[Federal Register Volume 65, Number 165 (Thursday, August 24, 2000)]
[Rules and Regulations]
[Pages 51692-51713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20511]



[[Page 51691]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 210, 211, et al.



Financial Statements and Periodic Reports for Related Issuers and 
Guarantors; Final Rules

  Federal Register / Vol. 65, No. 165 / Thursday, August 24, 2000 / 
Rules and Regulations  

[[Page 51692]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 211, 228, 240 and 249

[Release Nos. 33-7878; 34-43124; International Series No. 1229; FR-55; 
File No. S7-7-99]
RIN 3235-AH52


Financial Statements and Periodic Reports for Related Issuers and 
Guarantors

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting financial reporting rules for related issuers 
and guarantors of guaranteed securities. We also are adopting an 
exemption from Exchange Act periodic reporting for subsidiary issuers 
and subsidiary guarantors of these securities. These rules 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 
uncertainty about which financial statements and periodic reports 
subsidiary issuers and subsidiary guarantors must file. We also intend 
these rules and the guidance we provide in this release to eliminate 
substantially the need for requests for staff ``no-action'' letters in 
this area.

EFFECTIVE DATE: September 25, 2000, except that Form 20-F (referenced 
in Sec. 249.220f) is effective September 30, 2000.

FOR FURTHER INFORMATION CONTACT: Regarding Rule 12h-5, Michael Hyatte 
at (202) 942-2900; regarding the Regulation S-X and Regulation S-B 
revisions, Craig Olinger at (202) 942-2960, both in the Division of 
Corporation Finance.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rule 3-10 \1\ 
of Regulation S-X \2\ and Item 310 \3\ of Regulation S-B.\4\ We are 
adopting new Rule 3-16 \5\ of Regulation S-X and new Rule 12h-5 \6\ 
under the Securities Exchange Act of 1934.\7\ We are amending Form 20-F 
\8\ under the Exchange Act. We also are rescinding Staff Accounting 
Bulletin No. 53.\9\
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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 228.10 through 702.
    \5\ 17 CFR 210.3-16.
    \6\ 17 CFR 240.12h-5.
    \7\ 15 U.S.C. 78a et seq.
    \8\ 17 CFR 249. 220f.
    \9\ Staff Accounting Bulletin Release No. SAB 53 (June 13, 1983) 
[48 FR 28230].
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Table of Contents

I. Executive Summary
II. Financial statement and Exchange Act reporting requirements for 
subsidiary guarantors and subsidiary issuers of guaranteed 
securities before today's amendments
    A. Financial statement requirements before today's amendments
    1. Basis for the requirements
    2. Financial statement requirements
    B. Exchange Act reporting requirements before today's amendments
    1. Basis for the requirements
    2. Exchange Act reporting requirements
III. Today's amendments to the financial statement and Exchange Act 
reporting requirements for subsidiary guarantors and subsidiary 
issuers of guaranteed securities
    A. Rule 3-10 of Regulation S-X
    1. Two-part analysis to determine whether modified financial 
information may be provided
    a. The meaning of ``100% owned''
    i. Subsidiaries in corporate form
    (A) Definition of 100% owned
    (B) Interpretive position regarding foreign issuers and 
guarantors
    ii. Subsidiaries in other than corporate form
    b. The meaning of ``full and unconditional''
    i. A guarantee is not full and unconditional when it is not 
operative until some time after default
    ii. A guarantee can be full and unconditional even if it has a 
fraudulent conveyance ``savings clause''
    iii. A guarantee can be full and unconditional even if it has 
different subordination terms than the guaranteed securities
    2. Rule 3-10(b) through (f)
    a. Preliminary conditions to the availability of Rule 3-10(b) 
through (f)
    b. Finance subsidiary issuer of securities guaranteed by its 
parent company only
    c. Operating subsidiary issuer of securities guaranteed by its 
parent company only
    d. Subsidiary issuer of securities guaranteed by its parent 
company and one or more other subsidiaries of that parent company
    e. Single subsidiary guarantor of securities issued by its 
parent company
    f. Multiple subsidiary guarantors of securities issued by their 
parent company
    3. Condensed consolidating financial information required by 
Rule 3-10(c) through (f)
    a. Reasons for requiring condensed consolidating financial 
information instead of summarized financial information
    b. Comments regarding condensed consolidating financial 
information
    4. Securities to which Rule 3-10 applies
    a. Rule 3-10(a) requires separate financial statements for each 
issuer of registered guaranteed securities and each guarantor of 
registered securities
    b. Guaranteed securities for which paragraphs (b) through (f) of 
Rule 3-10 may provide an exception to the requirement of Rule 3-
10(a)
    i. The modified financial information permitted by paragraphs 
(b) through (f) is available only for guaranteed debt and debt-like 
securities
    (A) Full and unconditional guarantee of preferred securities
    (B) Trust preferred securities
    ii. Availability of paragraphs (b) through (f) to convertible 
debt or debt-like securities
    c. Availability of modified financial information for guaranteed 
securities not described in this release
    5. Recently acquired subsidiary issuers and subsidiary 
guarantors
    6. Definitions in Rule 3-10
    7. Instructions for condensed consolidating financial 
information under Rule 3-10
    B. Item 310 of Regulation S-B
    C. Exchange Act reporting requirements
    1. Exchange Act Rule 12h-5--Exemption from periodic reporting 
for subsidiary issuers and subsidiary guarantors where parent 
company periodic reports include modified financial information as 
permitted by paragraphs (b) through (f) of Rule 3-10
    2. Non-financial disclosure in parent company periodic reports
    3. When Rule 12h-5 becomes available or ceases to be available
    4. Meaning of the term ``financial statements'' in Rule 12h-5
    5. Rule 12h-5 does not require Exchange Act reporting when 
financial statements are provided solely in accordance with Rule 3-
10(g)
    6. Application of Rule 12h-5 when the guaranteed security is in 
default
    7. Application of Rule 3-10 and Rule 12h-5 to foreign parent 
companies with domestic subsidiary issuers or domestic subsidiary 
guarantors
    a. Foreign parent companies reporting on Form 20-F
    b. Foreign parent companies reporting on Form 40-F
    D. Financial statements of affiliates whose securities 
collateralize registered securities--Rule 3-16 of Regulation S-X
IV. Phase-in of today's amendments to Rule 3-10
V. Cost-Benefit Analysis
VI. Effects on efficiency, competition, and capital formation
VII. Final Regulatory Flexibility Act Certification
VIII. Paperwork Reduction Act
IX. Statutory Bases
Appendices

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

[[Page 51693]]

parent company and, sometimes, one or more of the parent company's 
other subsidiaries.
    Guarantees of securities are securities themselves for purposes of 
the Securities Act of 1933.\10\ As a result, the Securities Act 
requires the offering of both the guaranteed security and the guarantee 
to be either registered or exempt from registration. A Securities Act 
registration statement must include disclosure of both financial and 
non-financial information about the issuer of the guaranteed security 
as well as any guarantors. Moreover, Securities Act registration causes 
both the issuer and the guarantors to become subject to Section 15(d) 
\11\ of the Exchange Act. Section 15(d) requires all Securities Act 
registrants to file Exchange Act periodic reports for at least the 
fiscal year during which the related Securities Act registration 
statement became effective.
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    \10\ 15 U.S.C. 77a et seq.
    \11\ 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 finance subsidiary issues debt securities 
guaranteed by its parent company, full disclosure of the finance 
subsidiary's financial information would be of little value. Instead, 
investors would look to the financial status of the parent company that 
guaranteed the debt to evaluate the likelihood of payment.
    Subsidiary issuers and subsidiary guarantors raise a number of 
disclosure issues under the Securities Act and the Exchange Act. 
Included among these issues are:
     What information must issuers of guaranteed securities 
provide to potential investors in the registered offering;
     What information must guarantors provide to potential 
investors in the registered offering; and
     What 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. In the 17 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 transaction structures. In 
addition, the staff has responded to an increasing number of requests 
for relief from Exchange Act reporting.\12\ In 1999, approximately one-
fourth of all interpretive, no-action, and exemptive requests acted on 
by the Division of Corporation Finance involved the application of SAB 
53.\13\
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    \12\ SAB 53 instructs issuers to file exemptive applications 
under Section 12(h) of the Exchange Act with regard to the Exchange 
Act reporting obligations of subsidiary issuers and subsidiary 
guarantors. Early in the development of SAB 53 issues, the staff 
began processing these exemptive requests as requests for no-action 
letters instead of exemptive applications. This process continues 
today. Throughout this release, we will refer to these requests as 
requests for no-action letters.
    \13\ If requests for no-action letters under Exchange Act Rule 
14a-8 [17 CFR 240.14a-8], the shareholder proposal rule, are 
excluded, nearly one-half of all Division of Corporation Finance no-
action letters involved SAB 53.
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    The staff's interpretations, which balance the burden on issuers 
and guarantors to disclose required information fully with the 
investor's need for information, have addressed new and complex 
structures effectively. On March 5, 1999, we proposed rules and 
revisions to codify, in large part, the staff's current analysis 
regarding the obligations of the issuers and guarantors.\14\ We 
received 12 comment letters on our proposals.\15\
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    \14\ Securities Act Release No. 7649 (March 5, 1999) [64 FR 
10579].
    \15\ These letters are available in File S7-7-99 in the Public 
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. 
Comment letters sent to the Commission electronically are available 
at our web site--www.sec.gov.
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    Today, we announce the adoption of those rules and revisions 
substantially as proposed. We believe these rules and revisions will:
     Eliminate uncertainty regarding financial statement 
requirements;
     Eliminate uncertainty regarding ongoing reporting;
     Eliminate the burden on issuers and guarantors to seek 
guidance regarding those requirements; \16\ and
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    \16\ Issuers of guaranteed securities and guarantors could still 
request a no-action letter from the Division of Corporation Finance 
if today's amendments do not address their situation. The staff will 
apply the principles expressed in this release to those requests.
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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 are revising Rule 3-10 of Regulation S-X to require, generally, 
the inclusion of condensed consolidating financial information as a 
condition to omitting the separate financial statements of a subsidiary 
issuer or subsidiary guarantor.\17\ There are, however, three 
situations in which no separate financial information or condensed 
consolidating financial information would be required, so long as the 
parent company financial statements include specified narrative 
disclosure. These situations arise
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    \17\ In connection with the revision to Rule 3-10, we are:
     Moving the financial statement requirement of 
affiliates whose securities collateralize registered securities from 
Rule 3-10 to new Rule 3-16; and
     Adopting new Notes 3 and 4 to Item 310 of Regulation S-
B requiring small business issuers to present financial information 
for the fiscal periods they are required to present in accordance 
with amended Rule 3-10 and new Rule 3-16 of Regulation S-X.
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     Where the subsidiary issuer is a finance subsidiary and 
the parent company is the only guarantor of the securities;
     Where
     the parent company of the subsidiary issuer has no 
independent assets or operations,
     the parent company guarantees the securities,
     no subsidiary of the parent company guarantees the 
securities, and
     any subsidiaries of the parent company other than the 
issuer are minor; and
     Where
     the parent company issuer has no independent assets or 
operations, and
     all of the parent company's subsidiaries, other than minor 
subsidiaries, guarantee the securities.
    We are adopting Exchange Act Rule 12h-5 to exempt from Exchange Act 
reporting requirements those subsidiary issuers and subsidiary 
guarantors that may omit separate financial statements under revised 
Rule 3-10. We are amending Form 20-F. We also are rescinding SAB 
53.\18\
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    \18\ Rule 3-10 and the positions expressed in this release will 
replace all prior Division of Corporation Finance no-action 
positions relating to SAB 53.
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II. Financial Statement and Exchange Act Reporting Requirements for 
Subsidiary Guarantors and Subsidiary Issuers of Guaranteed 
Securities Before Today's Amendments

A. Financial Statement Requirements Before Today's Amendments

1. Basis for the Requirements
    Rule 3-10 of Regulation S-X identifies which financial statements 
must be included in Securities Act registration statements, Exchange 
Act registration statements, and Exchange Act periodic reports for 
guarantors that are not filing under the small business issuer 
reporting system.\19\ Item 310 of

[[Page 51694]]

Regulation S-B identifies those requirements for guarantors that are 
filing under the small business issuer reporting system.
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    \19\ Before today's amendments, Rule 3-10 of Regulation S-X also 
prescribed 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. 
Today's amendments move these requirements from Rule 3-10 to new 
Rule 3-16 of Regulation S-X. A more complete discussion of Rule 3-16 
is located in Section III.D. ``Financial statements of affiliates 
whose securities collateralize registered securities--Rule 3-16 of 
Regulation S-X.''
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    Before today's amendments, those requirements were modified by SAB 
53. In SAB 53, the staff responded to questions arising from the 
increased number of guaranteed securities offerings. 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 company of that subsidiary; and
     Securities issued by a parent company that are guaranteed 
by a subsidiary of that company.

The staff has expanded the analysis of SAB 53 through its processing of 
registration statements and requests for no-action letters.
2. Financial Statement Requirements
    SAB 53 and the expansion of its analysis have modified the 
financial statement requirements of Rule 3-10 and Item 310 for 
subsidiary guarantors of debt securities and subsidiary issuers of 
guaranteed debt securities. The basic assumption of the financial 
statement requirements before today's amendments was that there is no 
need for full financial statements of both the issuer of the guaranteed 
security and the guarantor when:
     The issuer or guarantor is a wholly-owned subsidiary of 
the parent company; and
     The guarantee is full and unconditional.
    Under this analysis, if either of these conditions was not met, 
full financial statements for the subsidiary issuer or subsidiary 
guarantor would have to be included in the registration statement. If 
both conditions were met, the amount of financial information required 
for the subsidiary issuer or subsidiary guarantor would depend on 
whether the subsidiary had independent operations. For example,
     If the subsidiary issuer or subsidiary guarantor was a 
finance subsidiary, no separate financial statements were required; and
     If the subsidiary was not a finance subsidiary, there was 
a two-step process for determining the appropriate financial 
information:
     If there was only one subsidiary issuer or subsidiary 
guarantor present, summarized financial information was appropriate; 
and
     In all other situations, condensed consolidating financial 
information was appropriate.

B. Exchange Act Reporting Requirements Before Today's Amendments

1. Basis for the Requirements
    Exchange Act Section 15(d) requires separate periodic reports from 
both the issuer and the guarantor of securities offered under an 
effective Securities Act registration statement. SAB 53 only briefly 
addresses the Exchange Act reporting obligations of subsidiary issuers 
of parent company-guaranteed securities. In a footnote, SAB 53 states:

where the parent guarantor of an issuer subsidiary * * * 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) \20\ of the Exchange Act from reporting 
obligations under such Act.
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    \20\ 15 U.S.C. 78l(h).

Since the issuance of SAB 53, the staff of the Division of Corporation 
Finance has responded to an increasing number of requests for no-action 
letters relating to Exchange Act reporting.
2. Exchange Act Reporting Requirements
    The staff's analysis of no-action requests relating to Exchange Act 
periodic reporting is the same as its analysis of the financial 
statement requirements for subsidiary guarantors and subsidiary issuers 
of guaranteed securities in Securities Act registration statements. 
Therefore, if a subsidiary issuer or subsidiary guarantor was not 
required to include separate financial statements under the SAB 53 
analysis, the staff would grant a request for a no-action letter 
relating to Exchange Act periodic reporting. Instead of separate 
reporting for the subsidiary issuer or subsidiary guarantor, the parent 
company would present in its periodic reports the same level of 
modified information regarding the subsidiary as it presented in the 
related Securities Act registration statement.

III. Today's Amendments to the Financial Statement and Exchange Act 
Reporting Requirements for Subsidiary Guarantors and Subsidiary 
Issuers of Guaranteed Securities

    We believe that the requirements for subsidiary issuer and 
subsidiary guarantor financial information should be provided in 
Regulation S-X. We also believe that the exemption from Exchange Act 
reporting should be provided in a rule that parallels the financial 
statement requirements. To accomplish this, we are adopting, in large 
part, the staff's current approach in these areas.
    We believe today's amendments will provide investors with 
meaningful and comparable financial information about subsidiary 
issuers and subsidiary guarantors. We also believe that these 
amendments will provide significant benefits to subsidiary issuers and 
subsidiary guarantors by removing uncertainty about financial statement 
requirements and reducing the number of requests for no-action letters.

A. Rule 3-10 of Regulation S-X

    We are adopting, as proposed, amendments to paragraph (a) of Rule 
3-10. These amendments restate the general rule that all issuers or 
guarantors of registered securities must include separate financial 
statements. We also are adopting new paragraphs (b) through (f) of Rule 
3-10. These new paragraphs provide exceptions to the general rule of 
Rule 3-10(a) and permit modified financial information in registration 
statements and the parent company's periodic reports when
     A finance subsidiary issues securities that its parent 
company guarantees;
     An operating subsidiary issues securities that its parent 
company guarantees;
     A subsidiary issues securities that its parent company and 
one or more other subsidiaries of its parent company guarantee;
     A parent company issues securities that one of its 
subsidiaries guarantees; and
     A parent company issues securities that more than one of 
its subsidiaries guarantees.
    Only one of these five paragraphs can apply to any particular 
offering and the subsequent Exchange Act reporting. With respect to 
these five paragraphs, the following two-part analysis determines 
whether modified financial information may be provided for subsidiary 
issuers and subsidiary guarantors.
     Is the subsidiary issuer or subsidiary guarantor 100% 
owned by its parent company?
     Are the guarantees full and unconditional?

If the answer to both questions is yes, modified financial information 
is allowed. If the answer to either question is no, modified financial 
information is

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not allowed. We have adopted three other new paragraphs to Rule 3-10. 
Paragraph (g) provides the financial statement requirements for 
recently acquired subsidiary issuers and subsidiary guarantors. 
Paragraph (h) defines the following terms for purposes of Rule 3-10:
     100% owned;
     Full and unconditional;
     Annual report;
     Quarterly report;
     No independent assets or operations;
     Minor;
     Finance subsidiary; and
     Operating subsidiary.

Paragraph (i) provides instructions for preparing the condensed 
consolidating financial information required by paragraphs (c) through 
(f) of Rule 3-10.
1. Two-Part Analysis To Determine Whether Modified Financial 
Information May Be Provided
a. The Meaning of ``100% Owned''
    Under SAB 53, a subsidiary was ``wholly owned'' if all of its 
outstanding voting shares and any outstanding securities convertible 
into its voting shares were owned, either directly or indirectly, by 
its parent company.\21\ This meaning differs from the general 
definition of ``wholly-owned subsidiary'' in Rule 1-02(aa) of 
Regulation S-X.\22\ Rule 1-02(aa) treats a subsidiary as wholly owned 
if substantially all of its voting shares are held by its parent 
company. We proposed that the meaning of ``wholly owned'' for the 
purposes of Rule 3-10 would be, in large part, the same as the staff's 
analysis under SAB 53.
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    \21\ See, e.g., Citizens Utilities Company (May 20, 1996).
    \22\ 17 CFR 210.1-02(aa).
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    The comments on the proposed definition of wholly owned in Rule 3-
10 varied significantly. One commenter suggested that the special 
relief granted by SAB 53 should be extended to any issuer or guarantor 
that is a subsidiary.\23\ Another commenter believed just the opposite, 
indicating its support for the definition as proposed.\24\ A third 
commenter suggested that reduced financial reporting should be 
permitted for 100%-owned subsidiaries and subsidiaries whose minority 
shareholders consist solely of affiliates of the consolidated 
group.\25\
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    \23\ Comment letter of Sullivan & Cromwell (May 4, 1999).
    \24\ Comment letter of PricewaterhouseCoopers (May 4, 1999).
    \25\ Comment letter of KPMG LLP (May 4, 1999).
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    We are adopting the meaning of ``wholly owned'' that was used under 
SAB 53. However, we have used the term ``100% owned'' in Rule 3-10 to 
avoid confusion with the definition of ``wholly-owned subsidiary'' in 
Rule 1-02(aa) of Regulation S-X. We discuss the definition of 100% 
owned and the reasons for adopting that definition in the following 
sections.\26\
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    \26\ We also have included Appendix A at the end of this release 
to further illustrate the meaning of 100% owned. We included four 
appendices in the proposing release to give guidance on the 
application of the proposed rules. We are rescinding those 
appendices. Issuers and guarantors should not rely on those 
appendices. Instead, issuers and guarantors should consider the 
appendices to this adopting release when applying today's amendments 
to specific situations. The staff intends to publish additional 
guidance on the application of today's amendments.
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i. Subsidiaries in Corporate Form
(A) Definition of 100% Owned
    A subsidiary in corporate form is 100% owned for the purposes of 
Rule 3-10 if all of its outstanding voting shares and any outstanding 
securities convertible into its voting shares are owned, directly or 
indirectly, by its parent company.\27\ We are adopting this definition 
because it assures investors in the guaranteed securities that there is 
no competing common equity interest in the assets or revenues of the 
subsidiary. This allows investors to evaluate the creditworthiness of 
the parent and subsidiary as a single, indivisible business. If a third 
party holds an interest in the subsidiary, the risks associated with 
investment in parent and subsidiary are not identical. Where those 
risks are not identical, there is not the financial unity between the 
subsidiary and its parent that is needed to justify the modified 
financial information permitted by paragraphs (b) through (f) of Rule 
3-10.
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    \27\ Rule 1-02(z) of Regulation S-X [17 CFR 210.1-02(z)] defines 
``voting shares.'' All securities of a subsidiary that confer the 
right to elect directors or their functional equivalents annually, 
whether or not those securities are equity or debt, must be held by 
the parent to satisfy the 100%-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.
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    To remain 100% owned, a subsidiary corporation may not issue any 
securities convertible into its voting shares unless those convertible 
securities are owned, directly or indirectly, by its parent company. 
This would preclude the use of options that are exercisable into voting 
shares unless those options are owned, directly or indirectly, by the 
subsidiary's parent company.
    One commenter addressed convertible securities.\28\ That commenter 
believed that a subsidiary that has issued securities convertible into 
its voting securities to someone other than its parent company should 
be considered 100% owned if the parent company has the unilateral right 
to reacquire such instruments for a fixed or determinable price before 
their conversion. We do not agree that the definition of 100% owned 
should include a subsidiary that issued to a third party securities 
convertible into its voting shares, irrespective of the parent's right 
to repurchase. A subsidiary that has issued to any person other than 
its parent company securities that are convertible into its voting 
stock does not have the financial unity with its parent company that is 
necessary to qualify for the modified financial information permitted 
by paragraphs (b) through (f) of Rule 3-10.
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    \28\ Comment letter of PricewaterhouseCoopers (May 4, 1999).
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(B) Interpretive Position Regarding Foreign Issuers and Guarantors

    The definition of 100% owned in Rule 3-10 precludes any outside 
ownership of voting shares for subsidiary corporations. Therefore, 
subsidiaries organized in a jurisdiction that requires directors to own 
shares would not meet the 100%-owned test. Nonetheless, we concur in 
the staff's response to Crown Cork & Seal Company, Inc. (March 10, 
1997), in which the staff agreed to a no-action request under SAB 53 
from a subsidiary organized in the Republic of France even though it 
had more than one voting shareholder. That no-action request stated 
that French law required the subsidiary to have a total of seven 
shareholders and also required each director to own at least one share. 
The request explained that, in order to comply with this requirement, 
the parent company would transfer approximately six shares, equaling 
approximately 0.24% of the parent company's outstanding shares, to its 
directors. In granting the no-action position, the staff noted that the 
non-parent company ownership was at the minimum level required to 
comply with French law. We have not included this exception in amended 
Rule 3-10 because it is an uncommon situation that should be handled 
through the no-action request process. However, the staff will continue 
to recognize the exception presented by Crown Cork & Seal Company, 
Inc., as well as any future no-action requests from other issuers under 
substantially similar facts.\29\
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    \29\ If any issuer and guarantor fail to meet the 100%-owned 
definition, but can demonstrate that their situation provides them 
with the financial unity needed to qualify for the modified 
financial information permitted by paragraphs (b) through (f) of 
Rule 3-10, they may request relief from the Division of Corporation 
Finance. In its consideration of these requests, the staff will 
consider the principles set forth in this release regarding the 
significance of the 100%-owned definition.

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[[Page 51696]]

ii. Subsidiaries in Other Than Corporate Form
    We also proposed a separate definition of 100% owned for 
subsidiaries that are not in corporate form. As proposed, a non-
corporate entity would be 100% owned if its parent company owned all of 
its outstanding interests. We have altered this definition slightly. As 
adopted, a subsidiary not in corporate form is 100% owned if all 
outstanding interests in that subsidiary are owned, either directly or 
indirectly, by its parent company other than:
     Securities to which Rule 3-10 applies that are guaranteed 
by its parent company and, if applicable, other 100%-owned subsidiaries 
of its parent company; and
     Guarantees of securities issued by its parent company and, 
if applicable, other 100%-owned subsidiaries of its parent company.

This revision recognizes that the securities issued in the transaction 
that makes the subsidiary subject to Rule 3-10 may be ``interests'' for 
purposes of the definition of 100% owned.
    One commenter suggested that the definition of 100% owned for an 
unincorporated entity should be changed so that relief would be 
available so long as the parent owns all or substantially all of the 
``participating'' ownership interests in the entity.\30\ We are not 
adopting this suggestion. Unincorporated entities operate differently 
than corporations and one form of participation in the operation of an 
entity may be separate from another form of participation in the 
entity. For example, in a limited liability corporation, the ability to 
vote can be separated from the ability to manage the financial affairs 
of the entity. The staff historically has allowed, and Rule 3-10 will 
allow, modified financial information only when the parent and 
subsidiary or subsidiaries have financial unity.
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    \30\ Comment letter of Sullivan & Cromwell (May 4, 1999).
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b. The Meaning of ``Full and Unconditional''
    We proposed to define a ``full and unconditional'' guarantee 
consistent with the staff's interpretation of that term for purposes of 
SAB 53. We are adopting the definition as proposed.
    The definition we adopt today is intended to limit the availability 
of the modified financial information permitted by paragraphs (b) 
through (f) of Rule 3-10 to those situations where the payment 
obligations of the issuer and guarantor are essentially identical. 
Under Rule 3-10, a guarantee is full and unconditional if

when an issuer of a guaranteed security has failed to make a 
scheduled payment, the guarantor is obligated to make the scheduled 
payment immediately and, if it doesn't, any holder of the guaranteed 
security may immediately bring suit directly against the guarantor 
for payment of all amounts due and payable.\31\

    \31\ See Rule 3-10(h)(2).
---------------------------------------------------------------------------

    Under this definition, a guarantee is not full and unconditional 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 exhaust its remedies against 
the issuer before seeking payment from the guarantor.
    In the following three sections, we discuss specific interpretive 
issues presented by the definition of full and unconditional guarantee.
i. A Guarantee Is Not Full and Unconditional When It Is Not Operative 
Until Some Time After Default
    One commenter noted that, under the proposed definition, a 
guarantee that became due only after the passage of some time period 
after default would not be full and unconditional under Rule 3-10.\32\ 
This commenter indicated that this definition would not comport with a 
debt structure used in some European transactions, where there is a 
``standstill'' period before the guarantee can be enforced. The 
commenter expressed the view that the ``standstill'' requirement should 
not result in additional disclosure obligations and the proposed 
definition would, likely, be detrimental to investors in European debt 
securities. We have not revised the definition as suggested. The 
presence of a delay before the guarantee could be enforced would 
undermine the financial unity that is necessary for the modified 
financial information permitted by paragraphs (b) through (f) of Rule 
3-10. Specifically, if there is any period of time during which the 
investor may not proceed against the guarantor(s), then it is necessary 
for that investor to be able to fully evaluate the issuer and 
guarantor(s) separately. Because the payment obligation does not fall 
uniformly across the issuer and the related guarantors when there is a 
delay before the guarantee can be enforced, each party in that 
structure must provide separate financial statements.
---------------------------------------------------------------------------

    \32\ Comment letters of Latham & Watkins (July 15, 1999, and 
July 6, 2000).
---------------------------------------------------------------------------

ii. A Guarantee Can 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, that guarantee 
would not be 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.''
     The guarantee is enforceable ``so long as it would not 
result in the guarantor having less than $XX in net assets [or other 
financial measure].''
iii. A Guarantee Can Be Full and Unconditional Even if it Has Different 
Subordination Terms Than the Guaranteed Securities
    A guarantee can be full and unconditional despite different 
subordination terms between the

[[Page 51697]]

guaranteed security and the guarantee.\33\ For example, a parent 
company's guarantee can be full and unconditional even if the 
subsidiary's debt obligation ranks senior to all other debt of that 
subsidiary and the parent company's guarantee ranks junior to other 
debt obligations of the parent company. Although different 
subordination terms mean security holders have different rights in the 
priority of payment with respect to the issuer and the guarantor, both 
the issuer and the guarantor remain fully liable to holders for all 
amounts due under the guaranteed security.
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    \33\ See Williams Scotsman, Inc. (March 19, 1998).
---------------------------------------------------------------------------

    One commenter agreed that subordination terms among the guaranteed 
security and the guarantees should not affect the full and 
unconditional analysis.\34\ However, that commenter felt that condensed 
consolidating financial information should be expanded in these cases 
to require separate columns grouping the guarantors by priority 
position or subordination. We are not expanding the condensed 
consolidating requirements as suggested because we believe that the 
condensed consolidating financial information provides the appropriate 
level of information to investors.
2. Rule 3-10(b) Through (f)
a. Preliminary Conditions to the Availability of Rule 3-10(b) Through 
(f)
    If either the guarantee is not full and unconditional or the 
subsidiary is not 100% owned by its parent company, then modified 
financial information would not be allowed. Our discussion of amended 
Rule 3-10 in subsections b. through f., below, assumes that each of 
these conditions has been met.
b. Finance Subsidiary Issuer of Securities Guaranteed by its Parent 
Company Only
    We proposed to amend Rule 3-10 to codify SAB 53's treatment of 
finance subsidiary issuers of securities that are guaranteed by the 
parent company. As adopted, paragraph (b) of Rule 3-10 provides that 
subsidiary issuers would not be required to include any financial 
information if:
     The subsidiary is a finance subsidiary; \35\
     The parent company of the subsidiary issuer guarantees the 
securities;
     No other subsidiary of the parent company guarantees 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; \36\ 
and
     The parent company's financial statements include a 
footnote stating that the issuer is a 100%-owned finance subsidiary of 
the parent company and the parent company has fully and unconditionally 
guaranteed the securities.
    In response to comments, we have added a note to paragraph (b) 
stating that if a subsidiary issuer satisfies the requirements of this 
paragraph but for the fact that it co-issued the securities, jointly 
and severally, with its parent company, the parent company may present 
its financial information with respect to the subsidiary as paragraph 
(b) permits.
    One commenter asked us to clarify what happens when a finance 
subsidiary ceases to meet the definition of finance subsidiary.\37\ At 
that time, the subsidiary should be treated as an operating subsidiary. 
The parent company is not required to amend any reports for periods 
before the subsidiary stopped being a finance subsidiary. The parent 
company must present condensed consolidating financial information for 
the subsidiary when the subsidiary ceases to be a finance subsidiary. 
That is, the parent company must present condensed consolidating 
financial information for the operating subsidiary in the Exchange Act 
report for the period in which the subsidiary stopped being a finance 
subsidiary.
    In an offering of securities that is registered under the shelf 
registration system,\38\ if the finance subsidiary ceases to meet the 
definition of finance subsidiary, the registration statement must be 
amended to include the appropriate financial information before any 
further offers may be made. Ordinarily, under the shelf registration 
system, this information would have to be included in the registration 
statement through a post-effective amendment. However, offerings that 
are registered on Form S-3 \39\ could satisfy this requirement by 
filing the financial information on a Form 8-K \40\ that is 
incorporated by reference.\41\
c. Operating Subsidiary Issuer of Securities Guaranteed by its Parent 
Company Only
    We proposed to amend Rule 3-10 to address specifically the 
structure where the parent company guarantees the securities issued by 
a subsidiary that is not a finance subsidiary. SAB 53 permitted the 
parent company's financial statement footnotes to include summarized 
financial information regarding the operating subsidiary issuer. 
Consistent with our view that condensed consolidating financial 
information is more appropriate, we are adopting paragraph (c) of Rule 
3-10 to provide that these issuers need not include separate financial 
statements if:
     The parent company guarantees the securities;
     No subsidiary of the parent company guarantees 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
---------------------------------------------------------------------------

    \34\ Comment letter of PricewaterhouseCoopers (May 4, 1999).
    \35\ Rule 3-10(h)(7) states that a subsidiary is a finance 
subsidiary if ``it has no assets, operations, revenues or cash flows 
other than those related to the issuance, administration and 
repayment of the security being registered and any other securities 
guaranteed by its parent company.''
    \36\ 17 CFR 210.3-01 and 17 CFR 210.3-02. Rule 3-10(a)(3) states 
that foreign parent companies should look to Item 8.A of Form 20-F 
to determine the periods for which financial statements are 
required.
    \37\ Comment letter of Arthur Andersen (May 4, 1999).
    \38\ See Securities Act Rule 415 [17 CFR 230.415].
    \39\ 17 CFR 239.13.
    \40\ 17 CFR 249.308.
    \41\ Similarly, offerings that are registered on Form F-3 [17 
CFR 239.33] could satisfy this requirement by filing the financial 
information on a Form 6-K [17 CFR 249.306] that is incorporated by 
reference.
---------------------------------------------------------------------------

     the parent company's financial statement footnotes include 
condensed consolidating financial 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.
    We are adopting the paragraph as proposed with the addition of 
three notes. First, we have added a note stating that the condensed 
consolidating financial information may be omitted if:
     The parent company has no independent assets or 
operations; \42\
     Any subsidiaries other than the subsidiary issuer are 
minor; \43\ and

[[Page 51698]]

     The parent company's financial statements include a 
footnote stating that the parent company has no independent assets or 
operations, the guarantee is full and unconditional and any 
subsidiaries other than the subsidiary issuer are minor.
    This note was added to the proposed rule based on comments we 
received suggesting that when the parent company is a holding company 
and the subsidiary issuer is the only subsidiary other than minor 
subsidiaries, the subsidiary issuer should be treated like a finance 
subsidiary. We agree that under these circumstances the consolidated 
financial statements, when combined with the required narrative 
information, provide substantially the same information as condensed 
consolidating financial information. Thus, the condensed consolidating 
financial information need not be presented.
    Second, we have added a note stating that the separate column for 
other subsidiaries is not required when the parent company has 
independent assets or operations, but the other subsidiaries are minor.
    Third, we have added a note stating that if a subsidiary issuer 
satisfies the requirements of this paragraph but for the fact that it 
co-issued the securities, jointly and severally, with its parent 
company, the parent company may present its financial information with 
respect to the subsidiary as paragraph (c) permits.
d. Subsidiary Issuer of Securities Guaranteed By its Parent Company and 
One or More Other Subsidiaries of That Parent Company
    We proposed to codify the staff's position regarding the structure 
where a subsidiary issues securities and both its parent company and 
one or more other subsidiaries of that parent company are guarantors. 
As adopted, paragraph (d) of Rule 3-10 provides that these subsidiary 
issuers and 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 for the same periods with 
a separate column for
     The parent company;
     the subsidiary issuer;
     the guarantor subsidiaries on a combined basis;
     any other subsidiaries on a combined basis;
     consolidating adjustments; and
     the total consolidated amounts.

This paragraph applies in the same manner regardless of whether the 
issuer is a finance subsidiary or an operating subsidiary.
    We are adopting this paragraph as proposed with the addition of 
four notes. First, we added a note stating that the separate column for 
other subsidiaries is not required when those other subsidiaries are 
minor.
    Second, we added a note stating that if a subsidiary issuer 
satisfies the requirements of this paragraph but for the fact that it 
co-issued the securities, jointly and severally, with its parent 
company, the parent company may present its financial information with 
respect to the subsidiaries as paragraph (d) permits.
    Third, we added a note addressing guarantees that are not joint and 
several. That note states that

 if

    \42\ Rule 3-10(h)(5) states that, for purposes of Rule 3-10, a 
parent company has no independent assets or operations if ``its 
total assets, revenues, income from continuing operations before 
income taxes, and cash flows from operating activities (excluding 
amounts related to its investment in its consolidated subsidiaries) 
are each less than 3% of the corresponding consolidated amounts.''
    \43\ Rule 3-10(h)(6) states that, for purposes of Rule 3-10, ``a 
subsidiary is minor if its total assets, stockholders' equity, 
revenues, income from continuing operations before income taxes, and 
cash flows from operating activities are each less than 3% of the 
parent company's corresponding consolidated amounts.'' A note to 
this definition indicates that when considering a group of 
subsidiaries, the definition applies to each subsidiary in that 
group individually and to all subsidiaries in that group in the 
aggregate.
---------------------------------------------------------------------------

     there is one subsidiary guarantor and that subsidiary's 
guarantee is not joint and several with the parent company's guarantee, 
or
     there is more than one subsidiary guarantor and any of the 
subsidiary guarantees is not joint and several with the guarantees of 
the parent company and the other subsidiaries,

 Then

     each subsidiary guarantor whose guarantee is not joint and 
several need not include separate financial statements, but
     the condensed consolidating financial information must 
include a separate column for each subsidiary guarantor whose guarantee 
is not joint and several.
    Fourth, we added a note addressing the situation when the parent 
company has no independent assets or operations, the subsidiary issuer 
is a finance company, and all of the parent company's other 
subsidiaries guarantee the securities on a full and unconditional and 
joint and several basis. In that situation, the consolidated financial 
statements, when combined with the required narrative information, 
provide substantially the same information as condensed consolidating 
financial information. Thus, the condensed consolidating financial 
information need not be presented.
e. Single Subsidiary Guarantor of Securities Issued By Its Parent 
Company
    We proposed to codify the staff's positions regarding the structure 
where a parent company issues securities and one of its subsidiaries 
guarantees those securities. As adopted, paragraph (e) of Rule 3-10 
provides that the subsidiary guarantor need not include separate 
financial statements if:
     No other subsidiary of that parent company guarantees 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 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.

This paragraph applies in the same manner regardless of whether the 
subsidiary guarantor is a finance subsidiary or an operating 
subsidiary.
    We are adopting this paragraph as proposed with the addition of 
three notes. First we have added a note stating that the condensed 
consolidating financial information may be omitted if:
     The parent company has no independent assets or 
operations;
     Any subsidiaries other than the guarantor are minor; and
     The parent company's financial statements include a 
footnote stating that the parent company has no independent assets or 
operations, the guarantee is full and unconditional and any non-
guarantor subsidiaries are minor.
    Second, we added a note stating that the separate column for other 
subsidiaries is not required when the parent company has independent 
assets or operations, but the other subsidiaries are minor.
    Third, we added a note stating that this paragraph does not apply 
if the subsidiary co-issued the securities, jointly and severally, with 
its parent company. Instead,
     If the subsidiary is a finance subsidiary, paragraph (b) 
would apply; and
     If the subsidiary is an operating subsidiary, paragraph 
(c) would apply.
    We added this note to eliminate any potential confusion regarding 
which paragraph applies in co-issuer situations.

[[Page 51699]]

f. Multiple Subsidiary Guarantors of Securities Issued By Their Parent 
Company
    We proposed to codify the staff's position for the structure when a 
parent company issues securities and more than one of its subsidiaries 
guarantees the securities. As adopted, paragraph (f) of Rule 3-10 
provides that 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 for the same periods with 
a separate column for
     the parent company;
     the subsidiary guarantors on a combined basis;
     any other subsidiaries on a combined basis;
     consolidating adjustments; and
     the total consolidated amounts.
    We are adopting this paragraph as proposed, with the addition of 
three notes. First, we have added a note stating that the condensed 
consolidating financial information may be omitted if:
     The parent company has no independent assets or 
operations;
     Any subsidiaries other than the subsidiary guarantors are 
minor; and
     The parent company's financial statements include a 
footnote stating that the parent company has no independent assets or 
operations, the guarantees are full and unconditional and joint and 
several, and any non-guarantor subsidiaries are minor.
    Second, we added a note stating that the separate column for other 
subsidiaries is not required when the parent company has independent 
assets or operations, but the other subsidiaries are minor.
    Third, we added a note addressing guarantees that are not joint and 
several. That note states that

 If

     any of the subsidiary guarantees is not joint and several 
with the guarantees of the other subsidiaries,

     Then
     each subsidiary guarantor whose guarantee is not joint and 
several need not include separate financial statements, but
     the condensed consolidating financial information must 
include a separate column for each subsidiary guarantor whose guarantee 
is not joint and several.
3. Condensed Consolidating Financial Information Required By Rule 3-
10(c) Through (f)
    Under today's amendments to Rule 3-10, a subsidiary may rely on one 
of the exceptions in paragraphs (c) through (f) if it is otherwise 
eligible for that exception and the parent company's financial 
statements include a footnote presenting condensed consolidating 
financial information.
a. Reasons for Requiring Condensed Consolidating Financial Information 
Instead of Summarized Financial Information
    Under SAB 53, subsidiary issuers were permitted to include 
summarized financial information as described in Rule 1-02(bb) of 
Regulation S-X.\44\ Summarized financial information originally was 
intended only to inform investors about a registrant's equity 
investments in unconsolidated affiliates. The summarized financial 
information shows the general, indirect effect of the subsidiaries on 
their parent company's financial condition. This type of financial 
information is appropriate when the investment decision is based solely 
on the financial condition of the parent company.
---------------------------------------------------------------------------

    \44\ The staff expanded this relief to subsidiary guarantors in 
Anheuser-Busch Companies, Inc. (April 2, 1987).
---------------------------------------------------------------------------

    However, in SAB 53, the staff did not contemplate the widespread 
use of summarized financial information as the primary financial 
information for assessing the creditworthiness of a subsidiary 
guarantor. The staff also did not contemplate more complex guarantee 
structures where investors must assess the subsidiary's financial 
condition more completely and independently of its parent company and 
other subsidiaries of its parent company. Summarized financial 
information is inadequate for this purpose. For example, although cash 
flow information is significant in assessing creditworthiness, 
summarized financial information includes no cash flow information.
    Further, summarized financial information, as the staff recognized 
in its application of SAB 53, raised the question of how to deal with 
multiple guarantors. Many structures presented to the staff involved a 
subsidiary issuer, a parent company guarantor, multiple subsidiary 
guarantors, and multiple subsidiaries that are not guarantors. Other 
structures involved more than 100 subsidiary guarantors. A strict 
application of SAB 53 in that situation would have required more than 
100 sets of summarized financial information. Not only would that 
disclosure have been burdensome for the registrant to provide, it is 
unlikely to have been useful to investors.
    Through interpretive requests and the review and comment process, 
the staff began to rely on the inclusion of condensed consolidating 
financial information in lieu of summarized financial information in 
most situations.\45\ Condensed consolidating financial information 
requires the columnar presentation of each category of parent and 
subsidiary as issuer, guarantor, or non-guarantor.\46\
---------------------------------------------------------------------------

    \45\ The staff required condensed consolidating financial 
information in all situations except those specifically addressed in 
SAB 53--specifically, those where (a) there was a single subsidiary 
issuer or, where there was a parent issuer and a subsidiary 
guarantee, that guarantee was provided by either a single subsidiary 
or all subsidiaries; or (b) the issuer was a finance subsidiary and 
the parent was the sole guarantor. The staff first accepted 
condensed consolidating financial information in connection with its 
case-by-case review of Securities Act registration statements. 
Consistent with the earlier development of SAB 53 interpretation, 
the staff applied the same analysis to no-action requests relating 
to Exchange Act reporting. See, e.g., Chicago & North Western 
Acquisition Corp. (February 6, 1990); EPIC Properties, Inc. (March 
13, 1992).
    \46\ The staff permits subsidiary guarantors to combine 
financial information in one column if their guarantees are joint 
and several.
---------------------------------------------------------------------------

    In today's amendments to Rule 3-10, we are requiring condensed 
consolidating financial information as a condition to omitting separate 
financial statements. We are requiring condensed consolidating 
financial information because it 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.\47\ 
Furthermore, condensed consolidating financial information provides the 
same level of detail about the financial position, results of 
operations, and cash flows of subsidiary issuers and subsidiary 
guarantors that investors are accustomed to obtaining in interim 
financial statements of a registrant. It also facilitates analysis of 
trends affecting subsidiary issuers and subsidiary guarantors and 
relationships among the various components of a consolidated 
organization.
---------------------------------------------------------------------------

    \47\ Summarized financial information may obscure these 
distinctions, particularly if subsidiary guarantors themselves have 
consolidated operating subsidiaries that are not guarantors.
---------------------------------------------------------------------------

b. Comments Regarding Condensed Consolidating Financial Information
    We requested comment on whether condensed consolidating financial 
information was the proper level of disclosure. The commenters 
generally expressed support for the proposed

[[Page 51700]]

requirement for condensed consolidating financial information. One 
commenter suggested an alternative to condensed consolidating financial 
information where summarized financial information would have been 
permitted before today's amendments.\48\ That commenter suggested that 
we expand the summarized financial information specified by Rule 1-
02(bb) to include additional line items and cash flow information.
---------------------------------------------------------------------------

    \48\ Comment letter of KPMG LLP (May 4, 1999).
---------------------------------------------------------------------------

    Another commenter expressed the view that condensed consolidating 
financial information results in a presentation that is inconsistent 
with other financial statement requirements of Regulation S-X because 
it requires parent companies to present investments in all 
subsidiaries, and subsidiary issuer and subsidiary guarantor columns to 
present investments in non-guarantor subsidiaries, on an unconsolidated 
basis.\49\ That commenter believed that the distinction between a 100%-
owned subsidiary issuer or subsidiary guarantor and a 100%-owned non-
guarantor subsidiary should not affect an investor's assessment of the 
parent company's ability to satisfy the debt obligations. The commenter 
also believed that condensed consolidating financial information is 
unduly burdensome to prepare and does not fully depict the ``structural 
subordination'' of an issuer's registered classes of guaranteed debt to 
other obligations of non-guarantor subsidiaries in many debt 
structures. Accordingly, the commenter proposed that the summarized 
financial information approach, expanded to include cash flow 
information, be adopted for all issuers and guarantors who exhibit 
evidence of the ability to satisfy their obligations and are in good 
financial condition. This suggestion would require a merit 
determination each time financial information is presented.
---------------------------------------------------------------------------

    \49\ Comment letters of Time Warner, Inc. (July 8, 1999 and 
August 10, 1999).
---------------------------------------------------------------------------

    For the reasons discussed above, we are adopting the condensed 
consolidating financial information requirement as proposed. We 
continue to believe that condensed consolidating financial information 
provides the most meaningful presentation to permit investors to 
evaluate the ability to pay of those entities that are legally 
obligated under the debt and the guarantee(s). We also believe the 
approach is more adaptable to new and complex debt instruments and 
structures.
    In our view, summarized financial information, even if modified to 
include additional data, provides less complete information about 
subsidiary issuers and subsidiary guarantors and is less flexible than 
condensed consolidating financial information. It also would be 
difficult to develop and administer a meaningful and practical 
difference in presentation requirements based on the financial 
condition of the subsidiary or parent company across the wide range of 
debt instruments, issuers and industries. Further, it seems that the 
likely result of the summarized financial information approach in 
complex structures would be the inclusion of multiple sets of 
summarized financial information. The relationship of the summarized 
data to the consolidated financial statements of the parent would 
likely be unclear, and the assets and operations of particular 
subsidiary issuers or subsidiary guarantors would likely be duplicated 
by inclusion in multiple sets of data. In large part, these same 
factors led the staff to develop the condensed consolidating financial 
information approach a number of years ago.
4. Securities to Which Rule 3-10 Applies
a. Rule 3-10(a) Requires Separate Financial Statements for Each Issuer 
of Registered Guaranteed Securities and Each Guarantor of Registered 
Securities
    Rule 3-10(a) requires, as a general rule, separate financial 
statements for ``every issuer of a registered security that is 
guaranteed and every guarantor of a registered security.'' \50\ This 
requirement applies regardless of:
---------------------------------------------------------------------------

    \50\ One commenter asked us to clarify the application of Rule 
3-10 when the guarantee does not run to the benefit of the debt 
holders and, thus, would not be a ``security'' itself. See Comment 
letter of PricewaterhouseCoopers (May 4, 1999). That commenter also 
asked that the rule be expanded to cover situations in which the 
staff historically has asked for financial disclosures by guarantors 
or credit enhancers even when the guarantee that is not a security 
or the credit enhancement does not run directly to the holders of 
the related security.
    Typically, in those situations, the issuer of the guarantee or 
provider of the credit enhancement does not incur a Rule 3-10(a) 
financial statement obligation or a Section 15(d) reporting 
obligation as a result of the guarantee or the credit enhancement. 
Nevertheless, when a party provides such a guarantee or credit 
enhancement, its financial information often is material to 
investors in the related security. If that information is material, 
the staff may ask that the guarantor or credit enhancer's financial 
statements be disclosed. These situations are beyond the scope of 
today's initiative. We have not amended Rule 3-10 in response to 
this comment and today's amendments do not affect the staff's 
practices with regard to these types of guarantees and credit 
enhancements.
---------------------------------------------------------------------------

     The relationship between the issuer and the guarantor(s);
     The nature of the guaranteed security; or
     Whether the guarantee is full and unconditional.
b. Guaranteed Securities for Which Paragraphs (b) Through (f) of Rule 
3-10 May Provide an Exception to the Requirement of Rule 3-10(a)
    We have adopted five exceptions to the general rule of Rule 3-10(a) 
in recognition that there are specific types of securities, guarantees, 
and related parties for which modified financial information is 
appropriate. We are providing, as proposed, that the modified financial 
information permitted by paragraphs (b) through (f) be available only 
for guaranteed debt and guaranteed preferred securities that have 
payment terms that are substantially the same as debt.\51\ Under this 
standard, the payment terms of the preferred securities must mandate 
redemption and/or dividend payments.\52\
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    \51\ These securities include trust preferred securities. We 
discuss these securities later in this section.
    \52\ Preferred 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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i. The Modified Financial Information Permitted by Paragraphs (b) 
Through (f) is Available Only for Guaranteed Debt and Debt-Like 
Securities
    The modified financial information permitted by paragraphs (b) 
through (f) will be available only for guaranteed debt and debt-like 
instruments. Neither the form of the security nor its title will 
determine the availability of those paragraphs. Instead, the substance 
of the obligation created by the security will be determinative. The 
characteristics that identify a guaranteed security as debt or debt-
like for this purpose are:
     The issuer has a contractual obligation to pay a fixed sum 
at a fixed time; and
     Where the obligation to make such payments is cumulative, 
a set amount of interest must be paid.
    The fact that disbursements on the security may be called 
``payments,'' ``distributions,'' or ``dividends'' rather than 
``interest'' or that holders are entitled to ``liquidation'' or 
``mandatory redemption'' rather than ``principal'' payments does not 
defeat their status as debt or debt-like for this purpose. Similarly, 
the fact that a security is called ``preferred stock'' or ``debt'' does 
not bring it within the rule if the

[[Page 51701]]

security does not bear the necessary characteristics of debt.
    The phrase ``set amount of interest'' is not intended to mean 
``fixed amount of interest.'' The modified financial information 
permitted by paragraphs (b) through (f) is available for floating and 
adjustable rate securities, as well as indexed securities, as long as 
the payment obligation is set in the debt instrument and can be 
determined from objective indices or other factors that are outside the 
discretion of the obligor.
    In the following sections, we discuss two issues that arise because 
paragraphs (b) through (f) of Rule 3-10 are available for debt-like 
securities. Specifically, we discuss:
     When a guarantee of preferred securities is full and 
unconditional for purposes of Rule 3-10; and
     The application of Rule 3-10 to ``trust preferred 
securities.''

(A) Full and Unconditional Guarantee of Preferred Securities

    For the modified financial information permitted by paragraphs (b) 
through (f) of Rule 3-10 to be available for guaranteed preferred 
securities, the guarantor 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 securities out of funds legally available for 
the payment of dividends;
     The redemption price, on redemption of the preferred 
securities, including all accumulated and unpaid dividends; and
     Upon liquidation of the issuer of the preferred 
securities, 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 guarantees of preferred securities 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 securities. 
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 
securities, the redemption price, including all accumulated and unpaid 
dividends, from funds legally available therefor to the issuer.
     Upon liquidation of the issuer of the preferred 
securities, the 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 
securities legally available for distribution to holders of the 
preferred stock in liquidation.

(B) Trust Preferred Securities

    Trust preferred securities generally are issued by a special 
purpose business trust created by its parent company.\53\ The trust 
exists only to issue the preferred securities and hold debt securities 
issued by its parent company.\54\ Payment obligations of the trust are 
ensured not by a single agreement called a guarantee, but through 
several agreements and by the terms of the debt securities that the 
trust holds. The agreements normally include a guarantee and an expense 
undertaking from the parent company, the trust indenture for the debt 
securities the trust holds, and the trust declaration of the trust 
itself. In applying SAB 53 to these securities, the staff agreed with 
the view that the bundle of rights provided by these agreements and the 
debt securities held by the trust, usually called the ``back-up 
undertakings,'' is the equivalent of a ``full and unconditional'' 
guarantee of the trust's payment obligations.
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    \53\ 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, QUIPs, or TOPRs.
    \54\ While these securities typically are issued by a business 
trust, they also may be issued by a limited partnership or a limited 
liability corporation.
---------------------------------------------------------------------------

    Based on the same reasoning as the staff has applied to these 
securities, we believe that the modified financial information 
permitted by paragraphs (b) through (f) of Rule 3-10 should be 
available for these securities where:
     Holders are entitled to receive periodic payments that are 
cumulative if unpaid and holders are entitled to receive a fixed 
liquidation amount; \55\ and
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    \55\ As with other debt-like securities, the modified financial 
information permitted by paragraphs (b) through (f) would be 
available only where the failure to make the periodic payment would 
have the same result as a default on a required payment of interest 
on a debt security.
---------------------------------------------------------------------------

     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.\56\
---------------------------------------------------------------------------

    \56\ Ordinarily, the issuers of these securities are finance 
subsidiaries with no operations or assets other than those in 
connection with the offering of the securities. Therefore, they 
should look to paragraph (b) of Rule 3-10.
---------------------------------------------------------------------------

ii. Availability of Paragraphs (b) Through (f) to Convertible Debt or 
Debt-Like Securities
    Two commenters addressed whether the modified financial information 
permitted by paragraphs (b) through (f) should be available for 
guaranteed debt that is convertible into equity of the parent company, 
other subsidiaries, or other companies.\57\ The modified financial 
information permitted by paragraphs (b) through (f) will be available 
for guaranteed convertible securities only where those securities are 
convertible into equity securities of the parent company.\58\ If the 
securities were convertible into securities of a company other than the 
parent company, the subsidiary issuer would not be considered 100% 
owned.
---------------------------------------------------------------------------

    \57\ Comment letters of PricewaterhouseCoopers (May 4, 1999) and 
Sullivan & Cromwell (May 4, 1999).
    \58\ See, e.g., World Access, Inc. NACT Telecommunications, Inc. 
(October 28, 1998) and PNC Bank Corp., PNC Bancorp, Inc. (April 1, 
1996).
---------------------------------------------------------------------------

c. Availability of Modified Financial Information for Guaranteed 
Securities Not Described in This Release
    The modified financial information permitted by paragraphs (b) 
through (f) of Rule 3-10 will not be available for every offering of a 
guaranteed security; they are intended to address only those situations 
where we are certain that modified financial information is 
appropriate. We do not believe that, as one commenter suggested, those 
paragraphs should be available broadly for ``any other security if the 
amounts payable or the other obligations owing to the holder thereunder 
will not depend on the financial health, value, or performance of the 
subsidiary issuer or subsidiary guarantor.'' \59\ However, there may be 
unique factual situations in which modified financial information would 
be appropriate, even though those situations are not identified in 
paragraphs (b) through (f) or otherwise described in this release. In 
these rare situations, we encourage the issuer and guarantor(s) to 
contact the Division of Corporation Finance to discuss the filing 
relating to those securities.\60\ Due

[[Page 51702]]

to the specificity and breadth of today's amendments and the guidance 
provided in this release and the appendices, we anticipate that these 
requests will be infrequent.
---------------------------------------------------------------------------

    \59\ Comment letter of Sullivan & Cromwell (May 4, 1999).
    \60\ Similarly, these issuers and guarantors may either apply to 
the Commission under Section 12(h) of the Exchange Act for an 
exemption from the Exchange Act reporting requirements or request a 
no-action letter from the Division of Corporation Finance.
---------------------------------------------------------------------------

5. Recently Acquired Subsidiary Issuers and Subsidiary Guarantors
    A special issue in the financial statement disclosure for issuers 
and guarantors is the treatment of recently acquired subsidiary issuers 
and subsidiary guarantors. 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 financial information to 
investors.\61\
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    \61\ Before today's amendments, Rule 3-10 and SAB 53 provided no 
relief for a subsidiary issuer or subsidiary guarantor for periods 
before its acquisition. Literal application of Rule 3-10 would have 
required three years of audited financial statements, regardless of 
the significance of the acquired subsidiary. The staff has permitted 
registrants to apply the significance tests then in Rule 3-10(b) by 
analogy, but that practice provided limited relief and created a 
number of implementation issues.
---------------------------------------------------------------------------

    We proposed to require pre-acquisition financial statements for 
significant, recently acquired subsidiary issuers and subsidiary 
guarantors until the condensed consolidating financial information 
reflects adequately their cash flows and results of operations. These 
separate audited financial statements would be for the subsidiary's 
most recent fiscal year preceding the acquisition. Unaudited financial 
statements also would have to be filed for any interim period specified 
by Rules 3-01 and 3-02 of Regulation S-X.
    As proposed, this treatment would have applied to any recently 
acquired subsidiary issuer or subsidiary guarantor:
     That has not been included in the audited consolidated 
results of its parent company for at least nine months of the most 
recent fiscal year; 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.\62\
---------------------------------------------------------------------------

    \62\ This significance test would be computed by using amounts 
for the subsidiary as of the most recent fiscal year end before the 
acquisition.
---------------------------------------------------------------------------

    We heard from several commenters on this proposal. While they 
generally supported the proposal, several commenters questioned the 
relevance and practicability of the proposed measure of 
significance.\63\ A number of commenters suggested that significance be 
measured by comparison to the amount of the securities being 
registered.\64\ One commenter noted that this measure would focus ``on 
the assets and cash flows of the recently acquired guarantor which will 
be available to satisfy the registered debt and the amount of credit 
enhancement the subsidiary is adding to the arrangement.'' \65\ Other 
commenters noted anomalies that could result if the parent company had 
negative shareholders' equity.\66\ For example, a parent company's 
large deficit could render an acquired guarantor insignificant under 
the proposed test, even though the guarantor may constitute the primary 
source of cash flows for repayment of the debt. These commenters also 
noted that comparison to the securities being registered is consistent 
with current staff practice.
---------------------------------------------------------------------------

    \63\See, e.g., comment letters of Arthur Andersen (May 4, 1999), 
Sullivan & Cromwell (May 4, 1999), PricewaterhouseCoopers (May 4, 
1999), KPMG LLP (May 4, 1999) and Ernst & Young (May 11, 1999).
    \64\ See, e.g., comment letters of PricewaterhouseCoopers (May 
4, 1999) and KPMG LLP (May 4, 1999).
    \65\ Comment letter of PricewaterhouseCoopers (May 4, 1999).
    \66\ See, e.g., comment letter of Ernst & Young (May 4, 1999).
---------------------------------------------------------------------------

    We are adopting the treatment of recently acquired subsidiaries 
largely as proposed. However, given the comments we received on the 
significance measure, we have revised that measure. As adopted, the 
rule calls for significance to be measured by comparing the net book 
value or purchase price of the subsidiary to the principal amount of 
the securities being registered.\67\
---------------------------------------------------------------------------

    \67\ See Rule 3-10(g)(1)(ii).
---------------------------------------------------------------------------

    The rule requires pre-acquisition financial statements in 
Securities Act registration statements only. Those financial statements 
are not required in Exchange Act periodic reports.\68\
---------------------------------------------------------------------------

    \68\ See Instruction 4 to Rule 3-10(g)(1).
---------------------------------------------------------------------------

    Commenters also requested that we clarify various matters regarding 
the implementation and operation of the paragraph relating to recently 
acquired subsidiaries. These include:
     Whether individually insignificant acquired guarantors 
must be aggregated;
     Whether the form of the acquisition affects the 
requirement for financial statements;
     Whether, and when, financial statements are required for 
very recently acquired, or not yet acquired, guarantors; and
     Whether use of the pooling or purchase method of 
accounting affects the financial statements to be provided under Rule 
3-10(g).

Many of these issues are similar to issues currently faced by 
registrants with significant acquired businesses outside the context of 
a registered offering of guaranteed debt securities. The staff 
addresses those issues through its normal practice. In these 
situations, we encourage the issuer and guarantor(s) to contact the 
Division of Corporation Finance to discuss the filing relating to those 
securities.
    While some of the requested guidance is outside the scope of 
today's rule-making, we agree that implementation guidance on a number 
of these matters would be useful. We have included Appendix B to 
illustrate the operation of the paragraph relating to recently acquired 
subsidiaries and provide guidance on various implementation issues.
6. Definitions in Rule 3-10
    We proposed to define the following four terms in paragraph (h) of 
Rule 3-10: ``wholly owned,'' ``full and unconditional,'' ``annual 
report,'' and ``quarterly report.'' We are adopting as proposed the 
definitions of ``full and unconditional,'' ``annual report,'' and 
``quarterly report.'' \69\

    \69\ See Rule 3-10(h)(2), (h)(3), and (h)(4).
---------------------------------------------------------------------------

As noted previously, we have made two revisions to the proposed 
definition of ``wholly owned,'' including changing the defined term to 
``100% owned.'' \70\
---------------------------------------------------------------------------

    \70\ See Rule 3-10(h)(1). We discuss the definition of 100% 
owned in Section III.A.1.a.--``The meaning of 100% owned.''
---------------------------------------------------------------------------

    In response to comments, we also have added the following 
definitions.
     A parent company has no independent assets or operations 
if each of its total assets, revenues, income from continuing 
operations before income taxes, and cash flows from operating 
activities (excluding amounts related to its investment in its 
consolidated subsidiaries) is less than 3% of the corresponding 
consolidated amount.\71\
---------------------------------------------------------------------------

    \71\ See Rule 3-10(h)(5).
---------------------------------------------------------------------------

     A subsidiary is minor if each of its total assets, 
stockholders' equity, revenues, income from continuing operations 
before income taxes, and cash flows from operating activities is less 
than 3% of the parent company's corresponding consolidated amount. This 
definition applies to each subsidiary individually and to all 
subsidiaries in the aggregate.\72\
---------------------------------------------------------------------------

    \72\ See Rule 3-10(h)(6). This 3% test has been applied by the 
staff in the context of condensed consolidating financial 
information under SAB 53. In no-action letters under SAB 53, the 
staff has referred to subsidiaries falling below the 3% test as 
``inconsequential.'' To avoid confusion with uses of the term 
``inconsequential'' in other parts of the federal securities laws, 
for example, in Section 10A(b)(1)(B) of the Exchange Act [15 U.S.C. 
78j-1(b)(1)(B)], we are using the term ``minor.'' The 3% test is a 
numerical threshold for determining when separate presentation of 
columnar information for specific subsidiaries may be omitted from 
condensed consolidating financial information under Rule 3-10. The 
3% test is not, and should not be construed as, a standard of 
general materiality for the preparation of consolidated financial 
statements.

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

[[Page 51703]]

     A subsidiary is a finance subsidiary if it has no assets, 
operations, revenues, or cash flows other than those related to the 
issuance, administration, and repayment of the security being 
registered and any other securities guaranteed by its parent.\73\
---------------------------------------------------------------------------

    \73\ See Rule 3-10(h)(7).
---------------------------------------------------------------------------

     A subsidiary is an operating subsidiary if it is not a 
finance subsidiary.\74\
---------------------------------------------------------------------------

    \74\ See Rule 3-10(h)(8).
---------------------------------------------------------------------------

    For purposes of Rule 3-10, the parent company is the company that:
     Is an issuer or guarantor of the subject securities; \75\
---------------------------------------------------------------------------

    \75\ It would not be appropriate under Rule 3-10 to file, in 
substitution for the financial statements of the parent company, 
financial statements of an entity that files Exchange Act reports 
but is not an issuer or guarantor of the securities being 
registered. See Note to Rule 3-10(a)(2). As an illustration, assume 
the following:
     A parent company with no independent assets or 
operations issues debt securities that are guaranteed by one or more 
of its subsidiaries, and
     The parent company is a 100%-owned subsidiary of an 
entity whose common shares are registered under Section 12 of the 
Exchange Act, but that entity is not a co-issuer or guarantor of the 
debt securities.
    In this situation, the consolidated financial statements of the 
parent company must be filed for modified financial information of 
the subsidiary guarantors to be permitted by paragraphs (b) through 
(f) of Rule 3-10. The financial statements of the Section 12-
registered entity do not meet the conditions in paragraphs (b) 
through (f) of Rule 3-10, even if the financial statements of that 
entity are virtually identical to those of the parent company, 
because the security holders cannot enforce payment of the 
obligation against that entity. Similarly, the financial statements 
of a subsidiary that is not an issuer or guarantor of the securities 
cannot be substituted for those of the parent company. This 
treatment is consistent with staff practice under SAB 53.
---------------------------------------------------------------------------

     Is, or as a result of the subject Securities Act 
registration statement will be, an Exchange Act reporting company; and
     Owns 100%, directly or indirectly, of each subsidiary 
issuer and/or subsidiary guarantor of the subject security.

    The identity of the parent company will vary based on the 
particular corporate structure. Instead of a definition of parent 
company in Rule 3-10, which would fail to account for these variations, 
we have included a number of examples in Appendix C that explain the 
term.
7. Instructions for Condensed Consolidating Financial Information Under 
Rule 3-10
    To help ensure meaningful, consistent presentation of the condensed 
consolidating financial information, we proposed instructions on how to 
prepare the financial information. We proposed 13 instructions. We have 
made seven changes to those proposals.
     We combined proposed paragraphs (i)(1) and (i)(2) into one 
instruction, reflected in paragraph (i)(1).
     One commenter suggested that we clarify the accounting 
basis to be used for recently acquired entities included in the 
guarantor/non-guarantor columns in the condensed consolidating 
financial information. In response to this suggestion, we created new 
paragraph (i)(4) to clarify that the basis must be ``pushed down'' to 
the applicable subsidiary columns to the extent that push down would be 
required or permitted in separate financial statements of the 
subsidiary.\76\
---------------------------------------------------------------------------

    \76\ Staff Accounting Bulletin 54 discusses ``push down'' 
accounting. See Securities Act Release No. SAB 54 (Nov. 3, 1983) [48 
FR 51769].
---------------------------------------------------------------------------

     We revised paragraph (i)(5) to clarify which investments 
in subsidiaries must be presented under the equity method in the 
subsidiary issuer or subsidiary guarantor columns.
     We added paragraph (i)(6) to clarify that separate columns 
are required for subsidiary issuers or subsidiary guarantors that are 
not 100% owned, whose guarantees are not full and unconditional, or 
whose guarantees are not joint and several with the guarantees of other 
subsidiaries.
     We added the words ``subsidiary issuers and'' into 
paragraph (i)(10) to reflect that both subsidiary issuers and 
subsidiary guarantors must comply with Rule 4-08(e)(3) of Regulation S-
X.\77\
---------------------------------------------------------------------------

    \77\ 17 CFR 210.4-08(e)(3). Rule 4-08(e)(3) relates to 
limitations on the payment of dividends.
---------------------------------------------------------------------------

     We combined proposed paragraphs (i)(10), (i)(11), and 
(i)(12) into one instruction, paragraph (i)(11).
     We added paragraph (i)(12) to clarify that U.S. GAAP 
reconciling information for the subsidiaries need not duplicate 
information included elsewhere in the reconciliation of the parent 
company's consolidated financial information.
    Other than these seven changes, we have adopted the instructions to 
Rule 3-10 as proposed.

B. Item 310 of Regulation S-B

    We proposed to amend Item 310 of Regulation S-B to require small 
business issuers to include the same financial information as required 
by proposed Rule 3-10. One commenter responded to our request for 
comment on this proposal.\78\ That commenter believed that the 
standards for large and small businesses should be the same because the 
likely higher cost to a small business of providing the information is 
balanced by the likely greater significance of that information. We are 
adopting Item 310 of Regulation S-B as proposed.\79\
---------------------------------------------------------------------------

    \78\ Comment letter of KPMG LLP (May 4, 1999).
    \79\ One commenter asked us to clarify the application of 
today's amendments to offerings that are exempt under Regulation A. 
See, comment letter of Arthur Andersen (May 4, 1999). An issuer 
conducting an offering in accordance with Regulation A is not 
affected by today's amendments, because only Article 2 of Regulation 
S--X applies to Regulation A offerings.
---------------------------------------------------------------------------

C. Exchange Act Reporting Requirements

1. Exchange Act Rule 12h-5--Exemption From Periodic Reporting for 
Subsidiary Issuers and Subsidiary Guarantors Where Parent Company 
Periodic Reports Include Modified Financial Information as Permitted by 
Paragraphs (b) Through (f) of Rule 3-10
    Before today's amendments, subsidiary issuers or subsidiary 
guarantors that were not required to include separate financial 
statements in their Securities Act registration statements would 
request that the Division of Corporation Finance provide no-action 
relief from the Exchange Act reporting requirements. The Division of 
Corporation Finance applied the same analysis to these requests as it 
applied in considering the appropriate presentation of financial 
information in Securities Act registration statements. As noted above, 
the volume of these requests has increased significantly.
    We are adopting new Rule 12h-5 to reduce significantly the need for 
these requests by providing certainty regarding the availability of an 
exemption from Exchange Act reporting. Rule 12h-5 exempts from Exchange 
Act reporting:
     Subsidiary issuers or subsidiary guarantors permitted to 
omit financial statements by paragraphs (b) through (f) of Rule 3-10; 
and
     Recently acquired subsidiary issuers or subsidiary 
guarantors that would be permitted to omit financial statements by 
paragraphs (b) through (f) of Rule 3-10, but are required to provide 
pre-acquisition financial statements under paragraph (g) of that rule.
    The parent company periodic reports must include the modified 
financial information permitted by paragraphs (b) through (f) of Rule 
3-10. The parent company periodic reports must contain

[[Page 51704]]

this information for as long as the subject securities are outstanding. 
These exemptions are the same as what the staff currently provides in 
its responses to requests from subsidiary issuers and subsidiary 
guarantors.
    Rule 12h-5 automatically exempts these subsidiary issuers and 
subsidiary guarantors from Exchange Act reporting requirements. As a 
result, there would be no need for them to request no-action letters 
from the Division of Corporation Finance.
2. Non-Financial Disclosure in Parent Company Periodic Reports
    Under Rule 12h-5, the parent company's Exchange Act reports must 
include the modified financial information permitted by paragraphs (b) 
through (f) of Rule 3-10. The parent company's periodic reports need 
not, however, provide the non-financial disclosure required by the 
periodic report form for the subsidiary, unless the securities laws 
otherwise require the parent company to provide information about the 
subsidiary.
3. When Rule 12h-5 Becomes Available or Ceases To Be Available
    We requested comment on 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 paragraphs (b) through (f) of Rule 3-10. We received no 
response to our request, other than a general suggestion to clarify the 
procedures for these situations. The following procedures will apply in 
these situations.
     If Rule 12h-5 is not initially available to a subsidiary 
because it does not satisfy the requirements of paragraphs (b) through 
(f) of Rule 3-10, but later fulfills the requirements, that subsidiary 
may write to the Division of Corporation Finance to request no-action 
relief.
     If a subsidiary initially meets the requirements of 
paragraphs (b) through (f) of Rule 3-10 and relies on Rule 12h-5, but 
later ceases to satisfy those requirements, we encourage that 
subsidiary to file promptly an Item 5 Form 8-K or a Form 6-K to report 
this change in circumstance. That subsidiary must begin reporting 
pursuant to the Exchange Act when it fails to satisfy paragraphs (b) 
through (f) of Rule 3-10. That is, the subsidiary must file the 
Exchange Act report for the period during which it ceased to satisfy 
paragraphs (b) through (f) of Rule 3-10. The subsidiary must present 
the financial statements that are required by Regulation S-X at the 
time the report is due. The subsidiary may not present the modified 
information that paragraphs (b) through (f) of Rule 3-10 would have 
allowed it to present for historical periods.
4. Meaning of the Term ``Financial Statements'' in Rule 12h-5
    One commenter suggested that the language in Rule 12h-5 was 
somewhat ambiguous because it refers to registrants that are permitted 
to omit ``financial statements.'' \80\ That commenter stated that 
condensed consolidating statements are one form of financial 
statements. In an attempt to avoid this confusion, throughout the 
proposing and adopting release, we have referred to the required 
presentation of financial information as condensed consolidating 
financial information, not condensed consolidating financial 
statements. In addition, Rule 12h-5 states that the exemption is 
applicable to those persons permitted to omit separate financial 
statements by Rule 3-10. If an issuer is not in compliance with Rule 3-
10, it is not permitted to omit financial statements in accordance with 
Rule 3-10. Therefore, we have not revised Rule 12h-5 in response to 
this comment.
---------------------------------------------------------------------------

    \80\ Comment letter of KPMG LLP (May 4, 1999).
---------------------------------------------------------------------------

5. Rule 12h-5 Does Not Require Exchange Act Reporting When Financial 
Statements Are Provided Solely in Accordance With Rule 3-10(g)
    One commenter suggested that we add language to clarify the 
operation of Rule 12h-5(b). \81\ The commenter expressed concern that 
Rule 12h-5 could be misinterpreted to require Exchange Act reporting 
when Rule 3-10(g) requires financial statements. We revised the 
language in Rule 12h-5(b) to clarify that, in the case of recently 
acquired subsidiary issuers or subsidiary guarantors, Exchange Act 
reporting is not required when financial statements are provided under 
Rule 3-10 solely because the subsidiary was recently acquired.
---------------------------------------------------------------------------

    \81\ Comment letter of Arthur Andersen (May 4, 1999).
---------------------------------------------------------------------------

6. Application of Rule 12h-5 When the Guaranteed Security Is in Default
    We requested comment on whether reporting relief should be 
available when a guaranteed security is in default. We asked if 
additional disclosures should be required in that circumstance. One 
commenter stated that it did not believe that the default should result 
in the loss of a subsidiary issuer's or subsidiary guarantor's Rule 
12h-5 reporting relief.\82\ That commenter also stated that, while 
additional disclosure may be required in the parent's filing when an 
issuer defaults on a debt security, it is difficult to predetermine and 
mandate the necessary disclosure. We agree with that commenter. We also 
believe that requiring additional disclosure in connection with the 
exemption provided in Rule 12h-5 is not necessary. Thus, a default on 
the guaranteed security or the guarantee will not result in the loss of 
a subsidiary issuer's or subsidiary guarantor's Exchange Act reporting 
relief under Rule 12h-5.
---------------------------------------------------------------------------

    \82\ Comment letter of PricewaterhouseCoopers (May 4, 1999).
---------------------------------------------------------------------------

7. Application of Rule 3-10 and Rule 12h-5 to Foreign Parent Companies 
With Domestic Subsidiary Issuers or Domestic Subsidiary Guarantors
a. Foreign Parent Companies Reporting on Form 20-F
    When a parent company is a foreign private issuer that files on 
Form 20-F, it is not required to file quarterly reports. Rather, it 
uses Form 6-K to make public in the United States the information that 
it made public under foreign law, under exchange regulations, or by 
distributing it to security holders. Absent the exemption provided by 
Rule 12h-5, a domestic subsidiary of that foreign parent company would 
be required to file annual and quarterly reports if it guaranteed 
registered securities or issued registered, guaranteed securities.
    When Rule 12h-5 applies, modified financial information must be 
included in the parent company's periodic reports.
    In the case of a foreign parent company filing on Form 20-F, that 
disclosure would not appear as frequently as when the domestic 
subsidiary were reporting. Nevertheless, consistent with the staff's 
historical position and the concepts underlying Rule 3-10, we believe 
that the parent company in this situation should not be required to 
file quarterly information regarding the domestic subsidiary. As we 
believe that the financial statements of the parent company, along with 
the required modified financial information permitted by Rule 3-10, are 
sufficient to inform an investment decision in those situations, the 
required periodic reports for that parent also should be sufficient. 
Therefore, if the parent company reports on Form 20-F and is not 
required to file quarterly reports under the Exchange Act, Rule 3-10 
would not require that parent company to file more frequent information 
regarding its domestic

[[Page 51705]]

subsidiary issuers and domestic subsidiary guarantors.
    Rule 3-10(a)(3) states that foreign parent companies should look to 
Item 8.A of Form 20-F to determine the periods for which financial 
statements are required. On September 30, 2000, Item 8.A of Form 20-F 
will replace Rule 3-19 of Regulation S-X as the source for the 
financial statement requirements for foreign private issuers.\83\ 
Before September 30, 2000, foreign private issuers should look to Rule 
3-19 instead of Item 8A.
---------------------------------------------------------------------------

    \83\ 17 CFR 210.3-19.
---------------------------------------------------------------------------

b. Foreign Parent Companies Reporting on Form 40-F
    When a Canadian parent company and one or more subsidiaries 
register an offering of guaranteed securities under the 
multijurisdictional disclosure system, the parent company and the 
subsidiaries incur reporting obligations under Section 15(d).\84\ When 
a subsidiary issuer or subsidiary guarantor is also eligible to 
register its security under the MJDS,\85\ the financial statements that 
would appear in the registration statement and in any annual report on 
Form 40-F \86\ filed by the Canadian parent company would not be 
affected by Rule 3-10. The disclosure would be in accordance with 
Canadian disclosure standards. When a subsidiary issuer or subsidiary 
guarantor is not eligible to register its security under the MJDS,\87\ 
the financial statements of the parent company included in the 
Securities Act registration statement and an Exchange Act registration 
statement or annual must comply with Rule 3-10.
---------------------------------------------------------------------------

    \84\ The multijurisdictional disclosure system, or MJDS, is a 
cross-border securities registration and reporting arrangement that 
we have established with securities regulators in Canada. It is 
comprised of Forms F-7, F-8, F-9, F-10 and F-80 under the Securities 
Act and Form 40-F under the Exchange Act. Companies registering 
securities under Forms F-7, F-8 and F-80 may avoid the reporting 
obligations under Section 15(d). See, Exchange Act Rule 12h-4.
    \85\ General Instruction I.E of Form F-9 and General Instruction 
I.H of Form F-10 permit majority-owned subsidiaries to register 
securities on those forms if various conditions are met.
    \86\ 17 CFR 249.240f.
    \87\ This situation arises when the subsidiary issuer or 
subsidiary guarantor is not incorporated in Canada. In this 
situation, registrants have filed the registration statement on a 
combined Form F-9/S-3 or Form F-10/S-1, depending on what 
registration form the subsidiary is eligible to use.
---------------------------------------------------------------------------

D. Financial Statements of Affiliates Whose Securities Collateralize 
Registered Securities--Rule 3-16 of Regulation S-X

    Before today's amendments, the financial statement requirements for 
affiliates whose securities collateralize registered securities were 
combined with the requirements for guarantors in Rule 3-10 of 
Regulation S-X. Because the amendments to Rule 3-10 change 
significantly the structure of that rule, we are moving the 
requirements for these affiliates into a rule that applies only to 
them--Rule 3-16 of Regulation S-X. This change will avoid confusion and 
make the requirements easier to follow. We are merely relocating the 
financial statement requirements for affiliates whose securities 
collateralize registered securities to Rule 3-16; we are not changing 
those requirements in any way.\88 \
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    \88\ We have amended Instruction 1 to Item 8 of Form 20-F to 
include a reference to new Rule 3-16. This amendment merely 
recognizes that we have moved the requirements for affiliates whose 
securities collateralize registered securities; it does not change 
the financial statement requirements in Form 20-F.
---------------------------------------------------------------------------

    One commenter suggested that we clarify whether small business 
issuers must comply with new Rule 3-16 of Regulation S-X.\89\ In 
response to this comment, we have made clear in Regulation S-B that 
small business issuers also must comply with Rule 3-16.\90\
---------------------------------------------------------------------------

    \89\ Comment letter of Arthur Andersen (May 4, 1999).
    \90\ See, Note 4 to Item 310 of Regulation S-B.
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    One commenter asked us to clarify whether a collateralizing 
affiliate incurs Exchange Act reporting obligations.\91\ Consistent 
with the past approach, we confirm that collateralizing affiliates will 
continue not to incur Exchange Act reporting requirements.
---------------------------------------------------------------------------

    \91\ Comment letter of Arthur Andersen (May 4, 1999).
---------------------------------------------------------------------------

    Similarly, one commenter asked us to clarify whether financial 
statements of collateralizing affiliates are required in quarterly 
reports of the issuer of the collateralized security.\92\ Unlike 
subsidiary issuers and subsidiary guarantors, collateralizing 
affiliates are not registrants.\93\ Therefore, financial statements of 
collateralizing affiliates are not required in quarterly reports of the 
issuer of the collateralized security.
---------------------------------------------------------------------------

    \92\ Comment letter of Arthur Andersen (May 4, 1999).
    \93\ Rule 10-01(a)(1) of Regulation S-X [17 CFR 210.10-01(a)(1)] 
states ``Interim financial statements required by this rule need 
only be provided as to the registrant and its subsidiaries 
consolidated and may be unaudited. Separate statements of other 
entities which may otherwise be required by this regulation may be 
omitted.''
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IV. Phase-In of Today's Amendments to Rule 3-10

    To ease the transition to the amendments to Rule 3-10, we will use 
the following phase-in schedule.

For Securities Act registration statements:

     Any registration statement that is first filed on or after 
September 25, 2000 must comply with amended Rule 3-10; and
     Any post-effective amendment filed on or after September 
25, 2000 to include either the company's latest audited financial 
statements in the registration statement or to update the prospectus 
under Section 10(a)(3) must comply with amended Rule 3-10.

For Exchange Act registration statements:

     Any registration statement that is first filed on or after 
September 25, 2000 must comply with amended Rule 3-10.

For Exchange Act periodic reports:

     If the reporting company was required to comply with 
amended Rule 3-10 in a Securities Act or Exchange Act registration 
statement, all Exchange Act periodic reports for periods ending after 
that registration statement became effective must comply with amended 
Rule 3-10;
     For all other reporting companies, the annual report on 
Form 10-K, Form 10-KSB, or Form 20-F, as applicable, for the first 
fiscal year ending after [effective date] must comply with amended Rule 
3-10 and all Exchange Act periodic reports for subsequent periods must 
comply with amended Rule 3-10.

In the first registration statement or periodic report to which amended 
Rule 3-10 applies, the financial statements must reflect the 
application of amended Rule 3-10 for all periods presented.

V. Cost-Benefit Analysis

    We are adopting financial reporting rules for related issuers and 
guarantors of guaranteed securities. We are also adopting an exemption 
from periodic reporting for subsidiary issuers and subsidiary 
guarantors. For the most part, today's amendments codify the positions 
the staff has developed through Staff Accounting Bulletin No. 53, later 
interpretations, and the registration statement review process. The 
amendments deviate from current practice in a significant way only in 
the following two situations:
     An operating subsidiary issues securities, its parent 
guarantees the securities, and no subsidiary guarantees the securities; 
and
     A parent issues securities, an operating subsidiary 
guarantees the securities, and no other subsidiary guarantees the 
securities.
    Under SAB 53, the staff continued to permit those subsidiaries to 
present summarized financial information instead of full financial 
statements. Under the amendments, those

[[Page 51706]]

subsidiaries will be required to present condensed consolidating 
financial information instead of summarized financial information.
    We believe that condensed consolidating financial information is 
more appropriate than summarized financial information, as it 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.\94\ Furthermore, condensed 
consolidating financial information provides the same level of detail 
about the financial position, results of operations, and cash flows of 
subsidiary issuers and subsidiary guarantors that investors are 
accustomed to obtaining in interim financial statements of a 
registrant. It also facilitates analysis of trends affecting subsidiary 
issuers and subsidiary guarantors and relationships among the various 
components of a consolidated organization.
---------------------------------------------------------------------------

    \94\ Summarized financial information may obscure these 
distinctions, particularly if subsidiary guarantors themselves have 
consolidated operating subsidiaries that are not guarantors.
---------------------------------------------------------------------------

    For purposes of this cost-benefit analysis, there is one 
quantifiable cost and one quantifiable benefit for registrants. The 
quantifiable cost is that of preparing condensed consolidating 
financial information in those situations in which they could have 
prepared only summarized financial information previously. The 
quantifiable benefit is the savings to be recognized by not having to 
prepare a request for relief from the reporting requirements of the 
Exchange Act. We estimate the total cost to be $87,000 annually. We 
estimate the total benefit to be $850,000 annually.\95\
---------------------------------------------------------------------------

    \95\ See Securities Act Release No. 7649 (March 5, 1999) [64 FR 
10579], Sec. VIII.
---------------------------------------------------------------------------

    In the proposing release, we estimated the aggregate additional 
annual cost to each registrant that would have to switch from 
summarized financial information to condensed consolidating financial 
information to be approximately $1,000. In that release, we also stated 
that there were 29 registrants that had received a no-action letter in 
calendar year 1998 from the Division of Corporation Finance permitting 
them to include summarized financial information in lieu of separate 
financial statements. In calendar year 1999, there were 26 such 
registrants. Based on the 1998 numbers, we estimated the total annual 
cost of the amendments to be $29,000.
    We requested comment on our estimates. Two commenters felt that our 
estimates were too low.\96\ We discuss these comments below.
---------------------------------------------------------------------------

    \96\ Comment letters of KPMG LLP (May 4, 1999) and Reynolds 
Metals Company (May 4, 1999).
---------------------------------------------------------------------------

    One commenter suggested that it would cost an average of $25,000 to 
prepare condensed consolidating financial information.\97\ That 
commenter, however, did not provide us with an estimate of how much 
more it would cost to provide condensed consolidating financial 
information rather than summarized financial information. We have, 
therefore, not revised our estimates in response to this comment.
---------------------------------------------------------------------------

    \97\ Comment letter of KPMG LLP (May 4, 1999).
---------------------------------------------------------------------------

    One commenter felt that, for those registrants that would have to 
switch from summarized financial information to condensed consolidating 
financial information, it was unreasonable to look at their increased 
costs for one year instead of the number of years they would provide 
condensed consolidating financial information. Based on this comment, 
we have considered the total cost to each registrant to be $1,000 for 
each of the three years for which financial information is generally 
required.\98\ This results in a cost to each such registrant of $3,000.
---------------------------------------------------------------------------

    \98\ The financial statement requirements for registrants that 
are not small business issuers are contained in Regulation S-X [17 
CFR 210.1-01 through 12-29]. The financial statement requirements 
for small business issuers are contained in Item 310 of Regulation 
S-B [17 CFR 228.310].
---------------------------------------------------------------------------

    Using the revised cost estimate of $3,000, the 29 registrants that 
received a no-action letter in calendar year 1998 from the Division of 
Corporation Finance permitting them to include summarized financial 
information in lieu of separate financial statements would have an 
increased cost of $87,000. The cost for the 26 registrants that were in 
that position based on 1999 no-action letters would be $78,000.
    Today's amendments benefit companies by reducing the need to 
prepare and submit requests for no-action letters from the Division of 
Corporation Finance. In the proposing release, we estimated the annual 
savings to registrants to be approximately $850,000.\99\ In that 
release, we also discussed the manner in which we estimated those 
annual savings. There were no responses to our request for comment on 
the reasonableness of our savings estimates.
---------------------------------------------------------------------------

    \99\ There were 130 no-action letters issued by the Division of 
Corporation Finance regarding SAB 53 in 1999. The financial 
information requirements under today's amendments would be the same 
with respect to 104 of the no-action letters. The financial 
information requirements under today's amendments would result in 
condensed consolidating financial information instead of summarized 
financial information with respect to 26 of the no-action letters.
---------------------------------------------------------------------------

    In addition to the quantifiable benefit of today's amendments to 
registrants, we believe that there also are a significant number of 
unquantifiable benefits to registrants and investors, including the 
following:
     Today's amendments eliminate uncertainty about which 
financial statements and periodic reports subsidiary issuers and 
subsidiary guarantors must file;
     Today's amendments require financial information that is 
more helpful to an investor in the two areas where summarized financial 
statements are permitted today; \100\ and
---------------------------------------------------------------------------

    \100\ Condensed consolidating financial information requires the 
columnar presentation of each category of parent and subsidiary as 
issuer, guarantor, or non-guarantor. This approach 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.
---------------------------------------------------------------------------

     Because registrants are required to provide condensed 
consolidating financial information in all situations in which they 
must provide separate financial information, investors will be able to 
compare the financial information among all offerings and in the 
secondary markets.

VI. Effects on Efficiency, Competition, and Capital Formation

    As required by Section 23(a) of the Exchange Act,\101\ we 
considered the impact any new Exchange Act rule would have on 
competition. We requested comment on the proposals, but received no 
response to our request for comment. We believe that the amendments 
will not have any anti-competitive effect since the rules, to a large 
extent, simply codify the reporting requirements to which registrants 
are already subject.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

    In addition, Section 2(b) of the Securities Act \102\ and Section 
3(f) of the Exchange Act \103\ require us, in adopting a rule that 
requires a public interest finding, to consider whether the proposed 
rule will promote efficiency, competition and capital formation. We 
sought comment on how these changes would affect competition, capital 
formation and market efficiency, but received no response to our 
request for comment. We believe that the amendments will have a 
positive, but

[[Page 51707]]

unquantifiable, effect on efficiency, competition, and capital 
formation. The use of condensed consolidating financial information 
will help investors assess better the repayment risk of different 
issuers.
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78b(b).
    \103\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    We find that the exemptions under Sections 7 \104\ and 28 \105\ of 
the Securities Act and Sections 12(h) and 36 \106\ of the Exchange Act 
are in the public interest and for the protection of investors.
---------------------------------------------------------------------------

    \104\ 15 U.S.C. 77g.
    \105\ 15 U.S.C. 77z-3.
    \106\ 15 U.S.C. 78mm.
---------------------------------------------------------------------------

VII. Final Regulatory Flexibility Act Certification

    In connection with the rule proposals, the Chairman of the 
Commission certified that the proposed amendments would not, if 
adopted, have a significant economic impact on a substantial number of 
small entities. The certification, including the factual bases for the 
determination, was published with the proposing release in satisfaction 
of Section 605(b) of Regulatory Flexibility Act.\107\ We requested 
comments on the certification, but received none.
---------------------------------------------------------------------------

    \107\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

VIII. Paperwork Reduction Act

    We submitted to the Office of Management and Budget the proposals 
for review in accordance with the Paperwork Reduction Act of 1995.\108\ 
The amendments 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 estimated 
that the proposed rules would increase the average burden per form by 
approximately five minutes.\109\ The amendments will also affect the 
inclusion of information in Exchange Act Forms 10, 10-SB, 10-K, 10-KSB, 
10-Q, 10-QSB and 20-F (OMB control numbers 3235-0064, 3235-0063, 3235-
0070 and 3235-0288).\110\ We estimated the proposed rules would 
increase the average burden per form by approximately three minutes for 
Form 10-K, one minute for Form 10-Q, five minutes for Form 10 and one 
minute for Form 20-F.\111\ 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.
---------------------------------------------------------------------------

    \108\ 44 U.S.C. Sec. 3501 et seq.
    \109\ 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 (5,653) and multiplied that quotient (.00513) by the estimated 
number of hours to convert financials (16).
    \110\ In the last ten years, the Division of Corporation Finance 
has responded to only one SAB 53 request in which the related 
offering was registered on a small business issuer form. Given the 
size of issuers who generally issue guaranteed debt, we do not 
expect that filers on Forms 10-SB, 10-QSB and 10-KSB are likely to 
issue such debt. Therefore, we make no changes with respect to these 
forms.
    \111\ 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 this 
form per year (10,392) and multiplied 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 this form per 
year (29,551) and multiplied that quotient (.0009814) by the 
estimated number of hours to convert financials (16). To arrive at 
this number for Form 10, we divided the estimated number of 
companies that will have to provide condensed consolidating 
financial information in lieu of summarized financial information 
per year (.7) by the estimated number of filings on this form per 
year (124) and multiplied that quotient (.0056451) by the estimated 
number of hours to convert financials (16). To arrive at this number 
for Form 20-F, we divided the estimated number of companies that 
will have to provide condensed consolidating financial information 
in lieu of summarized financial information per year (1.7) by the 
estimated number of filings on this form per year (1,007) and 
multiplied that quotient (.0015888) by the estimated number of hours 
to convert financials (16).
---------------------------------------------------------------------------

    The amendments will 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.
    No commenter responded to our request for comment with respect to 
these proposed changes in burden hours for each affected form.

IX. Statutory Bases

    The rule amendments outlined above are proposed pursuant to 
Sections 7, 10,\112\ 19(a),\113\ and 28 of the Securities Act and 
Sections 3(b), 12,\114\ 13,\115\ 15(d),\116\ 23,\117\ and 36 of the 
Exchange Act.
---------------------------------------------------------------------------

    \112\ 15 U.S.C. 77j.
    \113\ 15 U.S.C. 77t.
    \114\ 15 U.S.C. 78l.
    \115\ 15 U.S.C. 78m.
    \116\ 15 U.S.C. 78o(d).
    \117\ 15 U.S.C. 78w.
---------------------------------------------------------------------------

List of Subjects

17 CFR Parts 210 and 211

    Accounting, Reporting and recordkeeping requirements, Securities.

17 CFR Part 228

    Reporting and recordkeeping requirements, Securities, Small 
Businesses.

17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 249

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of the Amendments

    For the reasons set out in the preamble, the Securities and 
Exchange Commission amends 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 and issuers of 
guaranteed securities registered or being registered.

    (a)(1) 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. Only one of these paragraphs can apply to a single 
issuer or guarantor. Paragraph (g) of this section is a special rule 
for recently acquired issuers or guarantors that overrides each of 
these exceptions for a specific issuer or guarantor. Paragraph (h) of 
this section defines the following terms used in this section: 100% 
owned, full and unconditional, annual report, quarterly report, no

[[Page 51708]]

independent assets or operations, minor, finance subsidiary and 
operating subsidiary. 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.


    Note to paragraph (a)(2). Where paragraphs (b), (c), (d), (e) 
and (f) of this section specify the filing of financial statements 
of the parent company, the financial statements of an entity that is 
not an issuer or guarantor of the registered security cannot be 
substituted for those of the parent company.


    (3) Foreign private issuers. Where any provision of this section 
requires compliance with Secs. 210.3-01 and 3-02, a foreign private 
issuer may comply by providing financial statements for the periods 
specified by Item 8.A of Form 20-F (Sec. 249.220f of this chapter).
    (b) Finance subsidiary issuer of securities guaranteed by its 
parent company. When a finance subsidiary issues securities and its 
parent company guarantees those securities, the registration statement, 
parent company annual report, or parent company quarterly report need 
not include financial statements of the issuer if:
    (1) The issuer is 100% owned by the parent company guarantor;
    (2) The guarantee is full and unconditional;
    (3) No other subsidiary of the parent company guarantees 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 a footnote 
stating that the issuer is a 100%-owned finance subsidiary of the 
parent company and the parent company has fully and unconditionally 
guaranteed the securities. The footnote also must include the narrative 
disclosures specified in paragraphs (i)(9) and (i)(10) of this section.


    Note to paragraph (b). Paragraph (b) is available if a 
subsidiary issuer satisfies the requirements of this paragraph but 
for the fact that, instead of the parent company guaranteeing the 
security, the subsidiary issuer co-issued the security, jointly and 
severally, with the parent company. In this situation, the narrative 
information required by paragraph (b)(4) must be modified 
accordingly.


    (c) Operating subsidiary issuer of securities guaranteed by its 
parent company. When an operating subsidiary issues securities and its 
parent company guarantees those securities, the registration statement, 
parent company annual report, or parent company quarterly report need 
not include financial statements of the issuer if:
    (1) The issuer is 100% owned by the parent company guarantor;
    (2) The guarantee is full and unconditional;
    (3) No other subsidiary of the parent company guarantees 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:
    (i) The parent company;
    (ii) The subsidiary issuer;
    (iii) Any other subsidiaries of the parent company on a combined 
basis;
    (iv) Consolidating adjustments; and
    (v) The total consolidated amounts.


    Notes to paragraph (c).   
    1. Instead of the condensed consolidating financial information 
required by paragraph (c)(4), the parent company's financial 
statements may include a footnote stating, if true, that the parent 
company has no independent assets or operations, the guarantee is 
full and unconditional, and any subsidiaries of the parent company 
other than the subsidiary issuer are minor. The footnote also must 
include the narrative disclosures specified in paragraphs (i)(9) and 
(i)(10) of this section.
    2. If the alternative disclosure permitted by Note 1 to this 
paragraph is not applicable because the parent company has 
independent assets or operations, the condensed consolidating 
financial information described in paragraph (c)(4) may omit the 
column for ``any other subsidiaries of the parent company on a 
combined basis'' if those other subsidiaries are minor.
    3. Paragraph (c) is available if a subsidiary issuer satisfies 
the requirements of this paragraph but for the fact that, instead of 
the parent company guaranteeing the security, the subsidiary issuer 
co-issued the security, jointly and severally, with the parent 
company. In this situation, the narrative information required by 
paragraph (i)(8) of this section must be modified accordingly.


    (d) Subsidiary issuer of securities guaranteed by its parent 
company and one or more other subsidiaries of that parent company. When 
a subsidiary issues securities and both its parent company and one or 
more other subsidiaries of that parent company guarantee those 
securities, the registration statement, parent company annual report, 
or parent company quarterly report need not include financial 
statements of the issuer or any subsidiary guarantor if:
    (1) The issuer and all subsidiary guarantors are 100% owned by the 
parent company 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 and include, in a 
footnote, condensed consolidating financial information for the same 
periods with a separate column for:
    (i) The parent company;
    (ii) The subsidiary issuer;
    (iii) The guarantor subsidiaries of the parent company on a 
combined basis;
    (iv) Any other subsidiaries of the parent company on a combined 
basis;
    (v) Consolidating adjustments; and
    (vi) The total consolidated amounts.

    Notes to paragraph (d).   
    1. Paragraph (d) applies in the same manner whether the issuer 
is a finance subsidiary or an operating subsidiary.
    2. The condensed consolidating financial information described 
in paragraph (d)(4) may omit the column for ``any other subsidiaries 
of the parent company on a combined basis'' if those other 
subsidiaries are minor.
    3. Paragraph (d) is available if a subsidiary issuer satisfies 
the requirements of this paragraph but for the fact that, instead of 
the parent company guaranteeing the security, the subsidiary issuer 
co-issued the security, jointly and severally, with the parent 
company. In this situation, the narrative information required by 
paragraph (i)(8) of this section must be modified accordingly.
    4. If all of the requirements in paragraph (d) are satisfied 
except that the guarantee of a subsidiary is not joint and several 
with, as applicable, the parent company's guarantee or the 
guarantees of the parent company and the other subsidiaries, then 
each subsidiary guarantor whose guarantee is not joint and several 
need not include separate financial statements, but the condensed 
consolidating financial information should include a separate column 
for each guarantor whose guarantee is not joint and several.
    5. Instead of the condensed consolidating financial information 
required by paragraph (d)(4), the parent company's financial 
statements may include a footnote stating, if true, that the parent 
company has no independent assets or operations, the subsidiary 
issuer is a 100% owned finance subsidiary of the parent company, the 
parent company has guaranteed the securities, all of the parent 
company's subsidiaries other than the subsidiary issuer have 
guaranteed the securities, all of the guarantees are full and 
unconditional, and all of the guarantees are joint and several. The 
footnote also must include the narrative disclosures specified in 
paragraphs (i)(9) and (i)(10) of this section.


    (e) Single subsidiary guarantor of securities issued by the parent 
company of that subsidiary. When a parent company issues securities and 
one of its subsidiaries guarantees those securities, the registration 
statement, parent company annual report, or parent company quarterly 
report need not include financial statements of the subsidiary 
guarantor if:
    (1) The subsidiary guarantor is 100% owned by the parent company 
issuer;

[[Page 51709]]

    (2) The guarantee is full and unconditional;
    (3) No other subsidiary of that parent guarantees 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:
    (i) The parent company;
    (ii) The subsidiary guarantor;
    (iii) Any other subsidiaries of the parent company on a combined 
basis;
    (iv) Consolidating adjustments; and
    (v) The total consolidated amounts.


    Notes to paragraph (e).   
    1. Paragraph (e) applies in the same manner whether the 
guarantor is a finance subsidiary or an operating subsidiary.
    2. Instead of the condensed consolidating financial information 
required by paragraph (e)(4), the parent company's financial 
statements may include a footnote stating, if true, that the parent 
company has no independent assets or operations, the guarantee is 
full and unconditional, and any subsidiaries of the parent company 
other than the subsidiary guarantor are minor. The footnote also 
must include the narrative disclosures specified in paragraphs 
(i)(9) and (i)(10) of this section.
    3. If the alternative disclosure permitted by Note 2 to this 
paragraph is not applicable because the parent company has 
independent assets or operations, the condensed consolidating 
financial information described in paragraph (e)(4) may omit the 
column for ``any other subsidiaries of the parent company on a 
combined basis'' if those other subsidiaries are minor.
    4. If, instead of guaranteeing the subject security, a 
subsidiary co-issues the security jointly and severally with its 
parent company, this paragraph (e) does not apply. Instead, the 
appropriate financial information requirement would depend on 
whether the subsidiary is a finance subsidiary or an operating 
subsidiary. If the subsidiary is a finance subsidiary, paragraph (b) 
applies. If the subsidiary is an operating company, paragraph (c) 
applies.


    (f) Multiple subsidiary guarantors of securities issued by the 
parent company of those subsidiaries. When a parent company issues 
securities and more than one of its subsidiaries guarantee those 
securities, the registration statement, parent company annual report, 
or parent company quarterly report need not include financial 
statements of the subsidiary guarantors if:
    (1) Each of the subsidiary guarantors is 100% owned by the parent 
company 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:
    (i) The parent company;
    (ii) The subsidiary guarantors on a combined basis;
    (iii) Any other subsidiaries of the parent company on a combined 
basis;
    (iv) Consolidating adjustments; and
    (v) The total consolidated amounts.


    Notes to paragraph (f).   
    1. Instead of the condensed consolidating financial information 
required by paragraph (f)(4), the parent company's financial 
statements may include a footnote stating, if true, that the parent 
company has no independent assets or operations, the guarantees are 
full and unconditional and joint and several, and any subsidiaries 
of the parent company other than the subsidiary guarantors are 
minor. The footnote also must include the narrative disclosures 
specified in paragraphs (i)(9) and (i)(10) of this section.
    2. If the alternative disclosure permitted by Note 1 to this 
paragraph is not applicable because the parent company has 
independent assets or operations, the condensed consolidating 
financial information described in paragraph (f)(4) may omit the 
column for ``any other subsidiaries of the parent company on a 
combined basis'' if those other subsidiaries are minor.
    3. If any of the subsidiary guarantees is not joint and several 
with the guarantees of the other subsidiaries, then each subsidiary 
guarantor whose guarantee is not joint and several need not include 
separate financial statements, but the condensed consolidating 
financial information must include a separate column for each 
subsidiary guarantor whose guarantee is not joint and several.


    (g) Recently acquired subsidiary issuers or subsidiary guarantors.
    (1) The Securities Act registration statement of the parent company 
must include the financial statements specified in paragraph (g)(2) of 
this section for any subsidiary that otherwise meets 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 nine months of 
the most recent fiscal year; and
    (ii) The net book value or purchase price, whichever is greater, of 
the subsidiary is 20% or more of the principal amount of the securities 
being registered.
    (2) Financial statements required.
    (i) Audited financial statements for a subsidiary described in 
paragraph (g)(1) of this section must be filed for the subsidiary's 
most recent fiscal year preceding the acquisition. 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 must conform to the requirements of 
Regulation S-X (Secs. 210.1-01 through 12-29), except that supporting 
schedules need not be filed. If the subsidiary is a foreign business, 
financial statements of the subsidiary meeting the requirements of Item 
17 of Form 20-F (Sec. 249.220f) will satisfy this item.
    (3) Instructions to paragraph (g).
    (i) The significance test of paragraph (g)(1)(ii) of this section 
should be computed using net book value of the subsidiary as of the 
most recent fiscal year end preceding the acquisition.
    (ii) Information required by this paragraph (g) is not required to 
be included in an annual report or quarterly report.
    (iii) Acquisitions of a group of subsidiary issuers or subsidiary 
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:
    (A) They are under common control or management;
    (B) The acquisition of one subsidiary is conditioned on the 
acquisition of each subsidiary; or
    (C) The acquisition of each subsidiary is conditioned on a single 
common event.
    (h) Definitions. For the purposes of this section:
    (1) A subsidiary is ``100% owned'' if all of its outstanding voting 
shares are owned, either directly or indirectly, by its parent company. 
A subsidiary not in corporate form is 100% owned if the sum of all 
interests are owned, either directly or indirectly, by its parent 
company other than:
    (i) Securities that are guaranteed by its parent and, if 
applicable, other 100%-owned subsidiaries of its parent; and
    (ii) Securities that guarantee securities issued by its parent and, 
if applicable, other 100%-owned subsidiaries of its parent.
    (2) A guarantee is ``full and unconditional,'' if, when an issuer 
of a guaranteed security has failed to make a scheduled payment, the 
guarantor is obligated to make the scheduled payment immediately and, 
if it doesn't, 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 an annual report on Form 10-K, Form 10-
KSB, or

[[Page 51710]]

Form 20-F (Secs. 249.310, 249.310b, or 249.220f of this chapter).
    (4) Quarterly report refers to a quarterly report on Form 10-Q or 
Form 10-QSB (Secs. 249.308a or 249.308b of this chapter).
    (5) A parent company has no independent assets or operations if 
each of its total assets, revenues, income from continuing operations 
before income taxes, and cash flows from operating activities 
(excluding amounts related to its investment in its consolidated 
subsidiaries) is less than 3% of the corresponding consolidated amount.
    (6) A subsidiary is minor if each of its total assets, 
stockholders' equity, revenues, income from continuing operations 
before income taxes, and cash flows from operating activities is less 
than 3% of the parent company's corresponding consolidated amount.


    Note to paragraph (h)(6). When considering a group of 
subsidiaries, the definition applies to each subsidiary in that 
group individually and to all subsidiaries in that group in the 
aggregate.

    (7) A subsidiary is a finance subsidiary if it has no assets, 
operations, revenues or cash flows other than those related to the 
issuance, administration and repayment of the security being 
registered and any other securities guaranteed by its parent 
company.
    (8) A subsidiary is an operating subsidiary if it is not a 
finance subsidiary.
    (i) Instructions for preparation of the condensed consolidating 
financial information required by paragraphs (c), (d), (e) and (f) 
of this section.
    (1) Follow the general guidance in Sec. 210.10-01 for the form 
and content for condensed financial statements and 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) The financial information should be audited for the same 
periods that the parent company financial statements are required to 
be audited;
    (3) The parent company column should present investments in all 
subsidiaries under the equity method;
    (4) The parent company's basis shall be ``pushed down'' to the 
applicable subsidiary columns to the extent that push down would be 
required or permitted in separate financial statements of the 
subsidiary;
    (5) All subsidiary issuer or subsidiary guarantor columns should 
present the following investments in subsidiaries under the equity 
method:
    (i) Non-guarantor subsidiaries;
    (ii) Subsidiary issuers or subsidiary guarantors that are not 
100% owned or whose guarantee is not full and unconditional;
    (iii) Subsidiary guarantors whose guarantee is not joint and 
several with the guarantees of the other subsidiaries; and
    (iv) Subsidiary guarantors with differences in domestic or 
foreign laws that affect the enforceability of the guarantees;
    (6) Provide a separate column for each subsidiary issuer or 
subsidiary guarantor that is not 100% owned, whose guarantee is not 
full and unconditional, or whose guarantee is not joint and several 
with the guarantees of other subsidiaries. Inclusion of a separate 
column does not relieve that issuer or guarantor from the 
requirement to file separate financial statements under paragraph 
(a) of this section. However, paragraphs (b) through (f) of this 
section will provide this relief if the particular paragraph is 
satisfied except that the guarantee is not joint and several;
    (7) Provide separate columns for each guarantor by legal 
jurisdiction if differences in domestic or foreign laws affect the 
enforceability of the guarantees;
    (8) Include the following disclosure, if true:
    (i) Each subsidiary issuer or subsidiary guarantor is 100% 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;
    (9) Disclose any significant restrictions on the ability of the 
parent company or any guarantor to obtain funds from its 
subsidiaries by dividend or loan;
    (10) Provide the disclosures prescribed by Sec. 210.4-08(e)(3) 
with respect to the subsidiary issuers and subsidiary guarantors;
    (11) The disclosure:
    (i) May not omit any financial and narrative information about 
each guarantor if the information would be material for investors to 
evaluate the sufficiency of the guarantee;
    (ii) Shall include sufficient information so as to make the 
financial information presented not misleading; and
    (iii) Need not repeat information that would substantially 
duplicate disclosure elsewhere in the parent company's consolidated 
financial statements; and
    (12) 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 extent necessary to allow investors to evaluate the sufficiency 
of the guarantees. The reconciliation may be limited to the 
information specified by Item 17 of Form 20-F (Sec. 249.220f of this 
chapter). The reconciling information need not duplicate information 
included elsewhere in the reconciliation of the consolidated 
financial statements.


    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 211--INTERPRETATIONS RELATING TO FINANCIAL REPORTING MATTERS

Subpart A--[Amended]

    4. Part 211, subpart A, is amended by adding ``Financial Statements 
and Periodic Reports For Related Issuers and Guarantors, Appendices A, 
B and C,'' Release No. FR-55 and the release date of August 4, 2000, to 
the list of interpretive releases.

Subpart B--[Amended]

    5. Part 211 is amended by removing and reserving Staff Accounting 
Bulletin No. 53 to the table found in Subpart B.

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    6. 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, 
781, 78m, 78n, 78o, 78u-5, 78w, 7811, 80a-8, 80a-29, 80a-30, 80a-37, 
and 80b-11, unless otherwise noted.


    7. Section 228.310 is amended by redesignating Note 3 as Note 5 and 
adding new Notes 3 and 4 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 
must 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.
    4. Financial statements for a small business issuer's affiliates 
whose securities constitute

[[Page 51711]]

a substantial portion of the collateral for any class of securities 
registered or being registered must be presented as required by Rule 
3-16 of Regulation S-X (17 CFR 210.3-16), 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

    7. 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, 781, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 7811(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.


    8. Section 240.12h-5 is added to read as follows:


Sec. 240.12h-5  Exemption for subsidiary issuers of guaranteed 
securities and subsidiary guarantors.

    (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, but is required to 
file financial statements in accordance with the operation of 
Sec. 210.3-10(g) 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)).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    9. The authority citation for Part 249 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.


    10. Effective September 30, 2000, amend Form 20-F (referenced in 
Sec. 249.220f), first sentence of Instruction 1 of ``Instructions to 
Item 8'', by revising the phrase ``3-10 and 3-14'' to read ``3-10, 3-14 
and 3-16''.

    By the Commission.

    Dated: August 4, 2000.
Margaret H. McFarland,
Deputy Secretary.

    Note: Appendices A, B and C to the preamble will not appear in 
the Code of Federal Regulations.


Table of Contents

Appendix A--What does ``100% owned'' mean under Rule 3-10?
Appendix B--Recently Acquired Subsidiary Issuers or Subsidiary 
Guarantors
Appendix C--Who is the ``parent company'' under Rule 3-10?

Appendix A--What Does ``100% Owned'' Mean Under Rule 3-10?

    Example No. 1: Parent company owns 100% of the voting shares of 
SubA. SubA owns 100% of the voting shares of Sub1.
    Is SubA a 100%-owned subsidiary of the parent company? Yes.
    Is Sub1 a 100%-owned subsidiary of SubA? Yes.
    Is Sub1 an indirect, 100%-owned subsidiary of the parent 
company? Yes.
    Example No. 2: Parent company owns 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 100%-
owned subsidiary of the parent company.
    Is SubA a 100%-owned subsidiary of the parent company? Yes.
    Is Sub1 a 100%-owned subsidiary of SubA? No.
    Is Sub1 an indirect, 100%-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 100%-owned subsidiary of the parent company. 
SubA owns 100% of the voting shares of Sub1.
    Is SubA a 100%-owned subsidiary of the parent company? No.
    Is Sub1 a 100%-owned subsidiary of SubA? Yes.
    Is Sub1 an indirect, 100%-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 100%-owned subsidiary of the parent company? Yes.
    Is SubB a 100%-owned subsidiary of the parent company? Yes.
    Is Sub1 a 100%-owned subsidiary of SubA? No.
    Is Sub1 a 100%-owned subsidiary of SubB? No.
    Is Sub1 an indirect, 100%-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 100%-owned subsidiary of the parent company? Yes.
    Is Sub1 a 100%-owned subsidiary of SubA? No.
    Is Sub1 an indirect, 100%-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 100%-owned subsidiary of the parent company? No.
    Is Sub1 a 100%-owned subsidiary of SubA? Yes.
    Is Sub1 an indirect, 100%-owned subsidiary of the parent 
company? No.

    Note: This situation is discussed in the release. Under these 
facts, you may wish to request a no-action letter from the Division 
of Corporation Finance.

    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 100%-owned subsidiary of the parent.
    Is SubA a 100%-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 100%-owned subsidiary of the parent.
    Is SubA a 100%-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 100%-owned 
subsidiary of the parent.
    Is SubA a 100%-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 options are held by a party that is 
not a 100%-owned subsidiary of the parent.
    Is SubA a 100%-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 
100%-owned subsidiary of the parent company. The common equity has 
full voting rights. The preferred stock is non-voting.
    Is SubA a 100%-owned subsidiary of the parent company? Yes.

Appendix B--Recently Acquired Subsidiary Issuers or Subsidiary 
Guarantors

    The following examples illustrate the application of Rule 3-
10(g) in determining the financial statements to be provided for 
recently acquired subsidiary issuers or subsidiary guarantors. For 
ease of use, we have included only subsidiary guarantor examples in 
this appendix. You should note, however, that Rule 3-10(g) applies 
equally to subsidiary issuers and subsidiary guarantors.
    Each example is independent of the others. In each of the 
following examples, assume, unless stated otherwise, that:
     Parent company registers an offering of its debt 
securities under the Securities Act. The securities are guaranteed 
by one or more of its subsidiaries.
     Parent company and all acquired subsidiary guarantors 
have December 31

[[Page 51712]]

fiscal year ends and, unless otherwise specified, the parent company 
has filed its audited consolidated financial statements for the 
fiscal year in which the subsidiary was acquired.
     All subsidiaries are 100% owned.
     All guarantees are full and unconditional.
     All guarantees are joint and several.
     Each subsidiary's purchase price exceeds its net book 
value at its fiscal year end preceding the date of acquisition. The 
purchase price is used for testing significance.
    This Appendix addresses only the requirements of Rule 3-10(g) of 
Regulation S-X. In each example, audited financial statements for 
additional periods may be required by Rule 3-05 of Regulation S-X.
    Example No. 1: Significant acquired guarantor included more than 
nine months .
    Subsidiary A was acquired on March 1, and has been included in 
its parent company's audited consolidated financial statements for 
ten months of the most recent fiscal year. Subsidiary A's purchase 
price exceeds 20% of the principal amount of the debt being 
registered.
    Required financial information: No pre-acquisition financial 
statements of Subsidiary A are required. Although Subsidiary A's 
purchase price exceeds 20% of the principal amount of the debt being 
registered, financial statements may be omitted because Subsidiary A 
has been included in its parent company's audited consolidated 
financial statements for more than nine months of the most recent 
fiscal year.
    Example No. 2: Significant acquired guarantor included less than 
nine months.
    Subsidiary B was acquired on September 1, and has been included 
in its parent company's audited consolidated financial statements 
for four months of the most recent fiscal year. Subsidiary B's 
purchase price exceeds 20% of the principal amount of the debt being 
registered.
    Required financial information: Pre-acquisition financial 
statements of Subsidiary B are required. Subsidiary B is significant 
and has been included in its parent company's audited consolidated 
financial statements for less than nine months of the most recent 
fiscal year. Audited financial statements of Subsidiary B for its 
most recent fiscal year preceding the acquisition and subsequent 
unaudited interim financial statements are required.
    Example No. 3: Insignificant acquired guarantor. Subsidiary C 
was acquired on July 1, and has been included in its parent 
company's audited consolidated financial statements for six months 
of the most recent fiscal year. Subsidiary C's purchase price is 
less than 20% of the principal amount of the debt being registered.
    Required financial information: Pre-acquisition financial 
statements of Subsidiary C are not required because Subsidiary C's 
purchase price is less than 20% of the principal amount of the debt 
being registered.
    Example No. 4: Acquisition of significant business by pre-
existing guarantor.
    The assets and operations of Business D were acquired on October 
1, and have been included in its parent company's audited 
consolidated financial statements for three months of the most 
recent fiscal year. Upon acquisition, the assets and operations of 
Business D were transferred to pre-existing Subsidiary Guarantor X, 
which had little or no assets or operations. Business D's purchase 
price exceeds 20% of the principal amount of the debt being 
registered.
    Required financial information: Pre-acquisition financial 
statements of Business D are required. Although Subsidiary Guarantor 
X has been included in the consolidated financial statements for 
more than nine months of the most recent fiscal year, Business D is 
considered a predecessor of Subsidiary Guarantor X. Audited 
financial statements of Business D for its most recent fiscal year 
preceding the acquisition and subsequent unaudited interim financial 
statements are required.
    Example No. 5: Acquisition of multiple related guarantors.
    Subsidiaries E and F were acquired on August 1, and have been 
included in their parent company's audited consolidated financial 
statements for five months of the most recent fiscal year. 
Consummation of each acquisition was conditioned upon the other.
    Subsidiary E and F's purchase prices were 12% and 17% of the 
principal amount of the debt being registered, respectively.
    Required financial information: Pre-acquisition financial 
statements of Subsidiaries E and F are required. Because the 
acquisitions are related, their individual significance levels must 
be aggregated. Their aggregate purchase price exceeds 20% of the 
principal amount of the debt being registered. If Subsidiaries E and 
F were under common control or management before their acquisition, 
combined financial statements may be presented. Otherwise, separate 
financial statements are required. Audited financial statements of 
Subsidiaries E and F for their most recent fiscal years preceding 
the acquisition and subsequent unaudited interim financial 
statements are required.
    Example No. 6: Acquisition of multiple unrelated guarantors.
    Subsidiary G was acquired on May 1, and Subsidiary H was 
acquired on June 1. Subsidiaries G and H have been included in their 
parent company's audited consolidated financial statements for eight 
and seven months of the most recent fiscal year, respectively. The 
acquisitions are not related by common ownership, common management, 
or common conditions to consummation. Subsidiary G and H's purchase 
prices were 11% and 18% of the principal amount of the debt being 
registered, respectively.
    Required financial information: Pre-acquisition financial 
statements of Subsidiaries G and H are not required. Because the 
acquisitions are unrelated, their significance levels are assessed 
individually. Each subsidiary is less than 20% of the principal 
amount of the debt being registered.
    Example No. 7: Very Recent Acquisition of Significant Guarantor.
    Subsidiary I was acquired on April 1, after the end of the 
parent company's most recent fiscal year. Subsidiary I is not yet 
included in the parent company's audited consolidated financial 
statements. Subsidiary I's purchase price exceeds 20% of the 
principal amount of the debt being registered. Parent Company files 
a Securities Act registration statement on April 2.
    Required Financial Information: Pre-acquisition financial 
statements of Subsidiary I are required. Subsidiary I is significant 
and has not been included in its parent company's consolidated 
financial statements for nine months of the most recent fiscal year. 
Audited financial statements of Subsidiary I for its most recent 
fiscal year preceding the acquisition are required. The 75 day post-
consummation period generally available to a recently acquired 
business under Rule 3-05 is not applicable to Rule 3-10(g).
    Example No. 8: Acquisition of Significant Guarantor Not Yet 
Consummated.
    Parent company contemplates the acquisition of Business J. If 
acquired, Business J will become a subsidiary guarantor of the debt 
securities being registered. Consummation has not occurred at the 
time of effectiveness of the registration statement. Business J's 
purchase price would exceed 20% of the principal amount of the debt 
being registered.
    Required Financial Information: Pre-acquisition financial 
statements of Business J are not required under Rule 3-10(g). 
Business J is not a guarantor at the time of effectiveness of the 
registration statement. However, as for all businesses to be 
acquired, the parent company must separately evaluate whether pre-
acquisition financial statements of Business J are required by Rule 
3-05.
    Example No. 9: Significant Guarantor in a Pooling of Interests.
    Subsidiary K became a subsidiary on December 1 in a pooling of 
interests transaction. As a result of application of the pooling of 
interests method, Subsidiary K is included retroactively in its 
parent company's audited consolidated financial statements for all 
three years. Subsidiary K's net book value exceeds 20% of the 
principal amount of the debt being registered.
    Required Financial Information: Pre-acquisition financial 
statements of Subsidiary K are not required. Inclusion of Subsidiary 
K in its parent company's condensed consolidating financial 
information under Rule 3-10 for all periods presented satisfies the 
requirements of Rule 3-10(g).

Appendix C--Who Is the ``Parent Company'' Under Rule 3-10?

    Example No. 1:   
     Company A is an Exchange Act reporting company.
     Company A owns 100% of Company B.
     Company B is not an Exchange Act reporting company.
     Company B issues securities.
     Company A guarantees those securities.
     No other company in this corporate structure co-issues 
or guarantees the securities.
    Company A is the ``parent company'' for purposes of applying 
Rule 3-10 to the subject securities.
    Example No. 2:   
     Company A is an Exchange Act reporting company.

[[Page 51713]]

     Company A issues securities.
     Company A owns 100% of Company B.
     Company B is not an Exchange Act reporting company.
     Company B guarantees the subject securities.
     No other company in this corporate structure co-issues 
or guarantees the securities.
    Company A is the ``parent company'' for purposes of applying 
Rule 3-10 to the subject securities.
    Example No. 3:   
     Company A is an Exchange Act reporting company.
     Company A owns 100% of Company B.
     Company B is an Exchange Act reporting company.
     Company B issues securities.
     Company B owns 100% of Company C.
     Company C is not an Exchange Act reporting company.
     Company C guarantees the subject securities.
     Neither Company A nor any other company in this 
corporate structure co-issues or guarantees the securities.
    Company B is the ``parent company'' for purposes of applying 
Rule 3-10 to the subject securities. The consolidated financial 
statements of Company A may not be substituted for those of Company 
B, even if Company A's financial statements are substantially the 
same as Company B's. The parent company for purposes of Rule 3-10 
must be an issuer or guarantor of the subject security.
    Example No. 4:   
     Company A is not an Exchange Act reporting company.
     Company A owns 100% of Company B.
     Company B is an Exchange Act reporting company.
     Company B issues securities.
     Company B owns 100% of Company C.
     Company C is not an Exchange Act reporting company.
     Company C guarantees the subject securities.
     Neither Company A nor any other company in this 
corporate structure co-issues or guarantees the securities.
    Company B is the ``parent company'' for purposes of applying 
Rule 3-10 to the subject securities.
    Example No. 5:   
     Company A is an Exchange Act reporting company.
     Company A owns 100% of Company B.
     Company B is an Exchange Act reporting company.
     Company B owns 100% of Company C.
     Company C is not an Exchange Act reporting company.
     Company C issues securities.
     Company A and Company B guarantee the subject 
securities.
     No other company in this corporate structure co-issues 
or guarantees the securities.
    Company A is the ``parent company'' for purposes of applying 
Rule 3-10 to the subject securities. The consolidated financial 
statements of Company B may not be substituted for those of Company 
A, even if Company B's financial statements are substantially the 
same as Company A's. There are no exceptions to the parent company's 
obligation to provide the financial statements for a registrant 
under Rule 3-10(a).
    Example No. 6:   
     Company A is an Exchange Act reporting company.
     Company A owns 100% of Company B and Company C.
     Neither Company B nor Company C is an Exchange Act 
reporting company.
     Company B owns 50% of Company D.
     Company C owns the other 50% of Company D.
     Company D is not an Exchange Act reporting company.
     Company D owns 100% of Company E.
     Company E is not an Exchange Act reporting company.
     Company E issues securities.
     Companies A, B, C, and D guarantee the subject 
securities.
     No other company in this corporate structure co-issues 
or guarantees the securities.
    Company A is the ``parent company'' for purposes of applying 
Rule 3-10 to the subject securities.
    Example No. 7:   
     Company A is not Exchange Act reporting company.
     Company A owns 100% of Company B and Company C.
     Neither Company B nor Company C is an Exchange Act 
reporting company.
     Company B owns 50% of Company D.
     Company C owns the other 50% of Company D.
     Company D is an Exchange Act reporting company.
     Company D owns 100% of Company E.
     Company E is not an Exchange Act reporting company.
     Company E issues securities.
     Company D guarantees the subject securities.
     No other company in this corporate structure co-issues 
or guarantees the securities.
    Company D is the ``parent company'' for purposes of applying 
Rule 3-10 to the subject securities.

[FR Doc. 00-20511 Filed 8-23-00; 8:45 am]
BILLING CODE 8010-01-P