[Federal Register Volume 67, Number 217 (Friday, November 8, 2002)]
[Proposed Rules]
[Pages 68054-68079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28431]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229 and 249

[Release Nos. 33-8144; 34-46767, International Series Release No. 1264, 
File No. S7-42-02]
RIN 3235-AI70


Disclosure in Management's Discussion and Analysis About Off-
Balance Sheet Arrangements, Contractual Obligations and Contingent 
Liabilities and Commitments

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: As directed by new section 13(j) of the Securities Exchange 
Act of 1934, added by section 401(a) of the Sarbanes-Oxley Act of 2002, 
we propose to require disclosure of off-balance sheet transactions, 
arrangements, obligations (including contingent obligations), and other 
relationships of an issuer with unconsolidated entities or other 
persons that have, or may have, a material effect on financial 
condition, changes in financial condition, revenues or expenses, 
results of operations, liquidity, capital expenditures or capital 
resources. The new disclosure would be located in the ``Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations'' (``MD&A'') section in a company's disclosure documents. 
The proposals would require a registrant to provide, in a separately 
captioned subsection of MD&A, a comprehensive explanation of its off-
balance sheet arrangements. The proposals also would require a 
registrant (other than small business issuers) to provide an overview 
of its aggregate contractual obligations in a tabular format and 
contingent liabilities and commitments in either a textual or tabular 
format.

DATES: Comments should be received by December 9, 2002.

ADDRESSES: You should send three copies of your comments to Jonathan G. 
Katz, Secretary, U.S. Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. In the alternative, you may 
submit your comments electronically to the following address: [email protected]. To help us process and review your comments more 
efficiently, comments should be sent by hard copy or e-mail, but not by 
both methods. All comment letters should refer to File No. S7-42-02. 
This file number, along with the name of your organization, should be 
included in the subject line if you use electronic mail. Comment 
letters will be available for public inspection and copying at the

[[Page 68055]]

Commission's Public Reference Room, 450 Fifth Street, NW., Washington, 
DC 20549-0102. We will post electronically-submitted comment letters on 
the Commission's Internet Web site (http://www.sec.gov). We do not edit 
personal identifying information, such as names or electronic mail 
addresses, from electronic submissions. Submit only information that 
you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Questions about this release should be 
referred to Andrew Thorpe, Division of Corporation Finance (202-942-
2910) or Jenifer Minke-Girard or Eric Schuppenhauer, Office of the 
Chief Accountant (202-942-4400), Securities and Exchange Commission, 
450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing amendments to item 303\1\ 
of regulation S-K,\2\ item 303\3\ of regulation S-B,\4\ item 5 of form 
20-F \5\ and general instruction B of form 40-F \6\ under the 
Securities Exchange Act of 1934.\7\
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    \1\ 17 CFR 229.303.
    \2\ 17 CFR 229.10 et seq.
    \3\ 17 CFR 228.303.
    \4\ 17 CFR 228.10 et seq.
    \5\ 17 CFR 249.220f.
    \6\ 17 CFR 249.240f.
    \7\ 15 U.S.C. 78a et seq.
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Table of Contents

I. Background
II. Discussion of Proposed Rules
    A. Objectives of the Proposed Rules
    B. Off-balance Sheet Arrangements
    1. Background
    2. Off-balance Sheet Arrangements Covered Under the Proposals
    3. Proposed Disclosure Threshold
    4. Proposed Disclosure about Off-balance Sheet Arrangements
    C. Contractual Obligations and Contingent Liabilities and 
Commitments
    1. Proposed Tabular Disclosure in MD&A
    2. Proposed Disclosure of Contingent Liabilities or Commitments
    D. Presentation of Proposed Disclosure
    1. Separate Disclosure Sections
    2. Language and Format
    E. Other MD&A Disclosure
    F. Application of the Proposals to Foreign Private Issuers
    G. Proposed Safe Harbor for Forward-Looking Information
    H. Other Safe Harbors for Forward-Looking Information
III. General Request for Comment
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Effects on Efficiency, Competition and Capital Formation
VII. Initial Regulatory Flexibility Analysis
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Codification Update--Statutory Basis and Text of Proposed 
Amendments

I. Background

    On July 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted.\8\ 
Section 401(a) of the Sarbanes-Oxley Act, entitled ``Disclosures in 
Periodic Reports,'' adds section 13(j) to the Securities Exchange Act 
of 1934, which requires the Commission to adopt final rules by January 
26, 2003 (180 days after the date of enactment) to require each annual 
and quarterly financial report required to be filed with the 
Commission, to disclose ``all material off-balance sheet transactions, 
arrangements, obligations (including contingent obligations), and other 
relationships of the issuer with unconsolidated entities or other 
persons, that may have a material current or future effect on financial 
condition, changes in financial condition, results of operations, 
liquidity, capital expenditures, capital resources, or significant 
components of revenues or expenses.'' \9\ That legislative mandate is 
wholly consistent with the series of rulemaking and other initiatives 
that we have undertaken to improve the transparency and quality of 
corporate disclosure. Furthermore, much of the language in section 
401(a) (e.g., ``financial condition, changes in financial condition, 
results of operations, liquidity, capital expenditures, capital 
resources and significant components of revenues or expenses'') mirrors 
the language currently found in the MD&A rules. Moreover, much of the 
language and many of the concepts embodied in the legislation are 
consistent with the language and concepts embodied in the Commission's 
January 2002 statement, which discussed the desirability of enhanced 
disclosure in MD&A of off-balance sheet arrangements.\10\ Accordingly, 
we are proposing to implement this provision of the Sarbanes-Oxley Act, 
and to simultaneously advance our initiatives to improve disclosure, by 
amending the current MD&A rules.\11\
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    \8\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \9\ Pub. L. 107-204 sec. 401(a) [15 U.S.C. 78m(j)].
    \10\ See release no. 33-8056, FR-61 (Jan. 22, 2002) [67 FR 
3746]. That statement was issued in response to a petition from 
Arthur Andersen LLP, Deloitte and Touche LLP, Ernst & Young LLP, 
KPMG LLP, and PricewaterhouseCoopers LLP, with the endorsement of 
the American Institute of Certified Public Accountants, for an 
interpretive release to facilitate enhanced MD&A disclosures. See, 
rulemaking petition No. 4-450 (Dec. 31, 2001).
    \11\ The Sarbanes-Oxley Act exempts from section 401 investment 
companies registered under section 8 of the Investment Company Act 
of 1940 (15 U.S.C. 80a-8). See Pub. L. 107-204 sec. 405 [15 U.S.C. 
7263]. Therefore, registered investment companies are excluded from 
the scope of the proposals. The proposed rules would apply, however, 
to business development companies. Business development companies 
are defined in section 2(a)(48) of the Investment Company Act of 
1940. See 15 U.S.C. 80a-2(a)(48). Business development companies are 
a category of closed-end investment companies that are not required 
to register under the Investment Company Act, but file forms 10-K 
and 10-Q, and also include MD&A in their annual reports to 
shareholders.
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    The Commission has long recognized that there is a need for a 
narrative explanation of financial statements and accompanying 
footnotes and has developed MD&A over the years to fulfill this 
need.\12\ The disclosure in MD&A is of paramount importance in 
increasing the transparency of a company's financial performance and 
providing investors with the disclosure necessary to evaluate a company 
and to make informed investment decisions. After the financial 
statements themselves, MD&A is generally the most important portion of 
a company's disclosure. This is so because MD&A is designed to achieve 
three interrelated purposes:
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    \12\ See, e.g., Release No. 33-5443 (Dec. 12, 1973) [39 FR 829].
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    [sbull] To provide a narrative explanation of a company's financial 
statements that enables investors to see the company through the eyes 
of management;
    [sbull] To improve overall financial disclosure and provide the 
context within which financial statements should be analyzed; and
    [sbull] To provide information about the quality, and potential 
variability, of a company's earnings and cash flow, so that investors 
can ascertain the likelihood that past performance is indicative of 
future performance.

MD&A disclosure should provide investors with an understanding of 
management's view of the financial performance and condition of the 
company, as well as an appreciation of what the financial statements 
show and do not show, important trends and risks that have shaped the 
past and trends and risks that are reasonably likely to shape the 
future.
    The MD&A rules already require disclosure regarding off-balance 
sheet arrangements and other contingencies. The MD&A rules are designed 
to cover a wide range of corporate events, including events, variables 
and uncertainties not otherwise required to be disclosed under U.S. 
generally accepted accounting principles (``GAAP'').\13\ For example, 
the current MD&A rules require disclosure of:
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    \13\ In In the Matter of Caterpillar Inc., Release No. 34-30532 
(March 31, 1992), the Commission found that Caterpillar had violated 
section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] by failing to 
have disclosed the magnitude of its Brazilian subsidiary's 
contribution to Caterpillar's overall earnings. Disclosure of the 
extent of that contribution was required under the MD&A disclosure 
requirements, even though disclosure was not required under GAAP, 
because the subsidiary's earnings materially affected Caterpillar's 
reported income from continuing operations. See item 303(a)(3)(i) of 
regulation S-K [17 CFR 229.303(a)(3)(i)]. Furthermore, Caterpillar's 
MD&A should have discussed various factors which contributed to the 
subsidiary's earnings, such as currency translation gains, export 
subsidies, interest income, and Brazilian tax loss carry-forwards, 
because such items were significant components of its revenues that 
should have been identified and addressed in order for a reader of 
the company's financial statements to understand Caterpillar's 
results of operations. Id.

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[[Page 68056]]

    [sbull] Information necessary to an understanding of the 
registrant's financial condition, changes in financial condition and 
results of operations; \14\
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    \14\ See item 303(a) of regulation S-K [17 CFR 229.303(a)].
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    [sbull] Any known trends, demands, commitments, events or 
uncertainties that will result in, or that are reasonably likely to 
result in, the registrant's liquidity increasing or decreasing in any 
material way; \15\
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    \15\ See item 303(a)(1) of regulation S-K [17 CFR 
229.303(a)(1)].
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    [sbull] The registrant's internal and external sources of 
liquidity, and any material unused sources of liquid assets; \16\
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    \16\ Id.
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    [sbull] The registrant's material commitments for capital 
expenditures as of the end of the latest fiscal period; \17\
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    \17\ See item 303(a)(2)(i) of regulation S-K [17 CFR 
229.303(a)(2)(i)].
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    [sbull] Any known material trends, favorable or unfavorable, in the 
registrant's capital resources, including any expected material changes 
in the mix and relative cost of capital resources, considering changes 
between debt, equity and any off-balance sheet financing 
arrangements.\18\
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    \18\ See item 303(a)(2)(ii) of regulation S-K [17 CFR 
229.303(a)(2)(ii)].
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    [sbull] Any unusual or infrequent events or transactions or any 
significant economic changes that materially affected the amount of 
reported income from continuing operations and, in each case, the 
extent to which income was so affected.\19\
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    \19\ See item 303(a)(3)(i) of regulation S-K [17 CFR 
229.303(a)(3)(i)].
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    [sbull] Significant components of revenues or expenses that should, 
in the company's judgment, be described in order to understand the 
registrant's results of operations; \20\
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    \20\ Id.
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    [sbull] Known trends or uncertainties that have had or that the 
registrant reasonably expects will have a material favorable or 
unfavorable impact on net sales or revenues or income from continuing 
operations.\21\
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    \21\ See item 303(a)(3)(iii) of regulation S-K [17 CFR 
229.303(a)(3)(ii)].
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    [sbull] Matters that will have an impact on future operations and 
have not had an impact in the past; \22\ and
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    \22\ See instruction 3(A) to item 303(a) of regulation S-K [17 
CFR 229.303(a)].
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    [sbull] Matters that have had an impact on reported operations and 
are not expected to have an impact upon future operations.\23\

The MD&A rules are intentionally flexible to elicit more meaningful 
disclosure and to avoid boilerplate discussions.\24\ Therefore, while 
only one item in our current MD&A rules specifically identifies off-
balance sheet arrangements,\25\ the other requirements clearly require 
disclosure of off-balance sheet arrangements if necessary to an 
understanding of a registrant's financial condition, changes in 
financial condition and results of operations.
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    \23\ See instruction 3(B) to item 303(a) of regulation S-K [17 
CFR 229.303(a)].
    \24\ See Release No. 33-6711 (April 17, 1987) [52 FR 13715].
    \25\ See item 303(a)(2)(ii) of regulation S-K [17 CFR 
229.303(a)(2)(ii)].
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    We have focused a great deal of our attention on enhancing MD&A 
disclosure in a continuing effort to improve transparency and restore 
investor confidence. In December 2001, we issued cautionary advice 
emphasizing the need for MD&A disclosure regarding a company's critical 
accounting policies.\26\ In January 2002, we issued a statement 
focusing on the need for improved MD&A disclosure in the following 
three specific areas of concern: (1) Liquidity and capital resources, 
including off-balance sheet arrangements; (2) certain trading 
activities involving non-exchange traded contracts accounted for at 
fair value; and (3) relationships and transactions with persons or 
entities that derive benefits from their non-independent relationships 
with the registrant or the registrant's related parties.\27\ In each of 
those releases, we stated our intention to consider disclosure rules 
that would codify our views as expressed in those releases. In May of 
this year, we began the codification process by proposing rules to 
mandate improved MD&A disclosure about a company's application of its 
critical accounting policies.\28\ We also reiterated our intention to 
continue improving MD&A by proposing additional disclosure rules.\29\ 
In keeping with those intentions, and in accordance with the mandates 
in the Sarbanes-Oxley Act, we now are proposing additional rules that 
would require companies to more effectively fulfill the purposes of 
MD&A.\30\ As discussed below, the proposed rules would, under some 
circumstances, lower the threshold that triggers disclosure of off-
balance sheet arrangements, require that disclosure relating to off-
balance sheet arrangements must be set apart in a designated section of 
MD&A, and (except in the case of small business issuers) require 
disclosure of aggregate contractual obligations and contingent 
liabilities and commitments.\31\
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    \26\ See Release No. 33-8040, FR-60 (Dec. 12, 2001) [66 FR 
65013].
    \27\ See Release No. 33-8056, FR-61 (Jan. 22, 2002) [67 FR 
3746].
    \28\ See Release No. 33-8098 (May 10, 2002) [67 FR 35620].
    \29\ Id. at 35622. In a separate proposal, for example, we 
proposed rules to require current disclosure on form 8-K of the 
creation of a material direct or contingent financial obligation of 
a registrant and about events triggering a direct or contingent 
financial obligation of a registrant. See proposed items 2.03 and 
2.04 of form 8-K [17 CFR 249.308], Release No. 33-8106 (June 17, 
2002) [67 FR 42914]. While that disclosure would not be included in 
MD&A, it would provide investors with current disclosure of 
contingent obligations when they become material. The proposed 
periodic MD&A disclosure of off-balance sheet arrangements would 
provide more comprehensive information than the proposed current 
disclosure.
    \30\ While section 401(a) of the Sarbanes-Oxley Act requires us 
to adopt new disclosure requirements only for periodic reports, we 
propose to include Securities Act registration forms that require 
MD&A disclosure within the scope of the proposals because the 
policies underlying section 401(a) apply to such registration 
statements.
    \31\ See section II.B.
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II. Discussion of Proposed Rules

A. Objectives of the Proposed Rules

    The proposals seek to improve transparency of a company's off-
balance sheet arrangements and to provide an overview of aggregate 
contractual obligations and contingent liabilities and commitments. We 
believe that improvements in the quality of information in these areas 
is necessary for investors to better understand a company's current and 
future financial position and current and future sources of liquidity. 
Moreover, because management is in the best position to monitor and 
assess those aspects of its business, it also is in the best position 
to provide clear explanations and analysis to investors. Our objectives 
are:
    [sbull] To implement the legislative mandate in section 401(a) of 
the Sarbanes-Oxley Act;
    [sbull] To provide investors with the information and analysis 
necessary to gain a more comprehensive understanding of the 
implications of a company's obligations and contingencies from off-
balance sheet arrangements that are neither readily

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apparent nor easily understood from a reading of the financial 
statements alone; and
    [sbull] To better inform investors of the aggregate impact of 
short- and long-term contractual obligations and contingent liabilities 
and commitments, from both on- and off-balance sheet activities, by 
presenting a total picture in a single location.

With a greater understanding of off-balance sheet arrangements, 
contractual obligations and contingent liabilities and commitments, 
investors should be better able to understand how a company conducts 
significant aspects of its business (including financing), to assess 
the quality of earnings and to understand the risks that are not 
apparent on the face of the financial statements.

B. Off-Balance Sheet Arrangements

1. Background
    Off-balance sheet arrangements often are used to provide financing, 
liquidity, market or credit risk support or to engage in leasing, 
hedging or research and development services. Some companies use off-
balance sheet arrangements to obtain financing at a lower cost of 
capital than otherwise would be available to a company. Another common 
use of off-balance sheet arrangements is to allocate risks among third 
parties. Off-balance sheet arrangements may involve the use of complex 
structures, including structured finance or special purpose entities, 
to facilitate a company's transfer of, or access to, assets. In many 
cases, the transferor of assets has some continuing involvement with 
the transferred assets that may assume different forms, such as 
financial guarantees, retained interests, keepwell agreements \32\ or 
other contingent arrangements designed to reduce risks to the special 
purpose entities or other third parties. The use of off-balance sheet 
arrangements may play a significant role in the continued availability 
of liquidity and capital resources for the transferor of assets. It 
also may be a source of potential risks to a company's future liquidity 
or results of operations.
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    \32\ A ``keepwell agreement'' includes any agreement or 
undertaking under which a company is, or would be, obligated to 
provide or arrange for the provision of funds or property to an 
affiliate or third party.
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    One common off-balance sheet arrangement is used for selling 
financial assets through a process known as securitization.\33\ For 
example, a company may have loans receivable or trade accounts 
receivable recorded on its books that it wishes to sell in order to 
generate liquidity, to transfer the risk of defaults to other parties 
or to protect itself against changes in interest rates. To securitize 
its receivables, a company sponsors the establishment of entities that 
are commonly known as special purpose entities. Once a special purpose 
entity has been established, it purchases the receivables from the 
company with cash proceeds received from issuing debt or equity 
securities, backed by the cash flows from the receivables, to 
interested investors. The company that sold the receivables to the 
special purpose entity may be required to provide financial support to 
the special purpose entity. For example, the company may agree to 
repurchase receivables from the special purpose entity if the 
receivables are in default, or the company may guarantee a specified 
level of cash flows on the receivables held by the special purpose 
entity. Alternatively, the sponsoring company may retain a subordinated 
interest in a pool of receivables, so that the senior interests have a 
cushion in the event that a portion of receivables are in default. 
Accordingly, the company that sold the receivables may continue to have 
certain obligations to the special purpose entity or a continuing 
interest in, and risk related to, the transferred assets. Depending on 
the nature of the obligations and the related accounting treatment 
under GAAP, the company's financial statements may not fully reflect 
the company's obligations in respect of the special purpose entity or 
its arrangements.
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    \33\ The term ``securitization'' refers to the process of 
transforming financial assets into securities.
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    Transactions with special purpose entities commonly are structured 
so that the company that establishes or sponsors the special purpose 
entity and engages in transactions with it is not required to 
consolidate the special purpose entity into its financial statements 
under GAAP. The determination of whether or not to consolidate a 
special purpose entity begins with an analysis of whether the sponsor 
has a controlling financial interest in a special purpose entity.\34\ 
Under GAAP, the usual condition for a controlling financial interest is 
the ownership of a majority voting interest.\35\ The theory underlying 
consolidation is that ``boundaries between separate corporate entities 
must be ignored to report the business carried on by a group of 
affiliated corporations as the economic and financial whole that it 
actually is.''\36\ Off-balance sheet arrangements, however, often are 
structured so that the sponsor does not have a controlling financial 
interest because the sponsor neither owns a majority voting interest, 
nor exercises control over the management of the special purpose 
entity. For example, a special purpose entity may be a legal entity, 
such as a trust, that does not issue voting stock. In addition, the 
activities and business decisions of the management of a special 
purpose entity may be subject to legally imposed limitations and 
therefore the control traditionally contemplated by GAAP may not exist.
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    \34\ See Accounting Research Bulletin No. 51, Consolidated 
Financial Statements (Aug. 1959), paragraph 1.
    \35\ See FASB SFAS No. 94, Consolidation of all Majority-Owned 
Subsidiaries (Oct. 1987), paragraph 13 (amending paragraph 2 of 
Accounting Research Bulletin No. 51).
    \36\ Id. at paragraph 30.
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    Accounting standard setters in the U.S. are currently reevaluating 
the accounting guidance for consolidation of special purpose 
entities.\37\ Regardless of current standards for consolidation and 
regardless of how those standards change as a result of the ongoing 
reevaluation, disclosure of off-balance sheet arrangements is vital to 
investor understanding.
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    \37\ See FASB Exposure Draft, Proposed Interpretation, 
Consolidation of Certain Special-Purpose Entities (June 2002).
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2. Off-Balance Sheet Arrangements Covered Under the Proposals
    In light of the increasing complexity of off-balance sheet 
arrangements and the plain language of section 401(a) of the Sarbanes-
Oxley Act,\38\ we believe that the proposed disclosure should address a 
wide variety of arrangements. Accordingly, the proposed rules define 
the term ``off-balance sheet arrangement'' as any transaction, 
agreement or other contractual arrangement to which an entity that is 
not consolidated with the registrant is a party, under which the 
registrant, whether or not a party to the arrangement, has, or in the 
future may have:
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    \38\ Pub. L. 107-204 sec. 401 [15 U.S.C. 78m(j)].
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    [sbull] Any obligation under a direct or indirect guarantee or 
similar arrangement;
    [sbull] A retained or contingent interest in assets transferred to 
an unconsolidated entity or similar arrangement;
    [sbull] Derivatives, to the extent that the fair value thereof is 
not fully reflected as a liability or asset in the financial 
statements; or
    [sbull] Any obligation or liability, including a contingent 
obligation or liability, to the extent that it is not fully

[[Page 68058]]

reflected in the financial statements (excluding the footnotes 
thereto).\39\

    \39\ See proposed item 303(c)(3) of regulation S-B [17 CFR 
228.303(c)(3)]; proposed item 303(a)(4)(iii) of regulation S-K [17 
CFR 229.303(a)(4)(iii)]; proposed item 5.E.3 of form 20-F [17 CFR 
249.220f]; and proposed general instruction 7(iii) of form 40-F [17 
CFR 249.240f].
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This definition could encompass arrangements between a company and an 
entity conducting off-balance sheet activities, as well as arrangements 
between that entity and third parties and between the company and third 
parties.\40\
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    \40\ For example, a loan agreement entered into by an entity 
unconsolidated with the registrant or third party that benefits from 
a pre-existing guarantee or keepwell agreement of the registrant 
would be included within the definition whether or not the 
registrant is a party to the loan agreement.
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    The proposed definition of off-balance sheet arrangements slightly 
diverges from the exact language of section 401(a) of the Sarbanes-
Oxley Act. For example, the proposed definition refers to ``any 
obligation, including a contingent obligation, that is not fully 
reflected in the financial statements,'' whereas section 401(a) refers 
to ``obligations (including contingent obligations), and other 
relationships of the issuer with unconsolidated entities or other 
persons.'' The proposed definition is more focused than the language of 
section 401(a) in order to aid companies in disclosing off-balance 
sheet arrangements that warrant more focused and precise 
disclosure.\41\ An overly broad definition could elicit unnecessarily 
voluminous and repetitive disclosure.\42\
    Another aspect of the proposals that is not explicitly stated in 
the Sarbanes-Oxley Act is that the arrangements are contractual. We 
believe that the contemplated arrangements would be contractual and 
that it is appropriate to include them within our policy regarding MD&A 
disclosure of preliminary negotiations. Therefore, the proposals 
include an instruction that no obligation to make disclosure of an off-
balance sheet arrangement shall arise until an unconditionally binding 
definitive agreement, subject only to customary closing conditions 
exists or, if there is no such agreement, when settlement of the 
transaction occurs.\43\ That proposed instruction is consistent with 
the Commission policy set forth in an interpretive release in 1989 on 
disclosure of preliminary negotiations for the acquisition or 
disposition of assets not in the ordinary course of business.\44\ In 
the 1989 Interpretive Release, the Commission stated that, ``where 
disclosure is not otherwise required, and has not otherwise been made, 
the MD&A need not contain a discussion of the impact of [preliminary 
negotiations for the acquisition and or disposition of assets not in 
the ordinary course of business] where, in the registrant's view, 
inclusion of such information would jeopardize completion of the 
transaction.''\45\
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    \41\ Some arrangements that could be characterized as ``off-
balance sheet'' are already subject to disclosure requirements. For 
example, we are proposing to exclude from the definition 
``contingent liabilities arising out of litigation, arbitration or 
regulatory actions (not otherwise related to off-balance sheet 
arrangements).'' See proposed item 303(c)(3)(iv) of regulation S-B 
[17 CFR 228.303(c)(3)(iv)]; proposed item 303(a)(4)(iii)(D) of 
regulation S-K [17 CFR 229.303(a)(4)(iii)(D)]; proposed item 
5.E.3(d) of form 20-F [17 CFR 249.220f]; and proposed general 
instruction 7(iii)(D) of form 40-F [17 CFR 249.240f].
    \42\ Generally accepted accounting principles address situations 
involving off-balance sheet arrangements in many differing contexts 
(See, e.g., FASB SFAS No. 5, Accounting for Contingencies (Mar. 
1975); FASB SFAS No. 13, Accounting for Leases (Nov. 1976); FASB 
SFAS No. 47, Disclosure of Long-Term Obligations (Mar. 1981); and 
FASB SFAS No. 129, Disclosure of Information about Capital Structure 
(Feb. 1997)). We do not intend for those generally accepted 
accounting principles to limit or modify the breadth of the proposed 
definition of ``off-balance sheet arrangement.''
    \43\ See proposed Instruction 1 to paragraph (c) of item 303 of 
regulation S-B [17 CFR 228.303(c)]; proposed instruction 13 to 
paragraph 303(a) of item 303 of regulation S-K [17 CFR 229.303(a)]; 
proposed instruction 1 to item 5.E. of form 20-F [17 CFR 249.220f], 
and proposed general instruction 7(iv) to form 40-F [17 CFR 
249.240f].
    \44\ See Release No. 33-6835 (May 18, 1989) [54 FR 22427]. 
Hereinafter referred to as ``1989 Interpretive Release.''
    \45\ Id. at 22436.
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    The proposed definition specifically identifies four 
characteristics of off-balance sheet arrangements. First, the proposed 
definition addresses any obligation under a direct or indirect 
guarantee or similar arrangement.\46\ GAAP currently requires 
disclosure in the footnotes to the financial statements of the nature 
and amount of the guarantee even though the possibility of loss may be 
remote.\47\ We believe that, with regard to off-balance sheet 
arrangements involving guarantees, MD&A disclosure is warranted in 
addition to footnote disclosure when the possibility of loss is higher 
than remote.\48\ Second, the proposed definition includes off-balance 
sheet arrangements that involve a retained or contingent interest in 
assets transferred to an unconsolidated entity.\49\ Those interests may 
be used to provide credit enhancement to a special purpose entity and 
can subsequently have a material effect on a registrant's results of 
operations or liquidity. Third, the proposed definition includes 
derivatives that are not fully reflected as liabilities or assets in 
the financial statements.\50\ That item is designed to capture, for 
example, derivatives that are classified as stockholder's equity under 
GAAP.\51\
---------------------------------------------------------------------------

    \46\ See proposed item 303(c)(3)(i) of regulation S-B [17 CFR 
228.303(c)(3)(i)]; proposed item 303(a)(4)(iii)(A) of regulation S-K 
[17 CFR 229. 303(a)(4)(iii)(A)]; proposed item 5.E.3(a) of form 20-F 
[17 CFR 249.220f]; and proposed general instruction 7(iii)(A) of 
form 40-F [17 CFR 249.240f]. In May 2002, the FASB proposed a new 
interpretation that would affect the accounting for guarantees. See 
FASB Exposure Draft, Proposed Interpretation, Guarantor's Accounting 
and Disclosure Requirements for Guarantees, Including Indirect 
Guarantees of Indebtedness of Others (May 2002).
    \47\ See FASB SFAS No. 5, Accounting for Contingencies (Mar. 
1975), paragraph 12.
    \48\ See section II.B.3.
    \49\ See proposed item 303(c)(3)(ii) of regulation S-B [17 CFR 
228.303(c)(3)(ii)]; proposed item 303(a)(4)(iii)(B) of regulation S-
K [17 CFR 229. 303(a)(4)(iii)(B)]; proposed item 5.E.3(b) of form 
20-F [17 CFR 249.220f]; and proposed general instruction 7(iii)(B) 
of form 40-F [17 CFR 249.240f].
    \50\ See proposed item 303(c)(3)(iii) of regulation S-B [17 CFR 
228.303(c)(3)(iii)]; proposed item 303(a)(4)(iii)(C) of regulation 
S-K [17 CFR 229. 303(a)(4)(iii)(C)]; proposed item 5.E.3(c) of form 
20-F [17 CFR 249.220f]; and proposed general instruction 7(iii)(C) 
of form 40-F [17 CFR 249.240f]. The proposals are distinct from and 
are not intended to duplicate the disclosures required by item 305 
of regulation S-K [17 CFR 229.305] or FASB SFAS No. 133, Accounting 
for Derivative Instruments and Hedging Activities (June 1998).
    \51\ See FASB Emerging Issues Task Force Issue No. 00-19 
Accounting for Derivative Financial Instruments Indexed to, and 
Potentially Settled in, a Company's Own Stock (Jan. 2001).
---------------------------------------------------------------------------

    The proposed definition also includes any obligation or liability, 
including a contingent obligation or liability, to the extent that it 
is not ``fully reflected'' on the face of the financial statements.\52\ 
This item is designed to include certain contingent liabilities that 
would not be classified as guarantees under GAAP and that are not 
recorded at fair value as of the date of the financial statements.\53\ 
For purposes of the proposed definition, obligations or liabilities 
that are not considered to be fully reflected on the face of financial 
statements include:
---------------------------------------------------------------------------

    \52\ See proposed item 303(c)(3)(iv) of regulation S-B [17 CFR 
228.303(c)(3)(iv)]; proposed item 303(a)(4)(iii)(D) of regulation S-
K [17 CFR 229. 303(a)(4)(iii)(D)]; proposed item 5.E.3(d) of form 
20-F [17 CFR 249.220f]; and proposed general instruction 7(iii)(D) 
of form 40-F [17 CFR 249.240f].
    \53\ See, e.g., FASB Exposure Draft, Proposed Interpretation, 
Guarantor's Accounting and Disclosure Requirements for Guarantees, 
Including Indirect Guarantees of Indebtedness of Others (May 2002), 
paragraphs A8-A9.
---------------------------------------------------------------------------

    [sbull] Obligations that are not classified as a liability 
according to GAAP;\54\
---------------------------------------------------------------------------

    \54\ See FASB, Statement of Financial Accounting Concepts No. 6, 
Elements of Financial Statements (Dec. 1985), paragraphs 35-40.
---------------------------------------------------------------------------

    [sbull] Contingent liabilities which, as of the date of the 
financial statements, are not probable or, if probable, are not 
reasonably estimable;\55\ or
---------------------------------------------------------------------------

    \55\ See FASB SFAS No. 5, Accounting for Contingencies (Mar. 
1975), paragraph 8.
---------------------------------------------------------------------------

    [sbull] Liabilities as to which the amount recognized in the 
financial statements is

[[Page 68059]]

less than the reasonably possible maximum exposure to loss under the 
obligation as of the date of the financial statements.\56\
    The last bullet point includes within the scope of the proposed 
definition of off-balance sheet arrangements contingent liabilities 
that are partially accrued according to GAAP, but excludes liabilities 
recorded at fair value as of the date of the financial statements. For 
example, GAAP requires an accrual for a loss if information available 
prior to issuance of the financial statements indicates that it is 
probable that a liability has been incurred and the amount of the loss 
can be reasonably estimated.\57\ In some instances where a liability is 
probable, a company can reasonably estimate a range of losses. A 
company may determine that one amount within the range is more probable 
than any other amount within the range. FASB interpretation no. 14 
states that in that situation, a company should accrue its best 
estimate within the range and disclose in the notes to the financial 
statements the additional exposure to loss if there is at least a 
reasonable possibility of loss in excess of the amount accrued.\58\ In 
that case, the contingent obligation would fall within the scope of the 
proposed definition because the amount accrued reflects only the most 
probable estimate, but does not reflect other probabilities of losses 
as of the date of the financial statements.
---------------------------------------------------------------------------

    \56\ See FASB Interpretation No. 14, Reasonable Estimation of a 
Loss (Sept. 1976), paragraph 3.
    \57\ See FASB SFAS No. 5, Accounting for Contingencies (Mar. 
1975), paragraph 8.
    \58\ See FASB Interpretation No. 14, Reasonable Estimation of a 
Loss (Sept. 1976), paragraph 3.
---------------------------------------------------------------------------

    In contrast, a liability is considered to be fully reflected in the 
financial statements, and therefore outside the scope of the proposed 
definition, if it is recorded at its fair value. The fair value of a 
liability represents the amount at which a liability could be incurred 
or settled in a current transaction between willing parties other than 
in a forced or liquidation sale.\59\ To determine fair value of a 
liability, management often must make an estimate of the resources that 
a company will have to sacrifice to settle the liability.\60\ That 
estimate is the expected present value of the liability, and 
accordingly reflects the present value of all probabilities of all 
possible outcomes within a range. Because contingent liabilities 
recorded at fair value reflect the present value of all probabilities 
of all possible outcomes, as opposed to the most probable estimate 
within a range, they are considered to be fully reflected in the 
financial statements. For example, in some circumstances a company is 
required to recognize certain liabilities, such as derivatives and 
recourse obligations, at fair value. Under the proposed definition of 
off-balance sheet arrangement, those liabilities would be considered to 
be fully reflected in the financial statements, and outside of the 
scope of the proposed definition, even though the fair value of those 
liabilities may substantially increase in the future in response to 
changing events or circumstances.\61\
---------------------------------------------------------------------------

    \59\ See FASB SFAS No. 107, Disclosures about Fair Value of 
Financial Instruments (Dec. 1991), paragraph 5.
    \60\ See Id. at paragraph 11.
    \61\ While not within the scope of the proposed definition of 
off-balance sheet arrangements, existing MD&A disclosure rules 
require disclosure of known trends, demands, commitments, events or 
uncertainties that are reasonably likely to have a material effect 
on the registrant's financial condition, changes in financial 
condition and results of operations. In addition, disclosure of 
assets and liabilities recorded at fair value currently is required 
with respect to a registrant's market risk. See, e.g., item 305 of 
regulation S-K [17 CFR 229.305].
---------------------------------------------------------------------------

3. Proposed Disclosure Threshold
    The structure of an off-balance sheet arrangement is not as 
important as the effects that the off-balance sheet arrangement may 
have on a company. Consistent with the language in section 401(a) of 
the Sarbanes-Oxley Act, the threshold for disclosure of off-balance 
sheet arrangements falling within the proposed definition is whether 
they ``may have a current or future material effect on the company's 
financial condition, changes in financial condition, results of 
operations, revenues or expenses, liquidity, capital expenditures or 
capital resources.''\62\ The proposed disclosure would be required if 
management determines either that an off-balance sheet arrangement is 
material in the current period or that it may become material in the 
future. Disclosure would not be required for off-balance sheet 
arrangements where the likelihood of either the occurrence of an event, 
or the materiality of its effect, is remote.\63\
---------------------------------------------------------------------------

    \62\ See proposed item 303(c)(1) of regulation S-B [17 CFR 
228.303(c)(1)]; proposed item 303(a)(4)(i) of regulation S-K [17 CFR 
229. 303(a)(4)(i)]; proposed item 5.E.1 of form 20-F [17 CFR 
249.220f]; and proposed general instruction 7.(i) of form 40-F [17 
CFR 249.240f].
    \63\ Id. While this exclusion is not present in section 401(a) 
of the Sarbanes-Oxley Act, we believe that the exclusion is 
consistent with that legislative mandate and that it would aid 
companies in applying the rule to provide meaningful disclosure.
---------------------------------------------------------------------------

    In the 1989 interpretive release, the Commission stated that a 
registrant has a duty to disclose prospective information in its MD&A 
where a trend, demand, event, commitment or uncertainty is both 
presently known to management and reasonably likely to have future 
material effects on the registrant's financial condition or results of 
operations.\64\ Therefore, ``reasonably likely'' is the existing 
disclosure threshold under which information that could have a material 
effect on financial condition, changes in financial condition or 
results of operations must be included in MD&A.\65\ The Commission also 
stated that ``[r]egistrants preparing their MD&A disclosure should 
determine and carefully review what trends, demands, commitments, 
events or uncertainties are known to management.''\66\ According to the 
1989 interpretive release, if management were unable to determine the 
reasonable likelihood of the occurrence of a future event or the 
materiality of its effect, then disclosure would be required.\67\
    The 1989 interpretive release also stated that the probability/
magnitude test for materiality approved by the Supreme Court in Basic 
v. Levinson \68\ is inapposite to MD&A disclosure.\69\ In articulating 
the probability/magnitude test, the Supreme Court stated that the 
materiality of speculative or contingent information or events ``will 
depend at any given time upon the balancing of both the indicated 
probability that the event will occur and the anticipated magnitude of 
the event in light of the totality of the company activity.''\70\ In 
contrast, disclosure of prospective information in MD&A does not depend 
upon the balancing of probability and magnitude because the MD&A rules 
and

[[Page 68060]]

interpretive guidance specify the level of probability that would 
require disclosure of prospectively material information.
---------------------------------------------------------------------------

    \64\ See release no. 33-6835 (May 18, 1989) [54 FR 22427].
    \65\ In the January 2002 Commission statement, we indicated our 
view that ``reasonably likely'' is a lower disclosure threshold than 
``more likely than not.'' See release no. 33-8056, FR-61 (Jan. 22, 
2002) [67 FR 3746].
    \66\ See release no. 33-6835 (May 18, 1989) [54 FR 22427].
    \67\ Id. at 22430. The Commission identified two assessments 
management must make where a trend, demand, commitment, event or 
uncertainty is known: (1) Is the known trend, demand, commitment, 
event or uncertainty likely to come to fruition? If management 
determines that it is not reasonably likely to occur, no disclosure 
is required. (2) If management cannot make that determination, it 
must evaluate objectively the consequences of the known trend, 
demand, commitment, event or uncertainty, on the assumption that it 
will come to fruition. Disclosure is then required unless management 
determines that a material effect on the registrant's financial 
condition or results of operations is not reasonably likely to 
occur.
    \68\ 485 U.S. 224 (1988).
    \69\ See release no. 33-6835 (May 18, 1989) [54 FR 22427 at fn. 
27].
    \70\ Basic at 238, (quoting SEC v. Texas Gulf Sulphur Co., 401 
F. 2d 833, 849 (2nd Cir. 1968)).
---------------------------------------------------------------------------

    We read the legislative mandate in the Sarbanes-Oxley Act as 
suggesting a lower disclosure threshold for prospectively material 
information related to off-balance sheet arrangements. Instead of 
adopting the ``reasonably likely'' standard, it directs us to adopt a 
rule to require disclosure of items that ``may'' have a material 
current or future effect.\71\ We believe that an appropriate 
interpretation of the disclosure threshold is best captured by the 
concept of ``remoteness.'' Accordingly, the proposals would require 
disclosure of off-balance sheet arrangements under circumstances where 
management concludes that the likelihood of the occurrence of a future 
event and its material effect is higher than remote.\72\ In other 
words, an off-balance sheet arrangement ``may'' have a current or 
future material effect, and disclosure would be required, unless 
management determines that the occurrence of an event and the 
materiality of its effect is outside of the realm of reasonable 
possibility.\73\
    To apply the proposed disclosure threshold, management must make 
assessments similar to those required for current MD&A disclosure of 
known trends, demands, commitments, events or uncertainties.\74\ Under 
the proposed disclosure threshold, management first must identify and 
carefully review the registrant's direct or indirect guarantees, 
retained interests, equity-linked or -indexed derivatives and 
obligations (including contingent obligations) that are not fully 
reflected on the face of the financial statements. Second, management 
must assess the likelihood of the occurrence of any known trend, 
demand, commitment, event or uncertainty that could either require 
performance of a guarantee or other obligation, or require the 
registrant to recognize an impairment. If management concludes that the 
likelihood of occurrence is remote, then no disclosure would be 
required under the proposed rules.\75\ If management cannot make that 
determination, it would have to evaluate objectively the consequences 
of the known trend, demand, commitment, event or uncertainty on the 
assumption that it will come to fruition. Disclosure then would be 
required unless management concludes that likelihood of the event 
having a material effect is remote. Consistent with other disclosure 
threshold determinations that management must make in drafting MD&A, 
the assessment of remoteness must be objectively reasonable, viewed as 
of the time the determination is made.\76\
---------------------------------------------------------------------------

    \71\ Pub. L. 107-204 sec. 401(a) [15 U.S.C. 78m(j)].
    \72\ GAAP requires disclosure of some information about off-
balance sheet arrangements in footnotes to the financial statements. 
See, e.g., fn. 41. While parts of the proposed MD&A disclosure may 
overlap the disclosure presented in the footnotes to the financial 
statements, the proposed MD&A disclosure is designed to provide more 
comprehensive information and analysis than that which is provided 
in the footnotes. We believe this possible overlap to be warranted 
because it is consistent with our long-standing position that the 
financial statements and accompanying footnotes alone may be 
insufficient for an investor to judge the quality of earnings and 
the likelihood that past performance is indicative of future 
performance. See release no. 33-6711 (April 17, 1987) [52 FR 13715].
    \73\ ``Remote'' and ``reasonably possible'' are long-standing 
probability thresholds used in financial disclosure. See FASB SFAS 
No. 5, Accounting for Contingencies (Mar. 1975).
    \74\ While this proposal lowers the disclosure threshold for 
prospectively material information with respect to off-balance sheet 
arrangements, we are not proposing to lower the pre-existing 
``reasonably likely'' threshold for other MD&A disclosure 
requirements.
    \75\ Even if management determines that the likelihood of the 
occurrence of an event is remote, disclosure may be required if the 
information is otherwise material under the probability/magnitude 
test. See Securities Act Rule 408 [17 CFR 230.408] and Exchange Act 
Rule 12b-20 [17 CFR 240.12b-20].
    \76\ See release no. 33-6835 (May 18, 1989) [54 FR 22427].
---------------------------------------------------------------------------

4. Proposed Disclosure About Off-Balance Sheet Arrangements
    The proposals explicitly require a registrant to disclose the facts 
and circumstances that provide investors with a clear understanding of 
the registrant's business activities, financial arrangements and 
financial statements.\77\ To filter out disclosure of insignificant 
details, the proposals require disclosure of enumerated items only to 
the extent necessary to an understanding of the effect of the off 
balance sheet arrangements on the registrant's financial condition, 
changes in financial condition, revenues and expenses, results of 
operations, liquidity, capital expenditures and capital resources.\78\
---------------------------------------------------------------------------

    \77\ See proposed item 303(c) of regulation S-B [17 CFR 
228.303(c)]; proposed item 303(a)(4) of regulation S-K [17 CFR 229. 
303(a)]; proposed item 5.E of form 20-F [17 CFR 249.220f]; and 
proposed general instruction 7 of form 40-F [17 CFR 249.240f].
    \78\ Id.
---------------------------------------------------------------------------

    Under the proposals, a registrant would have to disclose the nature 
and business purpose of the off-balance sheet arrangements.\79\ This 
disclosure should explain to investors why and how a registrant engages 
in off-balance sheet arrangements. For example, a registrant may 
indicate that the arrangements enable the company to lease certain 
facilities rather than acquire them, where the latter would require the 
registrant to recognize a liability for the financing. Other possible 
disclosure under this proposed requirement may indicate that the off-
balance sheet arrangement enables the registrant to readily obtain cash 
through sales of groups of loans to a trust; to finance inventory, 
transportation or research and development costs without recognizing a 
liability; or to lower borrowing costs of affiliates by extending 
guarantees to their creditors.
---------------------------------------------------------------------------

    \79\ See proposed item 303(c)(1)(i) of regulation S-B [17 CFR 
228.303(c)(1)(i)]; proposed item 303(a)(4)(i)(A) of regulation S-K 
[17 CFR 229. 303(a)(4)(i)(A)]; proposed item 5.E.1(a) of form 20-F 
[17 CFR 249.220f]; and proposed general instruction 7(i)(A) of form 
40-F [17 CFR 249.240f].
---------------------------------------------------------------------------

    In addition, a registrant would have to disclose, to the extent 
material to an understanding of the proposed disclosure, the 
significant terms and conditions of the arrangements.\80\ This 
disclosure requirement may include disclosure of the terms of credit or 
liquidity enhancement provided by a registrant, leases, limitations on 
the activities or life of a special purpose entity, contracts between 
the registrant and a special purpose entity for goods or services or 
specific rights of third parties to participate in the management of a 
special purpose entity. This proposed disclosure requirement applies to 
arrangements to which a registrant is a party and to arrangements under 
which the registrant may have a direct or contingent obligation even 
though the company is not a party to the arrangement.\81\ That 
disclosure should inform investors of the significant terms and 
conditions of any arrangements that may implicate a company's pre-
existing guarantees, keepwell agreements or other arrangements. Terms 
and conditions that are not necessary to an understanding of the 
disclosure required under the proposals are not required to be 
disclosed.
---------------------------------------------------------------------------

    \80\ Id.
    \81\ See supra fn. 40.
---------------------------------------------------------------------------

    The proposals would require a registrant to disclose the nature and 
amount of the total assets and total obligations and liabilities 
(including contingent obligations and liabilities) of an entity in 
which off-balance sheet activities are conducted.\82\ This disclosure 
should provide the information that investors need to

[[Page 68061]]

understand the dynamics and business activities of a registrant's off-
balance sheet arrangements. For example, a registrant would have to 
identify the total amount of assets that it transferred to the off-
balance sheet entity, amounts receivable or payable and any debt 
obligations incurred by the entity. This information also should 
provide insight into an off-balance sheet entity's risk exposure, which 
in turn could expose the registrant to material risk.
---------------------------------------------------------------------------

    \82\ See proposed item 303(c)(1)(ii) of regulation S-B [17 CFR 
228.303(c)(1)(ii)]; proposed item 303(a)(4)(i)(B) of regulation S-K 
[17 CFR 229.303(a)(4)(i)(B)]; proposed item 5.E.1(b) of form 20-F 
[17 CFR 249.220f]; and proposed general instruction 7(i)(B) of form 
40-F [17 CFR 249.240f].
---------------------------------------------------------------------------

    The proposed disclosure would provide investors with insight into 
the overall magnitude of a company's off-balance sheet activities, the 
specific impact of the arrangements on a registrant and the 
circumstances that could cause material contingent obligations or 
liabilities to come to fruition. Specific disclosure would be required 
of:
    [sbull] The amounts of revenues, expenses, and cash flows arising 
from the arrangements;
    [sbull] The nature and total amount of any interests retained, 
securities issued and other indebtedness incurred; and
    [sbull] The nature and amount of any other obligations or 
liabilities (including contingent obligations or liabilities) of the 
registrant arising from the arrangements that are, or may become, 
material and the triggering events or circumstances that could cause 
them to arise.\83\
---------------------------------------------------------------------------

    \83\ See proposed item 303(c)(1)(iii) of regulation S-B [17 CFR 
228.303(c)(1)(iii)]; proposed item 303(a)(4)(i)(C) of regulation S-K 
[17 CFR 229.303(a)(4)(i)(C)]; proposed item 5.E.1(c) of form 20-F 
[17 CFR 249.220f]; and proposed general instruction 7(i)(C) of form 
40-F [17 CFR 249.240f].

For example, this disclosure includes identification of the class and 
amount of any debt or equity securities issued by the registrant, 
either to the entity or to third parties, amounts of any guarantees, 
lines of credit, standby letters of credit, take-or-pay contracts or 
throughput contracts. This proposed disclosure requirement also 
includes provisions in financial guarantees or commitments, debt or 
lease agreements or other arrangements that could trigger a requirement 
for an early payment, additional collateral support, changes in terms, 
acceleration of maturity or the creation of an additional financial 
obligation. In addition, the proposals require disclosure of the 
circumstances under which the registrant's obligations and liabilities 
(including contingencies) could arise, such as adverse changes in the 
registrant's credit rating, financial ratios, earnings, cash flows, or 
stock price, or changes in the value of underlying, linked or indexed 
assets.\84\
---------------------------------------------------------------------------

    \84\ Id.
---------------------------------------------------------------------------

    Under the proposals, a registrant would have to provide 
management's analysis of the material effects of the off-balance sheet 
arrangements and resulting obligations and liabilities on the 
registrant's financial condition, changes in financial condition, 
revenues or expenses, results of operations, liquidity, capital 
expenditures and capital resources.\85\ Possible disclosure may include 
a discussion of the amounts of gains or losses that were derived from 
sales of assets to special purpose entities in current and past 
periods, including the reasons for changes from period to period. If 
necessary, a registrant also may be required to disclose changes in the 
amount of third-party at-risk equity of special purpose entities and 
the material consequences of those changes. To adequately inform 
investors of the effect an off-balance sheet arrangement on liquidity 
and capital resources, a registrant may have to disclose that an off-
balance sheet arrangement requires the registrant to maintain a certain 
balance of liquid assets for an extended period of time. In that 
instance, the disclosure should include the amount and source of the 
assets required to be maintained and how that restriction on capital 
resources will affect ongoing operations. To inform investors of the 
material effects of the contingent obligations that arise from off-
balance sheet arrangements, a registrant would be required to disclose 
the amount of assets that may be required to settle any contingent 
obligation, the potential sources of necessary funding and whether or 
not circumstances indicate that a contingency will come to fruition.
---------------------------------------------------------------------------

    \85\ See proposed item 303(c)(1)(iv) of regulation S-B [17 CFR 
228.303(c)(1)(iv)]; proposed item 303(a)(4)(i)(D) of regulation S-K 
[17 CFR 229.303(a)(4)(i)(D)]; proposed item 5.E.1(d) of form 20-F 
[17 CFR 249.220f]; and proposed general instruction 7(i)(D) of form 
40-F [17 CFR 249.240f].
---------------------------------------------------------------------------

    The proposed analytical disclosure should provide investors with 
management's insight into the impact and proximity of the potential 
risks that may arise from material off-balance sheet arrangements. In 
addition, to increase investor understanding of circumstances that 
would have common effects with respect to a number of off-balance sheet 
arrangements, the proposals require registrants to disclose 
managements' analyses in the aggregate.\86\ For example, if particular 
triggering events or circumstances would either require a registrant to 
become directly obligated, or accelerate its obligations, under a 
number of off-balance sheet arrangements, and the overall obligations 
would be material, then the proposed rules would require an analysis of 
the circumstances and their aggregate effect to the extent it increases 
understanding.
---------------------------------------------------------------------------

    \86\ Id.
---------------------------------------------------------------------------

    Under the proposals, management would have to provide an analysis 
of the degree to which the registrant relies on off-balance sheet 
arrangements for its liquidity and capital resources or market risk or 
credit risk support or other benefits.\87\ This disclosure should 
provide investors with an understanding of the importance of off-
balance sheet arrangements to the continuing operations of a 
registrant's business. For example, if a registrant relies on off-
balance sheet arrangements for its liquidity and capital resources, a 
registrant may be required to disclose how often it securitizes 
financial assets, to what degree its securitizations are a material 
source of liquidity, whether it has increased or decreased 
securitizations from past periods and to explain such increase or 
decrease. If the registrant relies on off-balance sheet arrangements 
for market risk or credit risk support, disclosure may be required of 
the extent to which a group of assets has been overcollateralized and 
the extent to which the registrant has continuing exposure to loss. 
Together with the other disclosure requirements, registrants should 
provide information sufficient for investors to assess the extent of 
the risks that have been transferred and retained as a result of the 
arrangements.
---------------------------------------------------------------------------

    \87\ Id.
---------------------------------------------------------------------------

    Management also would have to discuss the effects of a termination 
or material reduction in the benefits of off-balance sheet 
arrangements.\88\ If under a contractual provision, or as a result of a 
known event, demand, commitment, trend or uncertainty, it is reasonably 
likely that an off-balance sheet arrangement that materially benefits 
the registrant will be terminated or the benefits of the arrangement 
will be materially reduced, disclosure would be required of the 
circumstances under which such termination or reduction may occur and 
the material effects.\89\ Under the proposals a registrant would have 
to disclose any contractual provisions calling for the termination or 
material reduction of an off-balance sheet arrangement. The disclosure 
would also address factors that are reasonably likely to affect the 
registrant's ability to continue using off-

[[Page 68062]]

balance sheet arrangements. For example, if a registrant's credit 
rating were to fall below a certain level, some off-balance sheet 
arrangements may require a registrant to purchase the assets or assume 
the liabilities of a special purpose entity. In addition, a change in a 
registrant's credit rating could either preclude or materially reduce 
the benefits to the registrant of engaging in off-balance sheet 
arrangements. In such cases, the registrant would have to disclose 
known circumstances that would be reasonably likely to cause its credit 
rating to fall to the specified level and discuss the material 
consequences.
---------------------------------------------------------------------------

    \88\ See proposed item 303(c)(2) of regulation S-B [17 CFR 
228.303(c)(2)]; proposed item 303(a)(4)(ii) of regulation S-K [17 
CFR 229.303(a)(4)(ii)]; proposed item 5.E.2 of form 20-F [17 CFR 
249.220f]; and proposed general instruction 7(ii) of form 40-F [17 
CFR 249.240f].
    \89\ Id.
---------------------------------------------------------------------------

Request for Comment

    [sbull] Have we appropriately tailored the proposed definition of 
the term ``off-balance sheet arrangement'' and the proposed disclosure 
to filter out disclosure that is unimportant to investors? If not, how 
should we change the proposed definition or disclosure requirements?
    [sbull] Is the proposed definition too narrow? If so, how should we 
change it to include other off-balance sheet arrangements that are 
significant to investors?
    [sbull] Is the proposed definition of an ``off-balance sheet 
arrangement'' sufficiently clear to enable registrants to determine 
which derivative instruments are included in the proposed disclosure 
requirements and which are not?
    [sbull] Is it appropriate to apply our existing policy of excluding 
preliminary negotiations from MD&A disclosure to off-balance sheet 
arrangements?
    [sbull] Is the proposed ``remote'' disclosure threshold appropriate 
and consistent with the language in section 401(a) of the Sarbanes-
Oxley Act? If not, how should we change it?
    [sbull] Would it be appropriate under the language in section 
401(a) of the Sarbanes-Oxley Act to apply the ``reasonably likely'' 
disclosure threshold applicable elsewhere in MD&A to disclosure about 
off-balance sheet arrangements? If so, should we adopt the ``reasonably 
likely'' standard for disclosure of off-balance sheet arrangements?
    [sbull] Would the application of the disparate disclosure threshold 
proposed to apply to disclosure of off-balance arrangements, in 
comparison to the ``reasonably likely'' standard used elsewhere in 
MD&A, attribute undue prominence to information about off-balance sheet 
arrangements in relation to other significant information?
    [sbull] Should we consider amending current MD&A rules to lower the 
existing ``reasonably likely'' disclosure threshold to be consistent 
with the threshold in the proposals?
    [sbull] Would the proposed disclosure threshold for prospectively 
material information related to off-balance sheet arrangements yield 
comparable disclosures among registrants?
    [sbull] Is there any basic information not required by the 
proposals that would be necessary to understand a registrant's off-
balance sheet arrangements? If so, what additional disclosure should be 
required?
    [sbull] Do the proposals provide enough flexibility to companies to 
fully and clearly describe their off-balance sheet arrangements? Would 
a more flexible approach, such as the current MD&A requirements for 
liquidity and capital resources, result in better disclosure?
    [sbull] Would a registrant be able to monitor and provide 
disclosure about arrangements to which it is not a party, yet that may 
create direct or contingent liabilities or obligations for the 
registrant?
    [sbull] Is there any management analysis not required by the 
proposals that would be necessary for an investor to gain an 
understanding of the magnitude and proximity of risk exposures and 
financial impact of a registrant's off-balance sheet arrangements? If 
so, what additional disclosure should be required?

C. Contractual Obligations and Contingent Liabilities and Commitments

    Disclosure of contractual obligations and contingent liabilities 
and commitments currently is dispersed throughout various parts of a 
registrant's filings. While section 401(a) of the Sarbanes-Oxley Act 
does not direct us to adopt a disclosure requirement, we believe that 
aggregated information about contractual obligations and contingent 
liabilities and commitments in a single location would improve 
transparency of a registrant's short- and long-term liquidity and 
capital resource needs and demands. It also would provide appropriate 
context for investors to assess the relative role of off-balance sheet 
arrangements with respect to liquidity and capital resources. We 
therefore propose to require certain registrants to include tabular 
disclosure about contractual obligations, and either tabular or textual 
disclosure about contingent liabilities and commitments in the MD&A 
section.\90\ The disclosure would include information about a 
registrant's known contractual obligations and contingent liabilities 
and commitments, encompassing both on- and off-balance sheet 
arrangements as of the latest balance sheet date.\91\ We are not 
proposing that this requirement apply to small business issuers.\92\
---------------------------------------------------------------------------

    \90\ See proposed item 303(a)(5) of regulation S-K [17 CFR 
229.303(a)(5)]; proposed item 5.F of form 20-F [17 CFR 249.220f]; 
and proposed general instruction 8 of form 40-F [17 CFR 249.240f].
    \91\ Id.
    \92\ ``Small business issuer'' is defined to mean any entity 
that (1) has revenues of less than $25,000,000; (2) is a U.S. or 
Canadian issuer; (3) is not an investment company; and (4) if a 
majority-owned subsidiary, has a parent corporation that also is a 
small business issuer. An entity is not a small business issuer, 
however, if it has a public float (the aggregate market value of the 
outstanding equity securities held by non-affiliates) of $25,000,000 
or more. See 17 CFR 228.10.
---------------------------------------------------------------------------

1. Proposed Tabular Disclosure in MD&A
    The proposed table requires disclosure of the amounts of 
contractual obligations, aggregated by type of contractual obligation, 
for at least the periods specified in the table below.\93\ To provide 
flexibility for company-specific disclosure, a registrant may either 
use the categories of obligations specified in the proposed table or 
other categories suitable for its business.\94\ The table should be 
accompanied by footnotes necessary to describe provisions that create, 
increase or accelerate obligations, or other pertinent data.
---------------------------------------------------------------------------

    \93\ See proposed item 303(a)(5)(i) of regulation S-K [17 CFR 
229.303(a)(5)(i)]; proposed item 5.F.1 of form 20-F [17 CFR 
249.220f]; and proposed general instruction 8(i) of form 40-F [17 
CFR 249.240f].
    \94\ Id.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Payments due by period
      Contractual Obligations       --------------------------------------------------------------------------------------------------------------------
                                            Total            Less than 1 year            1-3 years               3-5 years           More than 5 years
--------------------------------------------------------------------------------------------------------------------------------------------------------
[Long-Term Debt]
[Capital Lease Obligations]
[Operating Leases]

[[Page 68063]]

 
[Unconditional Purchase
 Obligations]
[Other Long-Term Obligations]
    [Total Contractual Obligations]
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Proposed Disclosure of Contingent Liabilities or Commitments
    Under the proposals, a registrant would have to disclose, either in 
tabular format or in text, the expected amount, range of amounts or 
maximum amount of contingent liabilities or commitments that are 
expected to expire in less than one year, from one to three years, from 
three to five years, and more than five years. The disclosure should 
indicate whether the amount disclosed is an expected amount or maximum 
amount if a range is not presented. The contingent liabilities or 
commitments must be aggregated by type in a manner that is suitable for 
the registrant's business. Examples of contingent liabilities or 
commitments that would be covered under the proposals are lines of 
credit, standby letters of credit, guarantees, and standby repurchase 
obligations. The disclosure should address, in footnotes to the table 
or in the text, provisions of contingent liabilities that create, 
increase or accelerate obligations, or other pertinent data.
    As with other MD&A requirements, a registrant would have to 
disclose material changes to the amounts of contractual obligations and 
contingent liabilities and commitments.\95\ The registrant would not be 
required to include the table or repeat the other proposed required 
textual disclosure in quarterly reports.\96\ Instead, the registrant 
may disclose material changes by including a discussion of the relevant 
changes.
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    \95\ See, e.g., item 303(b) of regulation S-K [17 CFR 
229.303(b)].
    \96\ See proposed instruction 7 to paragraph (b) of item 303 of 
regulation S-K [17 CFR 229.303(b)].
---------------------------------------------------------------------------

Request for Comment

    [sbull] Should we require the proposed table to be accompanied by 
additional narrative disclosure regarding liquidity and capital 
resources above and beyond that which already exists in MD&A?
    [sbull] Should we adopt definitions of ``contractual obligations'' 
and ``contingent liabilities or commitments'' If so, what should they 
be?
    [sbull] To avoid potential abuses and to promote comparable 
disclosure among companies, should we include an instruction to the 
table that would limit the extent to which a registrant may adapt the 
table to its particular circumstances? If so, what limits should we 
impose?
    [sbull] Should the proposed rules state that no disclosure is 
required with respect to the issuance of notes, drafts, acceptances, 
bills of exchange or other commercial instruments with a maturity of 
one year or less issued in the ordinary course of the registrant's 
business?

D. Presentation of Proposed Disclosure

1. Separate Disclosure Sections
    The proposals would require a registrant to present the proposed 
disclosure about off-balance sheet arrangements set apart in a 
designated section of MD&A. In contrast, a registrant may place the 
tabular and textual disclosure of known contractual obligations and 
contingent liabilities and commitments in an MD&A location that it 
deems to be appropriate. While the proposed disclosure in the separate 
section may relate to other aspects of MD&A, such as the results of 
operations or liquidity and capital resources, a distinct presentation 
of the information would highlight it for readers of MD&A and enable 
investors to more easily compare disclosure of different companies. 
Investors will often find information relating to a particular matter 
more meaningful if it is disclosed in a single location, rather than 
presented in a fragmented manner throughout the MD&A. In addition, a 
distinct presentation of each section would layer the MD&A, which would 
enable investors with varying levels of interest and financial acumen 
to easily obtain desired information.
2. Language and Format
    The proposed MD&A discussion should be presented in language and a 
format that is clear, concise and understandable. It should not be 
presented in such a manner that only an investor who is also an 
accountant or financial expert or an expert on a particular industry 
would be able to fully understand it. Boilerplate disclosures that do 
not specifically address the registrant's particular circumstances and 
operations also would not satisfy the proposed requirements. Under the 
proposals, a registrant should aggregate similar arrangements to the 
extent practicable, but the registrant must discuss important 
distinctions in terms and effects of the aggregated arrangements.\97\ 
Disclosure that could easily be transferred from year to year, or from 
company to company, with no change would neither inform investors 
adequately nor reflect the independent thinking that must accompany the 
assessment by management that is intended under the proposal.
---------------------------------------------------------------------------

    \97\ See proposed item 303(c)(1) of regulation S-B [17 CFR 
228.303(c)(1)]; proposed item 303(a)(4)(i) of regulation S-K [17 CFR 
229. 303(a)(4)(i)]; proposed item 5.E.1 of Form 20-F [17 CFR 
249.220f]; and proposed general instruction 7(i) of Form 40-F [17 
CFR 249.240f].
---------------------------------------------------------------------------

Request for Comment

    [sbull] Should we require the proposed disclosure to be presented 
in a separate MD&A section or should it be integrated into other 
closely related MD&A discussions of financial condition, changes in 
financial condition, results of operations and liquidity and capital 
resources?
    [sbull] To facilitate the layering of MD&A, should we amend the 
MD&A rules to require separate captions for the required discussions of 
results of operations, liquidity and capital resources?

E. Other MD&A Disclosure

    While certain elements of the information required by these 
proposals are subsumed by existing MD&A requirements, financial 
statement disclosure requirements and materiality standards, we believe 
that more focused and specific disclosure requirements would best 
achieve our objectives and effectuate the will of Congress. The 
proposals are intended to complement and clarify the more general MD&A 
disclosure provisions that require a registrant to provide information 
about how known trends or uncertainties affect its liquidity, capital 
resources and results of operations, and other information necessary to 
an understanding of its financial condition, changes in financial 
condition and results of operations.\98\ While that

[[Page 68064]]

disclosure mandate is general in nature, the responsive MD&A 
disclosures should be sufficiently detailed and tailored to the 
registrant's individual circumstances.\99\
---------------------------------------------------------------------------

    \98\ See item 303(a) of regulation S-K [17 CFR 229.303(a)].
    \99\ In addition to the information specifically required, a 
company would be required to provide any other information necessary 
to keep its disclosure from being materially misleading. See 
Securities Act Rule 408 [17 CFR 230.408] and Exchange Act Rule 12b-
20 [17 CFR 240.12b-20].
---------------------------------------------------------------------------

    In an effort to provide guidance to public companies, our January 
2002 statement presents a number of factors that management should 
consider to identify the trends, demands, commitments, events and 
uncertainties that require disclosure with respect to liquidity and 
capital resources.\100\ It also addresses MD&A disclosure of 
relationships and transactions with persons or entities that derive 
benefits from their non-independent relationships with the registrant 
or the registrant's related parties.\101\ We believe that existing 
disclosure requirements, including the January 2002 Commission 
statement, address disclosure in those areas. Therefore, to avoid 
unnecessary duplication of disclosure we are only proposing to codify 
the positions in our January 2002 statement as they relate to off-
balance sheet arrangements. We believe that the factors addressed in 
our January 2002 statement remain useful for management to consider in 
meeting its MD&A disclosure obligations of liquidity and capital 
resources and transactions with persons or entities that derive 
benefits from their non-independent relationships with the registrant 
or the registrant's related parties.
---------------------------------------------------------------------------

    \100\ See release No. 33-8056, FR-61 (Jan. 22, 2002) [67 FR 
3746], section II.A.1.
    \101\ Id. at section II.C.
---------------------------------------------------------------------------

    There are some transactions that, while referred to as ``off-
balance sheet arrangements,'' may not fall within the scope of the 
proposals. For example, some off-balance sheet arrangements do not 
create contingent liabilities or obligations. A registrant may 
routinely securitize financial assets without providing any recourse or 
credit or liquidity support to a special purpose entity. Existing 
requirements may require a registrant to discuss those activities in 
its MD&A discussion of liquidity and capital resources.\102\ If an off-
balance sheet arrangement does not fall within the scope of the 
proposed disclosure requirements, yet disclosure would be required 
under the other provisions of MD&A, a registrant may choose whether or 
not to provide the disclosure in the separately-captioned section 
required by this proposal. We would encourage that any such disclosure 
in the MD&A be organized so that it is most useful and understandable 
to investors.
---------------------------------------------------------------------------

    \102\ See item 303(a)(2)(ii) of regulation S-K [17 CFR 
229.303(a)(2)(ii)]. This section provides that the description of 
known material trends in capital resources must consider off-balance 
sheet financing arrangements.
---------------------------------------------------------------------------

Request for Comment

    [sbull] Should we further amend the MD&A rules to require more 
specific disclosure about liquidity and capital resources? If so, what 
specific disclosure items should we include?
    [sbull] Should we further amend the MD&A rules to require more 
specific disclosure about relationships and transactions with persons 
or entities that derive benefits from their non-independent 
relationships with the registrant or the registrant's related parties? 
If so, what specific disclosure items should we include?
    [sbull] Should we codify the factors that we identified in our 
January 2002 Commission statement for management's consideration in 
identifying the trends, demands, commitments, events and uncertainties 
that require disclosure with respect to liquidity and capital 
resources? Are there other factors that should be included in such a 
codification?

F. Application of the Proposals to Foreign Private Issuers

    The proposed MD&A disclosure requirements would apply to foreign 
private issuers \103\ that file annual reports on Form 20-F \104\ or on 
Form 40-F.\105\ Because section 401(a) of the Sarbanes-Oxley Act does 
not distinguish between foreign private issuers and U.S. companies, we 
interpret Congress' directive to the Commission to adopt rules 
requiring expanded disclosure about off-balance sheet transactions in 
annual reports filed with the Commission to apply equally to Form 20-F 
or 40-F annual reports filed by foreign private issuers as well as to 
Form 10-K or 10-KSB annual reports filed by domestic issuers.\106\
---------------------------------------------------------------------------

    \103\ A foreign private issuer is a non-U.S. company except for 
a company that has more than 50% of its outstanding voting 
securities owned by U.S. investors and has a majority of its 
officers and directors residing in or being citizens of the U.S., 
has a majority of its assets located in the U.S., or has its 
business principally administered in the U.S. See Exchange Act Rule 
3b-4 [17 CFR 240.3b-4].
    \104\ 17 CFR 249.220f.
    \105\ 17 CFR 249.240f. Form 40-F is the form used by qualified 
Canadian issuers to file their Exchange Act registration statements 
and annual reports with the Commission in accordance with Canadian 
disclosure requirements under the U.S.-Canadian Multijurisdictional 
Disclosure System (``MJDS'').
    \106\ Similarly, the Commission recently adopted rules 
pertaining to the certification requirements under section 302 of 
the Sarbanes-Oxley Act that apply to both Form 20-F and Form 40-F 
annual reports as well as to those filed on the domestic forms. See 
Release no. 33-8124 (August 29, 2002) [67 FR 57276].
---------------------------------------------------------------------------

    There are two additional reasons for applying the proposed rules to 
foreign private issuers' annual reports filed with the Commission. 
First, investors and others would enjoy the same benefits from expanded 
off-balance sheet disclosure in foreign private issuers' annual reports 
as they would from this disclosure in domestic issuers' annual reports. 
Second, for Form 20-F annual reports, the existing MD&A-equivalent 
requirements for foreign private issuers currently mirror the 
substantive MD&A requirements for U.S. companies. We believe this 
desirable policy should continue.\107\
---------------------------------------------------------------------------

    \107\ Although we revised the wording of the MD&A item in Form 
20-F in 1999, the adopting release noted that we interpret that item 
as requiring the same disclosure as item 303 of regulation S-K. See 
Release No. 33-7745 (September 28, 1999) [64 FR 53900 at 59304]. In 
addition, instruction 1 to item 5 in Form 20-F provides that issuers 
should refer to the Commission's 1989 interpretive release on MD&A 
disclosure under item 303 of regulation S-K for guidance in 
preparing the discussion and analysis by management of the company's 
financial condition and results of operations required in Form 20-F. 
See Release No. 33-6835 (May 18, 1989) [54 FR 22427].
---------------------------------------------------------------------------

    The disclosure provided by Canadian issuers that file form 40-F is 
generally that required under Canadian law. We have, however, 
supplemented these disclosure requirements with specific required items 
of information.\108\ We have proposed additional disclosure 
requirements under form 40-F as a result of the Sarbanes-Oxley 
Act.\109\ Although an issuer prepares its MD&A discussion contained in 
a form 40-F registration statement or annual report in accordance with 
Canadian disclosure standards, we believe that requiring disclosure of 
off-balance sheet arrangements in accordance with SEC rules is not 
inconsistent with the principles of the MJDS, is consistent with the 
Sarbanes-Oxley Act, and, most importantly, will provide investors with 
useful information that is comparable to that provided by U.S. and 
other foreign

[[Page 68065]]

companies that file reports under the Exchange Act.
---------------------------------------------------------------------------

    \108\ For example, under general instruction C.2 of Form 40-F, 
the issuer must usually include financial information that is 
reconciled to U.S. generally accepted accounting principles.
    \109\ We have recently proposed to amend Form 40-F to require 
disclosure concerning whether the issuer has adopted a code of 
ethics applicable to certain officers and whether it has a financial 
expert on its audit committee. See Release No. 33-8138 (October 22, 
2002) [67 FR 66208].
---------------------------------------------------------------------------

    Section 401(a) of the Sarbanes-Oxley Act also requires the 
Commission to adopt off-balance sheet disclosure rules that apply to 
``each quarterly financial report required to be filed with the 
Commission.''\110\ Since foreign private issuers are not required to 
file ``quarterly'' reports with the Commission, the proposed rules 
would not apply to Form 6-K reports submitted by foreign private 
issuers to provide copies of materials required to be made public in 
their home jurisdictions.\111\ Thus, unless a foreign private issuer 
files a Securities Act registration statement that must include interim 
period financial statements and related MD&A disclosure, it would not 
be required to update the proposed MD&A disclosure more frequently than 
annually.\112\
---------------------------------------------------------------------------

    \110\ Exchange Act section 13(j) [15 U.S.C. 78m(j)].
    \111\ A foreign private issuer must furnish under cover of Form 
6-K material information that it makes public or is required to make 
public under its home country laws or the rules of its home country 
stock exchange or that it distributes to security holders. While 
foreign private issuers may submit interim financial information 
under cover of Form 6-K, they do so pursuant to their home country 
requirements and not because of a Commission requirement to submit 
updated financial information for specified periods and according to 
specified standards. Therefore, we do not believe that a Form 6-K 
constitutes a ``periodic'' or ``quarterly'' report analogous to a 
Form 10-Q or 10-QSB for which expanded disclosure is required. We 
similarly exempted Form 6-K reports from the recently adopted 
section 302 certification requirements. See Release No. 33-8124 at 
n. 50.
    \112\ Similar to our treatment of Securities Act registration 
statements filed by domestic issuers, we are including within the 
scope of the proposals Securities Act registration statements filed 
by foreign private issuers on Forms F-1, F-2, F-3 and F-4 [17 CFR 
239.31-239.34]. Each of these registration statements references 
Form 20-F's disclosure requirements. The proposed rules would not 
apply to Securities Act registration statements filed by Canadian 
issuers under the MJDS because we believe them to be outside the 
scope of the directive in section 401(a) of the Sarbanes-Oxley Act, 
which addresses only periodic reports. These MJDS registration 
statements are based on Canadian disclosure requirements. We believe 
that extending the disclosure requirements to Securities Act 
registration statements filed under the MJDS would be contradictory 
to the policies underlying the MJDS.
---------------------------------------------------------------------------

Request for Comment

    [sbull] Should we apply the proposed rules to foreign private 
issuers' annual reports on Form 20-F or 40-F, as proposed? Or should we 
exempt these foreign private issuer annual reports from the scope of 
the proposed rules? If so, why?
    [sbull] Should we exempt Form 40-F, the MJDS annual report filed by 
qualified Canadian issuers, from the scope of the proposed rules? If 
so, why?
    [sbull] If we should require foreign private issuers to provide 
some expanded disclosure regarding off-balance sheet transactions and 
other similar items in their annual reports, should we adopt rules that 
apply different standards for foreign private issuers compared to the 
standards adopted for domestic issuers but that would be consistent 
with the Sarbanes-Oxley Act? If so, what standards would you substitute 
for the proposed rules?
    [sbull] Should we exempt form 6-K reports from the scope of the 
proposed rules, as proposed? Or should we apply the proposed rules to 
form 6-K reports that include quarterly financial statements?

G. Proposed Safe Harbor for Forward-Looking Information

    Some of the disclosure required by the proposals would require 
disclosure of forward-looking information.\113\ To encourage the type 
of information and analysis necessary for investors to understand the 
impact of off-balance sheet arrangements, the proposals include a safe 
harbor for forward-looking information.\114\ The proposed safe harbor 
explicitly applies the statutory safe harbor protections (sections 27A 
of the Securities Act and 21E of the Exchange Act) \115\ to forward-
looking information that would be required to be disclosed by the 
proposals.
---------------------------------------------------------------------------

    \113\ See, e.g., proposed item 303(c)(1)(iv) of regulation S-B 
[17 CFR 228.303(c)(1)(iv)]; proposed item 303(a)(4)(i)(D) of 
regulation S-K [17 CFR 229. 303(a)(4)(i)(D)]; proposed item 5.E.1(d) 
of Form 20-F [17 CFR 249.220f]; and proposed general instruction 
7(i)(D) of Form 40-F [17 CFR 249.240f].
    \114\ See proposed item 303(d) of regulation S-B [17 CFR 
228.303(d)]; proposed item 303(c) of regulation S-K [17 CFR 229. 
303(c)]; proposed item 5.G of Form 20-F [17 CFR 249.220f]; and 
proposed general instruction 9 of Form 40-F [17 CFR 249.240f].
    \115\ See 15 U.S.C. 77z-2 and 78u-5.
---------------------------------------------------------------------------

    The statutory safe harbors contain provisions to protect forward-
looking statements against private legal actions that are based on 
allegations of a material misstatement or omission.\116\ The statutory 
safe harbors provide three separate bases for a registrant to claim the 
protection against liability for forward-looking statements made in the 
registrant's MD&A. First, a forward-looking statement would fall within 
the safe harbors if it is identified as forward-looking and accompanied 
by meaningful cautionary statements that identify important factors 
that could cause actual results to differ materially from those in the 
forward-looking statement. Second, the safe harbors protect from 
private liability any forward-looking statement that is not material. 
Finally, the safe harbors preclude private liability if a plaintiff 
fails to prove that the forward-looking statement was made by or with 
the approval of an executive officer of the registrant who had actual 
knowledge that it was false or misleading. The statutory safe harbors 
cover statements by reporting companies, persons acting on their 
behalf, outside reviewers retained by them, and their underwriters 
(when using information from, or derived from, the companies).
---------------------------------------------------------------------------

    \116\ While the statutory safe harbors by their terms do not 
apply to forward-looking statements included in financial statements 
prepared in accordance with U.S. GAAP, they do cover MD&A 
disclosures. The statutory safe harbors would not apply, however, if 
the MD&A forward-looking statement were made in connection with: an 
initial public offering, a tender offer, an offering by a 
partnership or a limited liability company, a roll-up transaction, a 
going private transaction, an offering by a blank check company or a 
penny stock issuer, or an offering by an issuer convicted of 
specified securities violations or subject to certain injunctive or 
cease and desist actions. See 15 U.S.C. 77z-2(b) and 78u-5(b).
---------------------------------------------------------------------------

    Because we believe that it would promote more meaningful 
disclosure, we are invoking rulemaking authority under sections 27A and 
21E to ensure the application of the statutory safe harbors to the 
forward-looking statements that would be required under the proposed 
rules.\117\ The proposed safe harbors are designed to remove possible 
ambiguity about whether the statutory safe harbors would apply to some 
of the statements made in response to the proposed disclosure 
requirements. The proposed safe harbor specifies that, except for 
historical facts, some of the disclosure would be deemed to be a 
``forward looking statement'' as that term is defined in the statutory 
safe harbors.\118\ Under the proposed MD&A safe harbor, all of the 
conditions of the statutory safe harbors must be met. Accordingly, we 
urge companies preparing the proposed MD&A disclosure to consider the 
terms, conditions and scope of the statutory safe harbors in drafting 
their disclosure and to tailor the required cautionary language to the 
specific forward-looking statements being made.
---------------------------------------------------------------------------

    \117\ See proposed item 303(d)(1) of regulation S-B [17 CFR 
228.303(d)(1)]; proposed item 303(c)(i) of regulation S-K [17 CFR 
229. 303(c)(i)]; proposed item 5.G.1 of form 20-F [17 CFR 249.220f]; 
and proposed general instruction 9(i) of form 40-F [17 CFR 
249.240f].
    \118\ See proposed item 303(d)(2) of regulation S-B [17 CFR 
228.303(d)(2)]; proposed item 303(c)(ii) of regulation S-K [17 CFR 
229. 303(c)(ii)]; proposed item 5.G.2 of form 20-F [17 CFR 
249.220f]; and proposed general instruction 9(ii) of form 40-F [17 
CFR 249.240f].
---------------------------------------------------------------------------

Request for Comment

    [sbull] Should the proposed safe harbor be expanded to apply to all 
forward-looking information in MD&A, regardless of whether the 
information

[[Page 68066]]

relates to off-balance sheet arrangements?
    [sbull] Is there any need for the proposed safe harbor, or would 
the statutory safe harbors afford sufficient protection to encourage 
the type of information and analysis necessary for investors to 
understand the impact of off-balance sheet arrangements?

H. Other Safe Harbors for Forward-Looking Information

    Notwithstanding the proposed safe harbor for forward looking 
statements, the statutory safe harbor, by its terms, may be available 
for some of the disclosure required by the proposals. Companies 
preparing disclosure under the proposals that would constitute a 
forward-looking statement should consider the conditions under which 
several existing safe harbors apply. As defined in the relevant 
statutory provisions, a ``forward-looking statement'' generally is:
    [sbull] A statement containing a projection of revenues, income (or 
loss), earnings (or loss) per share, capital expenditures, dividends, 
capital structure, or other financial items;
    [sbull] A statement of the plans and objectives of management for 
future operations, including plans or objectives relating to the 
products or services of the issuer;
    [sbull] A statement of future economic performance, including any 
such statement contained in MD&A
    [sbull] Any statement of assumptions underlying or relating to any 
statement described in the three bullet points above; or
    [sbull] Any report issued by an outside reviewer retained by an 
issuer, to the extent that the report assesses a forward-looking 
statement made by the issuer.\119\
---------------------------------------------------------------------------

    \119\ See 15 U.S.C. 77z-2 and 78u-5.
---------------------------------------------------------------------------

    In addition, two Commission rules under those Acts that pre-date 
the adoption of the statutory safe harbors also provide protection for 
forward-looking statements. The Commission safe harbor rules that apply 
to forward-looking statements are Securities Act rule 175 and Exchange 
Act rule 3b-6.\120\ Under those rules, a forward-looking statement made 
by or on behalf of a registrant is deemed not to be a fraudulent 
statement if it is made in good faith and made or reaffirmed with a 
reasonable basis. The rule-based safe harbors apply to a registrant if 
it is a reporting company at the time it makes the forward-looking 
statement. These safe harbors also apply to a registrant that is not a 
reporting company, but makes the statement in a Securities Act 
registration statement \121\ or an Exchange Act registration statement. 
The safe harbors cover forward-looking statements in filed documents, 
in annual reports to shareholders \122\ and in part 1 of forms 10-Q and 
10-QSB.\123\
---------------------------------------------------------------------------

    \120\ See 17 CFR 230.175 and 17 CFR 240.3b-6.
    \121\ Thus, unlike the statutory safe harbors, the rule 175 safe 
harbor would protect MD&A forward-looking statements made in a 
registration statement or prospectus for an initial public offering.
    \122\ See Exchange Act rule 14a-3 [17 CFR 240.14a-3].
    \123\ The rule safe harbors also cover statements that reaffirm 
forward-looking statements made in those documents and forward-
looking statements made prior to filing or submission of those 
documents that are reaffirmed in those documents. In addition to the 
statutory and rule safe harbors directed at forward-looking 
statements, companies preparing the proposed MD&A disclosure also 
could be protected by the ``bespeaks caution'' legal doctrine that 
has developed through case law and is recognized by most circuit 
courts of appeal. See, e.g., Lilley v. Charren, 2001 U.S. App. LEXIS 
19430 (9th Cir. 2001); EP Medsystems, Inc. v. Echocath Inc., 235 
F.3d 865; (3d Cir. 2000); Parnes v. Gateway 2000, 122 F.3d 539 (8th 
Cir. 1997). The bespeaks caution doctrine recognizes that forecasts, 
projections and expectations must be read in context and that 
accompanying cautionary language can render a misstatement or 
omission immaterial or render a plaintiff's reliance on it 
unreasonable. For a forward-looking statement to be covered by the 
bespeaks caution doctrine, there must be adequate cautionary 
language that warns investors of the potential risks related to the 
forward-looking statement.
---------------------------------------------------------------------------

III. General Request for Comment

    The Commission is proposing these amendments to the MD&A 
requirements to improve the quality and relevance of explanatory 
disclosure about a registrant's financial condition, changes in 
financial condition, results of operations and reasonably likely 
trends, demands, commitments, events and uncertainties affecting a 
registrant. We welcome your comments. We solicit comment, both specific 
and general, upon each component of the proposals. If you would like to 
submit written comments on the proposals, to suggest additional changes 
or to submit comments on other matters that might affect the proposals, 
we encourage you to do so.

Request for Comment

    [sbull] Is the additional information elicited by the proposals 
useful to investors, other users of company disclosure and readers of a 
company's financial statements? If not, how can it be improved to 
achieve that goal?
    [sbull] In addition to the requirements we propose, are there 
particular aspects of off-balance sheet arrangements, contractual 
obligations and contingent liabilities and commitments that the 
proposals should specifically require companies to address? If so, what 
are they?
    [sbull] If the proposed disclosure would involve competitive or 
other sensitive information, are there any mechanisms that would ensure 
full and accurate disclosure while reducing a company's risk of 
competitive harm?
    [sbull] Are there aspects of the proposed disclosure that should be 
retained while other parts of the proposed disclosure are eliminated? 
We solicit comment on the desirability of adopting some sections of the 
proposed rules, but not all sections.
    Any interested person wishing to submit written comments on any 
aspect of the proposals, as well as on other matters that might have an 
impact on the proposals, is requested to do so. In addition, we request 
comment on whether any further changes to our rules and forms are 
necessary or appropriate to implement the objectives of the proposals. 
Please submit three copies of your comment letter to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. You may also submit comments 
electronically to the following e-mail address: [email protected].\124\ To help us process and review your comments more 
efficiently, comments should be sent by hard copy or e-mail, but not by 
both methods. All comments should refer to file number S7-42-02. If you 
are commenting by e-mail, include this file number in the subject line, 
as well as the name of your organization. We will make comments 
available for public inspection and copying in the Commission's public 
reference room at 450 Fifth Street, NW., Washington, DC 20549-0102. In 
addition, we will post electronically submitted comments on our 
Internet website (www.sec.gov).
---------------------------------------------------------------------------

    \124\ For more information on how to submit comments 
electronically, see www.sec.gov/rules/submitcomments.htm.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

A. Background

    The proposed amendments to regulations S-B, S-K,\125\ form 20-F and 
form 40-F contain ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\126\ We are 
submitting the proposal to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\127\

[[Page 68067]]

The titles for the collections of information are:
---------------------------------------------------------------------------

    \125\ Although we are proposing amendments to regulations S-B 
and S-K, the burden is imposed through the forms that refer to the 
disclosure regulations. To avoid a Paperwork Reduction Act inventory 
reflecting duplicative burdens, we estimate the burdens imposed by 
regulations S-B and S-K to be one hour.
    \126\ 44 U.S.C. 3501 et seq.
    \127\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Form S-1'' (OMB Control No. 3235-0065);
    (2) ``Form F-1'' (OMB Control No. 3235-0258);
    (3) ``Form SB-2'' (OMB Control No. 3235-0418);
    (4) ``Form S-4'' (OMB Control No. 3235-0324);
    (5) ``Form F-4'' (OMB Control No. 3235-0325);
    (6) ``Form 10'' (OMB Control No. 3235-0064);
    (7) ``Form 10-SB'' (OMB Control No. 3235-0419);
    (8) ``Form 20-F'' (OMB Control No. 3235-0288);
    (9) ``Form 40-F'' (OMB Control No. 3235-0381);
    (10) ``Form 10-K'' (OMB Control No. 3235-0063);
    (11) ``Form 10-KSB'' (OMB Control No. 3235-0420);
    (12) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1 
through 14a-15) and Schedule 14A'' (OMB Control No. 3235-0059);
    (13) ``Information Statements--Regulation 14C (Commission Rules 
14c-1 through 14c-7 and Schedule 14C)'' (OMB Control No. 3235-0057);
    (14) ``Form 10-Q'' (OMB Control No. 3235-0070);
    (15) ``Form 10-QSB'' (OMB Control No. 3235-0416);
    (16) ``Regulation S-K'' (OMB Control No. 3235-0071); and
    (17) ``Regulation S-B'' (OMB Control No. 3235-0417).

These regulations and forms were adopted pursuant to the Securities Act 
and the Exchange Act and set forth the disclosure requirements for 
annual and quarterly reports, registration statements and proxy and 
information statements filed by companies to ensure that investors are 
informed. The hours and costs associated with preparing, filing, and 
sending these forms constitute reporting and cost burdens imposed by 
each collection of information. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid control number.
    Under the proposals, we would require public companies to include a 
discussion of material off-balance sheet arrangements, contractual 
obligations and contingent liabilities and commitments in the MD&A 
section of their filings with the Commission. We are proposing these 
rules pursuant to the legislative mandate in section 401(a) of the 
Sarbanes-Oxley Act of 2002.\128\ Compliance with the revised disclosure 
requirements would be mandatory. There would be no mandatory retention 
period for the information disclosed, and responses to the disclosure 
requirements would not be kept confidential.
---------------------------------------------------------------------------

    \128\ Pub. L. 107-204 sec. 401(a) [15 U.S.C. 78m(j)].
---------------------------------------------------------------------------

    For purposes of the Paperwork Reduction Act, we estimate the annual 
incremental paperwork burden for all companies to prepare the 
disclosure that would be required under our proposals to be 
approximately 366,337 hours of company personnel time and a cost of 
approximately $44,795,000 for the services of outside 
professionals.\129\ That estimate includes the time and the cost of in-
house preparers, reviews by executive officers, in-house counsel, 
outside counsel, independent auditors and members of the audit 
committee.\130\
---------------------------------------------------------------------------

    \129\ For convenience, the estimated PRA hour burdens have been 
rounded to the nearest whole number, and the estimated PRA cost 
burdens have been rounded to the nearest $1,000.
    \130\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures. For Securities Act 
registration statements, we also consider additional reviews of the 
disclosure by underwriter's counsel and underwriters.
---------------------------------------------------------------------------

B. Methodology

1. Initial Calculation of Preparation Time
    We derived the above estimates first by estimating the total amount 
of time it would take to a company prepare each item of the proposed 
disclosure. We estimate that in the first year, the proposed off-
balance sheet disclosure would take 14.5 hours for annual reports and 
proxy statements, 16 hours for registration statements and 10 hours for 
quarterly reports. We estimate that in the first year, the proposed 
disclosure of contractual obligations and contingent liabilities would 
take 7.5 hours for annual reports and proxy statements, 8.5 hours for 
registration statements and 3 hours for quarterly reports. Our 
estimates for the preparation time for all of the proposed disclosure 
items in the first year are 22 hours for annual reports and proxy 
statements, 24.5 hours for registration statements and 15.5 hours for 
quarterly reports.
    Because the Paperwork Reduction Act estimates represent the average 
burden over a three-year period, we adjusted the first-year preparation 
time estimates to account for the fact that companies should become 
more efficient at preparing the proposed disclosure after the first 
year. Accordingly, to calculate an estimate of the amount of time it 
would take to prepare the proposed disclosure in year two, we assumed 
that the amount of time to prepare the proposed disclosure would be 
reduced by 20%. In year three, we assumed the amount of time to prepare 
the proposed disclosure would be reduced by 10%. After we averaged the 
estimated preparation times for the three-year period and rounded to 
the nearest whole-number, the estimates for the amount of time it would 
take companies to prepare the disclosure are 18 hours for annual 
reports and proxy statements, 21 hours for registration statements and 
11 hours for quarterly reports.
2. Adjustments to Estimated Preparation Times
    Since not all companies engage in off-balance sheet arrangements, 
we made adjustments to estimated preparation time. Based on a review of 
a random sample of filings, we estimate that 80% of public companies 
engage in off-balance sheet arrangements.\131\ Therefore, we estimate 
that the same percentage of public companies would have to disclose 
off-balance sheet arrangements under the proposals. To reflect the fact 
that not all of the forms for which we estimate a burden would include 
the proposed new disclosure, we reduced the incremental burden hour 
estimates for the affected forms accordingly.
---------------------------------------------------------------------------

    \131\ The sample consisted of approximately 175 firms listed on 
the NYSE and the Nasdaq that disclosed securitizations, guarantees, 
operating leases or other off-balance sheet arrangements.
---------------------------------------------------------------------------

    In addition, we recognize that some issuers may have to include an 
MD&A section in more than one filing covering the same period. To 
account for this, we estimate that 40% of the forms S-1, 65% of forms 
F-1, 38% of forms S-4, 34% of forms F-4 and 5% of schedules 14A and 14C 
would be required to carry the full burden of preparing entirely new 
MD&A disclosure about off-balance arrangements.\132\ To reflect this, 
we further reduced the incremental burden hours for forms by the 
percentage of respondents who would not be required to carry the full 
burden of preparing new disclosure pursuant to the proposals. After 
making those adjustments for our estimate of preparation time for year 
one, we then derived a three-year average by reducing the preparation 
time by 20% and 10%

[[Page 68068]]

for years two and three, and averaging the sum.
---------------------------------------------------------------------------

    \132\ We derived these percentages from the proportion of new 
issuers to total issuers from our internal database. The adjustments 
to schedules 14A and 14C represent our best estimate based on our 
belief that the percentage of companies that would actually be 
required to carry the full burden of preparing the proposed 
disclosure would be minimal.
---------------------------------------------------------------------------

C. Registration Statements

    Table 1 below illustrates the total annual compliance burden of the 
proposed collection of information in hours and in cost for 
registration statements under the Securities Act and the Exchange Act. 
The burden was calculated by multiplying the estimated number of 
responses by the estimated average number of hours each entity spends 
completing the form. We have based our estimated number of annual 
responses on the actual number of filers during the 2002 fiscal year. 
To determine the average total number of hours each entity spends 
completing each form, we added the estimated hour increment to the 
current burden hour estimate for each form reported to OMB. For 
registration statements, we estimate that 25% of the burden of 
preparation is carried by the company internally and that 75% of the 
burden of preparation is carried by outside professionals retained by 
the company at an average cost of $300 per hour. The portion of the 
burden carried by outside professionals is reflected as a cost, while 
the portion of the burden carried by the company internally is 
reflected in hours.
    The incremental cost of outside professionals for registration 
statements would be approximately $4,400,000 per year and the 
incremental company burden would be approximately 4,888 hours per year. 
For purposes of our submission to OMB under the PRA, the total cost of 
outside professionals for registration statements would be 
approximately $868,882,000 per year and the company burden would be 
approximately 965,425 hours per year.

                                                            Table 1.--Registration Statements
                                 [Columns ``25% company'' and ``$300 prof. cost'' are the PRA burdens submitted to OMB]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Total                                                                 Added
                                                                 Annual     hours/      Total      25% company         75%         $300 prof.     hours/
                                                               responses     form      burden                     professional        cost         form
                                                                     (A)        (B)  (C)=(A)*(B    (D)=(C)*0.25    (E)=(C)*0.75    (F)=(E)*$300  .......
                                                                                              )
--------------------------------------------------------------
S-1..........................................................        433      1,749     757,317         189,329      567,987.75    $170,396,000        7
F-1..........................................................         43      1,918      82,474          20,619       61,855.50      18,557,000       12
SB-2.........................................................        650        593     385,450          96,363      289,087.50      86,726,000       11
S-4..........................................................        631      3,980   2,511,380         627,845    1,883,535.00     565,061,000        7
F-4..........................................................         61      1,329      81,069          20,267       60,801.75      18,241,000        6
10...........................................................         71        144      10,224           2,556        7,668.00       2,300,000       18
10-SB........................................................        254        133      33,782           8,446       25,336.50       7,601,000       11
                                                              ------------
    Total....................................................  .........  .........  ..........         965,425  ..............     868,882,000  .......
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Annual Reports and Proxy/Information Statements

    Table 2 below illustrates the total annual compliance burden of the 
collection of information in hours and in cost for annual reports and 
proxy and information statements under the Exchange Act. The burden was 
calculated by multiplying the estimated number of responses by the 
estimated average number of hours each entity spends completing the 
form. We have based our estimated number of annual responses on the 
actual number of filers during the 2002 fiscal year. For Exchange Act 
reports and proxy and information statements, we estimate that 75% of 
the burden of preparation is carried by the company internally and that 
25% of the burden of preparation is carried by outside professionals 
retained by the company at an average cost of $300 per hour.\133\ The 
portion of the burden carried by outside professionals is reflected as 
a cost, while the portion of the burden carried by the company 
internally is reflected in hours.
---------------------------------------------------------------------------

    \133\ This allocation of the burden is a departure from our past 
PRA submissions for Exchange Act periodic reports and proxy and 
information statements, for which we estimated that the company 
carried 25% of the burden internally and 75% of the burden of 
preparation was carried by outside professionals retained by the 
company. We believe that this new allocation more accurately 
reflects current practice for annual and quarterly reports and proxy 
and information statements. We estimate, however, that the 
traditional 25% company and 75% outside professional allocation 
remains applicable for forms 20-F and 40-F because those forms are 
prepared by foreign private issuers who rely more heavily on outside 
counsel for their preparation.
---------------------------------------------------------------------------

    The incremental cost of outside professionals for annual reports 
and proxy/information statements would be approximately $18,436,000 per 
year and the incremental company burden would be approximately 141,864 
hours per year. For purposes of our submission to OMB under the PRA the 
total cost of outside professionals for annual reports and proxy/
information statements would be approximately $2,110,552,000 per year 
and the company burden would be approximately 15,878,892 hours per 
year.

                                                Table 2.--Annual Reports and Proxy/Information Statements
                                 [Columns ``75% company'' and ``$300 prof. cost'' are the PRA burdens submitted to OMB]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Total                                                                    Added
                                                              Annual     hours/      Total      75% company         25%        $300 prof. cost    hours/
                                                            responses     form      burden                     professional                        form
                                                                  (A)        (B)  (C)=(A)*(B    (D)=(C)*0.75    (E)=(C)*0.25       (F)=(E)*$300  .......
                                                                                           )
-----------------------------------------------------------
20-F......................................................      1,194      2,185   2,608,890         652,223    1,956,667.50       $587,000,000       16
40-F......................................................        134         33       4,422           1,106        3,316.50            995,000       16
10-K......................................................      8,484      1,810  15,351,798      11,513,849    3,837,949.50      1,151,385,000       16
10-KSB....................................................      3,820      1,260   4,811,290       3,608,468    1,202,822.50        360,847,000       10
SCH 14A...................................................      7,661         17     130,237          97,678       32,559.25          9,768,000        1

[[Page 68069]]

 
SCH 14C...................................................        464         16       7,424           5,568        1,856.00            557,000        1
                                                           ------------
    Total.................................................  .........  .........  ..........      15,878,892  ..............      2,110,552,000  .......
--------------------------------------------------------------------------------------------------------------------------------------------------------

E. Quarterly Reports

    Table 3 below illustrates the total annual compliance burden of the 
collection of information in hours and in cost for quarterly reports 
under the Exchange Act. The burden was calculated by multiplying the 
estimated number of responses by the estimated average number of hours 
each entity spends completing the form. We have based our estimated 
number of annual responses on the actual number of filers during the 
2002 fiscal year. For quarterly reports, we estimate that 75% of the 
burden of preparation is carried by the company internally and that 25% 
of the burden of preparation is carried by outside professionals 
retained by the company at an average cost of $300 per hour. The 
portion of the burden carried by outside professionals is reflected as 
a cost, while the portion of the burden carried by the company 
internally is reflected in hours. Additionally, there would be no 
change to the estimated burden of the collection of information 
entitled ``Regulation S-B'' and ``Regulation S-K'' because the burdens 
are already reflected in our estimates for the forms.
    The incremental cost of outside professionals for quarterly reports 
would be approximately $21,959,000 per year and the incremental company 
burden would be approximately 219,585 hours per year. For purposes of 
our submission to OMB under the PRA, the total cost of outside 
professionals for quarterly reports and Regulations S-K and S-B would 
be approximately $475,105,000 per year and the company burden would be 
4,751,056 hours per year.

                                                 Table 3.--Quarterly Reports and Regulations S-K and S-B
                                 [Columns ``%75 company'' and ``$300 prof. cost'' are the PRA burdens submitted to OMB]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Total                                                                 Added
                                                                 Annual     hours/      Total      75% company         25%         $300 prof.     hours/
                                                               responses     form      burden                     professional        cost         form
                                                                     (A)        (B)  (C)=(A)*(B    (D)=(C)*0.75    (E)=(C)*0.25    (F)=(E)*$300  .......
                                                                                              )
--------------------------------------------------------------
10-Q.........................................................     23,743        184   4,368,712       3,276,534    1,092,178.00    $327,653,000        9
10-QSB.......................................................     11,299        174   1,966,026       1,474,520      491,506.50     147,452,000        7
Reg. S-K.....................................................          0          1           1               1            0.00               0        0
Reg. S-B.....................................................          0          1           1               1            0.00               0        0
                                                              ------------
    Total....................................................  .........  .........  ..........       4,751,056  ..............     475,105,000  .......
--------------------------------------------------------------------------------------------------------------------------------------------------------

F. Solicitation of Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), we solicit comments to: (i) 
Evaluate whether the proposed collection of information is necessary 
for the proper performance of the functions of the agency, including 
whether the information will have practical utility; (ii) evaluate the 
accuracy of our estimate of the burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility and clarity of the information to be collected; and 
(iv) evaluate whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should send a copy to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609, with reference to File No. S7-42-02. Requests for 
materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. S7-
42-02, and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services. OMB is 
required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release. Consequently, 
a comment to OMB is assured of having its full effect if OMB receives 
it within 30 days of publication.

V. Cost-Benefit Analysis

A. Background

    In accordance with the directive of section 401(a) of the Sarbanes-
Oxley Act,\134\ the Commission is proposing disclosure rules regarding 
a company's off-balance sheet arrangements. The proposals would require 
disclosure to improve investors' understanding of a company's overall 
financial condition, changes in financial condition and results of 
operations. The proposals would require companies that are reporting, 
raising capital in the registered public markets or asking shareholders 
for their votes to discuss certain aspects and effects of their off-
balance sheet arrangements and to provide an aggregate overview of 
their known contractual obligations and contingent liabilities and 
commitments.
---------------------------------------------------------------------------

    \134\ Pub. L. 107-204 sec. 401(a) [15 U.S.C. 78m(j)].

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

[[Page 68070]]

B. Objectives of Proposed Disclosure

    The proposals seek to improve transparency of a company's off-
balance sheet arrangements and to improve an investor's understanding 
of the liquidity and capital resource needs and demands by requiring 
disclosure of aggregate contractual obligations and contingent 
liabilities and commitments. We believe that the quality of information 
in these areas could be improved. Our objectives are:
    [sbull] To implement the legislative mandate in section 401(a) of 
the Sarbanes-Oxley Act;
    [sbull] To provide investors with the information and analysis 
necessary to gain a more comprehensive understanding of the 
implications of a company's obligations and contingencies from off-
balance sheet arrangements that cannot be easily understood from the 
financial statements alone; and
    [sbull] To better inform investors of the aggregate impact of 
short- and long-term contractual obligations, contingent liabilities 
and commitments, from both on and off-balance sheet activities, by 
presenting a total picture in a single location.
    With a greater understanding of a company's off-balance sheet 
arrangements, contractual obligations and contingent liabilities and 
commitments, investors would be better able to understand how a company 
conducts significant aspects of its business and to assess the quality 
of a company's earnings and the risks that are not apparent on the face 
of the financial statements.

C. Regulatory Approach

    Although the Sarbanes-Oxley Act requires that the Commission issue 
rules to require disclosure of off-balance sheet arrangements, we 
considered alternative regulatory approaches for achieving our goal to 
promote greater transparency of a company's off-balance sheet 
arrangements. As one possible approach, we considered proposing a 
general MD&A requirement that companies disclose information regarding 
off-balance sheet arrangements that they believe to be necessary to an 
understanding of its financial condition, changes in financial 
condition and results of operations. In the alternative, we considered 
proposing more rigid disclosure requirements that would mandate the 
particular content of disclosure, regardless of whether it would be 
necessary to an understanding of the registrant's financial condition, 
changes in financial condition and results of operations. After due 
consideration of both approaches, we propose an approach somewhere in 
between these two alternatives as the most effective. Accordingly, the 
proposal enumerates specific disclosure items regarding off-balance 
sheet arrangements, but requires disclosure only to the extent 
necessary to an understanding of a registrant's off-balance sheet 
arrangements and their effect on financial condition, changes in 
financial condition and results of operations.
    With regard to the proposed tabular disclosure of contractual 
obligations, we believe that a more specific approach is necessary to 
elicit disclosure that is comparable among firms. For example, the 
proposed table and/or textual disclosure of contractual obligations and 
contingent liabilities and commitments requires registrant to include 
specific time periods for payments due under contractual 
obligations.\135\ We have, however, attempted to provide flexibility 
for registrants where doing so would yield more relevant disclosure and 
reduce the burden for registrants. For example, our proposals allow 
registrants to use either specified categories of obligations or other 
categories suitable to its business.\136\ We have also provided 
flexibility with regard to the proposed disclosure of contingent 
liabilities and commitments. For example, the proposals allow 
registrants to disclose contingent liabilities and commitments either 
in text or in tabular format.\137\ In addition, under the proposals a 
registrant may disclose either the expected amount, range of amounts or 
maximum amount of contingent liabilities or commitments.\138\
---------------------------------------------------------------------------

    \135\ See, e.g., proposed item 303(a)(5)(i) of regulation S-K 
[17 CFR 229.303(a)(5)(i)].
    \136\ Id.
    \137\ See, e.g., proposed item 303(a)(5)(ii) of regulation S-K 
[17 CFR 229.303(a)(5)(ii)].
    \138\ Id.
---------------------------------------------------------------------------

    Current MD&A rules require disclosure of off-balance sheet 
arrangements that have a material effect on a company's liquidity and 
capital resources.\139\ In addition, MD&A must include other 
information that management believes to be necessary to an 
understanding of its financial condition, changes in financial 
condition and results of operations.\140\ These requirements provide 
companies with significant flexibility in drafting the MD&A disclosure. 
Although some public companies provide more detailed information in 
their financial statements about off-balance sheet arrangements, other 
companies provide arcane disclosure that may not be materially 
misleading in a legal sense, but it nevertheless does not provide 
investors with the information and analysis necessary to assess the 
impact of off-balance sheet arrangements. To stimulate higher quality 
disclosures regarding off-balance sheet arrangements, we are proposing 
more specific disclosure requirements in the MD&A.
---------------------------------------------------------------------------

    \139\ See item 303(a)(2)(ii) of regulation S-K [17 CFR 
229.303(a)(2)(ii)].
    \140\ See item 303(a) of regulation S-K [17 CFR 229.303(a)].
---------------------------------------------------------------------------

    The proposed disclosures are designed to result in a more focused 
and descriptive discussion of the registrant's material off-balance 
sheet arrangements. The proposals attempt to mitigate the possibility 
that investors would be overwhelmed with voluminous disclosure by 
requiring disclosure ``to the extent necessary to an understanding of 
the registrant's off-balance sheet arrangements and their effect on 
financial condition, changes in financial condition and results of 
operations.'' \141\ This approach attempts to balance the need for 
registrants to have flexibility when drafting financial disclosure, 
with investors' needs for more transparency.
---------------------------------------------------------------------------

    \141\ See proposed item 303(c)(1) of regulation S-B [17 CFR 
228.303(c)(1)]; proposed item 303(a)(4)(i) of regulation S-K [17 CFR 
229. 303(a)(4)(i)]; proposed item 5.E.1 of form 20-F [17 CFR 
249.220f]; and proposed general instruction 7(i) of form 40-F [17 
CFR 249.240f].
---------------------------------------------------------------------------

D. Potential Benefits of the Proposed Rules

    The primary anticipated benefit of the proposed rules is to 
increase transparency of the financial condition, changes in financial 
condition and operating results of companies and possibly to reduce the 
information asymmetry between management and investors. Current market 
events have evidenced a need to provide investors with a clearer 
understanding of how a company's off-balance sheet arrangements 
materially affect the financial statements and company 
performance.\142\ The proposed disclosure is intended to enhance the 
utility of the disclosure in the MD&A section by providing more 
information, including management's analysis, of off-balance sheet 
arrangements. In addition, the proposed tabular and/or textual 
disclosure of contractual obligations and contingent liabilities and 
commitments is designed to provide investors with an understanding of 
the liquidity and

[[Page 68071]]

capital resource need and demands in short- and long-term time 
horizons.
---------------------------------------------------------------------------

    \142\ See, e.g., Paquita Y. Davis-Friday et. al., The Value 
Relevance of Financial Statement Recognition vs. Disclosure: 
Evidence from SFAS No. 106, 74 The Accounting Review 403 (Oct. 
1999).
---------------------------------------------------------------------------

    By making information about off-balance sheet arrangements, 
contractual obligations and contingent liabilities and commitments 
available and more understandable, the proposals would benefit 
investors both directly and indirectly through the financial analysts 
and the credit rating agencies whose analyses investors consider.\143\ 
In addition, the proposed disclosures should benefit investors because 
the enumerated disclosure under the proposed rule would likely be more 
comparable across all firms and consistent over time. Greater 
transparency would thus enable investors to make more informed 
investment decisions and to allocate capital on a more efficient basis.
---------------------------------------------------------------------------

    \143\ See, e.g., Kent L. Womack, Do Brokerage Analysts' 
Recommendations have Investment Value? 51 Journal of Finance 137 
(1996). See also, R. Mear and M. Firth, Risk Perceptions of 
Financial Analysts and the Use of Market and Accounting Data, 18 
Accounting and Business Research 335 (1988).
---------------------------------------------------------------------------

Request for Comment

    [sbull] We solicit quantitative data to assist our assessment of 
the benefits of identifying off-balance sheet arrangements and 
analyzing their effects on the financial statements and preparing a 
table of contractual obligations and contingent liabilities.

E. Potential Costs of Proposed Rules

    We estimate that proposed rules would impose a new disclosure 
requirement on approximately 9,850 public companies.\144\ We estimate 
that the disclosure would involve multiple parties, including in-house 
preparers, senior management, in-house counsel, outside counsel, 
outside auditors, and audit committee members. For purposes of the 
Paperwork Reduction Act,\145\ we estimated that company personnel would 
spend approximately 366,337 hours per year (37 hours per company) to 
prepare, review and file the proposed disclosure. Based on our 
estimated cost of in-house staff time, we estimated the PRA hour-burden 
would translate into an approximate cost of $45,792,000 ($5,000 per 
company).\146\ We also estimated that companies would spend 
approximately $44,795,000 ($5,000 per company) on outside professionals 
to comply with the disclosure.\147\ We also estimate that companies 
will incur some additional printing and dissemination costs, as the 
proposals may result in more detailed disclosure. We are unable to 
estimate the potential printing and dissemination costs because there 
is a wide possible range of paper and ink available and different 
companies will print a different number of reports depending on their 
shareholder base.
---------------------------------------------------------------------------

    \144\ We estimate that about 80% of the number of registrants 
who filed annual reports last year would be required to provide the 
proposed disclosure.
    \145\ 44 U.S.C. 3501 et seq.
    \146\ We estimate the average hourly cost of in-house personnel 
to be $125. This cost estimate is based on data obtained from The 
SIA Report on Management and Professional Earnings in the Securities 
Industry (Oct. 2001).
    \147\ To derive our estimates for the Paperwork Reduction Act, 
we multiplied the number of filers for each form by the incremental 
hours per form. The portion of the product carried by the company is 
reflected in hours and the portion carried by outside professionals 
is reflected as a cost.
---------------------------------------------------------------------------

    We believe our proposals would not substantially increase the costs 
to collect the information necessary to prepare the proposed 
disclosure. This information should largely be readily available from 
each company's books and records. Since management should be fully 
apprised of off-balance sheet arrangements, contractual obligations and 
contingent liabilities and commitments in the ordinary course of 
managing the company, the proposed disclosure may not impose 
significant incremental costs for the collection and calculation of 
data.

Request for Comment

    [sbull] What types of expenses would companies incur in order to 
comply with the proposed disclosure requirements?
    [sbull] What would the average printing and dissemination costs be 
for each firm?
    [sbull] We solicit quantitative data to assist our assessment of 
the compliance costs of identifying off-balance sheet arrangements and 
the table of contractual obligations and contingent liabilities and 
commitments in the manner proposed.

F. Foreign Private Issuers

    We propose to apply to foreign private issuers the same MD&A 
disclosure requirements that would apply to U.S. companies. Foreign 
private issuers, however, are not required to file quarterly reports 
with the Commission. Thus, unless a foreign private issuer files a 
registration statement that must include interim period financial 
statements and related MD&A disclosure, it generally would not be 
required to update the proposed MD&A disclosure more frequently than 
annually. Therefore, the cost of compliance could be lower for foreign 
private issuers than for U.S. companies. It is possible, however, that 
foreign private issuers would incur greater expenses in connection with 
the required reconciliation to U.S. GAAP.

G. Small Business Issuers

    We have proposed not to require that small businesses provide 
tabular and/or textual disclosure about the contractual obligations and 
contingent liabilities and commitments. This information is currently 
required to be disclosed in various locations in filings. While it 
would be useful to investors if this information were disclosed in a 
single location, we believe that excluding small business issuers from 
this requirement is consistent with the policies underlying the small 
business issuer disclosure system.

H. Request for Comments

    To assist the Commission in its evaluation of the costs and 
benefits of the proposed disclosure discussed in this release, we 
request that commenters provide views and data relating to any costs 
and benefits associated with the proposed rules.

VI. Effects on Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \148\ requires us, when 
adopting rules under the Exchange Act, to consider the anti-competitive 
effects. The proposed rules are intended to make information about off-
balance sheet arrangements and their implications for the presentation 
of a public company's financial condition, changes in financial 
condition and operating results more understandable to investors. The 
proposed rules also would provide an overview of a company's known 
contractual obligations and contingent liabilities and commitments. We 
have identified one possible area where the proposed rules could 
potentially place a burden on competition. There is some possibility 
that a company's competitors could be able to infer proprietary or 
sensitive information from disclosure about off-balance sheet 
arrangements. To the extent that all companies make the proposed 
disclosure, that impact may diminish. We request comment regarding the 
degree to which our proposed disclosure requirements would create 
competitively harmful effects upon public companies, and how to 
minimize those effects. We also request comment on any disproportionate 
cross-sectional burdens among the firms affected by our proposals that 
could have anti-competitive effects.
---------------------------------------------------------------------------

    \148\ 15 U.S.C. 78w(a)(2).

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[[Page 68072]]

    Section 2(b) of the Securities Act \149\ and section 3(f) of the 
Exchange Act \150\ require us, when engaging in rulemaking that 
requires us to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition and capital formation. We believe the proposed disclosure 
may promote market efficiency by making information about off-balance 
sheet arrangements, and their impact on the presentation of the 
company's financial position, more understandable. As a result, we 
believe that investors may be able to make more informed investment 
decisions and capital may be allocated on a more efficient basis. The 
possibility of these effects, their magnitude if they were to occur and 
the extent to which they would be offset by the costs of the proposals 
are difficult to quantify. We request comment on these matters and how 
the proposed amendments, if adopted, would affect efficiency and 
capital formation. Commenters are requested to provide empirical data 
and other factual support to the extent possible.
---------------------------------------------------------------------------

    \149\ 15 U.S.C. 77b(b).
    \150\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

VII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603. It relates to proposed revisions to item 
303 of regulation S-K,\151\ item 303 of regulation S-B,\152\ item 5 of 
form 20-F \153\ and general instruction B of form 40-F.\154\ The 
proposals require public companies to discuss off-balance sheet 
arrangements and to disclose aggregate contractual obligations and 
contingent liabilities and commitments. The new disclosure would be 
included in the MD&A section of a company's annual reports, quarterly 
reports, registration statements and proxy and information statements.
---------------------------------------------------------------------------

    \151\ 17 CFR 229.303.
    \152\ 17 CFR 228.303.
    \153\ 17 CFR 249.220f.
    \154\ 17 CFR 249.240f.
---------------------------------------------------------------------------

A. Reasons for the Proposed Action

    On July 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted.\155\ 
Section 401 of the Sarbanes-Oxley Act, entitled ``Disclosures in 
Periodic Reports,'' requires the Commission to adopt final rules by 
January 26, 2003 (180 days after the date of enactment) that require a 
company, in each annual and quarterly financial report that it files 
with the Commission, to disclose ``all material off-balance sheet 
transactions, arrangements, obligations (including contingent 
obligations), and other relationships of the issuer with unconsolidated 
entities or other persons, that may have a material current or future 
effect on financial condition, changes in financial condition, results 
of operations, liquidity, capital expenditures, capital resources, or 
significant components of revenues or expenses.''\156\ To implement 
that legislative mandate, the Commission is proposing rules that would 
improve the transparency of off-balance sheet arrangements. The 
potential consequences of not taking this action to require disclosure 
regarding the off-balance sheet arrangements are: (a) Less transparency 
in the presentation of companies' financial statements and, 
correspondingly, a lesser understanding of companies' financial 
condition, changes in financial condition and results of operations 
when making investment decisions; and (b) a potential decrease in 
investor confidence in the full and fair disclosure system that is the 
hallmark of the U.S. capital markets.
---------------------------------------------------------------------------

    \155\ Pub. L. 107-204, 116 stat. 745 (2002).
    \156\ Pub. L. 107-204 sec. 401 [15 U.S.C. 78m(j)].
---------------------------------------------------------------------------

B. Objectives

    The proposals seek to improve transparency of a company's off-
balance sheet arrangements, aggregate contractual obligations and 
contingent liabilities and commitments. We believe that improvements in 
the quality of information in these areas would promote investor 
understanding of a company's current and future financial position. Our 
objectives are:
    [sbull] To implement the legislative mandate in section 401(a) of 
the Sarbanes-Oxley Act;
    [sbull] To provide investors with the information and analysis 
necessary to gain an understanding of the financial implications of a 
company's obligations and contingencies that cannot be easily 
understood from the financial statements alone; and
    [sbull] To better inform investors of the aggregate impact of a 
company's contractual obligations, contingent liabilities and 
commitments by presenting a total picture in a single location.

With a greater understanding of a company's off-balance sheet 
arrangements, contractual obligations and contingent liabilities and 
commitments, investors would be better able to understand how a company 
conducts significant aspects of its business and to assess the quality 
of a company's earnings and the risks that are not apparent on the face 
of the financial statements.

C. Legal Basis

    We are proposing the amendments under the authority set forth in 
sections 7, 10, 19, 27A and 28 of Securities Act of 1933 and sections 
12, 13, 14, 21E, 23 and 36 of the Securities Exchange Act of 1934. We 
are also proposing the amendments pursuant to sections 3(a) and 401(a) 
of the Sarbanes-Oxley Act of 2002.

D. Small Entities Subject to the Proposed Regulation and Rules

    The proposals would affect companies that are small entities. 
Securities Act rule 157 \157\ and Exchange Act rule 0-10(a) \158\ 
define a company, other than an investment company, to be a ``small 
business'' or ``small organization'' if it had total assets of $5 
million or less on the last day of its most recent fiscal year. We 
estimate that there were approximately 2,500 companies, other than 
investment companies, that may be considered small entities. The 
proposed disclosure requirements would apply to any small entity that 
fulfills its disclosure obligations by complying with our standard 
disclosure requirements \159\ or in our optional disclosure system 
available only to small businesses.\160\
---------------------------------------------------------------------------

    \157\ 17 CFR 230.157.
    \158\ 17 CFR 270.0-10(a).
    \159\ Regulation S-K, 17 CFR 229.10-229.1016.
    \160\ Regulation S-B, 17 CFR 228.10-228.701.
---------------------------------------------------------------------------

    We believe that the off-balance sheet arrangements involving small 
entities would most likely be operating leases. In our Paperwork 
Reduction Act analysis, we estimated that the cost of in-house staff 
time would translate into an approximate cost of $4,000 per 
company.\161\ This figure may be lower for a small entity if its 
average hourly cost for its personnel were lower than $125. We also 
estimated that companies would spend approximately $5,000 per company 
on outside professionals to comply with the disclosure.\162\ This 
figure may be lower for a small entity if its average hourly cost of 
outside professionals was lower than $300. While we believe that the 
costs of compliance with the proposals may be

[[Page 68073]]

lower for small entities, we are unable to quantify that number.
---------------------------------------------------------------------------

    \161\ We estimate the average hourly cost of in-house personnel 
to be $125. This cost estimate is based on data obtained from The 
SIA Report on Management and Professional Earnings in the Securities 
Industry (Oct. 2001).
    \162\ To derive our estimates for the Paperwork Reduction Act, 
we multiplied the number of filers for each form by the incremental 
hours per form. The portion of the product carried by the company is 
reflected in hours and the portion carried by outside professionals 
is reflected as a cost.
---------------------------------------------------------------------------

    We request comment on the number of small entities that would not 
be required to comply with our proposals because they do not engage in 
off-balance sheet arrangements and whether the relative costs of 
company personnel and outside professionals for small entities would be 
lower than for larger entities.

E. Reporting, Recordkeeping and Other Compliance Requirements

    Small entities would either utilize existing personnel or hire an 
outside professional to provide the proposed disclosure. This would 
impose incremental costs on small entities in connection with drafting, 
reviewing, filing, printing and disseminating additional disclosure in 
annual reports, registration statements, proxy and information 
statements and quarterly reports. The data underlying the proposed 
disclosure should be readily available from a company's books and 
records. Since management should be fully apprised of material off-
balance sheet arrangements through its internal controls, the proposed 
disclosure may not impose significant incremental costs for the 
collection and calculation of data.
    To further ease the regulatory burden on small entities, we are 
excluding small business issuers from the proposed tabular and/or 
textual disclosure about the contractual obligations and contingent 
liabilities and commitments. This information is currently required to 
be disclosed in various locations in filings. While it may be useful to 
investors if this information were disclosed in a single location, we 
believe that excluding small business issuers from this requirement is 
consistent with the policies underlying the small business issuer 
disclosure system.

F. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that there are no rules that conflict with or completely 
duplicate the proposed rules. There is a partial overlap with financial 
statement requirements requiring disclosures about off-balance sheet 
arrangements and risks and uncertainties that could materially affect 
the financial statements. There also is a partial overlap with existing 
MD&A requirements that may require some discussion of off-balance sheet 
arrangements that are essential to an understanding of a company's 
financial condition, changes in financial condition or results of 
operations. However, those requirements do not include much of the 
information specifically targeted for inclusion in the proposed rules.

G. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. In 
connection with the proposals, we considered the following 
alternatives:
    (a) The establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    (b) The clarification, consolidation, or simplification of 
disclosure for small entities;
    (c) The use of performance rather than design standards; and
    (d) An exemption for small entities from coverage under the 
proposals.
    We have drafted the proposed disclosure rules to require clear and 
straightforward disclosure of off-balance sheet arrangements in MD&A. 
Separate disclosure requirements regarding off-balance sheet 
arrangements for small entities would not yield the disclosure that we 
believe to be necessary to achieve our objectives. In addition, the 
informational needs of investors in small entities are typically as 
great as the needs of investors in larger companies. Therefore, it does 
not seem appropriate to develop separate requirements with regard to 
off-balance sheet arrangements for small entities involving 
clarification, consolidation or simplification of the proposed 
disclosure. We have, however, excluded small business issuers from the 
proposals that require tabular and/or textual disclosure of contractual 
obligations and contingent liabilities and commitments.
    We have used design rather than performance standards in connection 
with the proposals for three reasons. First, we believe the proposed 
disclosure would be more useful to investors if there were enumerated 
informational requirements. The proposed mandated disclosures may be 
likely to result in a more focused and comprehensive discussion of the 
company's off-balance sheet arrangements. Second, mandated disclosures 
regarding off-balance sheet arrangements may benefit investors in small 
entities because the enumerated disclosure under the proposed rule 
would likely be more comparable across all firms and consistent over 
time. Third, a mandated discussion of a company's off-balance sheet 
arrangements is uniquely suited to the MD&A disclosure in light of 
MD&A's emphasis on the identification of significant uncertainties and 
events and favorable or unfavorable trends. Therefore, adding a 
disclosure requirement to the existing MD&A appears to be the most 
effective method of eliciting the disclosure.

H. Solicitation of Comments

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding: (i) The number of small entities that may 
be affected by the proposals; (ii) the existence or nature of the 
potential impact of the proposals on small entities discussed in the 
analysis; and (iii) how to quantify the impact of the proposed 
revisions. Commenters are asked to describe the nature of any impact 
and provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposals are adopted, and will be placed 
in the same public file as comments on the proposed amendments 
themselves.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\163\ a rule is ``major'' if it has resulted, 
or is likely to result in:
---------------------------------------------------------------------------

    \163\ Pub. L. No. 104-121, title II, 110 stat. 857 (1996).
---------------------------------------------------------------------------

    [sbull] An annual effect on the economy of $100 million or more;
    [sbull] A major increase in costs or prices for consumers or 
individual industries; or
    [sbull] Significant adverse effects on competition, investment or 
innovation.
    We request comment on whether our proposals would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on: (a) The potential effect on the U.S. economy on an annual basis; 
(b) any potential increase in costs or prices for consumers or 
individual industries; and (c) any potential effect on competition, 
investment or innovation.

IX. Codification Update

    The Commission proposes to amend the ``Codification of Financial 
Reporting Policies'' announced in Financial Reporting Release No. 1 
(April 15, 1982):
    By adding section 501.12, captioned ``Off-balance Sheet 
Arrangements'' to include the text in the adopting release

[[Page 68074]]

that discusses the final rules, which, if the proposed rules are 
adopted, would be substantially similar to section II of this release.
    The Codification is a separate publication of the Commission. It 
will not be published in the Code of Federal Regulations.

Statutory Bases and Text of Proposed Amendments

    We are proposing amendments to Commission's existing rules under 
the authority set forth in sections 7, 10, 19, 27A and 28 of the 
Securities Act and sections 12, 13, 14, 21E, 23 and 36 of the Exchange 
Act. We are also proposing the amendments pursuant to sections 3(a) and 
401(a) of the Sarbanes-Oxley Act of 2002.

List of Subjects in 17 CFR Parts 228, 229 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendments

    In accordance with the foregoing, the Securities and Exchange 
Commission proposes to amend title 17, chapter II of the Code of 
Federal Regulations as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    1. The authority citation for part 228 is amended by adding the 
following citation in numerical order to read as follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29, 
80a-30, 80a-37 and 80b-11.
    Section 228.303 is also issued under secs. 3(a) and 401(a), Pub. 
L. No. 107-204, 116 Stat. 745.

* * * * *
    2. Section 228.303 is amended by:
    a. Removing the phrase ``paragraph (a)'' and adding, in its place, 
the phrase ``paragraphs (a) and (c)'' in the first sentence of the 
introductory text;
    b. Removing the phrase ``paragraph (b)'' and adding, in its place, 
the phrase ``paragraphs (b) and (c)'' in the second sentence of the 
introductory text; and
    c. Adding paragraphs (c) and (d) and an instruction to paragraph 
(c) of item 303 before instructions to item 303.
    The additions read as follows:


Sec.  228.303  (Item 303) Management's Discussion and Analysis or Plan 
of Operation.

* * * * *
    (c) Off-balance sheet arrangements. (1) For the periods set forth 
in paragraphs (a) and (b) of this item, include a separately-captioned 
section discussing the small business issuer's off-balance sheet 
arrangements that may have a current or future material effect on the 
small business issuer's financial condition, changes in financial 
condition, revenues or expenses, results of operations, liquidity, 
capital expenditures or capital resources. Disclosure under this 
paragraph (c) of an arrangement is not necessary if the likelihood of 
either the occurrence of an event implicating an off-balance sheet 
arrangement, or the materiality of its effect, is remote. Disclosure 
regarding similar arrangements should be aggregated to the extent 
practicable, but important distinctions in terms and effects must be 
discussed. Disclose the following items to the extent necessary to an 
understanding of the effect of the off-balance sheet arrangements on 
the small business issuer's financial condition, changes in financial 
condition, revenues and expenses, results of operations, liquidity, 
capital expenditures and capital resources:
    (i) The nature and business purpose of the small business issuer's 
off-balance sheet arrangements and, to the extent necessary to an 
understanding of the disclosures under this paragraph (c), the 
significant terms and conditions of the arrangements, including those 
between the small business issuer and any entity in which off-balance 
sheet activities are conducted and between the small business issuer or 
that entity and other persons;
    (ii) With respect to an entity in which off-balance sheet 
activities are conducted, the nature and amount of the total assets and 
of the total obligations and liabilities (including contingent 
obligations and liabilities) of that entity;
    (iii)The amounts of revenues, expenses and cash flows of the small 
business issuer arising from the arrangements; the nature and amount of 
any interests retained, securities issued and other indebtedness 
incurred by the small business issuer; and any other obligations or 
liabilities (including contingent obligations or liabilities) of the 
small business issuer arising from the arrangements that are or may 
become material and the triggering events or circumstances that could 
cause them to arise; and
    (iv) Management's analysis of the material effects of any of the 
items identified in paragraphs (c)(1)(i), (ii) and (iii) of this item 
on the small business issuer's financial condition, changes in 
financial condition, revenues or expenses, results of operations, 
liquidity, capital expenditures and capital resources. Effects that are 
common or similar with respect to a number of off-balance sheet 
arrangements must be analyzed in the aggregate to the extent the 
aggregation increases understanding. An analysis of the degree to which 
the small business issuer relies on off-balance sheet arrangements for 
its liquidity and capital resources or market risk or credit risk 
support or other benefits also must be disclosed.
    (2) If under a contractual provision or as a result of a known 
event, demand, commitment, trend or uncertainty, an off-balance sheet 
arrangement that materially benefits the small business issuer will be 
terminated or the benefits thereof to the small business issuer will be 
materially reduced, or it is reasonably likely that such a termination 
or reduction will occur, describe the circumstances under which such 
termination or reduction may occur and discuss any material effects 
thereof.
    (3) As used in this paragraph (c), the term off-balance sheet 
arrangement means any transaction, agreement or other contractual 
arrangement to which an entity unconsolidated with the small business 
issuer is a party, under which the small business issuer, whether or 
not a party to the arrangement, has, or in the future may have:
    (i) Any obligation under a direct or indirect guarantee or similar 
arrangement;
    (ii) A retained or contingent interest in assets transferred to an 
unconsolidated entity or similar arrangement;
    (iii) Derivatives to the extent that the fair value thereof is not 
fully reflected as a liability or asset in the financial statements; or
    (iv) Any obligation or liability, including a contingent obligation 
or liability, to the extent that it is not fully reflected in the 
financial statements (excluding the footnotes thereto). Obligations or 
liabilities that are not fully reflected in the financial statements 
(excluding the footnotes thereto) include, without limitation: 
obligations that are not classified as a liability according to 
generally accepted accounting principles; contingent liabilities as to 
which, as of the date of the financial statements, it is not probable 
that a loss has been incurred or, if probable, is not reasonably 
estimable; or liabilities as to which the amount recognized in the 
financial statements is less than the reasonably possible maximum 
exposure to loss under the obligation as of the date of the

[[Page 68075]]

financial statements. Contingent liabilities arising out of litigation, 
arbitration or regulatory actions (not otherwise related to off-balance 
sheet arrangements) are not off-balance sheet arrangements.

    Instruction to paragraph (c): No obligation to make disclosure 
under paragraph (c) of this item shall arise in respect of an off-
balance sheet arrangement until a definitive agreement that is 
unconditional or subject only to customary closing conditions exists 
or, if there is no such agreement, when settlement of the 
transaction occurs.

    (d) Safe harbor. (1) The safe harbor provided in section 27A of the 
Securities Act of 1933 (15 U.S.C. 77z-2) and section 21E of the 
Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe 
harbors'') shall apply to forward-looking information provided pursuant 
to paragraph (c) of this item, provided that the disclosure is made by: 
An issuer; a person acting on behalf of the issuer; an outside reviewer 
retained by the issuer making a statement on behalf of the issuer; or 
an underwriter, with respect to information provided by the issuer or 
information derived from information provided by the issuer.
    (2) For purposes of this paragraph (d) only, all information 
required by paragraphs (c)(1)(iv) and (c)(2) of this item is deemed to 
be a ``forward looking statement'' as that term is defined in the 
statutory safe harbors, except for historical facts.
* * * * *

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    3. The authority citation for part 229 is revised to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 
78ll(d), 78mm, 79e, 79j, 79n, 79t, 80a-8, 80a-9, 80a-20, 80a-29, 
80a-30, 80a-31(c), 80a-37, 80a-38(a), 80a-39 and 80b-11, unless 
otherwise noted.
    Section 229.303 is also issued under secs. 3(a) and 401(a), Pub. 
L. No. 107-204, 116 Stat. 745.
    Section 229.307 is also issued under secs. 3(a), 302 and 404, 
Pub. L. No. 107-204, 116 Stat. 745.

    4. Section 229.303 is amended by:
    a. Removing the authority citation following Sec.  229.303;
    b. Removing the phrase ``paragraphs (a)(1), (2) and (3)'' and 
adding, in its place, the phrase ``paragraphs (a)(1), (2), (3) and (4) 
of this section'' in the second sentence of the introductory text of 
paragraph (a);
    c. Removing the phrase ``or for those fiscal years beginning after 
December 25, 1979,'' in paragraph (a)(3)(iv);
    d. Adding paragraphs (a)(4) and (a)(5) before the ``Instructions to 
Paragraph 303(a)'';
    e. Adding instruction 13 to ``Instructions to Paragraph 303(a)'';
    f. Adding instruction 7 to ``Instructions to Paragraph (b) of Item 
303''; and
    g. Adding paragraph (c).
    The additions read as follows:


Sec.  229.303  (Item 303) Management's discussion and analysis of 
financial condition and results of operations.

    (a) * * *
    (4) Off-balance sheet arrangements. (i) In a separately-captioned 
section, discuss the registrant's off-balance sheet arrangements that 
may have a current or future material effect on the registrant's 
financial condition, changes in financial condition, revenues or 
expenses, results of operations, liquidity, capital expenditures or 
capital resources. Disclosure under this paragraph (a)(4) of an 
arrangement is not necessary if the likelihood of either the occurrence 
of an event implicating an off-balance sheet arrangement, or the 
materiality of its effect, is remote. Disclosure regarding similar 
arrangements should be aggregated to the extent practicable, but 
important distinctions in terms and effects must be discussed. Disclose 
the following items to the extent necessary to an understanding of the 
effect of the off-balance sheet arrangements on the registrant's 
financial condition, changes in financial condition, revenues and 
expenses, results of operations, liquidity, capital expenditures and 
capital resources:
    (A) The nature and business purpose of the registrant's off-balance 
sheet arrangements and, to the extent necessary to an understanding of 
the disclosures under this paragraph (a)(4), the significant terms and 
conditions of the arrangements, including those between the registrant 
and any entity in which off-balance sheet activities are conducted and 
between the registrant or that entity and other persons;
    (B) With respect to an entity in which off-balance sheet activities 
are conducted, the nature and amount of the total assets and of the 
total obligations and liabilities (including contingent obligations and 
liabilities) of that entity;
    (C) The amounts of revenues, expenses and cash flows of the 
registrant arising from the arrangements; the nature and amounts of any 
interests retained, securities issued and other indebtedness incurred 
by the registrant; and any other obligations or liabilities (including 
contingent obligations or liabilities) of the registrant arising from 
the arrangements that are or may become material and the triggering 
events or circumstances that could cause them to arise; and
    (D) Management's analysis of the material effects of any of the 
items identified in paragraphs (a)(4)(i)(A), (B) and (C) of this item 
on the registrant's financial condition, changes in financial 
condition, revenues or expenses, results of operations, liquidity, 
capital expenditures and capital resources. Effects that are common or 
similar with respect to a number of off-balance sheet arrangements must 
be analyzed in the aggregate to the extent the aggregation increases 
understanding. An analysis of the degree to which the registrant relies 
on off-balance sheet arrangements for its liquidity and capital 
resources or market risk or credit risk support or other benefits also 
must be disclosed.
    (ii) If under a contractual provision or as a result of a known 
event, demand, commitment, trend or uncertainty, an off-balance sheet 
arrangement that materially benefits the registrant will be terminated 
or the benefits thereof to the registrant will be materially reduced, 
or it is reasonably likely that such a termination or reduction will 
occur, describe the circumstances under which such termination or 
reduction may occur and discuss any material effects thereof.
    (iii) As used in this paragraph (a)(4), the term off-balance sheet 
arrangement means any transaction, agreement or other contractual 
arrangement to which an entity unconsolidated with the registrant is a 
party, under which the registrant, whether or not a party to the 
arrangement, has, or in the future may have:
    (A) Any obligation under a direct or indirect guarantee or similar 
arrangement;
    (B) A retained or contingent interest in assets transferred to an 
unconsolidated entity or similar arrangement;
    (C) Derivatives to the extent that the fair value thereof is not 
fully reflected as a liability or asset in the financial statements; or
    (D) Any obligation or liability, including a contingent obligation 
or liability, to the extent that it is not fully reflected in the 
financial statements (excluding the footnotes thereto). Obligations or 
liabilities that are not fully reflected in the financial statements 
(excluding the footnotes

[[Page 68076]]

thereto) include, without limitation: obligations that are not 
classified as a liability according to generally accepted accounting 
principles; contingent liabilities as to which, as of the date of the 
financial statements, it is not probable that a loss has been incurred 
or, if probable, is not reasonably estimable; or liabilities as to 
which the amount recognized in the financial statements is less than 
the reasonably possible maximum exposure to loss under the obligation 
as of the date of the financial statements. Contingent liabilities 
arising out of litigation, arbitration or regulatory actions (not 
otherwise related to off-balance sheet arrangements) are not off-
balance sheet arrangements.
    (5) Tabular disclosure of contractual obligations. (i) In a tabular 
format, provide the information specified in this paragraph (a)(5) with 
respect to the registrant's known contractual obligations as of the 
latest balance sheet date. The tabular presentation should include at 
least the periods set forth in the columns in the table following this 
paragraph (a)(5)(i). The registrant shall provide amounts, aggregated 
by type of contractual obligation, and may use the categories of 
obligations specified in the table or other categories suitable to its 
business. A presentation of total contractual obligations for at least 
the periods specified shall be included. The tabular presentation may 
be accompanied by footnotes to describe provisions that create, 
increase or accelerate obligations, or other pertinent data.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Payments due by period
      Contractual obligations       --------------------------------------------------------------------------------------------------------------------
                                            Total            Less than 1 year            1-3 years               3-5 years           More than 5 years
--------------------------------------------------------------------------------------------------------------------------------------------------------
[Long-Term Debt]
[Capital Lease Obligations]
[Operating Leases]
[Unconditional Purchase
 Obligations]
[Other Long-Term Obligations]
    Total Contractual Obligations
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (ii) Contingent liabilities and commitments. Disclose, either in 
text or in a tabular format, the expected amount, range of amounts or 
maximum amount of contingent liabilities or commitments, aggregated by 
type in a manner that is suitable for the registrant's business, that 
are expected to expire in less than one year, in one to three years, in 
three to five years, and more than five years. Unless a range of 
amounts is disclosed, specify whether the amount disclosed is the 
expected or maximum amount.

Instructions to Paragraph 303(a)

* * * * *
    13. No obligation to make disclosure under paragraph (a)(4) of 
this item shall arise in respect of an off-balance sheet arrangement 
until a definitive agreement that is unconditional or subject only 
to customary closing conditions exists or, if there is no such 
agreement, when settlement of the transaction occurs.
    (b) * * *

    Instructions to Paragraph (b) of Item 303:
* * * * *
    7. The registrant is not required to include the table required 
by paragraph (a)(5) of this item in a quarterly report on form 10-Q 
(Sec.  249.308a of this chapter). Instead, the registrant may 
disclose material changes by including a discussion of the relevant 
changes.

    (c) Safe harbor. (1) The safe harbor provided in section 27A of the 
Securities Act of 1933 (15 U.S.C. 77z-2) and section 21E of the 
Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe 
harbors'') shall apply to forward-looking information provided pursuant 
to paragraph (a)(4) of this item, provided that the disclosure is made 
by: An issuer; a person acting on behalf of the issuer; an outside 
reviewer retained by the issuer making a statement on behalf of the 
issuer; or an underwriter, with respect to information provided by the 
issuer or information derived from information provided by the issuer.
    (2) For purposes of paragraph (c) of this item only, all 
information required by paragraphs (a)(4)(i)(D) and (a)(4)(ii) of this 
item is deemed to be a ``forward looking statement'' as that term is 
defined in the statutory safe harbors, except for historical facts.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    5. The authority citation for part 249 is amended by revising the 
sectional authority for 249.220f and 249.240f to read as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
    Section 249.220f is also issued under secs. 3(a), 302, and 
401(a), Pub. L. No. 107-204, 116 Stat. 745.
    Section 249.240f is also issued under secs. 3(a), 302, and 
401(a), Pub. L. No. 107-204, 116 Stat. 745.
* * * * *
    6. Form 20-F (referenced in Sec.  249.220f), item 5 is amended by:
    a. Adding items 5.E. through 5.G.; and
    b. Adding an instruction to 5.F. to read as follows:

    Note: Form 20-F does not, and this amendment will not, appear in 
the Code of Federal Regulations.

Form 20-F

* * * * *

Item 5--Operating and Financial Review and--Prospects

* * * * *

E. Off-balance sheet arrangements

    1. In a separately-captioned section, discuss the company's off-
balance sheet arrangements that may have a current or future 
material effect on the company's financial condition, changes in 
financial condition, revenues or expenses, results of operations, 
liquidity, capital expenditures or capital resources. Disclosure 
under this item 5.E. of an arrangement is not necessary if the 
likelihood of either the occurrence of an event implicating an off-
balance sheet arrangement, or the materiality of its effect, is 
remote. Disclosure regarding similar arrangements should be 
aggregated to the extent practicable, but important distinctions in 
terms and effects must be discussed. Disclose the following items to 
the extent necessary to an understanding of the effect of the off-
balance sheet arrangements on the company's financial condition, 
changes in financial condition, revenues and expenses, results of 
operations, liquidity, capital expenditures and capital resources:
    (a) The nature and business purpose of the company's off-balance 
sheet arrangements and, to the extent necessary to an understanding 
of the disclosures under this item 5.E, the significant terms and 
conditions of the arrangements, including those between the company 
and any entity in which off-balance sheet activities are conducted 
and between the company or that entity and other persons;
    (b) With respect to an entity in which off-balance sheet 
activities are conducted, the nature and amount of the total assets 
and of the total obligations and liabilities (including

[[Page 68077]]

contingent obligations and liabilities) of that entity;
    (c) The amounts of revenues, expenses and cash flows of the 
company arising from the arrangements; the nature and amounts of any 
interests retained, securities issued and other indebtedness 
incurred by the company; and any other obligations or liabilities 
(including contingent obligations or liabilities) of the company 
arising from the arrangements that are or may become material and 
the triggering events or circumstances that could cause them to 
arise; and
    (d) Management's analysis of the material effects of any of the 
items identified in paragraphs (a), (b) or (c) of this item on the 
company's financial condition, changes in financial condition, 
revenues or expenses, results of operations, liquidity, capital 
expenditures and capital resources. Effects that are common or 
similar with respect to a number of off-balance sheet arrangements 
must be analyzed in the aggregate to the extent it increases 
understanding. An analysis of the degree to which the company relies 
on off-balance sheet arrangements for its liquidity and capital 
resources or market risk or credit risk support or other benefits 
also must be disclosed.
    2. If under a contractual provision or as a result of a known 
event, demand, commitment, trend or uncertainty, an off-balance 
sheet arrangement that materially benefits the company will be 
terminated or the benefits thereof to the company will be materially 
reduced, or it is reasonably likely that such a termination or 
reduction will occur, describe the circumstances under which such 
termination or reduction may occur and discuss any material effects 
thereof.
    3. As used in this item 5.E., the term off-balance sheet 
arrangement means any transaction, agreement or other contractual 
arrangement to which an entity unconsolidated with the company is a 
party, under which the company, whether or not a party to the 
arrangement, has, or in the future may have:
    (a) Any obligation under a direct or indirect guarantee or 
similar arrangement;
    (b) A retained or contingent interest in assets transferred to 
an unconsolidated entity or similar arrangement;
    (c) Derivatives to the extent that the fair value thereof is not 
fully reflected as a liability or asset in the financial statements; 
or
    (d) Any obligation or liability, including a contingent 
obligation or liability, to the extent that it is not fully 
reflected in the financial statements (excluding the footnotes 
thereto). Obligations or liabilities that are not fully reflected in 
the financial statements (excluding the footnotes thereto) include, 
without limitation: obligations that are not classified as a 
liability according to generally accepted accounting principles; 
contingent liabilities as to which, as of the date of the financial 
statements, it is not probable that a loss has been incurred or, if 
probable, is not reasonably estimable; or liabilities as to which 
the amount recognized in the financial statements is less than the 
reasonably possible maximum exposure to loss under the obligation as 
of the date of the financial statements. Contingent liabilities 
arising out of litigation, arbitration or regulatory actions (not 
otherwise related to off-balance sheet arrangements) are not off-
balance sheet arrangements.

F. Tabular disclosure of contractual obligations

    1. In a tabular format, provide the information specified in 
this item 5.F.1. with respect to the company's known contractual 
obligations as of the latest balance sheet date. The tabular 
presentation should include at least the periods set forth in the 
columns in the table below. The company shall provide amounts, 
aggregated by type of contractual obligation, and may use the 
categories of obligations specified in the table below or other 
categories suitable to its business. A presentation of total 
contractual obligations for at least the periods specified shall be 
included. The tabular presentation may be accompanied by footnotes 
to describe provisions that create, increase or accelerate 
obligations, or other pertinent data.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Payments due by period
      Contractual obligations       --------------------------------------------------------------------------------------------------------------------
                                            Total            Less than 1 year            1-3 years               3-5 years           More than 5 years
--------------------------------------------------------------------------------------------------------------------------------------------------------
[Long-Term Debt]
[Capital Lease Obligations]
[Operating Leases]
[Unconditional Purchase
 Obligations]
[Other Long-Term Obligations]
    Total Contractual Obligations
--------------------------------------------------------------------------------------------------------------------------------------------------------

    2. Contingent liabilities and commitments. Disclose, either in 
text or in a tabular format, the expected amount, range of amounts 
or maximum amount of contingent liabilities or commitments, 
aggregated by type in a manner that is suitable for the company's 
business, that are expected to expire in less than one year, in one 
to three years, in three to five years, and more than five years. 
Unless a range of amounts is disclosed, specify whether the amount 
disclosed is the expected or maximum amount.

G. Safe harbor

    1. The safe harbor provided in section 27A of the Securities Act 
and section 21E of the Exchange Act (``statutory safe harbors'') 
shall apply to forward-looking information provided pursuant to item 
5.E., provided that the disclosure is made by: an issuer; a person 
acting on behalf of the issuer; an outside reviewer retained by the 
issuer making a statement on behalf of the issuer; or an 
underwriter, with respect to information provided by the issuer or 
information derived from information provided by the issuer.
    2. For purposes of paragraph 5.G.1. of this item only, all 
information required by paragraphs 5.E.1(d) and 5.E.2 of this item 
is deemed to be a ``forward looking statement'' as that term is 
defined in the statutory safe harbors, except for historical facts.
* * * * *
    Instruction to item 5.A:
* * * * *
    Instruction to Item 5.F.: 1. The company is not required to 
include the table required by paragraph 5.F.1. of this item for 
interim periods. Instead, the company may disclose material changes 
in the table by including a discussion of the relevant changes.
* * * * *
    7. Form 40-F (referenced in Sec.  249.240f) is amended by adding 
paragraphs 7 through 9 to General Instruction B to read as follows;

    Note: The text of Form 40-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 40-F

* * * * *

General Instructions

* * * * *

B. Information To Be Filed on This Form.

* * * * *
    7. Off-balance sheet arrangements. (i) In a separately-captioned 
section, discuss the registrant's off-balance sheet arrangements 
that may have a current or future material effect on the 
registrant's financial condition, changes in financial condition, 
revenues or expenses, results of operations, liquidity, capital 
expenditures or capital resources. Disclosure under this general 
instruction B.7. of an arrangement is not necessary if the 
likelihood of either the occurrence of an event implicating an off-
balance sheet arrangement, or the materiality of its effect, is 
remote. Disclosure regarding similar arrangements should be 
aggregated to the extent practicable, but important distinctions in 
terms and effects must be discussed. Disclose the following items to 
the extent necessary to an understanding of the effect of the off-

[[Page 68078]]

balance sheet arrangements on the registrant's financial condition, 
changes in financial condition, revenues and expenses, results of 
operations, liquidity, capital expenditures and capital resources:
    (A) The nature and business purpose of the registrant's off-
balance sheet arrangements and, to the extent necessary to an 
understanding of the disclosures under this general instruction 
B.7., the significant terms and conditions of the arrangements, 
including those between the registrant and any entity in which off-
balance sheet activities are conducted and between the registrant or 
that entity and other persons;
    (B) With respect to an entity in which off-balance sheet 
activities are conducted, the nature and amount of the total assets 
and of the total obligations and liabilities (including contingent 
obligations and liabilities) of that entity;
    (C) The amounts of revenues, expenses and cash flows of the 
registrant arising from the arrangements; the nature and amount of 
any interests retained, securities issued and other indebtedness 
incurred by the registrant; and any other obligations or liabilities 
(including contingent obligations or liabilities) of the registrant 
arising from the arrangements that are or may become material and 
the triggering events or circumstances that could cause them to 
arise; and
    (D) Management's analysis of the material effects of any of the 
items identified in paragraphs (A), (B) and (C) of this general 
instruction on the registrant's financial condition, changes in 
financial condition, revenues or expenses, results of operations, 
liquidity, capital expenditures and capital resources. Effects that 
are common or similar with respect to a number of off-balance sheet 
arrangements must be analyzed in the aggregate to the extent it 
increases understanding. An analysis of the degree to which the 
registrant relies on off-balance sheet arrangements for its 
liquidity and capital resources or market risk or credit risk 
support or other benefits also must be disclosed.
    (ii) If under a contractual provision or as a result of a known 
event, demand, commitment, trend or uncertainty, an off-balance 
sheet arrangement that materially benefits the registrant will be 
terminated or the benefits thereof to the registrant will be 
materially reduced, or it is reasonably likely that such a 
termination or reduction will occur, describe the circumstances 
under which such termination or reduction may occur and discuss any 
material effects thereof.
    (iii)As used in this general instruction B.7., the term off-
balance sheet arrangement means any transaction, agreement or other 
contractual arrangement to which an entity unconsolidated with the 
registrant is a party, under which the registrant, whether or not a 
party to the arrangement, has, or in the future may have:
    (A) Any obligation under a direct or indirect guarantee or 
similar arrangement;
    (B) A retained or contingent interest in assets transferred to 
an unconsolidated entity or similar arrangement;
    (C) Derivatives to the extent that the fair value thereof is not 
fully reflected as a liability or asset in the financial statements; 
or
    (D) Any obligation or liability, including a contingent 
obligation or liability, to the extent that it is not fully 
reflected in the financial statements (excluding the footnotes 
thereto). Obligations or liabilities that are not fully reflected in 
the financial statements (excluding the footnotes thereto) include, 
without limitation: obligations that are not classified as a 
liability according to generally accepted accounting principles; 
contingent liabilities as to which, as of the date of the financial 
statements, it is not probable that a loss has been incurred or, if 
probable, is not reasonably estimable; or liabilities as to which 
the amount recognized in the financial statements is less than the 
reasonably possible maximum exposure to loss under the obligation as 
of the date of the financial statements. Contingent liabilities 
arising out of litigation, arbitration or regulatory actions (not 
otherwise related to off-balance sheet arrangements) are not off-
balance sheet arrangements.
    (iv) No obligation to make disclosure under this general 
instruction B.7. shall arise in respect of an off-balance sheet 
arrangement until a definitive agreement that is unconditional or 
subject only to customary closing conditions exists or, if there is 
no such agreement, when settlement of the transaction occurs.
    8. Tabular disclosure of contractual obligations. (i) In a 
tabular format, provide the information specified in this general 
instruction B.8. with respect to the registrant's known contractual 
obligations as of the latest balance sheet date. The tabular 
presentation should include at least the periods set forth in the 
columns in the table below. The registrant shall provide amounts, 
aggregated by type of contractual obligation, and may use the 
categories of obligations specified in the table below or other 
categories suitable to its business. A presentation of total 
contractual obligations for at least the periods specified shall be 
included. The tabular presentation may be accompanied by footnotes 
to describe provisions that create, increase or accelerate 
obligations, or other pertinent data.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Payments due by period
      Contractual obligations       --------------------------------------------------------------------------------------------------------------------
                                            Total            Less than 1 year            1-3 years               3-5 years           More than 5 years
--------------------------------------------------------------------------------------------------------------------------------------------------------
[Long-Term Debt]
[Capital Lease Obligations]
[Operating Leases]
[Unconditional Purchase
 Obligations]
[Other Long-Term Obligations]
    Total Contractual Obligations
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (ii) Contingent liabilities and commitments. Disclose, either in 
text or in a tabular format, the expected amount, range of amounts 
or maximum amount of contingent liabilities or commitments, 
aggregated by type in a manner that is suitable for the registrant's 
business, that are expected to expire in less than one year, in one 
to three years, in three to five years, and more than five years. 
Unless a range of amounts is disclosed, specify whether the amount 
disclosed is the expected or maximum amount.

[[Page 68079]]

    9. Safe Harbor. (i) The safe harbor provided in section 27A of 
the Securities Act and section 21E of the Exchange Act (``statutory 
safe harbors'') shall apply to forward-looking information provided 
pursuant to general instruction B.7. of this form 40-F, provided 
that the disclosure is made by: an issuer; a person acting on behalf 
of the issuer; an outside reviewer retained by the issuer making a 
statement on behalf of the issuer; or an underwriter, with respect 
to information provided by the issuer or information derived from 
information provided by the issuer.
    (ii) For purposes of paragraph (i) of this general instruction 
B.9. only, all information required by general instruction 
B.7.(i)(D) and B.7.(ii) of this form 40-F is deemed to be a 
``forward looking statement'' as that term is defined in the 
statutory safe harbors, except for historical facts.
* * * * *

    Dated: November 4, 2002.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-28431 Filed 11-7-02; 8:45 am]
BILLING CODE 8010-01-P