 1934 (``Exchange Act''),9 establishing
statutory safe harbors for forward-looking information. The purpose of
this release is to propose amendments that would explicitly extend the
statutory safe harbor protections to specified disclosures that would
be provided pursuant to proposed Item 305 of Regulation S-K and
proposed Item 9A of Form 20-F.
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\5\ Pub. L. No. 104-67, 109 Stat. 737 (1995). See Section I and
III.B.3.e of the Derivatives Proposing Release.
\6\ 15 U.S.C. 77z-2.
\7\ 15 U.S.C. 77a et seq.
\8\ 15 U.S.C. 78u-5.
\9\ 15 U.S.C. 78a et seq.
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II. DISCUSSION OF PROPOSALS
The amendments being proposed today would add a safe harbor
provision to proposed Item 305 of Regulation S-K 10 and proposed
Item 9A of Form 20-F.11 The provision would state that the safe
harbor provided in Section 27A of the Securities Act and Section 21E of
the Exchange Act will apply to quantitative information about market
risk provided pursuant to Item 305(a) of Regulation S-K or Item 9A(a)
of Form 20-F, and information about market risk with respect to future
reporting periods provided pursuant to Item 305(b)(3) of Regulation S-K
or Item 9A(b)(3) of Form 20-F.
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\10\ Proposed paragraph (c) to proposed Item 305 of Regulation
S-K.
\11\ Proposed paragraph (c) to proposed Item 9A of Form 20-F.
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The Commission notes that, by its terms, the statutory safe harbor
may be available with respect to disclosure required by proposed Items
305 and 9A, to the extent that all of the conditions of the statutory
safe harbor are met. By invoking its rulemaking authority under
Sections 27A and 21E, the Commission seeks to ensure the application of
the statutory safe harbor to specified disclosures under Items 305 and
9A, and to broaden the application of the statutory safe harbor with
respect to those disclosures. The Commission believes that the proposed
safe harbor protection is consistent with the public interest and the
protection of investors.
Comment is solicited as to whether it is appropriate to include a
safe harbor provision in proposed Item 305 of Regulation S-K and
proposed Item 9A of Form 20-F, and if so, whether it is appropriate to
apply the new statutory safe harbor protection to the disclosure
required by these items, or whether a different safe harbor should be
established. The proposed safe harbor is limited to paragraphs (a) and
(b)(3) of Items 305 and 9A because these appear to be the provisions
pursuant to which forward-looking information may be required. Comment
is requested on whether the proposed safe harbor should be expanded to
apply to any or all of the information required by paragraphs (b)(1)
and (b)(2) of proposed Items 305 and 9A, especially in light of the
difficult nature of the required disclosure.
As proposed, the safe harbor would be available with respect to the
specified information regardless of whether the issuer providing it or
the type of transaction otherwise is excluded from the statutory safe
harbor.12 Thus, for
[[Page 16673]]
example, first-time Commission registrants and those making initial
public offerings would be covered by the safe harbor with respect to
this specific information if all other conditions are satisfied. As is
the case with the statutory safe harbor, the proposed safe harbor would
apply only to a forward-looking statement made by: (1) an issuer; (2) a
person acting on behalf of the issuer; (3) an outside reviewer retained
by the issuer making a statement on behalf of the issuer; or (4) an
underwriter, with respect to information provided by the issuer or
information derived from information provided by the issuer. Comment is
solicited on whether all or some of the types of issuers and
transactions excluded from the statutory safe harbor also should be
excluded from the proposed safe harbor provisions.
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\12\ Paragraph (b) of Section 27A of the Securities Act and
Section 21E of the Exchange Act exclude from the statutory safe
harbor a forward-looking statement:
(1) that is made with respect to the business or operations of
an issuer that: (A) during the three-year period preceding the date
on which the statement was first made: (i) was convicted of a felony
or misdemeanor described in clauses (i) through (iv) of Exchange Act
Section 15(b)(4)(B) [15 U.S.C. 78o(b)(4)(B)]; or (ii) has been made
the subject of a judicial or administrative decree or order arising
out of a governmental action that prohibits future violations of the
antifraud provisions of the securities laws, requires that the
issuer cease and desist from violating the antifraud provisions of
the securities laws, or determines that the issuer violated the
antifraud provisions of the federal securities laws; (B) makes the
forward-looking statement in connection with an offering of
securities by a blank check company; (C) issues penny stock; (D)
makes the forward-looking statement in connection with a rollup
transaction; or (E) makes the forward-looking statement in
connection with a going private transaction; or
(2) that is: (A) included in a financial statement prepared in
accordance with generally accepted accounting principles; (B)
contained in a registration statement of, or otherwise issued by, an
investment company; (C) made in connection with a tender offer; (D)
made in connection with an initial public offering; (E) made in
connection with an offering by, or relating to the operations of, a
partnership, limited liability company, or a direct participation
investment program; or (F) made in a disclosure of beneficial
ownership in a report required to be filed with the Commission
pursuant to Exchange Act Section 13(d) [15 U.S.C. 78m(d)].
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As proposed, the Item 305 and 9A disclosures may be provided in
footnotes to the financial statements,13 and the safe harbor
proposed today would also be available regardless of whether the
information is set forth in text or financial statement footnotes.
Comment is requested as to whether disclosure contained in a footnote
to the financial statements, which, in the absence of Commission
rulemaking, would be excluded from the statutory safe harbor, should be
covered by the proposed safe harbor provisions, as proposed.
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\13\ See General Instruction 5 to paragraphs (a) and (b) of
proposed Item 305 of Regulation S-K and proposed Item 9A of Form 20-
F.
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As proposed, Item 305 information would not be required of small
business issuers complying with Regulation S-B. The safe harbor
proposed today would be available to those small business issuers that
choose to provide this information.14 To the extent that this
disclosure is voluntarily provided, however, the proposed safe harbor
protection would be available for information within the scope of
proposed Item 305(a) only if all of the information that would be
required by 305(a) were provided, rather than just a portion of it.
Similarly, the safe harbor protection would be available for
information within the scope of Item 305(b)(3) only if all of the
information required by Item 305(b) were provided. Comment is requested
as to whether the proposed safe harbor should apply to voluntarily
provided disclosures. Additionally, comment is solicited as to whether
the proposed safe harbor's application to voluntarily reported
information should depend on providing all of the disclosure that would
be required by proposed Item 305, rather than permitting compliance
with either 305(a) or 305(b) separately. Conversely, should the
proposed safe harbor apply to voluntary disclosures even when only a
portion of the information required by paragraph (a) or paragraph (b)
is provided by a small business issuer?
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\14\ Proposed Item 10(g) to Regulation S-B.
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III. Request for Comment
Any interested person wishing to submit written comments on the
proposed amendments as well as other matters that might have an impact
on the proposed rules, is requested to do so. The Commission also
requests comment on whether the proposed amendments, if adopted, would
have an adverse impact on competition that is neither necessary nor
appropriate in furthering the purposes of the Exchange Act. Comments
responsive to this inquiry will be considered by the Commission in
complying with its responsibilities under Section 23(a) of the Exchange
Act.15
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\15\ 15 U.S.C. 78w(a).
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IV. Cost-Benefit Analysis
To evaluate fully the costs and benefits associated with the
proposed rules, the Commission requests commenters to provide their
views and data as to the costs and benefits associated therewith. It is
expected that the proposed amendments would reduce the costs to
companies that provide disclosure pursuant to proposed Items 305 and 9A
by providing protection as set forth in the safe harbor.
V. Summary of Initial Regulatory Flexibility Analysis
An Initial Regulatory Flexibility Analysis has been prepared in
accordance with 6 U.S.C. 603 concerning the proposed amendments. The
analysis notes that the purpose of the amendments proposed is to extend
the applicability of the safe harbor provisions in Section 27A of the
Securities Act and Section 21E of the Exchange Act to quantitative
information about market risk included in Securities Act and Exchange
Act documents pursuant to paragraph (a) of proposed Item 305 of
Regulation S-K or proposed Item 9A of Form 20-F, and information about
market risk with respect to future reporting periods provided pursuant
to paragraph (b)(3) of those proposed items.
As discussed more fully in the analysis, the changes would affect
persons that are small entities, as defined by the Commission's rules,
by making the safe harbor available to those small entities that
voluntarily provide such disclosure.
The analysis discusses possible alternatives to the proposed
amendments including, among others, establishing different compliance
or reporting requirements or exempting small issuers from all or part
of the proposed amendments. Given the fact that the proposed amendments
would extend protection to all issuers, including small business
issuers, disclosing information to which the safe harbor protection
applies, the Commission does not believe that any of the alternatives
are preferable at this time.
Comments are encouraged on any aspect of this analysis. A copy of
the analysis may be obtained by contacting Elizabeth M. Murphy, Office
of Disclosure Policy, Division of Corporation Finance, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
VI. Statutory Basis
The amendments to Item 10 of Regulation S-B, and proposed Item 305
of Regulation S-K and Item 9A of Form 20-F are being proposed pursuant
to Section 27A of the Securities Act and Section 21E of the Exchange
Act.
List of Subjects in 17 CFR Parts 228, 229 and 249
Reporting and recordkeeping requirements, Securities.
Text of Proposed Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
1. The authority citation for Part 228 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss,
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.
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2. By amending Sec. 228.10 by adding paragraph (g) to read as
follows:
Sec. 228.10 (Item 10) General.
* * * * *
(g) Quantitative and qualitative disclosures about market risk. The
safe harbor provision included in paragraph (c) of Item 305 of
Regulation S-K (Sec. 229.305(c) of this chapter) shall apply to
information required by paragraph (a) of Item 305 of Regulation S-K
(Sec. 229.305(a) of this chapter) that is voluntarily provided by or on
behalf of a small business issuer complying with Regulation S-B, but
only if all of the information required by Item 305(a), and not just a
portion of it, is provided. The safe harbor provision also shall apply
to statements with respect to future reporting periods provided
pursuant to paragraph (b)(3) of Item 305 of Regulation S-K
(Sec. 229.305(b)(3) of this chapter) that are voluntarily provided by
or on behalf of a small business issuer complying with Regulation S-B,
but only if all of the information required by Item 305(b)
(Sec. 229.305(b) of this chapter), and not just a portion of it, is
provided.
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
3. The authority citation for Part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn,
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n,
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
4. By amending Sec. 229.305, as provided in the Federal Register
(61 FR 593, January 8, 1996), by adding paragraph (c) after the General
Instructions to paragraphs 305(a) and 305(b) to read as follows:
Sec. 229.305 (Item 305) Quantitative and qualitative disclosures about
market risk.
* * * * *
(c) Safe Harbor. The safe harbor provided in Section 27A of the
Securities Act of 1933 (15 U.S.C. 77z-2) and Section 21E of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe
harbors'') shall apply, with respect to all types of issuers and
transactions, to information provided pursuant to paragraph (a) of this
Item (Sec. 229.305(a)), and any statements with respect to future
reporting periods provided pursuant to paragraph (b)(3) of this Item
(Sec. 229.305(b)(3)), whether located in text or notes to financial
statements, provided that the disclosure is made by an issuer; a person
acting on behalf of the issuer; an outside reviewer retained by the
issuer making a statement on behalf of the issuer; or an underwriter,
with respect to information provided by the issuer or information
derived from information provided by the issuer.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
5. The authority citation for Part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
6. By amending Form 20-F (referenced in Sec. 249.220f) by adding
paragraph (c) to Item 9A in Part I after the General Instructions to
paragraphs 9A(a) and 9A(b) to read as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 20-F--Registration Statement Pursuant to Section 12 (b) or (g) of
the Securities Exchange Act of 1934 or Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 or
Transaction Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
* * * * *
Part I
* * * * *
Item 9A. Quantitative and qualitative disclosures about market risk.
* * * * *
(c) Safe Harbor. The safe harbor provided in Section 21E of the
Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe
harbor'') shall apply, with respect to all types of issuers and
transactions, to information provided pursuant to paragraph (a) of this
Item, and any statements with respect to future reporting periods
provided pursuant to paragraph (b)(3) of this Item, whether located in
text or notes to financial statements, provided that the disclosure is
made by an issuer; a person acting on behalf of the issuer; an outside
reviewer retained by the issuer making a statement on behalf of the
issuer; or an underwriter, with respect to information provided by the
issuer or information derived from information provided by the issuer.
* * * * *
By the Commission.
Dated: April 9, 1996.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9183 Filed 4-15-96; 8:45 am]
BILLING CODE 8010-01-P
