[Federal Register Volume 75, Number 187 (Tuesday, September 28, 2010)]
[Proposed Rules]
[Pages 59866-59891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-23743]
[[Page 59865]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 229 and 249
Short-Term Borrowings Disclosure; Proposed Rule
Federal Register / Vol. 75 , No. 187 / Tuesday, September 28, 2010 /
Proposed Rules
[[Page 59866]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229 and 249
[Release Nos. 33-9143; 34-62932; File No. S7-22-10]
RIN 3235-AK72
Short-Term Borrowings Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing amendments to enhance the disclosure that
registrants provide about short-term borrowings. Specifically, the
proposals would require a registrant to provide, in a separately
captioned subsection of Management's Discussion and Analysis of
Financial Condition and Results of Operations, a comprehensive
explanation of its short-term borrowings, including both quantitative
and qualitative information. The proposed amendments would be
applicable to annual and quarterly reports, proxy or information
statements that include financial statements, registration statements
under the Securities Exchange Act of 1934, and registration statements
under the Securities Act of 1933. We are also proposing conforming
amendments to Form 8-K so that the Form would use the terminology
contained in the proposed short-term borrowings disclosure requirement.
In a companion release, we are providing interpretive guidance that
is intended to improve overall discussion of liquidity and capital
resources in Management's Discussion and Analysis of Financial
Condition and Results of Operations in order to facilitate
understanding by investors of the liquidity and funding risks facing
the registrant.
DATES: Comments should be received on or before November 29, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
Send an e-mail to [email protected]. Please include
File Number S7-22-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-22-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Christina L. Padden, Attorney Fellow
in the Office of Rulemaking, at (202) 551-3430, or Stephanie L.
Hunsaker, Associate Chief Accountant, at (202) 551-3400, in the
Division of Corporation Finance; or Wesley R. Bricker, Professional
Accounting Fellow, Office of the Chief Accountant at (202) 551-5300;
U.S. Securities and Exchange Commission, 100 F Street, NE., Washington,
DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to Item 303 \1\
of Regulation S-K \2\ and amendments to Forms 8-K \3\ and 20-F \4\
under the Securities Exchange Act of 1934 (``Exchange Act'').\5\
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\1\ 17 CFR 229.303.
\2\ 17 CFR 229.10 et al.
\3\ 17 CFR 249.308.
\4\ 17 CFR 249.220f.
\5\ 15 U.S.C. 78a et seq.
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The proposed amendments include:
A new disclosure requirement in Management's Discussion
and Analysis of Financial Condition and Results of Operations
(``MD&A'') relating to short-term borrowings that would be designated
as Item 303(a)(6) of Regulation S-K;
Amendments to Item 303(b) of Regulation S-K that would
require interim period disclosure of short-term borrowings with the
same level of detail as is proposed for annual presentation;
Conforming amendments to Item 5 of Form 20-F to add short-
term borrowings disclosure requirements;
Conforming amendments to the definition of ``direct
financial obligations'' in Items 2.03 and 2.04 of Form 8-K; and
Revisions to Item 303 of Regulation S-K and Item 5 of Form
20-F to update the references to United States generally accepted
accounting principles (``U.S. GAAP'') to reflect the release by the
Financial Accounting Standards Board (``FASB'') of its FASB Accounting
Standards Codification (``FASB Codification'').
Table of Contents
I. Background and Summary
II. Discussion of the Proposed Amendments
A. Short-Term Borrowings Disclosure
B. Treatment of Foreign Private Issuers and Smaller Reporting
Companies
C. Leverage Ratio Disclosure Issues
D. Technical Amendments Reflecting FASB Codification
E. Conforming Amendments to Definition of ``Direct Financial
Obligation'' in Form 8-K
F. Transition
III. General Request for Comment
IV. Paperwork Reduction Act
A. Background
B. Burden and Cost Estimates Related to the Proposed Amendments
C. Request for Comment
V. Cost-Benefit Analysis
A. Introduction and Objectives of Proposals
B. Benefits
C. Costs
D. Request for Comment
VI. Consideration of Impact on the Economy, Burden on Competition
and Promotion of Efficiency, Competition and Capital Formation
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Initial Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Action
D. Reporting, Recordkeeping, and other Compliance Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
G. Solicitation of Comments
IX. Statutory Authority and Text of the Proposed Amendments
I. Background and Summary
Over the past several years, we have provided guidance and have
engaged in rulemaking initiatives to improve the presentation of
information about funding and liquidity risk.\6\ As we have
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emphasized in past guidance, MD&A disclosure relating to liquidity and
capital resources is critical to an assessment of a company's prospects
for the future and even the likelihood of its survival.\7\ We believe
that leverage and liquidity continue to be significant areas of focus
for investors,\8\ particularly as many failures in the financial crisis
arose due to liquidity constraints.\9\
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\6\ See, e.g., Disclosure in Management's Discussion and
Analysis About Off-Balance Sheet Arrangements, Contractual
Obligations and Contingent Liabilities and Commitments, Release No.
33-8144 (Nov. 4, 2002) [67 FR 68054] (the ``OBS Proposing
Release''); Disclosure in Management's Discussion and Analysis About
Off-Balance Sheet Arrangements, Contractual Obligations and
Contingent Liabilities and Commitments, Release No. 33-8182 (Jan.
28, 2003) [68 FR 5982] (the ``OBS Adopting Release'') (adopting
rules for disclosure in MD&A of off-balance sheet arrangements and
aggregate contractual obligations); and Commission Guidance
Regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations, Release No. 33-8350 (Dec. 19,
2003) [68 FR 75056] (the ``2003 Interpretive Release'') (providing
interpretive guidance on disclosure in MD&A, including liquidity and
capital resources).
\7\ See 2003 Interpretive Release, supra note 6, at 75062. See
also Commission Statement About Management's Discussion and Analysis
of Financial Condition and Results of Operations, Release No. 33-
8056 (Jan. 22, 2002) [67 FR 3746] (the ``2002 Interpretive
Release'') and the OBS Adopting Release, supra note 6.
\8\ See L. H. Pedersen, When Everyone Runs for the Exit, 5 Int'l
J. Cent. BankING 177 (2009) (``[t]he global crisis that started in
2007 provides ample evidence of the importance of liquidity risk * *
* [t]he crisis spilled over to other credit markets, money markets,
convertible bonds, stocks and over-the-counter derivatives.''); M.
Brunnermeier, Deciphering the Liquidity and Credit Crunch 2007-2008,
23 J. Econ. Persp. 77 (2009); M. Brunnermeier & L. Pedersen, Market
Liquidity and Funding Liquidity, 22 Rev. Fin. Stud. 2201 (2009); R.
Huang, How Committed Are Bank Lines of Credit? Evidence from the
Subprime Mortgage Crisis, (working paper) (Aug. 2010), available at
http://www.phil.frb.org/research-and-data/publications/working-papers/2010/wp10-25.pdf; P. Strahan et al., Liquidity Risk
Management and Credit Supply in the Financial Crisis, (working
paper) (May 2010), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1601992.
\9\ See, e.g., K. Ayotte & D. Steele, Bankruptcy or Bailouts?,
35 J. CORP. L. 469 (2010) (discussing illiquidity and insolvency for
financial institutions in the context of the recent financial
crisis); When the River Runs Dry, ECONOMIST, Feb. 11, 2010 (``Many
of those clobbered in the crisis were struck down by a sudden lack
of cash or funding sources, not because they ran out of capital.'').
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A critical component of a company's liquidity and capital resources
is often its access to short-term borrowings for working capital and to
fund its operations.\10\ Traditional sources of funding, such as trade
credit, bank loans, and long-term or medium-term debt instruments,
remain important for many types of businesses.\11\ However, other
short-term financing techniques, including commercial paper, repurchase
transactions and securitizations, have become increasingly common among
financial institutions and industrial companies alike.\12\
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\10\ See D. Booth & J. Renier, Fed Policy in the Financial
Crisis: Arresting the Adverse Feedback Loop, FRBD Economic Letter
(Sept. 2009), available at http://www.dallasfed.org/research/eclett/2009/el0907.html (``Many businesses were hampered by the squeeze on
short-term financing, a key source of working capital needed to
prevent deeper reductions in inventories, jobs and wages.'').
\11\ See, generally, B. Becker & V. Ivashina, Cyclicality of
Credit Supply: Firm Level Evidence (May 2010) (Harvard Working
Paper); C. M. James, Credit Market Conditions and the Use of Bank
Lines of Credit, FRBSF Economic Letter 2009-27 (Aug. 2009),
available at http://www.frbsf.org/publications/economics/letter/2009/el2009-27; M. Campello et al., Liquidity Management and
Corporate Investment During a Financial Crisis (July 2010) (working
paper) (examining how non-financial companies choose among various
sources of liquidity), available at http://faculty.fuqua.duke.edu/
~charvey/Research/Working--Papers/W99--Liquidity--management--
and.pdf; V. Ivashina & D. Scharfstein, Bank Lending During the
Financial Crisis of 2008, J. FIN. ECON. (forthcoming), available at
http://ssrn.com/abstract=1297337 (examining the increase in draw-
downs or threats of draw-downs of existing credit lines by
commercial and industrial firms and the related impact on bank
lending).
\12\ See S. Sood, Is the Ride Coming to an End?, Global
Investor, May 1, 2009 (``Treasurers need to look harder at a broader
range of funding alternatives, e.g., debt factoring, invoice
factoring and trade finance which are essentially forms of
collateralized financing''); M. Lemmon et al., The Use of Asset-
backed Securitization and Capital Structure in Industrial Firms: An
Empirical Investigation (May 2010), available at http://www.fma.org.
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Recent events have shown that these types of arrangements can be
impacted, sometimes severely and rapidly, by illiquidity in the markets
as a whole.\13\ When market liquidity is low, short-term borrowings
present increased risks: that financing rates will increase or terms
will become unfavorable, that it will be more costly or impossible to
roll over short-term borrowings, or for financial institutions, that
demand depositors will withdraw funds.\14\
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\13\ See J. Tirole, Illiquidity and All Its Friends (Bank for
International Settlements, Working Paper No. 303, 2010), available
at http://www.bis.org (``[t]he recent crisis, we all know, was
characterized by massive illiquidity.'' In addition, ``Overall there
has been a tremendous increase in the proportion of short-term
liabilities in the financial sector''). See also, e.g., P. Eavis,
Lehman's Racy Repo, WALL ST. J., Mar. 12, 2010 (suggesting that repo
financing ``is highly vulnerable in times of panic, as the credit
crisis showed''); A. Martin et al., Repo Runs, FRBNY Staff Report
No. 444 (Apr. 2010) (demonstrating that institutions funded by
short-term collateralized borrowings are subject to the threat of
runs similar to those faced by commercial banks).
\14\ See, e.g., Brunnermeier, supra note 8, at 79-80; see also
C. Borio, Market Distress and Vanishing Liquidity: Anatomy and
Policy Options (Bank for International Settlements, Working Paper
No. 158, 2004), available at http://www.bis.org (``Under stress,
risk management practices, funding liquidity constraints, and in the
most severe cases, concerns with counter-party risk become
critical.'').
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Moreover, short-term financing arrangements can present complex
accounting and disclosure issues, even when market conditions are
stable.\15\ Due to their short-term nature, a company's use of such
arrangements can fluctuate materially during a reporting period, which
means that presentation of period-end amounts of short-term borrowings
alone may not be indicative of that company's funding needs or
activities during the period. For example, a bank that routinely enters
into repurchase transactions during the quarter might curtail that
activity at quarter-end,\16\ resulting in a period-end amount of
outstanding borrowings that does not necessarily reflect its business
operations or related risks. Likewise, a retailer may have significant
short-term borrowings during the year to finance inventory that is sold
by year-end (and where those short-term borrowings are repaid by year-
end). In that case, where the need to finance inventory purchases
fluctuates, impacted by the timing and volume of inventory sales, the
ability to have access to short-term borrowings may be very important
to the company. Therefore, although the financial services sector has
been in the spotlight, the issues arising from short-term borrowings
are not limited to that sector.\17\
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\15\ See, e.g., the Division of Corporation Finance, Sample
Letter Sent to Public Companies Asking for Information Related to
Repurchase Agreements, Securities Lending Transactions, or Other
Transactions Involving the Transfer of Financial Assets (Mar. 2010)
(the ``2010 Dear CFO Letter''), available at http://www.sec.gov/divisions/corpfin/guidance/cforepurchase0310.htm.
\16\ See V. Kotomin & D. Winters, Quarter-End Effects in Banks:
Preferred Habitat or Window Dressing?, 29 J. FIN. RES. 1 (2006); M.
Rappaport & T. McGinty, Banks Trim Debt, Obscuring Risks, WALL ST.
J., May 25, 2010.
\17\ See, e.g., W. Dudley, President & CEO, FRBNY, Remarks at
the Center for Economic Policy Studies Symposium: More Lessons From
the Crisis, (Nov. 13, 2009), available at http://newyorkfed.org/newsevents/speeches/2009/dud091113.html (noting ``[a] key
vulnerability turned out to be the misplaced assumption that
securities dealers and others would be able to obtain very large
amounts of short-term funding even in times of stress.''); J.
Lahart, U.S. Firms Build Up Record Cash Piles, WALL ST. J., June 10,
2010 (``In the darkest days of late 2008, even large companies faced
the threat that they wouldn't be able to do the everyday, short-term
borrowing needed to make payrolls and purchase inventory.'').
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Recent events have suggested that investors could benefit from
additional transparency about companies' short-term borrowings,
including particularly whether these borrowings vary materially during
reporting periods compared to amounts reported at period-end without
investor appreciation of those variations.\18\ Although current MD&A
rules generally require disclosure of a registrant's use of short-term
borrowing arrangements and the registrant's exposure to related risks
and uncertainties,\19\ without a specific
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requirement to disclose information about intra-period short-term
borrowings, investors may not have access to sufficient information to
understand companies' actual funding needs and financing activities or
to evaluate the liquidity risks faced by companies during the reporting
period. To address these issues, we are proposing to amend the MD&A
requirements to enhance disclosure that registrants provide regarding
the use and impact of short-term financing arrangements during each
reporting period. The principal aspects of the proposals are outlined
below.
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\18\ See, e.g., Financial Crisis Inquiry Commission, Hearing on
``The Shadow Banking System'' (May 5, 2010) (transcript available at
http://www.fcic.gov/hearings/pdfs/2010-0505-Transcript.pdf).
\19\ See Item 303(a)(1) and (2) of Regulation S-K and
Instruction 5 to paragraph 303(a) [17 CFR 229.303] (noting that
liquidity generally shall be discussed on both a long-term and
short-term basis); see also 2002 Interpretive Release, supra note 7
(providing interpretive guidance on MD&A, noting ``registrants
should consider describing the sources of short-term funding and the
circumstances that are reasonably likely to affect those sources of
liquidity'').
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First, the proposed amendments would add new disclosure
requirements relating to short-term borrowings, similar to the
provisions for annual disclosure of short-term borrowings that are
currently applicable to bank holding companies in accordance with the
disclosure guidance set forth in Industry Guide 3, Statistical
Disclosure by Bank Holding Companies (``Guide 3'').\20\ The proposed
amendments would codify the Guide 3 provisions for disclosure of short-
term borrowings in Regulation S-K, would require disclosure on an
annual and quarterly basis, and would be expanded to apply to all
companies that provide MD&A disclosure, not only to financial
institutions. If the proposals are adopted, we expect to authorize the
Commission's staff to eliminate the corresponding provisions of Guide 3
to avoid redundant disclosure requirements.\21\
Second, we are proposing amendments to the requirements applicable
to ``foreign private issuers'' in the ``Operating and Financial Review
and Prospects'' item in Form 20-F to add short-term borrowings
disclosure requirements, which would be substantially similar to the
proposed amendments to MD&A, but without the requirement for quarterly
reporting since foreign private issuers are not subject to quarterly
reporting requirements.
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\20\ See 17 CFR 229.801, Item VII.
\21\ Guide 3, as originally promulgated in 1968 under the
designations Guide 61 and Guide 3, served as an expression of the
policies and practices of the Commission's Division of Corporation
Finance in order to assist issuers in the preparation of their
registration statements and reports. See Guides for Preparation and
Filing of Registration Statements, Release No. 33-4936 (Dec. 9,
1968) [33 FR 18617]. In 1982, these guides were redesignated as
Securities Act Industry Guide 3 and Exchange Act Industry Guide 3,
and were included in the list of industry guides in Items 801 and
802 of Regulation S-K, but were not codified as rules. See
Rescission of Guides and Redesignation of Industry Guides, Release
No. 33-6384 [47 FR 11476], at 11476 (``The list of industry guides
has been moved into Regulation S-K, which serves as the central
repository of disclosure requirements under the Securities Act and
Exchange Act, in order to more effectively put registrants on notice
of their existence. These guides remain as an expression of the
policies and practices of the Division of Corporation Finance and
their status is unaffected by this change.'') If the proposed
amendments are adopted, the Commission would authorize its staff to
amend Guide 3 to eliminate Item VII in its entirety.
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Third, we are proposing conforming amendments to the definition of
``direct financial obligations'' in Items 2.03 and 2.04 of Form 8-K.
Finally, the proposed amendments would update the references to
U.S. GAAP in Item 303 of Regulation S-K and Item 5 of Form 20-F to
reflect the FASB Codification.
Over time, to enhance the information provided to investors through
MD&A we have supplemented the principles-based disclosure requirements
governing MD&A with more detailed and specific MD&A disclosure
requirements, such as the contractual obligations table and the off-
balance sheet arrangements disclosure requirements.\22\ Our proposal to
require quantitative and qualitative information about short-term
borrowings is similarly designed to enhance investor understanding of a
company's financial position and liquidity. We emphasize, however, that
the addition of these specific disclosure requirements to MD&A
supplements, and is not a substitute for the required discussion and
analysis that enables investors to understand the company's business as
seen through the eyes of management.\23\
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\22\ See Items 303(a)(4) and (5) of Regulation S-K [17 CFR
229.303(a)(4) and (5)].
\23\ See 2003 Interpretive Release, supra note 6, at 75056.
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In a companion release, we are providing interpretive guidance that
is intended to improve the overall discussion of liquidity and funding
in MD&A in order to facilitate understanding by investors of the
liquidity and funding risks facing registrants.
II. Discussion of the Proposed Amendments
A. Short-Term Borrowings Disclosure
1. Existing Requirements for Disclosure of Short-Term Borrowings
Existing MD&A requirements call for discussion and analysis of a
registrant's liquidity and capital resources. With respect to
liquidity, registrants must identify any known trends or any known
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.\24\ Registrants are also
required to identify and separately describe internal and external
sources of liquidity.\25\ With respect to capital resources, a
registrant is required to describe any known material trends, favorable
or unfavorable, in its capital resources, indicating any expected
material changes in the mix and relative cost of such resources.\26\ In
its discussion of capital resources, a registrant is also required to
consider changes between equity, debt and any off-balance sheet
financing arrangements.\27\ However, other than in connection with this
discussion of liquidity and capital resources under Item 303(a)(1) and
(2) of Regulation S-K, companies that do not provide Guide 3 disclosure
are not subject to any line item requirements for the reporting of
specific data regarding short-term borrowing amounts or information
about intra-period borrowing levels.
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\24\ See Item 303(a)(1) of Regulation S-K [17 CFR
229.303(a)(1)].
\25\ Id.
\26\ See Item 303(a)(2)(ii) of Regulation S-K [17 CFR
229.303(a)(2)].
\27\ Id.
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Registrants that are bank holding companies provide statistical
disclosures in accordance with the industry guidance set forth in Guide
3.\28\ Guide 3 is primarily intended to provide supplemental data to
facilitate analysis and to allow for comparisons of sources of income
and evaluations of exposures to risk.\29\ One of the important
provisions of Guide 3 is annual disclosure of average, maximum month-
end, and period-end amounts of short-term borrowings.\30\ Registrants
that follow the provisions of Guide 3 provide three years of annual
data, broken out into three categories of short-term borrowings,
namely: Federal funds purchased and securities sold under agreements to
repurchase, commercial paper, and other short-term borrowings.\31\ We
believe that this data
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is useful to show the types of short-term financings constituting a
portion of the bank holding company's liquidity profile, as well as to
highlight differences between period-end and intra-period short-term
financing activity and the overall liquidity risks it faces during the
period. Given the utility of this data in analyzing liquidity and
funding risks, we are proposing to require all registrants to provide
disclosure in their MD&A similar to the short-term borrowings
information called for by Guide 3.\32\ Further, since liquidity and
funding risks can change rapidly over the course of a year, we are
proposing to require the information for both annual and interim
periods.
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\28\ See 17 CFR 229.801. Bank holding companies typically
include this disclosure in the MD&A section of their filings.
\29\ See Proposed Revision of Financial Statement Requirements
and Industry Guide Disclosures for Bank Holding Companies, Release
No. 33-6417 (July 9, 1982) [47 FR 32158] at 32159.
\30\ See Item VII of Guide 3.
\31\ Id. Item VII of Guide 3 calls for the presentation of
information for each category of short-term borrowings that is
reported in the financial statements pursuant Article 9 of
Regulation S-X. Rule 9-03.13(3) of Regulation S-X [17 CFR 210.9-
03.13(3)] requires separate balance sheet disclosure of ``amounts
payable for (1) Federal funds purchased and securities sold under
agreements to repurchase, (2) commercial paper, and (3) other short-
term borrowings.''
\32\ As described below in this release, in codifying the Guide
3 short-term borrowings provisions in Regulation S-K, we are
proposing several changes from the existing provisions of Item VII
of Guide 3. The changes include: Expanding the categories of short-
term borrowings that require disclosure; expanding the applicability
to all registrants that are required to provide MD&A disclosure;
requiring financial companies to provide disclosure of the daily
maximum amount during the period, as well as averages on a daily
average basis; requiring a discussion and analysis of short-term
borrowings arrangements; and requiring quarterly reporting of short-
term borrowings. See ``Proposed New Short-Term Borrowings Disclosure
in MD&A.''
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We note that, in 1994, in connection with the elimination of
various financial statement disclosure schedules, the Commission
eliminated a short-term borrowings disclosure requirement for
registrants that were not bank holding companies, which was similar to
the existing Guide 3 short-term borrowings disclosure guidance.\33\
Former Rule 12-10 of Regulation S-X \34\ required those registrants to
include with their financial statements a schedule of short-term
borrowings that disclosed the maximum amount outstanding during the
year, the average amount outstanding during the year, and the weighted-
average interest rate during the period, with amounts broken out into
specified categories of short-term borrowings.\35\
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\33\ See Financial Statements of Significant Foreign Equity
Investees and Acquired Foreign Businesses of Domestic Issuers and
Financial Schedules, Release No. 33-7118 (Dec. 13, 1994) [59 FR
65632].
\34\ 17 CFR 210.12-10.
\35\ The categories in former Rule 12-10 were amounts payable
to: banks for borrowings; factors or other financial institutions
for borrowings; and holders of commercial paper.
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While former Rule 12-10 of Regulation S-X was similar to the short-
term borrowing requirements proposed in this release, we believe there
are important differences. In proposing to eliminate the schedule, the
Commission noted that ``the disclosures concerning the registrant's
liquidity and capital resources that are required in MD&A would appear
to be sufficiently informational to permit elimination of the short-
term borrowing schedule.'' \36\ Although we believe that a thorough
discussion of liquidity and capital resources under existing MD&A
requirements often would provide qualitative information comparable to
that elicited by the proposed requirements, we expect that the proposed
requirements would serve as a useful framework for the provision of
both quantitative and qualitative information about short-term
borrowings that would supplement the registrant's discussion of
liquidity and capital resources. We also believe that, in contrast to
the presentation required in the financial statement schedule that was
eliminated in 1994, the information would be more useful to investors
if it is provided in MD&A, in tabular form, coupled with a discussion
and analysis to provide context for the quantitative data.
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\36\ See Financial Statements of Significant Foreign Equity
Investees and Acquired Foreign Businesses of Domestic Issuers and
Financial Schedules, Release No. 33-7055 (Apr. 19, 1994) [59 FR
21814], at 21818.
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Among the primary reasons cited for the repeal of Rule 12-10 were
the practical difficulties involved in gathering the data and preparing
meaningful disclosure.\37\ We note that some of those practical
difficulties may be less relevant today because of technological
advancements in accounting systems that have become more widely used by
companies since 1994. In addition, the requirements proposed today
contain a number of features designed to address some of the practical
difficulties cited by prior commentators in connection with former Rule
12-10. More importantly, however, recent events suggest that more
detailed information about average short-term borrowings would
facilitate a better understanding of whether a registrant's period-end
figures are indicative of levels during the period. In light of these
changes, we believe the balance of factors may have shifted, such that
the utility of the disclosure justifies the burden of preparing it.
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\37\ See Release No. 33-7118, supra note 30, at 65635.
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2. Proposed New Short-Term Borrowings Disclosure in MD&A
Summary of Proposed Requirements
We are proposing to amend our MD&A requirements to include a new
section that would provide tabular information about a company's short-
term borrowings, as well as a discussion and analysis of those short-
term borrowings. We note that the current Guide 3 disclosure of short-
term borrowings does not call for a qualitative discussion of the
reasons for use by a registrant of the particular types of financing
techniques, or of the drivers of differences between average amounts
and period-end amounts outstanding for the period. We believe that
including a requirement for a narrative explanation together with
tabular data would provide important information so that investors can
better understand the role of short-term financing and its related
risks to the registrant as viewed through the eyes of management.
The proposed amendments would codify in Regulation S-K the Guide 3
provisions for disclosure of short-term borrowings applicable to bank
holding companies and would apply to all companies that provide MD&A
disclosure, not only to bank holding companies and other financial
institutions. If the proposals are adopted, we expect to authorize the
Commission's staff to eliminate the corresponding provisions of Guide 3
in their entirety to avoid redundant disclosure requirements for bank
holding companies. As proposed, registrants would be required to
provide disclosure in MD&A of:
The amount in each specified category of short-term
borrowings at the end of the reporting period and the weighted average
interest rate on those borrowings;
The average amount in each specified category of short-
term borrowings for the reporting period and the weighted average
interest rate on those borrowings;
For registrants meeting the proposed definition of
``financial company,'' the maximum daily amount of each specified
category of short-term borrowings during the reporting period; and
For all other registrants, the maximum month-end amount of
each specified category short-term borrowings during the reporting
period.
We believe that the largest amount of short-term borrowings
outstanding during the period is an important data point for assessing
the intra-period fluctuation of short-term borrowings and, thus, of
liquidity risk. Given the critical nature of liquidity and funding
matters to a financial company's business activities, we believe it may
be important for an investor to know the maximum amount that a
financial company has borrowed in any given period as an indication of
its short-term financing needs. We are proposing that financial
companies be required to
[[Page 59870]]
disclose the maximum daily amount of short-term borrowings outstanding.
Both Guide 3 and former Rule 12-10 called for disclosure of the maximum
month-end amounts, which is the standard we are proposing to require
for registrants that are not ``financial companies.'' As explained
below, we are proposing monthly, rather than daily, maximum amounts for
non-financial companies in view of the costs that non-financial
companies may encounter in recording daily amounts and the information
needs of investors.
Definition of Short-Term Borrowings
Under the proposed rule, ``short-term borrowings'' would be defined
by reference to the various categories of arrangements that comprise
the short-term obligations reflected in a registrant's financial
statements, and all registrants would be required to present
information for each category of short-term borrowings.\38\
Specifically, as proposed, ``short-term borrowings'' would mean amounts
payable for short-term obligations that are:
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\38\ Consistent with the approach taken in Guide 3 and in former
Rule 12-10 of Regulation S-X, we propose to define ``short-term
borrowings'' by reference to the amounts payable for various
categories of short-term obligations that are typically stated
separately on the balance sheet in accordance with Regulation S-X.
Under U.S. GAAP, short-term obligations are those that are scheduled
to mature within one year after the date of an entity's balance
sheet or, for those entities that use the operating cycle concept of
working capital, within an entity's operating cycle that is longer
than one year. See FASB ASC 210-10-20. As such, the proposed
definition of short-term borrowings is intended to be a subset of
short-term obligations under U.S. GAAP.
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Federal funds purchased and securities sold under
agreements to repurchase;
Commercial paper;
Borrowings from banks;
Borrowings from factors or other financial institutions;
and
Any other short-term borrowings reflected on the
registrant's balance sheet.\39\
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\39\ This last category is derived from the balance sheet line
item in Rule 9-03.13(3) of Regulation S-X [17 CFR 210.9-03.13(3)]
for ``other short-term borrowings.'' Amounts that a registrant
includes on its balance sheet under a line item for ``other short-
term borrowings'' that do not fall into one of the other proposed
categories would be disclosed under this category.
These categories are derived from the categories of short-term
borrowings specified in Guide 3 and Rule 9-03 of Regulation S-X,\40\ as
well as certain categories of current liabilities set forth in Rule 5-
02 of Regulation S-X.\41\ Registrants that are bank holding companies
and other companies that follow Guide 3 prepare their financial
statements in accordance with Article 9 of Regulation S-X and present
separate line items for categories of short-term borrowings on the face
of their balance sheets under Rule 9-03 of Regulation S-X. Registrants
that are commercial or industrial companies prepare their financial
statements in accordance with Article 5 of Regulation S-X and present
separate categories of current liabilities on the face of their balance
sheets under Rule 5-02 of Regulation S-X.\42\
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\40\ 17 CFR 210.9-03.
\41\ Rule 5-02.19(a) of Regulation S-X [17 CFR 210.5-02.19(a)]
also requires separate disclosure in the balance sheet of amounts
payable to trade creditors, related parties, and underwriters,
promoters and employees (other than related parties). Consistent
with the approach taken in former Rule 12-10 of Regulation S-X and
in existing Guide 3 provisions, we are proposing to define short-
term borrowings more narrowly than ``current liabilities'' or
``short-term obligations.''
\42\ Registrants that are insurance companies follow Article 7
of Regulation S-X, which also incorporates certain standards of
Article 5. For example, under Rule 7-03.16(b), insurance companies
must include disclosure required by Rule 5-02.19(b), if the
aggregate short-term borrowings from banks, factors and other
financial institutions and commercial paper issued exceeds five
percent of total liabilities. See 17 CFR 210.5-02.19(b) and 17 CFR
210.7-03.16(b).
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Categories and Disaggregation
Rather than creating different disclosure categories for
registrants based solely on existing financial reporting rules
applicable to certain types of entities, the proposed requirement draws
on the categories from both Rule 9-03 and Rule 5-02 so that a
registrant must present each of the categories that is relevant to the
types of short-term financing activities it conducts, even if that
category is not required to be reported as a separate line item on its
balance sheet under Regulation S-X.\43\ As a result, for example,
registrants currently subject to Guide 3 would need to provide
disclosure for the same categories as all other registrants. We believe
this approach will result in more meaningful disclosure, since it will
elicit more specific information regarding the borrowing methods
actually used by the registrant. Foreign private issuers that do not
prepare financial statements under U.S. GAAP would be permitted to
provide disclosure of categories that correspond to the classifications
used for such types of short-term borrowings under the comprehensive
set of accounting principles that the company uses to prepare its
primary financial statements, so long as the disclosure is provided at
a level of detail that satisfies the objective of the disclosure
requirement.\44\
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\43\ In such circumstances, a registrant should consider whether
additional information should be provided to identify the financial
statement line items where the period-end short-term borrowings
amounts are reported.
\44\ See proposed Instruction 1 to Item 5.H of Form 20-F. This
approach is consistent with the existing Instruction 5 to Item 5 of
Form 20-F for issuers that file financial statements that comply
with International Financial Reporting Standards (``IFRS'') as
issued by the International Accounting Standards Board (``IASB'').
It is also consistent with the approach taken for tabular disclosure
of contractual obligations in Form 20-F for filers that do not use
U.S. GAAP.
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The proposed requirements do not include a quantitative threshold
for purposes of disaggregating amounts into categories of short-term
borrowings. For bank holding companies, this would be a change from
existing Guide 3 instructions, which allow categories to be aggregated
where they do not exceed 30% of the company's stockholders' equity at
the end of the period.\45\ On the one hand, including such a threshold
could ease the compliance burden for a company where the distinction
among categories of short-term borrowings is not material. On the other
hand, including such a quantitative threshold could diminish the
comparability of information across companies and, more fundamentally,
could defeat the objective of specifically highlighting the types of
short-term borrowing arrangements that expose registrants to liquidity
risks. Accordingly, the allocation of amounts into the various
categories is intended to achieve this purpose so that investors can
assess the proportionate exposure to the funding risk and market risk
inherent in the borrowing arrangements.
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\45\ See Instruction to Item VII of Guide 3. If the proposals
are adopted, we expect to authorize our staff to eliminate Item VII
of Guide 3 in its entirety. In that case, a registrant that provides
Guide 3 information would need to follow the proposed Item 303(a)(6)
for its short-term borrowings disclosure in MD&A.
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In circumstances where aggregate amounts within a category of
short-term borrowings are subject to a wide range of interest rates and
exchange rates, we note that disclosure of those aggregate amounts may
not be comparable or meaningful. For example, a company with operations
outside of the United States may have, for a variety of reasons (such
as the need to finance its subsidiaries in local currency or as a hedge
against an asset denominated in that currency), foreign currency-
denominated borrowings that have a significantly higher interest rate
than the rate on its dollar-denominated borrowings. Under those
circumstances, combining the dollar-denominated borrowings with the
foreign currency-denominated borrowings could distort the presentation
of the interest rates for the company, causing the combined weighted
average interest rate on the
[[Page 59871]]
borrowings to be much higher than the company would incur to borrow in
U.S. dollars alone. This would be particularly true if the borrowings
are denominated in the currency of an economy that has experienced high
rates of inflation. To address this issue, the proposal would include a
requirement to further disaggregate amounts by currency or interest
rate to the extent necessary to promote understanding or to prevent
aggregate amounts from being misleading. Additional footnote disclosure
describing the method for disaggregation is proposed to be required
where necessary to an understanding of the data, stating, for example,
the timing and exchange rates used for currency translations and any
other pertinent data relating to the calculation of the amounts
provided.
Requirements for ``Financial Companies'' and Other Companies
As noted above, the proposed rule would distinguish between
registrants that engage in financial activities as their business and
all other registrants for purposes of calculating and reporting maximum
amounts outstanding and average amounts outstanding during the
reporting period. Registrants that are ``financial companies'' would be
required to compile and report data for the maximum daily amounts
outstanding (meaning the largest amount outstanding at the end of any
day in the reporting period) and the average amounts outstanding during
the reporting period computed on a daily average basis (meaning the
amount outstanding at the end of each day, averaged over the reporting
period). Registrants that are not ``financial companies'' would be
required to report the maximum month-end amounts outstanding (meaning
the largest amount outstanding at the end of the last day of any month
in the reporting period) and would be required to disclose the basis
used for calculating the average amounts reported. These registrants
would not be required to present average outstanding amounts computed
on a daily average basis, but, under the proposal, the averaging period
used must not exceed a month.
For purposes of the proposed requirement, a ``financial company''
would mean a registrant that, during the relevant reported period, is
engaged to a significant extent \46\ in the business of lending,
deposit-taking, insurance underwriting or providing investment advice,
or is a broker or dealer as defined in Section 3 of the Exchange
Act,\47\ and includes, without limitation, an entity that is, or is the
holding company of, a bank, a savings association, an insurance
company, a broker, a dealer, a business development company,\48\ an
investment adviser, a futures commission merchant, a commodity trading
advisor, a commodity pool operator, or a mortgage real estate
investment trust.\49\ Although this non-exclusive list \50\ would be
provided in the rule as guidance to registrants, the proposed
definition itself is intentionally flexible, so that disclosure of
maximum daily amount outstanding and the average amount outstanding
during the reporting period computed on a daily average basis would be
required to be provided by registrants that are engaged to a
significant extent in the business of lending, deposit-taking,
insurance underwriting, providing investment advice, or are brokers or
dealers or any of the other enumerated types of entities, regardless of
their nominal industry affiliation, organizational structure or primary
regulator.
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\46\ We are not proposing a specific threshold or definition of
``significant'' for this purpose. As described below, we are
proposing an instruction that allows a registrant to present the
short-term borrowings attributable to any non-financial operations
separately using the reporting rules for non-financial companies.
\47\ 15 U.S.C. 78c. See also proposed Item 303(a)(6)(iv) of
Regulation S-K and Item 5.H.4 of Form 20-F.
\48\ Business development companies are a category of closed-end
investment companies that are not registered under the Investment
Company Act of 1940, but are subject to certain provisions of that
Act. See Section 2(a)(48) and Sections 54-65 of the Investment
Company Act of 1940 [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
\49\ A mortgage real estate investment trust, or mortgage REIT,
is a type of real estate investment trust that invests in mortgages
and interests in mortgages. Mortgage REITs typically rely on the
exemption from registration under the Investment Company Act of 1940
provided by Section 3(c)(5)(C) of that Act. [15 U.S.C. 80a-
3(c)(5)(C)].
\50\ We note that the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Pub. L. 111-203) (``Dodd-Frank Act'')
includes defined terms for ``financial institution,'' ``financial
company,'' and ``non-bank financial company'' which are used in
various contexts in that legislation. Our proposed definition of
``financial company'' is informed by the terms used in the
legislation, but is not exactly the same. Because each of those
terms has a definition specific to the regulatory purpose of the
section of the legislation in which it is used, none is perfectly
aligned with the disclosure aim of our proposed requirement.
Therefore, in keeping with the over-arching principles-based
approach to MD&A requirements, we are proposing a definition of
``financial company'' based on the types of business activities that
expose a company to similar liquidity risks that banks face.
The enumerated examples of entities that would be considered
``financial companies'' for purposes of the proposed rule are
similar to the entities covered by the definition of ``financial
institution'' contained in Sec. 803 of the Dodd-Frank Act, which
includes: A depository institution, as defined in Section 3 of the
Federal Deposit Insurance Act (12 U.S.C. 1813); a branch or agency
of a foreign bank, as defined in Section 1(b) of the International
Banking Act of 1978 (12 U.S.C. 3101); an organization operating
under Section 25 or 25A of the Federal Reserve Act (12 U.S.C. 601-
604a and 611 through 631); a credit union, as defined in Section 101
of the Federal Credit Union Act (12 U.S.C. 1752); a broker or
dealer, as defined in Section 3 of the Securities Exchange Act of
1934 (15 U.S.C. 78c); an investment company, as defined in Section 3
of the Investment Company Act of 1940 (15 U.S.C. 80a-3); an
insurance company, as defined in Section 2 of the Investment Company
Act of 1940 (15 U.S.C. 80a-2); an investment adviser, as defined in
Section 202 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-
2); a futures commission merchant, commodity trading advisor, or
commodity pool operator, as defined in Section 1a of the Commodity
Exchange Act (7 U.S.C. 1a); and any company engaged in activities
that are financial in nature or incidental to a financial activity,
as described in Section 4 of the Bank Holding Company Act of 1956
(12 U.S.C. 1843(k)).
In addition, we expect that registrants that meet the existing
definition of ``bank holding company'' in Rule 1-02 of Regulation S-
X [17 CFR 210.1-02] would be ``financial companies'' under the
proposed definition.
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Some registrants that are engaged in both financial and non-
financial businesses may meet the definition of ``financial company,''
such as manufacturing companies that have a subsidiary that provides
financing to its customers to purchase its products. For those
registrants, the costs involved in providing averages computed on a
daily average basis and maximum daily amounts of short-term borrowings
may not be justified by the benefit to investors, where only a portion
of their activities are financial in nature. To address this, the
proposal would provide an instruction that would permit a company to
provide separate short-term borrowings disclosure for its financial and
non-financial business operations. A company relying on the instruction
would be required to provide averages computed on a daily average basis
and maximum daily amounts for the short-term borrowings arrangements of
its financial operations, and would be permitted to follow the
requirements and instructions applicable to non-financial companies for
purposes of the short-term borrowings arrangements of its non-financial
operations. The instruction would also require the company to provide
an explanatory footnote to the table with information to enable readers
to understand how the operations were grouped for purposes of the
disclosure.
Although investors could benefit from having all registrants
provide data for maximum daily amounts and average amounts computed on
a daily average basis, we preliminarily believe that it is appropriate
to limit these daily requirements to entities that are engaged
[[Page 59872]]
in activities that are financial in nature. Because of the nature of
their business activities, we believe it may be important for an
investor to have information about the daily amounts of borrowings of
financial companies, particularly where borrowed funds are invested in
assets that contribute to their earnings activities. We believe that
most banks would be able to track daily short-term borrowings without
unreasonable effort or expense, and some companies that engage in
financial businesses may already track this type of information for
their own risk management purposes.
We expect that many other non-bank companies that engage in these
types of activities do not currently track this information on a daily
basis, so this proposed requirement could impose significant costs on
these entities. On balance, however, we preliminarily believe that the
importance of the information in the financial company setting
justifies the increased costs. By contrast, for companies that are not
financial companies, we are not proposing to require maximum daily
amounts or averages calculated on a daily average basis because we
preliminarily believe that the information with respect to those
issuers is less important to investors than in the context of financial
companies, and that the combination of our existing and proposed
requirements should provide sufficient information about their use of
short-term borrowings. However, we request comment on this issue below.
Narrative Discussion of Short-Term Borrowings
In order to provide context for the short-term borrowings data, we
are also proposing to require a narrative discussion of short-term
borrowings arrangements.\51\ This narrative discussion is not currently
included in Guide 3. The topics proposed to be included would be:
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\51\ See proposed Item 303(a)(6)(ii) of Regulation S-K.
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A general description of the short-term borrowings
arrangements included in each category (including any key metrics or
other factors that could reduce or impair the registrant's ability to
borrow under the arrangements and whether there are any collateral
posting arrangements) and the business purpose of those arrangements;
\52\
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\52\ A discussion of the business purpose of the arrangements
might encompass topics such as the use of proceeds of the borrowings
and the reasons for the particular structure of the arrangements.
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The importance to the registrant of its short-term
borrowings arrangements to its liquidity, capital resources, market-
risk support, credit-risk support or other benefits; \53\
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\53\ Similar to the existing requirement in Item 303(a)(4)(i)(B)
of Regulation S-K, this proposed requirement is intended to provide
investors with an understanding of the importance to the registrant
of its short-term borrowings as a financial matter and as they
relate to the funding of its operations and to its risk management
activities.
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The reasons for the maximum amount for the reporting
period, including any non-recurring transactions or events, use of
proceeds or other information that provides context for the maximum
amount; and
The reasons for any material differences between average
short-term borrowings for the reporting period and period-end short-
term borrowings.
This proposed short-term borrowings discussion and analysis is
intended to highlight short-term financing activities and to complement
the other MD&A requirements relating to liquidity and capital
resources, but it is not intended to be repetitive of other disclosures
relating to liquidity and capital resources. In preparing the short-
term borrowings disclosure, we anticipate that a registrant would need
to consider its disclosures of cash requirements presented in the
contractual obligations table, its disclosures of off-balance sheet
arrangements, as well as its other liquidity and capital resources
disclosures.\54\ For example, the company may have significant payments
under operating leases or may have entered into a significant
repurchase agreement that is accounted for as a sale that will be
settled shortly after the balance sheet date and that are disclosed in
the contractual obligations table. To be able to settle these amounts,
the company may plan to use existing short-term financing arrangements
that will limit its ability to borrow for other purposes, such as
making loans or financing inventory, which in turn can impact
operations. In this example, the company should discuss these items
together and explain the implications. A registrant would need to
consider ways to integrate the proposed disclosures, together with
disclosures made under existing MD&A requirements, into a clear,
comprehensive description of its liquidity profile. For example, a
registrant could consider organizing its discussion to address overall
liquidity, and then short-term and long-term borrowings and liquidity
needs.
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\54\ See Item 303(a)(1) and (a)(2) of Regulation S-K.
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As discussed above, we believe investors would benefit from an
expanded discussion and analysis about a company's use of short-term
borrowings. We believe that disclosure of a company's short-term
borrowings data, with a comprehensive discussion of its overall
approach to short-term financings and the role of short-term borrowings
in the company's funding of its operations and business plan, can
provide investors with additional information necessary to better
evaluate a registrant's current short-term liquidity profile and
potential future trends in its liquidity and funding risks.
Request for Comment
1. Is information about short-term borrowings and intra-period
variations in the level of short-term borrowings useful to investors?
If so, should we require specific line item disclosure of this
information in MD&A, as proposed, or would existing MD&A requirements
for disclosure of liquidity and capital resources provide sufficient
disclosure about these issues? If a specific MD&A requirement would be
appropriate, does the proposed requirement capture the type of
information about short-term borrowings that is important to investors?
If not, how should we change the proposed requirement? For example,
should we require disclosure of the weighted average interest rate on
the short-term borrowings, as proposed?
2. Consistent with the approach taken in Guide 3 and in former Rule
12-10 of Regulation S-X, we propose to define ``short-term borrowings''
by reference to the amounts payable for various categories of short-
term obligations that are typically reflected as short-term obligations
on the balance sheet and stated as separate line items in accordance
with Regulation S-X. Is the proposed definition sufficiently clear? If
not, what changes should be made to the proposed definition? For
example, should the definition refer to ``short-term obligations'' as
defined in U.S. GAAP? \55\ In connection with any response, please
provide information as to the costs associated with the implementation
of any changes to the proposed definition.
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\55\ See, e.g., FASB ASC 210-10-20 (``Short-term obligations are
those that are scheduled to mature within one year after the date of
an entity's balance sheet or, for those entities that use the
operating cycle concept of working capital described in paragraphs
210-10-45-3 and 210-10-45-7, within an entity's operating cycle that
is longer than one year.'').
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3. Are the proposed categories of short-term borrowings
appropriate? If not, why not, and how should we change the proposed
requirement? For example, should we apply different categories to Guide
3 companies as compared to other companies, as was the case when former
Rule 12-10 of
[[Page 59873]]
Regulation S-X was in effect? Are the proposed categories appropriately
tailored so that companies can monitor and provide the proposed
disclosure? In particular, is the category for ``any other short-term
borrowings reflected on the registrant's balance sheet'' too broad? If
so, how should it be narrowed? Are there other categories of short-term
borrowings that should be broken out? For example, should amounts
relating to repurchase arrangements be disaggregated into those that
are collateralized by U.S. Treasury securities and those that are
collateralized by other assets? If so, please include in your
discussion the reasons such information would be meaningful to
investors and provide an indication of the costs and burdens associated
with providing that level of detail.
4. Is disaggregation by currency or other grouping useful to the
understanding of aggregate short-term borrowing amounts? Would the
proposed requirement for disaggregation provide an appropriate level of
detail? Is it sufficiently clear? Instead, should we prescribe a
specified method or threshold for disaggregation? If so, describe it.
For example, should we require information to be presented separately
by currency where there is a significant amount of borrowings that are
not denominated in the company's reporting currency? If so, should we
specify a threshold amount (e.g., 5, 15 or 20% of borrowings) and what
should that threshold be? Or should the amounts instead be
disaggregated into more generalized categories, such as ``domestic''
and ``foreign'' borrowings? Please provide details about the costs and
benefits of any alternatives to the proposed disaggregation provision,
and discuss whether requiring companies to follow a specific
disaggregation method would impose practical difficulties on companies
(or particular types of companies) when they are gathering and
compiling the proposed short-term borrowings disclosure.
5. We note that Guide 3 currently provides a quantitative threshold
for separate disclosure of short-term borrowings by category. The
proposed short-term borrowings provision does not contain a specific
quantitative disclosure threshold for separate disclosure of amounts in
the different categories of short-term borrowings. Should we establish
a quantitative disclosure threshold for the separate categories of
short-term borrowings, such as above a specified percentage of
liabilities or stockholders' equity (e.g., 5, 10, 20, 30 or 40%)? If
so, how should the threshold be computed? Should this quantitative
disclosure threshold apply to all companies?
6. As proposed, ``financial companies'' would be required to
provide the largest daily amount of short-term borrowings. We
understand that banks and bank holding companies track this information
on a daily basis in connection with the preparation of reports to
banking regulators. We also expect that other non-bank companies
engaged in financial businesses that would fall within the scope of the
proposed requirement do not currently track this type of information on
a daily basis. Is this information useful to investors? What are the
burdens and costs of requiring registrants that meet the definition of
``financial company'' but are not banks to meet that requirement?
7. Is the activities-based definition of ``financial company''
sufficiently clear? Are the activities identified (lending, deposit
taking, insurance underwriting, providing investment advice, broker or
dealer activities) as part of the definition appropriate, or are they
overly-inclusive (or under-inclusive)? Should we provide a definition
of the term ``significant'' as used in the proposed definition? If so,
should we provide a numerical, threshold-based definition (e.g., 10% of
total assets)? If so, what should the threshold be? Should it relate to
assets or should it relate to revenues and income? Should we specify
certain types of entities in the definition, as proposed? Should other
entities be added to or excluded from the definition? If so, please
provide details. Are there any circumstances that would cause an entity
to come under the proposed definition that should be excluded, and if
so, why?
8. Should all registrants that are financial companies be required
to provide the maximum daily amount of short-term borrowings, as
proposed? Should registrants that are not financial companies be
required to provide the maximum daily amount of short-term borrowings,
rather than permitting them to provide the maximum month-end amount as
is proposed? Do registrants that are not financial companies have
systems to track and calculate this information on a daily basis? What
are the burdens and costs of requiring companies engaged in non-
financial businesses to meet that requirement? Should registrants that
are not financial companies be required to disclose each month-end
amount rather than the maximum, as proposed? Should registrants also be
required to provide the minimum month-end (or daily for financial
companies) amount outstanding? What are the burdens and costs of
requiring companies to meet those requirements?
9. Is the proposed accommodation for reporting that would allow
financial companies to present information about their non-financial
businesses on the same basis as other non-financial companies
appropriate? Would this address cause concerns for these companies? Is
the proposed instruction to implement this accommodation sufficiently
clear?
10. Should registrants be required to provide the largest amount of
short-term borrowings outstanding at any time during the reporting
period (meaning intra-day as opposed to close of business)? Would this
amount be difficult for registrants to track?
11. As proposed, registrants that are financial companies would be
required to provide average amounts outstanding computed on a daily
average basis. Should averages computed on a daily average basis be
required only for certain companies (for example, bank holding
companies, banks, savings associations, broker-dealers)? If so, why and
which companies? In this connection, please describe whether financial
companies that are not banks typically close their books on a daily
basis and whether they have the systems to track and calculate this
daily balance information used to compute averages on a daily average
basis. What are the burdens and costs for a registrant (that is not a
bank) to meet the proposed requirement? Are some types of businesses,
such as multi-nationals, disproportionately affected by such costs? If
so, please explain why. Is there an alternative requirement for such a
business that would still meet the disclosure objective?
12. As proposed, registrants that are not financial companies would
be permitted to use a different averaging period, such as weekly or
monthly, so long as the period used is not longer than a month. Is it
appropriate to allow this type of flexibility given the possibility
that longer averaging periods could mask fluctuations? Are certain
borrowing practices more likely to be impacted than others, such as
overdrafts used as financing? Is there an alternative requirement or
instruction that could eliminate this issue while not imposing undue
costs and burdens and still meeting the disclosure objective?
13. Should we require a narrative discussion of short-term
borrowing arrangements, as proposed? Are the narrative discussion
topics useful to investors? Are there other discussion topics that
would be useful to investors? If so, what other topics should we
require to be discussed? Should we
[[Page 59874]]
tailor the disclosure to omit information that may be unimportant to
investors? If so, what information, and why, and which registrants
would be affected?
14. Do the proposed discussion topics provide enough flexibility to
companies to fully and clearly describe their short-term borrowings
arrangements?
15. If the proposals are adopted, we expect to authorize our staff
to amend Guide 3 to eliminate Item VII in its entirety. Are there any
other technical amendments that would be appropriate, such as the
elimination of cross-references in other Commission rules or forms, if
the staff removes Item VII from Guide 3?
3. Reporting Periods
As proposed, the requirements would be applicable to annual and
quarterly reports and registration statements. For annual reports,
information would be presented for the three most recent fiscal years
and for the fourth quarter. In addition, registrants preparing
registration statements with audited full-year financial statements
would be required to include short-term borrowings disclosure for the
three most recent full fiscal year periods and interim information for
any subsequent interim periods, consistent in each case with general
MD&A requirements and instructions applicable to the relevant
registration statement form requirements. For quarterly reports,
information would be presented for the relevant quarter, without a
requirement for comparative data. For registrants that are not subject
to Guide 3, we are proposing a yearly phase-in of the requirements for
comparative annual data until all three years are included in the
annual presentation. This is described under the heading ``Transition''
in this release. Notwithstanding this transitional accommodation, all
registrants would be permitted to provide three full years during the
transition period.
A principal objective of the proposed disclosure is to provide
transparency about intra-period borrowings activity, as a supplement to
disclosure of period-end amounts. To achieve this purpose in each
reporting period, we are proposing that disclosure in quarterly reports
and interim period disclosure in registration statements include short-
term borrowings information presented with the same level of detail as
would be provided for annual periods.\56\ Companies would need to
include the full presentation of quantitative and qualitative
information for short-term borrowings during the interim period, rather
than only disclosing material changes that have occurred since the
previous balance sheet date. In addition, registrants would be required
to identify material changes from previously reported disclosures in
the discussion and analysis, so that any material changes would be
highlighted. This layered approach is intended to enhance transparency
of short-term borrowing activities during the specific quarterly
period, while still emphasizing material changes so that investors can
more easily understand how the exposures have evolved from past
reporting periods.
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\56\ We are proposing to revise the ``Instructions to Paragraph
303(b)'' in Item 303 of Regulation S-K to accomplish this change to
interim period reporting requirements. The proposed instructions
would only apply to disclosure pursuant to Item 303(a)(6). See 17
CFR 229.303(b).
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In addition, registrants would be required to provide quarterly
short-term borrowings information for the fourth fiscal quarter in
their annual report. Because the disclosure is intended to provide
additional transparency about a registrant's short-term borrowing
practices, including the ability of the registrant to obtain financing
to conduct its business, and the costs of that financing, during the
year, we believe that short-term borrowings data for the fourth quarter
would be useful to investors. As this type of reporting requirement
would be a departure from our long-standing approach to the
presentation of fourth quarter financial information in MD&A contained
in annual reports, we specifically request comment below on this issue,
and particularly whether material information as to short-term
borrowing activities prior to year-end would be lost without separate
quarterly disclosure for the fourth quarter.
As proposed, interim period disclosures would be presented without
comparative period data.\57\ We believe that this data is most
meaningful to show changes from annual borrowing amounts and any intra-
period variations from period-end amounts. In addition, because any
seasonal trends in the information should generally already be
disclosed under existing MD&A requirements, we preliminarily do not
believe it is necessary to specifically require prior period
comparisons to identify seasonality in borrowing levels. Moreover,
other than the presentation of short-term borrowings information for
the fourth fiscal quarter, registrants would not be required to include
a quarterly breakdown of short-term borrowings information in their
annual report. Because quarterly information would be available in
Forms 10-Q for all quarters other than the fourth quarter, we do not
believe that repeating that quarterly information in the annual report
would be useful to investors.
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\57\ Proposed Instruction 8 to Paragraph 303(b) would require
the registrant to include narrative discussion that highlights any
material changes from prior periods. In doing so, registrants should
consider whether including comparative period data would make the
presentation of those material changes more clear.
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These interim period requirements would not apply to registrants
that are foreign private issuers or smaller reporting companies. In
addition, smaller reporting companies would be permitted to disclose
two fiscal years rather than three, in accordance with existing
disclosure accommodations for small entities. For a discussion of the
treatment of these types of entities, see the discussion under
``Treatment of Foreign Private Issuers and Smaller Reporting
Companies'' in this release.
Request for Comment
16. Are the proposed reporting periods appropriate? Should we
require annual short-term borrowings information in annual reports, as
proposed? Should annual reports instead include a quarterly breakdown
of short-term borrowings information? Should annual reports include
quarterly information for the fourth fiscal quarter in addition to
annual information, as proposed? For example, would disclosure of
information for the fourth fiscal quarter be necessary to highlight any
efforts to reduce borrowings at year-end, below the levels prevailing
throughout the fourth fiscal quarter? Is the presentation of this
information for the fourth fiscal quarter, in isolation without
corresponding quarterly financial statements and MD&A for that period,
potentially misleading? If so, what additional information should be
required? Should quarterly reports be required to include quarterly
information, as proposed? Should registration statements be required to
include annual and interim information, as proposed? In each case,
explain the reasons for requiring the applicable reporting periods and
provide information as to whether investors would find the information
useful. Please also include details about additional costs involved.
17. Should we require quarterly disclosure at the same level of
detail as annual period disclosure, as proposed? Does the proposed
presentation provide information that is useful to investors? Describe
in detail the costs and benefits of providing full (rather than
material changes) interim period disclosures of the proposed short-term
borrowings information. Instead, should we require quarterly reports to
include disclosure
[[Page 59875]]
of material changes only? If so, why? How would disclosure of material
changes address the issue of transparency of intra-period borrowings?
18. For annual periods, should we require, as proposed, three years
of comparative data? Or would data for the current year, without
historical comparison periods, provide investors with adequate
information? Describe in detail the costs and benefits of providing
comparative period disclosures in this context.
19. Is the proposed disclosure for the current interim period
sufficient, or should we also require comparative period data? If so,
which comparative periods would be most useful? Explain how prior
period comparisons would be useful to investors; for example, would
prior period comparisons be needed to identify seasonality in borrowing
levels? If so, instead of requiring comparative data, should we
specifically require companies to qualitatively describe trends or
seasonality in borrowing levels? Describe in detail the costs and
benefits of providing comparative period disclosures in this context.
20. Should we require year-to-date information in addition to
quarterly information for interim periods? Would year-to-date
information be useful to investors? Describe in detail the costs and
benefits of providing year-to-date information in this context.
4. Application of Safe Harbors for Forward-Looking Statements
In some instances, the disclosure provided in response to the
proposed short-term borrowings narrative discussion requirements could
include disclosure of forward-looking information.\58\ We are not,
however, proposing to extend the safe harbor in Item 303(c) of
Regulation S-K to include disclosures of forward-looking information
made pursuant to proposed Item 303(a)(6). This safe harbor was adopted
in connection with the adoption of Items 303(a)(4) and (a)(5) and
explicitly applies the statutory safe harbors of Sections 27A\59\ of
the Securities Act and 21E \60\ of the Exchange Act to those Items in
order to remove possible ambiguity about whether the statutory safe
harbors would be available for that information.\61\ The disclosure
required by Items 303(a)(4) and (a)(5) consists primarily of forward-
looking information, and as such, issuers and market participants
expressed particular concerns about the application of existing safe
harbors to that disclosure.\62\ In the proposing release for Item
303(c), we requested comment as to whether the safe harbor in Item
303(c) should be expanded to cover all forward-looking information in
MD&A.\63\ We declined to adopt such an expansion. We preliminarily
believe that the proposed short-term borrowings disclosure
requirements, which primarily concern disclosure of historical amounts
together with qualitative information about the registrant's use of
short-term borrowings, would not present any distinctive issues under
the application of the statutory safe harbor, and, accordingly, we are
not proposing to provide any specific provision or guidance as to its
application to this information. Companies would need to treat forward-
looking information disclosed pursuant to proposed Item 303(a)(6) in
the same manner as other MD&A disclosure for purposes of the statutory
safe harbor. We further note that nothing in the proposed requirements
would limit (or expand) the scope of the statutory safe harbor, the
safe harbor rules under Securities Act Rule 175 or Exchange Act Rule
3b-6, or Item 303(c) of Regulation S-K.
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\58\ See generally proposed Item 303(a)(6)(ii)(B), (C) and (D)
of Regulation S-K.
\59\ 15 U.S.C. 77z-2.
\60\ 15 U.S.C. 78u-5.
\61\ See OBS Adopting Release, supra note 6, at 5993.
\62\ See, e.g., Letter of Committee on Federal Regulation of
Securities of the American Bar Association's Section of Business Law
in Response to the OBS Proposing Release, available at http://www.sec.gov/rules/proposed/s74202.shtml (``[B]ecause of the inherent
predictive nature of disclosures of contingent liabilities and
commitments. * * * [W]e are concerned that the failure to include
that provision would lead to a negative inference that such
disclosure is not covered by the safe harbor.'').
In the OBS Adopting Release, the Commission emphasized that
notwithstanding the safe harbor provided in Item 303(c) of
Regulation S-K, the statutory safe harbor, by its terms, as well as
the safe harbor rules under Securities Act Rule 175 [17 CFR 230.175]
and Exchange Act Rule 3b-6 [17 CFR 240.3b-6] may be available for
the forward-looking disclosure required by Items 303(a)(4) and (5)
of Regulation S-K.
\63\ See OBS Proposing Release, supra note 6, at 68065-68066.
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Request for Comment
21. Is there any need for further guidance from the Commission with
respect to the application of either the statutory or the rule-based
safe harbors to the information called for by the proposed short-term
borrowings disclosure requirement? If so, please provide details as to
the potential ambiguity in the application of existing safe harbors. In
particular, what information called for by the proposed requirements
raises doubt as to the applicability of the statutory safe harbor or
the safe harbor rules under Securities Act Rule 175 or Exchange Act
Rule 3b-6?
22. Should Item 303(c) of Regulation S-K be revised to also cover
forward-looking information disclosed pursuant to the proposed short-
term borrowings disclosure requirement?
B. Treatment of Foreign Private Issuers and Smaller Reporting Companies
1. Foreign Private Issuers (Other Than MJDS Filers)
The proposed amendments would apply to foreign private issuers that
are not MJDS filers.\64\ The existing MD&A-equivalent disclosure
requirements in Form 20-F \65\ currently mirror the substantive MD&A
requirements for U.S. companies, and we believe that our proposed
changes to the MD&A requirements for U.S. companies would provide
important disclosure to investors that should also be provided by
foreign private issuers. Accordingly, we are proposing a new paragraph
H under Item 5 (Operational and Financial
[[Page 59876]]
Review and Prospects) in Form 20-F covering short-term borrowings.
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\64\ The term ``MJDS filers'' refers to registrants that file
reports and registration statements with the Commission in
accordance with the requirements of the U.S.-Canadian
Multijurisdictional Disclosure System (the ``MJDS''). The definition
for ``foreign private issuer'' is contained in Exchange Act Rule 3b-
4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign
issuer other than a foreign government, except for an issuer that
has more than 50% of its outstanding voting securities held of
record by U.S. residents and any of the following: A majority of its
officers and directors are citizens or residents of the United
States, more than 50% of its assets are located in the United
States, or its business is principally administered in the United
States.
\65\ Form 20-F is the combined registration statement and annual
report form for foreign private issuers under the Exchange Act. It
also sets forth disclosure requirements for registration statements
filed by foreign private issuers under the Securities Act.
In designing the integrated disclosure regime for foreign
private issuers the Commission endeavored to ``design a system that
parallels the system for domestic issuers but also takes into
account the different circumstances of foreign registrants.''
Integrated Disclosure System for Foreign Private Issuers, Release
No. 33-6360 (Nov. 20, 1981) [46 FR 58511]. As such, the requirements
of Item 5 of Form 20-F are analogous to those in Item 303 of
Regulation S-K. Although the wording is not identical, we interpret
Item 5 as requiring the same disclosure as Item 303 of Regulation S-
K. See Rules, Registration and Annual Report for Foreign Private
Issuers, Release No. 34-16371 (Nov. 29, 1979) [44 FR 70132]
(adopting Form 20-F and stating that the Commission would consider
revisions when MD&A requirements in Regulation S-K were adopted);
Integrated Disclosure System for Foreign Private Issuers, Release
No. 33-6360 (revising Form 20-F to add requirements consistent with
the MD&A requirements in Regulation S-K); International Disclosure
Standards, Release No. 33-7745 (Sept. 28, 1999)[64 FR 53900]
(adopting revisions to Form 20-F to conform to international
disclosure standards endorsed by the International Organization of
Securities Commissions in 1998); see also OBS Adopting Release,
supra note 6, at 5992 n. 135.
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Because foreign private issuers using a comprehensive set of
accounting principles other than U.S. GAAP might capture data and
prepare their financial statements using different categories of short-
term borrowings, we propose to include an instruction to paragraph H
that would permit a foreign private issuer to base the categories of
short-term borrowings used in the rule on the classifications for such
types of short-term borrowings under the comprehensive set of
accounting principles which the company uses to prepare its primary
financial statements, so long as the disclosure is provided in a level
of detail that satisfies the objective of the Item 5.H disclosure
requirement.\66\ This approach is consistent with the approach to
contractual obligations disclosure in Item 5.F, for which foreign
private issuers are instructed to base their tabular disclosure on the
classifications of obligations used in the generally accepted
accounting principles under which the company prepares its primary
financial statements.\67\ Similarly, in connection with references to
FASB pronouncements used in Item 5 of Form 20-F, issuers that file
financial statements that comply with IFRS as issued by the IASB are
instructed to ``provide disclosure that satisfies the objective of Item
5 disclosure requirements.'' \68\ Other than this instruction regarding
the categorization of short-term borrowings, the short-term borrowings
disclosure requirement proposed for Form 20-F is substantially similar
to the proposed provision applicable to U.S. issuers.
---------------------------------------------------------------------------
\66\ See proposed Instruction 1 to Item 5.H of Form 20-F.
\67\ See Instruction 2 to Item 5.F of Form 20-F.
\68\ See Instruction 5 to Item 5 of Form 20-F.
---------------------------------------------------------------------------
The reporting periods applicable to U.S. issuers are proposed to
also apply to foreign private issuers, except with respect to quarterly
reporting. For annual reports on Form 20-F, foreign private issuers
would present three years of annual short-term borrowings data, subject
to the proposed transition accommodation applicable to all registrants
that are not bank holding companies. Foreign private issuers preparing
registration statements with audited full-year financial statements
would be required to include short-term borrowings disclosure for the
three most recent full fiscal year periods and quarterly information
for any subsequent interim periods included in the registration
statement in accordance with the requirements of the relevant
registration statement form. The proposed amendments for U.S. issuers
would require quarterly disclosure of short-term borrowings in
quarterly reports on Form 10-Q.\69\ Foreign private issuers, however,
are not required to file quarterly reports with the Commission, and
therefore the proposed amendments would not apply to Form 6-K \70\
reports submitted by foreign private issuers.\71\ Thus, unless a
foreign private issuer (other than an MJDS filer) files a Securities
Act registration statement that must include interim period financial
statements and related MD&A-equivalent disclosure,\72\ it would not be
required to update its disclosure under proposed Item 5.H of Form 20-F
more than annually.
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\69\ 17 CFR 249.308a. See proposed Instruction 8 to Item 303(b)
of Regulation S-K [17 CFR 229.303(b)].
\70\ 17 CFR 249.306. 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, files or is
required to file with a stock exchange on which its securities are
traded and which was made public by that exchange under the rules of
the stock exchange or distributes or is required to distribute to
security holders. In instances where a foreign private issuer is
furnishing interim information on short-term borrowings under those
circumstances, we would encourage the foreign private issuer to
consider providing an update to its annual short-term borrowings
disclosure, although it would not be required to do so.
\71\ This treatment is consistent with the approach we took when
adopting off-balance sheet arrangements and contractual obligations
disclosure. See OBS Adopting Release, supra note 6, at 5992 n. 139.
\72\ The proposed amendments would apply to Securities Act
registration statements on Forms F-1 [17 CFR 239.31], F-3 [17 CFR
239.33] and F-4 [17 CFR 239.34]. Each of these registration
statements references the disclosure requirements in Form 20-F.
---------------------------------------------------------------------------
Request for Comment
23. Should we apply the proposed amendments to foreign private
issuers' annual reports on Form 20-F, as proposed? Or should we exclude
these annual reports from the scope of the amendments? If so, why?
24. Should we apply the proposed amendments to foreign private
issuers' registration statements, as proposed? Or should these
registration statements be excluded from the scope of the proposed
rules? In particular, should we not require the interim period short-
term borrowings information to be included in the registration
statements of foreign private issuers? If not, why?
25. Should we limit the application of the new disclosure
requirements to foreign private issuers that are banks or bank holding
companies, or that are financial companies? If so, why?
26. Is the instruction to proposed Item 5.H regarding the
categories of short-term borrowings appropriate? Is the instruction
clear? If not, how can it be clarified?
2. MJDS Filers
The proposed amendments would not affect MJDS filers. The
disclosure provided by Canadian issuers is generally that which is
required under Canadian law, and we do not propose to depart from our
approach with respect to financial disclosure provided by MJDS filers.
Accordingly, we are not proposing to further amend Form 40-F at this
time.
Request for Comment
27. Should we amend Form 40-F to include the new short-term
borrowings disclosure requirements? If so, why?
3. Smaller Reporting Companies
Smaller reporting companies currently provide disclosure pursuant
to Item 303, subject to the special accommodation provided in Item
303(d) that, among other things, permits the exclusion of tabular
disclosure of contractual obligations under Item 303(a)(5). The
proposed short-term borrowings disclosure requirements would apply to
smaller reporting companies, except that quarterly disclosures would
not be required unless material changes have occurred during that
interim period (as is the case under existing requirements for interim
period disclosure) and information for the fourth fiscal quarter would
not be required in annual reports. To this end, we propose to amend
Item 303(d) to clarify that smaller reporting companies need only
provide the proposed Item 303(a)(6) information on an annual basis and,
in interim periods, if any material changes have occurred.\73\ In
addition, for smaller reporting companies providing financial
information on net sales and revenues and on income from continuing
operations for only two years, only two years of short-term borrowings
information would be required, consistent with the scaled MD&A
disclosure requirement for smaller reporting companies under existing
Item 303(d).
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\73\ Proposed ``Instruction 8 to Paragraph 303(b)'' would
exclude smaller reporting companies from the requirement to provide
all the information specified in paragraph (a)(6) in interim
periods. As proposed, Item 303(d) would state that smaller reporting
companies are only required to provide material changes to the
information specified in proposed Item 303(a)(6) in interim periods.
The proposed revisions to Item 303(d) would not affect the existing
accommodation for disclosure of Item 303(a)(5) information.
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This accommodation for interim period disclosure is intended to
balance the practical impact of the disclosure requirement with the
need to enhance
[[Page 59877]]
disclosure of liquidity risks facing smaller reporting companies. While
liquidity risks, particularly those arising from short-term borrowings,
are equally important for smaller reporting companies, we also believe
that smaller reporting companies are likely to have fewer complex
financing alternatives available. Accordingly, we believe that smaller
reporting companies would not likely have as many significant changes
to the liquidity profile presented in periodic reports as other
reporting companies. Thus, we do not believe that the burden of
preparing expanded interim period reporting is justified by the
incremental information that would be provided compared to that
provided under the existing interim updating model applicable to
smaller reporting companies.
Request for Comment
28. Does the proposal strike the proper balance between imposing
proportional costs and burdens on smaller reporting companies while
providing adequate information to investors? Would the proposed new
short-term borrowings disclosure be useful to investors in smaller
reporting companies? Are there any features of the proposed
requirements that would impose unique difficulties or significant costs
for smaller reporting companies? If so, how should we change the
requirements to reduce those difficulties or costs while still
achieving the disclosure objective?
29. Should we provide the proposed exemption for interim period
updating to smaller reporting companies? If not, please discuss whether
the expanded level of interim period disclosure by smaller reporting
companies would be useful to investors and why.
30. Would the gathering of data and preparation of expanded interim
period disclosure be burdensome to smaller reporting companies? Could
the proposed requirement be structured a different way for smaller
reporting entities so as to enable interim period reporting without
imposing a significant cost? If so, please provide details of such an
alternative.
31. Are the nature of the short-term borrowings and the related
risks different for smaller reporting companies such that additional or
alternate disclosure would be appropriate? In particular, would the
proposed annual requirement for disclosing short-term borrowings
information cause a smaller reporting company to collect the same data
it would need to collect for interim reporting, such that the expanded
level of interim period disclosure proposed for registrants that are
not smaller reporting companies would not be unduly burdensome?
C. Leverage Ratio Disclosure Issues
Many observers believe that high leverage at financial
institutions, in the U.S. and globally, was a contributing factor to
the financial crisis.\74\ As a result, investors and market
participants are increasingly focused on leverage ratio disclosures,
particularly for banks and for non-bank financial institutions.\75\
Similarly, we believe that investors may benefit from additional
transparency about the capitalization and leverage profile of non-
financial companies, particularly for those companies that rely heavily
on external financing and credit markets to fund their businesses and
future growth.
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\74\ See, e.g., Financial Stability Board, Report of the
Financial Stability Forum on Addressing Pro-cyclicality in the
Financial System (2009) available at http://www.financialstabilityboard.org/publications/r_0904a.pdf; S. Deng,
SIVs, Bank Leverage and Subprime Mortgage Crisis, (Dec. 2009),
available at http://ssrn.com/abstract=1319431.
\75\ See, e.g., K. D'Hulster, The Leverage Ratio, WORLD BANK
PUB. POL'Y J. (2009); J. Gabilondo, Financial Moral Panic! Sarbanes-
Oxley, Financier Folk Devils, and Off-Balance Sheet Arrangements, 36
SETON HALL L. REV. 781 (2006) (proposing that a financial
transparency ratio would reduce the public information gap arising
from off-balance sheet arrangements); P. M. Hildebrand, Vice-
Chairman of the Governing Board of the Swiss National Bank, Is Basel
II Enough? The Benefits of a Leverage Ratio, London School of
Economics Financial Markets Group Lecture, Dec. 15, 2008, available
at http://www.bis.org/review/r081216d.pdf; Standard & Poor's, The
Basel III Leverage Ratio is a Raw Measure but Could Supplement Risk
Based Capital Measures, April 15, 2010, available at http://www.bis.org/publ/bcbs165/splr.pdf.
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Under U.S. GAAP, bank holding companies are currently required to
disclose certain capital and leverage ratios (calculated in accordance
with the requirements of their primary banking regulator) in the
financial statements that are included in filings with the
Commission.\76\ The Commission's staff has observed that some bank
holding companies also include disclosure of these ratios in their MD&A
presented in annual and quarterly reports. The financial statement
disclosure by bank holding companies of their capital and leverage
ratios provides to investors some of the same information that banking
regulators use to assess a bank's capital adequacy and leverage
levels.\77\ For U.S. banks and thrifts, the standards applied by the
various banking agencies are substantially uniform,\78\ which means
that the ratios that bank holding companies are required to include in
their financial statements filed with the Commission should be
calculated using consistent methodology. Consistent with existing
disclosure rules, where disclosed ratios are likely to be materially
impacted by known events such as short-term borrowings, contractual
obligations or off-balance sheet arrangements, or are not otherwise
indicative of the registrant's leverage profile, additional disclosure
would be required in order to provide an understanding of the
registrant's financial condition and prospects.\79\
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\76\ See FASB ASC 942-505-50, Regulatory Capital Disclosures.
Specifically, bank holding companies must present their required and
actual ratios and amounts of Tier 1 leverage, Tier 1 risk based
capital, and total risk based capital, (for savings institutions)
tangible capital, and (for certain banks and bank holding companies)
Tier 3 capital for market risk. Under U.S. GAAP, bank holding
companies are required to include this information in the footnotes
to their financial statements.
\77\ See Regulation Y, Appendices A (Risk-Based Capital), B
(Leverage Measure) and D (Tier I Leverage Measure) [12 CFR 225].
\78\ See The Federal Reserve Board et al., Joint Report:
Differences in Capital and Accounting Standards among the Federal
Banking and Thrift Agencies (Feb. 5, 2003) [68 FR 5976].
\79\ See, e.g., Item 303(a)(1) of Regulation S-K, and
Instructions 1, 2 and 3 to Paragraph 303(a).
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We are considering whether to extend a leverage ratio disclosure
requirement to companies that are not bank holding companies. We
understand that, outside the banking industry, a variety of metrics are
used to evaluate a company's debt levels and capital adequacy. There
does not appear to be a ``one-size-fits all'' leverage ratio that is
used by companies or investors. For example, we understand that
financial analysts, credit analysts and other sophisticated users of
financial statements tend to apply their own models and calculate their
own ratios for use in their analyses of a registrant's financial
health, using their own proprietary calculation methods.\80\ We also
understand that there is not a consensus on how to measure and treat
``off-balance sheet'' leverage for purposes of calculating leverage or
capital ratios. We are requesting comment today as to the scope of a
potential disclosure requirement, and importantly, how such a
requirement would take into account the differences among metrics and
industries while still providing comparability.
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\80\ See, e.g., P. Kraft, Rating Agency Adjustment to GAAP
Financial Statements and Their Effect on Ratings and Bond Yields
(Nov. 1, 2009) at http://ssrn.com/abstract=1266381.
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Request for Comment
32. Should all types of registrants be required to provide leverage
ratio disclosure and discussion? Are there differences among industries
or types of businesses that would need to be addressed in such a
requirement so that
[[Page 59878]]
it is meaningful to investors? If so, how should ``leverage ratio'' be
defined in this context? Is comparability across companies and
industries important, or is the disclosure more meaningful if it is
presented in the context of the particular registrant's business?
33. Rather than extending the leverage ratio disclosure requirement
to include all registrants, should we extend it only to other financial
institutions or financial services companies? If so, how should the
scope of included companies be defined? Would the proposed definition
of ``financial company'' used in proposed Item 303(a)(6) work for this
purpose? How should ``leverage ratio'' be defined in this context? Is
there a different metric that would be more useful to investors? Should
the ratio include ``off-balance sheet'' leverage or off-balance sheet
equity adjustments? If so, describe how such a ratio would be
calculated. What are the costs and benefits of defining a leverage
ratio that would be applicable to all registrants? Where relevant,
discuss the usefulness of a standardized ratio requirement given that
many users of financial statements make their own calculations.
34. Should bank holding companies be required to include the same
level of disclosure of leverage and capital ratios for quarterly
financial statements as they do for annual financial statements, rather
than quarterly reporting of material changes? Should additional
disclosures be required to accompany existing ratio disclosure that
would make it more meaningful?
D. Technical Amendments Reflecting FASB Codification
On June 30, 2009, the FASB issued FASB Statement of Financial
Accounting Standards No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles--a replacement of FASB Statement No. 162, to establish the
FASB Codification as the source of authoritative non-Commission
accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. In August 2009, we issued guidance regarding
the interpretation of references in the Commission's rules and staff
guidance to specific standards under U.S. GAAP in light of the FASB
Codification.\81\ As noted in that interpretive release, the Commission
and its staff intend to embark on a longer term rulemaking and updating
initiative to revise comprehensively specific references to specific
standards under U.S. GAAP in the Commission's rules and staff guidance.
Although we plan to make those comprehensive changes at a later date,
we believe it is appropriate, at the same time that we propose to make
other amendments to Item 303 of Regulation S-K and Item 5 of Form 20-F,
to propose technical amendments to these provisions to reflect the FASB
Codification. These proposed technical amendments include:
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\81\ See Commission Guidance Regarding the Financial Accounting
Standards Board's Accounting Standards Codification, Release No. 33-
9062A (Aug. 19, 2009)[74 FR 42772] (stating that, concurrent with
the effective date of the FASB Codification, references in the
Commission's rules and staff guidance to specific standards under
U.S. GAAP should be understood to mean the corresponding reference
in the FASB Codification).
---------------------------------------------------------------------------
Updating the U.S. GAAP references in the definition of
``off-balance sheet arrangement'' in Item 303(a)(4)(ii) of Regulation
S-K and Item 5.E.2 of Form 20-F;
Updating U.S. GAAP references in the existing definitions
of ``Long-Term Debt Obligation,'' ``Capital Lease Obligation'' and
``Operating Lease Obligation'' in Item 303(a)(5)(ii) of Regulation S-K;
\82\ and
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\82\ The instructions to Item 5.F (Tabular Disclosure of
Contractual Obligations) of Form 20-F direct registrants to provide
disclosure of contractual obligations (other than purchase
obligations, for which a definition is provided) based on the
classifications used in the generally accepted accounting principles
under which the registrant prepares its primary financial
statements. Accordingly, no update for FASB codification is
necessary for Item 5.F of Form 20-F.
---------------------------------------------------------------------------
Updating U.S. GAAP references in instructions 8 and 9 of
the Instructions to Paragraph 303(a) of Regulation S-K.
As part of our continuing initiative to update the references in the
Commission's rules and staff guidance, we believe that these proposed
technical amendments would assist registrants in applying the relevant
definitions and instructions, without needing to spend time and
resources to identify the corresponding FASB provision as contemplated
by the interpretive guidance.
Request for Comment
35. Are there any additional revisions to the provisions of
Regulation S-K or Form 20-F affected by the proposal that would be
necessary or appropriate to reflect the release by the FASB of its FASB
codification?
E. Conforming Amendments to Definition of ``Direct Financial
Obligation'' in Form 8-K
We are proposing revisions to the definition of ``direct financial
obligation'' used in Items 2.03 and 2.04 of Form 8-K to conform to the
definition of short-term borrowings used in proposed Item 303(a)(6).
Specifically, the proposed amendment would revise paragraph (4) of the
definition of ``direct financial obligation'' contained in Item 2.03(c)
of Form 8-K.\83\
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\83\ Item 2.03(c) defines a ``direct financial obligation'' as
any of the following: (1) a long-term debt obligation, as defined in
Item 303(a)(5)(ii)(A) of Regulation S-K [17 CFR
229.303(a)(5)(ii)(A)]; (2) a capital lease obligation, as defined in
Item 303(a)(5)(ii)(B) of Regulation S-K [17 CFR
229.303(a)(5)(ii)(B)];(3) an operating lease obligation, as defined
in Item 303(a)(5)(ii)(C) of Regulation S-K [17 CFR
229.303(a)(5)(ii)(C)]; or (4) a short-term debt obligation that
arises other than in the ordinary course of business. The item
defines ``short-term debt obligation'' as a payment obligation under
a borrowing arrangement that is scheduled to mature within one year,
or, for those companies that use the operating cycle concept of
working capital, within a company's operating cycle that is longer
than one year.
---------------------------------------------------------------------------
The current definition of ``direct financial obligation'' was
adopted as part of the 2004 adoption of Items 2.03 and 2.04 of Form 8-
K, in connection with updates to Form 8-K to require real-time
disclosure of material information regarding changes in a company's
financial condition or operations as mandated by Section 409 of the
Sarbanes-Oxley Act of 2002.\84\ Items 2.03 and 2.04 of Form 8-K are
intended to provide real-time disclosure when a company becomes
obligated under a direct financial obligation or off-balance sheet
arrangement that is material to the company, and upon the triggering of
an increase or acceleration of any of those types of transactions where
the impact would be material to the company. This real-time disclosure
was intended to supplement and align with the requirements for annual
and quarterly disclosure of off-balance sheet arrangements and
contractual obligations under Items 303(a)(4) and (a)(5) of Regulation
S-K. Acknowledging the importance of short-term financing disclosure to
an understanding of a company's financial condition and risk profile,
we included certain short-term debt obligations in the definition of
``direct financial obligations,'' along with the long-term debt, leases
and purchase obligations identified by reference to Item 303(a)(5) of
Regulation S-K.
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\84\ Public Law 107-204, 116 Stat. 745 (2002). See Additional
Form 8-K Disclosure Requirements and Acceleration of Filing Date,
Release No. 33-8400 (Mar. 16, 2004) [69 FR 15594].
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We believe it is appropriate to align the existing reporting
requirements for short-term debt obligations under Items 2.03 and 2.04
of Form 8-K with the new proposed definition of short-term borrowings
in Item 303(a)(6), in order to continue to provide consistency of
disclosure. Accordingly, we are
[[Page 59879]]
proposing to amend clause (4) of the definition of direct financial
obligation to refer to ``a short-term borrowing, as defined in Item
303(a)(6)(iii) of Regulation S-K (17 CFR 229.303(a)(6)(iii) that arises
other than in the ordinary course of business.'' \85\ In doing so,
however, we propose to retain the existing carve-out in the definition
of direct financial obligation for obligations that arise in the
ordinary course of business, in order to maintain the focus of Items
2.03 and 2.04 on real-time disclosure of individual transactions that
are not routine or ``ordinary course'' financing transactions. If we
were to eliminate the ordinary course of business carve-out in the
definition, we do not believe that the level of material information
provided would justify the burden on registrants to prepare, and the
burden on investors to review and understand, potentially voluminous
disclosure about routine transactions. In addition, we believe that the
proposed short-term borrowings disclosures in MD&A would provide
investors with timely information about fluctuations in short-term
borrowings levels and about short-term borrowings practices, such that
current reporting on Form 8-K of particular instances of significant
fluctuations that arise due to ordinary course transactions would not
necessarily provide additional insight to investors. Moreover, a
registrant that experiences a material increase in short-term
borrowings during a reporting period that is not consistent with past
practices would likely need to consider carefully whether the
underlying transactions causing the fluctuations fall within the
meaning of ``ordinary course of business'' for purposes of Items 2.03
and 2.04.
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\85\ See proposed revisions to Item 2.03(c)(4) of Form 8-K.
---------------------------------------------------------------------------
Request for Comment
36. Instead of amending the definition of ``direct financial
obligation'' to refer to proposed Item 303(a)(6), should the category
of short-term financings included in the definition of ``direct
financial obligation'' for purposes of Items 2.03 and 2.04 of Form 8-K
differ from the standard used in proposed Item 303(a)(6)? Describe how
the standards should differ and explain why. For example, should we
retain the existing reference to ``short-term debt obligation''
instead?
37. Is the proposed definition of short-term borrowings
sufficiently tailored so as to exclude borrowing obligations that arise
in the ordinary course of business, so that the carve-out in the
definition of direct financial obligation is unnecessary? Should the
carve-out for obligations that arise in the ordinary course of business
be retained, as proposed? Describe the costs and burdens for companies
if the carve-out were eliminated, particularly the burden on management
to make an assessment of materiality of each short-term borrowing
transaction within the filing timeframe. Is current reporting of
routine short-term borrowing transactions that are material to the
registrant sufficient? Would the new reporting requirements regarding
short-term borrowing practices and average borrowings sufficiently
improve reporting on this topic, so that Form 8-K reporting of ordinary
course short-term borrowings would be unnecessary? Explain why or why
not.
F. Transition
In connection with the proposed short-term borrowings disclosure,
we are proposing a transition accommodation for registrants that are
not bank holding companies or subject to Guide 3 that would, for
purposes of the annual reporting requirement, permit those companies to
phase in compliance with the comparable annual period disclosure under
proposed Item 303(a)(6). In the initial year of the transition period,
these companies would be required to include short-term borrowings
information for the most recent fiscal year and permitted to omit
information for the two preceding fiscal years. In the second year of
the transition period, these companies would be required to include the
two most recent fiscal years, and permitted to omit the third preceding
fiscal year. In the third year of the transition period, and
thereafter, these companies would be required to include disclosure for
the each of the three most recent fiscal years as prescribed in
proposed Item 303(a)(6)(v). This transition accommodation would not
apply to bank holding companies or other companies subject to Guide 3,
since those companies already provide this disclosure for the three
most recent fiscal years (or two fiscal years for certain smaller bank
holding companies).\86\
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\86\ See General Instruction 3 of Guide 3.
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Request for Comment
38. Is the proposed transition accommodation appropriate? Should we
require all companies to present all required periods at the outset?
39. Would the proposed transition accommodation be useful for
registrants? Is it sufficiently clear? Should we extend it to cover
bank holding companies? If so, why?
40. Are any other transition accommodations necessary for any
aspects of the proposed requirements? Would any of the proposed
requirements present any particular difficulty or expense that should
be addressed by a transition accommodation? If so, please explain what
would be needed and why. For example, should we provide a transition
period to allow smaller reporting companies and/or non-bank companies
time to set up systems to gather the data for the proposed disclosure?
If so, what should that period be?
III. General Request for Comment
We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on the amendments, and any suggestions for additional changes. With
respect to any comments, we note that they are of greatest assistance
to our rulemaking initiative if accompanied by supporting data and
analysis of the issues addressed in those comments and by alternatives
to our proposals where appropriate.
IV. Paperwork Reduction Act
A. Background
Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (PRA).\87\ We are submitting the proposed
amendments to the Office of Management and Budget (OMB) for review in
accordance with the PRA.\88\ The titles for the collection of
information are:
---------------------------------------------------------------------------
\87\ 44 U.S.C. 3501 et seq.
\88\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------
(A) ``Regulation S-K'' (OMB Control No. 3235-0071); \89\
---------------------------------------------------------------------------
\89\ The paperwork burden from Regulation S-K and the Industry
Guides is imposed through the forms that are subject to the
disclosures in Regulation S-K and the Industry Guides and is
reflected in the analysis of those forms. To avoid a Paperwork
Reduction Act inventory reflecting duplicative burdens, for
administrative convenience, we estimate the burdens imposed by each
of Regulation S-K and the Industry Guides to be a total of one hour.
---------------------------------------------------------------------------
(B) ``Form 10-K'' (OMB Control No. 3235-0063);
(C) ``Form 10-Q'' (OMB Control No. 3235-0070);
(D) ``Form 8-K'' (OMB Control No. 3235-0060);
(E) ``Form 20-F'' (OMB Control No. 3235-0288);
(F) ``Form 10'' (OMB Control No. 3235-0064);
[[Page 59880]]
(G) ``Form S-1'' (OMB Control No. 3235-0065);
(H) ``Form F-1'' (OMB Control No. 3235-0258);
(I) ``Form S-4'' (OMB Control No. 3235-0324);
(J) ``Form F-4'' (OMB Control No. 3235-0325);
(K) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1
through 14a-15) and Schedule 14A'' (OMB Control No. 3235-0059);
(L) ``Information Statements--Regulation 14C (Commission Rules 14c-
1 through 14c-7) and Schedule 14C'' (OMB Control No. 3235-0057); and
(M) ``Form N-2'' (OMB Control No. 3235-0026).
These regulations, schedules and forms were adopted under the
Securities Act and the Exchange Act, and in the case of Form N-2, the
Investment Company Act of 1940.\90\ They set forth the disclosure
requirements for periodic and current reports, registration statements,
and proxy and information statements filed by companies to help
investors make informed investment and voting decisions. The hours and
costs associated with preparing, filing and sending each form or
schedule 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 OMB control number.
---------------------------------------------------------------------------
\90\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------
We anticipate that the proposed amendments to Item 303 of
Regulation S-K and to Item 5 of Form 20-F would increase existing
disclosure burdens for annual reports on Form 10-K and Form 20-F,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and
information statements, and registration statements on Forms 10, S-1,
F-1, S-4, F-4 and N-2 by requiring new disclosure and discussion of
short-term borrowings to be provided on an annual and interim basis.
At the same time, the proposed technical amendments to Item 303 of
Regulation S-K and Item 5.E of Form 20-F that update references to U.S.
GAAP to reflect the FASB Codification would not increase existing
disclosure burdens for annual reports on Form 10-K and Form 20-F,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and
information statements, and registration statements on Forms 10, S-1,
F-1, S-4, F-4 and N-2.
We also estimate that the amendments to the definition of ``direct
financial obligation'' for purposes of disclosure requirements in Items
2.03 and 2.04 of Form 8-K would not increase existing disclosure
burdens for filings of Form 8-K. Although we propose to amend the
existing definition to conform to the terminology used in the proposed
MD&A requirements, we propose to retain the existing carve-out for
ordinary course obligations. Thus, we assume that the proposed change
in the definition would not substantially change the existing scope of
the disclosure requirement, and, therefore, the proposed amendments
would not increase the number of Form 8-K filings nor add incremental
costs and burdens to the existing disclosure burden under Form 8-K. We
solicit comment on whether our assumption is correct, and if not, how
to estimate the additional number of Forms 8-K that would be filed
pursuant to the proposed amendments to the definition of ``direct
financial obligation.'' We note that, based on the number of filings
made under Items 2.03 and 2.04 of Form 8-K in 2009, only approximately
4% of all Form 8-K filings would be made in connection with those
Items.
Compliance with the proposed amendments would be mandatory.
Responses to the information collections would not be kept
confidential, and there would be no mandatory retention period for the
information disclosed.
B. Burden and Cost Estimates Related to the Proposed Amendments
As discussed below, we have estimated the average number of hours a
company would spend preparing and reviewing the proposed disclosure
requirements and the average hourly rate for outside professionals. In
deriving our estimates, we recognize that some companies would
experience costs in excess of those averages in the first year of
compliance with the proposed amendments, and some companies may
experience less than the average costs. The estimates of reporting and
cost burdens provided in this PRA analysis address the time, effort and
financial resources necessary to provide the proposed collections of
information and are not intended to represent the full economic cost of
complying with the proposal.
For purposes of the PRA, we estimate that over a three year period,
the average annual incremental paperwork burden for all companies to
prepare the disclosure that would be required under the proposals to be
approximately 872,458 hours of company personnel time and a cost of
approximately $144,061,000 for the services of outside
professionals.\91\ These estimates include the time and the cost of
implementing data gathering systems and disclosure controls and
procedures, the time and cost of in-house preparers, review by
executive officers, in-house counsel, outside counsel, in-house
accounting staff, independent auditors and members of the audit
committee, and the time and cost of filing documents and retaining
records.
---------------------------------------------------------------------------
\91\ We calculated an annual average over a three-year period
because OMB approval of PRA submissions covers a three-year period.
For administrative convenience, the presentation of totals related
to the paperwork burden hours have been rounded to the nearest whole
number. The estimates reflect the burden of collecting and
disclosing information under the PRA. Other costs associated with
the proposed amendments are discussed in below under ``Cost-Benefit
Analysis.''
---------------------------------------------------------------------------
Our methodologies for deriving the burden hour and cost estimates
presented in the tables below represent the average burdens for all
registrants who are required to provide the disclosure, both large and
small. As discussed elsewhere in this release, the time required to
prepare the proposed disclosures could vary significantly depending on,
among other factors, the nature of the registrant's business, its
capital structure, its internal controls and disclosure controls
systems, its risk management systems and other applicable regulatory
requirements. In addition, the estimates do not distinguish between
registrants that are bank holding companies and other registrants.
Although bank holding companies and other companies that currently
provide Guide 3 disclosure would already collect and disclose on an
annual basis some of the information covered by the new requirements,
the new requirements are not identical to the provisions of Guide 3.
Accordingly, for purposes of these estimates, we assume that bank
holding companies would have the same burden as other registrants,
although they might not actually incur additional expenses for those
portions of the new requirements that are the same as the existing
provisions of Guide 3.
Because our estimates assume that 100% of public companies engage
in short-term borrowings from time to time, we estimate that the same
percentage of companies would be impacted by the proposed disclosure
requirements for short-term borrowings.\92\ Therefore, for those
companies that do not engage in short-term borrowing activities during
a reporting period, the incremental burdens and costs may be lower than
our estimate. However, because these
[[Page 59881]]
companies may still need to implement systems and controls to capture
short-term borrowings data that is not currently collected, we have
assumed that they would share the same average burden and cost
estimate. In addition, we assume that the burden hours of the proposed
amendments would be comparable to the burden hours related to similar
disclosure requirements, such as off-balance sheet arrangements
disclosure requirements,\93\ contractual obligations disclosure
requirements,\94\ and requirements for the qualitative and quantitative
disclosure of market risk,\95\ which call for quantitative and/or
qualitative discussion and analysis of financial data.
---------------------------------------------------------------------------
\92\ We further assume that the proposed amendments would not
affect the number of filings.
\93\ OBS Adopting Release, supra note 6, at 5994 (which we
estimated to be 14.5 hours for annual reports and proxy statements,
16 hours for registration statements and 10 hours for quarterly
reports).
\94\ OBS Adopting Release, supra note 6, at 5994 (which we
estimated to be 7.5 hours for annual reports and proxy statements,
8.5 hours for registration statements and 3 hours for quarterly
reports).
\95\ Disclosure of Accounting Policies for Derivative Financial
Instruments and Derivative Commodity Instruments and Disclosure of
Qualitative and Quantitative Information About Market Risk Inherent
in Derivative Financial Instruments, Other Financial Instruments and
Derivative Commodity Instruments, Release No. 33-7386 (Jan. 31,
1997) [62 FR 6044] (which we estimated to be 80 hours total per
registrant).
---------------------------------------------------------------------------
We derived the estimates by estimating the total amount of time it
would take a company to implement systems to capture the data,
implement related disclosure controls and procedures, prepare and
review the disclosure pursuant to the proposed short-term borrowings
requirements. We first estimated the total amount of time it would take
a company to prepare and review the proposed disclosure for each form,
using the estimates for the comparable disclosure requirements
identified above as a starting point. Because we believe that the
proposed rules would impose an increased burden on companies in
connection with the implementation of data gathering systems and the
implementation of related disclosure controls and procedures as
compared to those comparable disclosure requirements, we added hours to
those estimates, to reflect our best estimate of the additional time
needed to implement the new systems.
The tables below illustrate the total incremental annual compliance
burden of the collection of information in hours and in cost under the
proposed amendments for annual reports, proxy and information
statements, quarterly reports and current reports on Form 8-K under the
Exchange Act (Table 1) and for registration statements under the
Securities Act and Exchange Act (Table 2). There is no change to the
estimated burden of the collection of information under Regulation S-K
because the burdens that Regulation S-K imposes are reflected in our
revised estimates for the forms. The burden estimates were calculated
by multiplying the estimated number of annual responses by the
estimated average number of hours it would take a company to prepare
and review the proposed disclosure requirements. We recognize that some
registrants may need to include MD&A disclosure in more than one filing
covering the same period, accordingly actual numbers may be lower than
our estimates.
We have based our estimated number of annual responses on the
actual number of filings during the 2009 fiscal year, with three
exceptions. First, we reduced the number of annual responses for
Schedules 14A and 14C, based on our belief that only a minimal number
of companies that file these schedules would need to prepare MD&A
disclosure for the filing, rather than incorporating by reference from
a periodic report. Second, we reduced the number of annual responses
for Form N-2, based on our estimate of the number of Form N-2 filings
made by business development companies in 2009 because only business
development companies are required to include MD&A disclosure in a Form
N-2.\96\ In addition, we recognize that smaller reporting companies
would be exempted from ``full'' interim period reporting in their
quarterly reports rather than only reporting material changes on a
quarterly basis. To reflect this, we reduced the number of annual
responses of Forms 10-Q by our estimate of the number of Forms 10-Q
filed by smaller reporting companies.\97\
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\96\ The current estimate of annual responses for Form N-2 is
205. Our best estimate of the total number of Forms N-2 filed in
2009 by business development companies is 29. Accordingly, for
purposes of Table 2, we reduced the current estimate of annual
responses for Form N-2 (205 Form N-2 filings) to 29 Form N-2
filings.
\97\ This adjustment is based on our best estimate of the number
of Forms 10-Q filed by smaller reporting companies in 2009.
---------------------------------------------------------------------------
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
$400 per hour.\98\ 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 $400 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 is
reflected in hours.
---------------------------------------------------------------------------
\98\ For Form 20-F, we estimate that 25% of the burden is
carried by the company and 75% by outside professionals because we
assume that foreign private issuers rely more heavily on outside
counsel for preparation of the Form.
Table 1--Incremental Paperwork Burden Under the Proposed Amendments for Annual Reports, Quarterly Reports, Forms 8-K and Proxy and Information
Statements
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Incremental Total 75% Company 25% Professional
responses 99 burden hours/ incremental ---------------- Professional costs
---------------- form burden hours -------------------------------
-------------------------------- (D)=(C)*0.75
(A) (B) (C)=(A)*(B) (E)=(C)*0.25 (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K.................................................... 13,545 40 541,800 406,350 135,450 $54,180,000
20-F.................................................... 942 30 28,260 7,065 21,195 8,478,000
10-Q.................................................... 28,841 20 574,840 431,130 143,710 57,484,000
8-K..................................................... 115,795 0 0 0 0 0
SCH 14A................................................. 365 30 10,950 8,212.5 2,737.5 1,095,000
SCH 14C................................................. 34 30 1,020 765 255 102,000
-----------------------------------------------------------------------------------------------
Total............................................... 159,522 150 1,156,860 853,522.5 303,347.5 121,339,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 59882]]
Table 2--Incremental Paperwork Burden Under the Proposed Amendments for Registration Statements
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual Incremental Total 25% Company 75% Professional
responses 100 burden hours/ incremental ---------------- Professional costs
---------------- form burden hours -------------------------------
-------------------------------- (D)=(C)*0.25
(A) (B) (C)=(A)*(B) (E)=(C)*0.75 (F)=(E)*$400
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-1..................................................... 1,168 35 40,880 10,220 30,660 $12,264,000
F-1..................................................... 42 35 1,470 367.5 1,102.5 441,000
S-4..................................................... 619 35 21,665 5,416.25 16,248.75 6,499,500
F-4..................................................... 68 35 2,380 595 1,785 714,000
10...................................................... 238 35 8,330 2,082.5 6,247.5 2,499,000
N-2..................................................... 29 35 1,015 253.75 761.25 304,500
-----------------------------------------------------------------------------------------------
Total............................................... 2,164 210 75,740 18,935 56,805 22,722,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Annual Reports and Proxy/Information Statements
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\99\ Except as described above, the number of responses
reflected in the table equals the actual number of forms and
schedules filed with the Commission during the 2009 fiscal year.
\100\ Except as described above, the number of responses
reflected in the table equals the actual number of forms filed with
the Commission during the 2009 fiscal year.
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We estimate that the preparation of annual reports currently
results in a total annual compliance burden of 21,986,455 hours and an
annual cost of outside professionals of $3,591,562,980. We estimate
that the preparation of proxy and information statements currently
result in a total annual compliance burden of 735,122 hours and an
annual cost of outside professionals of $86,608,526.
As set forth in Table 1 above, if the proposals were adopted, we
estimate that the incremental cost of outside professionals for annual
reports would be approximately $62,658,000 per year and the incremental
company burden would be approximately 413,415 hours per year; and, for
proxy and information statements, the total incremental cost of outside
professionals would be approximately $1,197,000 per year and the
incremental company burden would be approximately 8,978 hours per year.
For purposes of our submission to the OMB under the PRA, if the
proposals were adopted, the total cost of outside professionals for
annual reports would be approximately $3,654,220,980 per year and the
total company burden would be approximately 22,399,870 hours per year;
and the total cost of outside professionals for proxy and information
statements would be approximately $87,805,526 per year and the total
company burden would be approximately 744,100 hours per year.
2. Quarterly Reports
We estimate that Form 10-Q preparation currently results in a total
annual compliance burden of 4,559,793 hours and an annual cost of
outside professionals of $607,972,400. As set forth in Table 1 above,
if the proposals were adopted, we estimate that the incremental cost of
outside professionals for quarterly reports would be approximately
$57,484,000 per year and the incremental company burden would be
approximately 431,130 hours per year. For purposes of our submission to
the OMB under the PRA, if the proposals were adopted, the total cost of
outside professionals for quarterly reports would be approximately
$665,456,400 per year and the total annual company burden for quarterly
reports would be approximately 4,990,923 hours per year.
3. Current Reports on Form 8-K
Form 8-K prescribes information about significant events that a
registrant must disclose on a current basis. We are proposing
amendments to the definitions used in Items 2.03 and 2.04 of Form 8-K
that revise the terminology used, but which we assume would not
significantly impact the scope of information required to be disclosed
under those items. Accordingly, we estimate that the proposed
amendments would not increase the number of current reports filed on
Form 8-K nor add incremental costs and burdens to the existing
disclosure burden under Form 8-K. If the proposed revisions to Items
2.03 and 2.04 of Form 8-K were adopted, we estimate that, on average,
completing and filing a Form 8-K would require the same amount of time
currently spent by entities completing the form--approximately 4 hours.
We estimate that Form 8-K preparation currently results in a total
annual compliance burden of 493,436 hours and an annual cost of outside
professionals of $65,791,500.
4. Registration Statements
We estimate that the preparation of registration statements that
would be affected by the proposed amendments currently has a total
annual compliance burden of 1,023,273 hours and an annual cost of
outside professionals of $1,127,687,401. As set forth in Table 2 above,
if the proposals were adopted, we estimate that the incremental cost of
outside professionals for registration statements would be
approximately $22,722,000 per year and the incremental company burden
would be approximately 18,935 hours per year. For purposes of our
submission to the OMB under the PRA, if the proposals were adopted, the
total cost of outside professionals for registration statements would
be approximately $1,150,409,401 per year and the total company burden
would be approximately 1,042,208 hours per year.
C. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information would have practical
utility;
Evaluate the accuracy of our estimates of the burden of
the proposed collections of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collections of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collections of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
the burdens. Persons who desire to submit comments on the collection of
[[Page 59883]]
information requirements should direct their comments to the OMB,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
send a copy of the comments to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090, with reference to File No. S7-22-10. Requests for materials
submitted to the OMB by us with regard to these collections of
information should be in writing, refer to File No. S7-22-10 and be
submitted to the Securities and Exchange Commission, Office of Investor
Education and Advocacy, 100 F Street, NE., Washington, DC 20549-0213.
Because the OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication,
your comments are best assured of having their full effect if the OMB
receives them within 30 days of publication.
V. Cost-Benefit Analysis
A. Introduction and Objectives of Proposals
We are proposing amendments to enhance the disclosure that
companies provide about short-term borrowings in order to provide more
useful disclosure to investors about liquidity and short-term
financings and to enhance investor understanding of issuers' liquidity.
The proposed amendments are intended to improve disclosure by expanding
and supplementing existing requirements.
First, the proposals would require a registrant to provide a
comprehensive explanation of its short-term borrowings, including both
quantitative and qualitative information. In addition, we are proposing
conforming amendments to Form 8-K so that the Form uses the terminology
contained in the proposed short-term borrowings disclosure requirement.
Finally, we are making technical amendments to Item 303 of Regulation
S-K to revise references to U.S. GAAP to reflect the FASB Codification.
The proposals seek to improve transparency of a company's short-
term borrowings in order to provide investors with comprehensive
information about a company's liquidity profile and demands on capital
resources in each reporting period. The proposals also aim to clarify
existing MD&A requirements in these areas to assist registrants in
preparing disclosure that is meaningful, useful and clear. Ultimately,
the proposals are expected to enhance the ability of investors to make
informed investment decisions and to allocate capital on a more
efficient basis.
We considered alternative regulatory approaches for achieving these
objectives, including providing further interpretive guidance on
existing MD&A disclosure requirements and encouraging companies to
voluntarily provide quantitative and qualitative information on short-
term borrowings where material to their financial condition. Although
some public companies are voluntarily providing more detailed
information as to short-term financings in their MD&A, we have observed
that some companies generally do not provided investors with the
desired level of detail in their disclosure absent a specific
disclosure requirement or guidance, such as Guide 3. To elicit more
detailed and comparable disclosures regarding a company's short-term
borrowings activities in each reporting period as part of its overall
liquidity profile, we are proposing mandated disclosure of short-term
borrowings to complement existing MD&A disclosures.
B. Benefits
The proposed disclosures would benefit investors by informing them
about the fluctuations in short-term borrowings during the reporting
period. Information about the variability of borrowing levels and
variations in types of borrowing activities over the course of the
reporting period should enable investors to better understand the
ability of a registrant to obtain the financing it needs to conduct its
business operations and the costs of that financing, and how those may
vary during the reporting period. The transparency of the financial
statements should increase because investors would be able to learn
more about the amount of financial risk taken by the company, its
liquidity and capital resources, and the amount of capital deployed in
earning activities by the company on an on-going basis during the year,
including at quarter-ends. The proposed narrative discussion of the
short-term borrowings arrangements, including the importance of those
arrangements to the registrant in terms of its liquidity and capital
resources, should provide investors with insight into the magnitude of
the registrant's short-term borrowing activities, the specific material
impact of the short-term borrowing arrangements on the registrant, and
the factors that could affect its ability to continue to use those
short-term borrowing arrangements.
The proposed disclosures would inform investors about the amount of
financial risk taken by the company.\101\ For some businesses, short-
term borrowings may decrease or increase at quarter- and year-ends due
to innate fluctuations in cash flow obligations. In other cases,
management may be deliberately reducing short-term debt at period
ends.\102\ Regardless of the cause, period-end financial statements
could be less informative regarding the financial risks taken by
companies during the period. The proposed disclosures should add
transparency to the ongoing risks taken by companies. These disclosures
should also help facilitate a more accurate understanding of a
company's liquidity and capital resources.
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\101\ K. Kelly et al., Big Banks Move To Mask Risk Levels--
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period
Progresses, Wall St. J., Apr. 9, 2010; and M. Rappaport & T.
McGinty, supra note 16 (reporting that ``the practice, known as end-
of-quarter `window dressing' on Wall Street, suggests that the banks
are carrying more risk most of the time than their investors or
customers can easily see. This activity has accelerated since 2008 *
* *''.).
\102\ M. Griffiths & D. Winters, The Turn of the Year in Money
Markets: Tests of the Risk-Shifting Window Dressing and Preferred
Habitat Hypotheses, J. BUS, 2005, vol. 78, no. 4.; M. Griffiths & D.
Winters, On a Preferred Habitat for Liquidity at the Turn-of-the-
Year: Evidence From the Term-Repo Market, 12 J. FIN. SERV. RES. 1,
1997; V. Kotomin & D. Winters, Quarter-End Effects in Banks:
Preferred Habitat or Window Dressing?, 29 J. FIN. SERV. RES. 1,
2006.
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The proposed disclosures should also inform investors about the
amount of capital deployed in earning activities by a company and thus
help evaluate its overall source of profitability. Investors should
benefit from knowing whether the period-end balance sheet fully
reflects all intra-period activities and assets. The disclosure should
also enable more accurate comparisons between companies that engage in
a pattern of borrowing and those that do not.
Thus, the new disclosures should enhance transparency and
competition especially in industries where short-term borrowing
practices are common. Similar disclosure requirements exist in a more
limited fashion for banks and bank holding companies under applicable
banking regulations.\103\ Therefore, bank regulators find this
information to be useful in monitoring the risk of these
institutions.\104\
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\103\ Banks and bank holding companies report the quarterly
average for Federal funds sold and securities purchased under
agreements to resell (FFIEC 031 and 041 Schedule RC-K, and FR Y-9C
Schedule HC-K).
\104\ See e.g., Board of Governors of the Federal Reserve
System, Announcement of Board Approval Under Delegated Authority and
Submission to OMB, (March. 18, 2006) [71 FR 11194]. (``The FR Y-9
family of reports historically has been, and continues to be, the
primary source of financial information on [bank holding companies]
between on-site inspections. Financial information from these
reports is used to detect emerging financial problems, to review
performance and conduct pre-inspection analysis, to monitor and
evaluate capital adequacy, to evaluate [bank holding company]
mergers and acquisitions, and to analyze a [bank holding company's]
overall financial condition to ensure safe and sound operations.'').
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[[Page 59884]]
The proposed amendments are likely to increase transparency.
Therefore, information asymmetry and information risk would be lower
and investors should demand a lower risk premium and rate of
return.\105\ Thus, the proposed disclosures would help reduce cost of
capital and improve capital allocation and formation in the overall
economy.
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\105\ See D. Easley & M. O'Hara, Information and the Cost of
Capital, 59 J. Fin. 1553 (2004) (arguing that the information
composition between public and non-public information affects the
cost of capital because investors demand a higher return from their
investments when they face asymmetric information); R. Lambert et
al., Accounting Information, Disclosure, and the Cost of Capital, 45
J. ACCT. RES. 385 (2007) (deriving conditions under which an
increase in information quality leads to an unambiguous decline in
the cost of capital).
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C. Costs
The proposals to require short-term borrowings disclosure on an
annual and quarterly basis are new. In connection with the new
disclosure requirements, registrants would be required to incur
additional direct costs to which they were previously not subject, and
could incur indirect costs as well. Because the proposed requirements
require additional disclosures that are not currently provided in
connection with Guide 3 compliance, bank holding companies would also
incur additional direct and indirect costs to which they were
previously not subject. Furthermore, as noted in our PRA analysis, we
estimate that registrants would incur higher costs in the initial
reporting periods than would be incurred in ongoing reporting periods.
We estimate that the proposals would impose new disclosure
requirements on approximately 10,380 public companies.\106\ We estimate
that the collection of information and the preparation of the
disclosure would involve multiple parties, including in-house
preparers, senior management, in-house accounting staff, in-house
counsel, information technology personnel, outside counsel, outside
auditors and audit committee members. For purposes of our PRA analysis,
we estimated that company personnel would spend approximately 872,204
hours per year (84 hours per company) to prepare, review and file the
proposed disclosure. We also estimated that companies would spend
approximately $143,756,500 ($13,849 per company) on outside
professionals to comply with the proposed requirements.
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\106\ We estimate that all registrants who filed annual reports
in 2009 would be required to provide the proposed disclosures.
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We believe that the proposed amendments could increase the costs
for some companies to collect the information necessary to prepare the
disclosure. We also believe that the proposed amendments will impose
different costs for companies, depending on whether they are bank-
holding companies that currently provide Guide 3 information, financial
companies as defined in the proposed rule, non-financial companies, or
smaller reporting companies, as described below. Although management
must already consider short-term borrowing information as it prepares
its financial statements and MD&A under existing requirements, the
proposed amendments could impose significant incremental costs for the
collection and calculation of data, particularly in connection with the
registrant's initial compliance.
In particular, this disclosure requires the production of new data
for companies that are not already reporting this type of data
voluntarily or to their primary regulators. In some industries,
companies may readily have access to this information in their systems
while others may not be producing it on a daily basis as would be
required for financial companies under the proposals. For example,
insurance companies may find it difficult to produce daily balances for
each day that is necessary for the average and maximum short-term
borrowing disclosures applicable to them. In addition, companies that
are not financial companies under the proposed definition, particularly
those with multi-national operations, may not currently be producing
the data necessary for the monthly average and maximum short-term
borrowings disclosures, and they may be faced with complex calculation
issues when gathering the data from multiple jurisdictions. For many
companies, the costs of data production may be high.
For bank holding companies currently subject to Guide 3, costs will
likely arise primarily from the preparation of incremental disclosure
in MD&A (i.e., the proposed requirements for maximum daily amounts
instead of maximum monthly amounts and the proposed narrative
discussion of short-term borrowings arrangements) as well as quarterly
reporting of this information (rather than on an annual basis alone).
These bank holding companies already report to the Commission average
short-term borrowings data computed based on daily averages on an
annual basis, pursuant to Item VII of Guide 3. Of the approximately
10,380 public companies, we estimate that approximately 800 are bank
holding companies.
For registrants that meet the proposed definition of ``financial
company'' but that are not bank holding companies, such as insurance
companies, broker-dealers, business development companies, and
financing companies, the costs imposed could be substantial because, as
requirements that are newly applicable to these entities, costs would
likely include implementing or adjusting data gathering systems to
capture daily balance information, implementing new disclosure controls
and procedures, time spent by internal accounting staff to compile the
data, as well as the preparation of narrative disclosure. As a portion
of these costs would arise from data collection, the costs of
compliance in the initial reporting period would likely be higher
because systems may need to be implemented or adjusted. We estimate
that, in addition to the approximately 800 bank holding companies,
approximately 700 registrants would meet the proposed definition of
``financial company.''
Registrants that do not meet the definition of ``financial
companies'' could have lower costs than those registrants that are
financial companies, because they would not be required to compile data
based on daily balances. Again, the requirements would be newly
applicable, and could require these registrants to incur costs to
implement or adjust data gathering systems to capture month-end balance
information, the implementation of new disclosure controls and
procedures, time spent by internal accounting staff to compile the
data, as well as preparation of narrative disclosure. For companies
that do not currently close their books on a monthly basis, the costs
of gathering the data would likely be higher than those that do,
because monthly balances would not be readily available from existing
books and records systems. The implementation or adjustment of data
gathering systems would likely cause costs to be higher for these
companies in the initial compliance period. We estimate that the number
of registrants that are not financial companies and that are not
smaller reporting companies, is approximately 7,640.
[[Page 59885]]
For smaller reporting companies, the proposed requirements would
also be newly applicable, and costs incurred would be similar to those
applicable to large reporting companies, except that, as proposed,
smaller reporting companies would only be required to provide two years
of annual short-term borrowings information, rather than three years,
and would not be required to provide quarterly disclosure on the same
level of detail as annual disclosure. Accordingly, in addition to the
costs to prepare and review the disclosure, smaller reporting companies
that do not currently track the data needed to compile the short-term
borrowings disclosure or that do not currently close their books on a
monthly basis, would incur costs to implement or adjust data collection
systems and disclosure controls and procedures. On the other hand,
small entities without such systems would be more likely to engage in
financing activities that are less complex, where the compilation and
calculation of such data would not raise significant burdens. In
addition, the cost estimates set forth in our PRA analysis may be lower
for a small entity to the extent its costs for personnel and outside
professionals are lower than our assumed amounts. As discussed
elsewhere in this release, we estimate that there are approximately
1,240 smaller reporting companies.
In addition, registrants that are not smaller reporting companies
could incur increased costs in connection with the preparation of their
quarterly reports, as the amendments call for disclosure in quarterly
reports at the same level of detail as in annual reports. To provide
this increased level of detail, registrants may need to alter their
existing disclosure controls and procedures for quarterly reporting.
For purposes of our PRA analysis, we estimated that company personnel
would spend approximately 18 additional hours per year to prepare,
review and file the proposed disclosure in Form 10-Q. We estimate that
approximately 8,200 registrants (based on our estimated number of
annual report filers, less smaller reporting companies and foreign
private issuers) would be subject to the requirement to provide
quarterly disclosure at the same level of detail as in annual reports.
Companies may also be faced with indirect costs arising from the
amendments. For example, companies may need to consider the impact of
the amendments on their financing plans, to the extent the gathering of
data and preparation of disclosure imposes significant time burdens.
Specifically, companies could decide to delay registered offerings or
conduct unregistered offerings if they are unable to gather data and
prepare the new disclosures without significant time and expense. This
indirect cost should decrease over time, as companies implement
disclosure controls and procedures to comply with the new disclosures.
In other cases, companies may alter their short-term borrowings
activities in response to the proposed disclosure, in order to avoid
incurring the cost of compliance, and in doing so could incur
transaction costs or opportunity costs that they would not face without
a mandatory disclosure requirement.
In certain cases, mandatory required disclosure requirements can
have adverse effects for companies and their shareholders if the
disclosures reveal confidential information and trade secrets of a
company. In the case of the proposed short-term borrowings, however,
such indirect costs should be minimal due to the non-proprietary nature
of short-term borrowings. There is some possibility that a company's
competitors could be able to infer proprietary or sensitive information
about a company's business operations or strategy from disclosure about
short-term borrowings arrangements. If this were the case, it could
disproportionately impact companies that meet the proposed definition
of ``financial company,'' to the extent that amounts calculated based
on daily balance information provide a more accurate basis for such
inferences. We preliminarily believe that the likelihood of this impact
is low.
D. Request for Comment
We request data to quantify the costs and the value of the benefits
described above. We seek estimates of these costs and benefits, as well
as any costs and benefits not already defined, that may result from the
adoption of these proposed amendments. We also request qualitative
feedback on the nature of the benefits and costs described above and
any benefits and costs we may have overlooked.
VI. Consideration of Impact on the Economy, Burden on Competition, and
Promotion of Efficiency, Competition, and Capital Formation
Section 23(a)(2) of the Exchange Act requires us,\107\ when
adopting rules under the Exchange Act, to consider the impact that any
new rule would have on competition. In addition, Section 23(a)(2)
prohibits us from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
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\107\ 15 U.S.C. 78w(a)(2).
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Section 2(b) of the Securities Act \108\ and Section 3(f) of the
Exchange Act\109\ require us, when engaging in rulemaking where we are
required 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.
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\108\ 15 U.S.C. 77b(b).
\109\ 15 U.S.C. 78c(f).
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The proposed amendments are intended to enhance disclosure in MD&A
relating to registrants' liquidity profile in each reporting period by
highlighting and expanding disclosure requirements for short-term
borrowings. The proposed amendments to Form 8-K, which would conform
the disclosure requirements in the Form to the proposed amendments to
Regulation S-K, are intended to continue to provide real-time
disclosure in connection with these topics.
The proposed amendments may increase the usefulness of MD&A. The
ability of users of financial information to understand registrants'
financial statements and to determine the existence of trends in
borrowing and funding activity is expected to improve as a result of
the disclosure of average and maximum short-term borrowings during each
reporting period.
The proposed amendments also should increase the efficiency of U.S.
capital markets by providing investors with additional and more timely
information about registrants' borrowing and funding activities,
including borrowing activities that are not apparent on the face of
period-end financial statements and exposures to market and funding
liquidity risks. This information could be used by investors in
allocating capital across companies, and toward companies where the
risk incentives appear better aligned with an investor's appetite for
risk. Furthermore, these reductions in the asymmetry of information
between registrants and investors could reduce registrants' cost of
capital as investors may demand a lower risk premium when they have
access to more information.\110\
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\110\ See D. Easley & M. O'Hara, supra note 98, and R. Lambert
et al., supra note 98.
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In certain cases, mandatory required disclosure requirements can
have adverse effects for companies and their shareholders if the
disclosures reveal confidential information and trade secrets of a
company. In the case of the proposed short-term borrowings,
[[Page 59886]]
however, such indirect costs should be minimal due to the non-
proprietary nature of short-term borrowings. There is some possibility
that a company's competitors could be able to infer proprietary or
sensitive information about a company's business operations or strategy
from disclosure about short-term borrowings arrangements. If this were
the case, it could disproportionately impact companies that meet the
proposed definition of ``financial company,'' to the extent that
amounts calculated based on daily balance information provide a more
accurate basis for such inferences. We preliminarily believe that the
likelihood of this impact is low.
We request comment on whether the proposed amendments would promote
efficiency, competition, and capital formation or have an impact or
burden on competition. Commentators are requested to provide empirical
data and other factual support for their view to the extent possible.
VII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA)\111\ we solicit data to determine whether the
proposed rule amendments constitute a ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results or is likely
to result in:
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\111\ Public Law 104-121, tit. II, 110 Stat. 857 (1996).
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An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
Commentators should provide empirical data on (a) the potential
annual effect on the economy; (b) any increase in costs or prices for
consumers or individual industries; and (c) any potential effect on
competition, investment or innovation.
VIII. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Analysis (IRFA) has been
prepared in accordance with the Regulatory Flexibility Act.\112\ It
relates to proposed revisions to the rules and forms under the
Securities Act and Exchange Act to enhance disclosure that registrants
provide in MD&A regarding short-term borrowings.
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\112\ 5 U.S.C. 603.
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A. Reasons for, and Objectives of, the Proposed Action
The proposed amendments are intended to enhance disclosure in MD&A
relating to registrants' liquidity profile by highlighting and
expanding disclosure requirements for short-term borrowings. The
proposed amendments to Form 8-K, which would conform the disclosure
requirements in the Form to the proposed amendments to Regulation S-K,
are intended to continue to provide real-time disclosure in connection
with these topics. These amendments are being proposed to increase
transparency in the presentation of registrants' borrowing and funding
activities and exposure to liquidity risks in connection with that
activity. This increased transparency in areas of increasing importance
to investors is intended to maintain investor confidence in the full
and fair disclosure required of all registrants.
B. Legal Basis
We are proposing the amendments pursuant to Sections 6, 7, 10,
19(a) and 28 of the Securities Act and Sections 12, 13, 14, 15(d),
23(a) and 36 of the Exchange Act.
C. Small Entities Subject to the Proposed Action
The proposed amendments would affect some companies that are small
entities. The Regulatory Flexibility Act defines ``small entity'' to
mean ``small business,'' ``small organization,'' or ``small
governmental jurisdiction.'' \113\ The Commission's rules define
``small business'' and ``small organization'' for purposes of the
Regulatory Flexibility Act for each of the types of entities regulated
by the Commission. Securities Act Rule 157 \114\ and Exchange Act Rule
0-10(a) \115\ 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 are approximately 1,240 companies that may be
considered small entities.\116\ The proposed amendments would affect
small entities that (i) have a class of securities that are registered
under Section 12 of the Exchange Act, or are required to file reports
under Section 15(d) of the Exchange Act and (ii) are required to
provide MD&A disclosure under applicable rules and forms or disclosure
under Items 2.03 and 2.04 of Form 8-K. In addition, the proposals also
would affect small entities that file, or have filed, a registration
statement (that is required to include MD&A disclosure under the
applicable rules and forms) that has not yet become effective under the
Securities Act and that has not been withdrawn.
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\113\ 5 U.S.C. 601(6).
\114\ 17 CFR 230.157.
\115\ 17 CFR 240.0-10(a).
\116\ This includes approximately 30 business development
companies that are small entities. For purposes of the Regulatory
Flexibility Act, an investment company (including a business
development company) is a small entity if it, together with other
investment companies in the same group of related investment
companies, has net assets of $50 million or less as of the end of
its most recent fiscal year. 17 CFR 270.0-10(a).
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The data underlying the proposed short-term borrowing disclosures
should be available from a company's books and records, although it may
not currently be collected on month-end basis or daily basis, as
proposed in the rule. As discussed in our PRA analysis, we believe that
the collection and calculation of short-term borrowing data in the form
proposed may have a cost impact on registrants, including small
entities, that do not currently maintain information technology systems
for the collection of the required data. On the other hand, small
entities without such systems would be more likely to engage in
financing activities that are less complex, where the compilation and
calculation of such data would not raise significant burdens. In
addition, the cost estimates set forth in our PRA analysis may be lower
for a small entity to the extent its costs for personnel and outside
professionals are lower than our assumed amounts.
We are proposing an accommodation for smaller reporting companies,
such that expanded disclosures of short-term borrowings would not be
required for interim periods and annual period data would only be
required for two years rather than three years.
D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposed amendments are intended to enhance disclosure about
short-term borrowings. These proposals would require a small entity to:
Provide, in a separately captioned subsection of MD&A, a
comprehensive explanation of its short-term borrowings, including both
quantitative and qualitative information; and
Use a revised definition of ``direct financial
obligation'' for purposes of disclosure requirements in Items 2.03 and
2.04 of Form 8-K.
These proposed amendments largely would apply to both large and small
entities equally, except that smaller reporting companies would benefit
from the proposed exclusion from expanded interim reporting of short-
term borrowings and would provide two
[[Page 59887]]
years of annual data rather than three. As noted above, the proposed
short-term borrowings disclosure should be available from a company's
books and records and tracked with existing internal controls without a
significant incremental burden imposed on small entities, except to the
extent that it doesn't track the data on a monthly basis.
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe the proposed amendments would not duplicate, overlap, or
conflict with other Federal rules. The proposed new requirements for
short-term borrowings disclosures provide specific, additional
information that would be complementary to existing MD&A requirements.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider alternatives
that would accomplish our stated objectives, while minimizing any
significant adverse impact on small entities. In connection with the
proposed disclosure amendments, we considered the following
alternatives:
Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
Clarifying, consolidating or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
Currently, small entities are subject to the same MD&A requirements
as larger registrants under Item 303 of Regulation S-K, except that
smaller reporting companies are permitted to exclude information as to
their contractual obligations.\117\ The proposed amendments would not
alter the exclusions applicable to smaller reporting companies, except,
as discussed above, an additional exclusion would be provided for
smaller reporting companies so that they would not need to provide the
proposed expanded interim period disclosures of short-term borrowings
and would be permitted to provide two years of annual data instead of
three years. The remaining proposed disclosure requirements would apply
to small entities to the same extent as larger registrants, and would
require clear, straightforward disclosure about short-term borrowings.
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\117\ Item 303(d) of Regulation S-K provides an exclusion for
smaller reporting companies from the requirements of Item 303(a)(5),
and permits smaller reporting companies to provide, if they meet
specified conditions, only two fiscal years of information on the
impact of inflation and changing prices pursuant to Item
303(a)(3)(iv).
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Except for the exclusions noted above, we are not proposing to
change existing alternative reporting requirements under Item 303 of
Regulation S-K, or establish additional different compliance
requirements or an exemption from coverage of the proposed amendments
for small entities. The proposed amendments would provide investors
with greater transparency into the liquidity profile of registrants, by
highlighting short-term borrowings. With potentially fewer financing
options available to small entities, information about critical funding
risks and future commitments is important to investors in the context
of small entities as it is in the context of larger entities.
Therefore, we do not believe it is appropriate to develop separate
requirements for small entities that would involve clarification,
consolidation, or simplification of the proposed disclosure
requirements, other than the proposed exclusions discussed above. We do
not believe that these proposed disclosures would create a significant
new burden for small entities, and, we believe that uniform, comparable
disclosures across all companies would be beneficial for investors and
the markets.
We have used design standards and performance standards in
connection with the proposed amendments. We rely on design standards
for two reasons. First, based on our past experience, we believe that
the proposed requirements would result in disclosure that is more
useful to investors than if there were specific, enumerated
informational requirements. The proposed requirements are intended to
elicit more comprehensive and clear disclosure, while still affording
registrants the ability to tailor the disclosure to reflect their
specific activities and to provide the information that is most
important in the context of their specific business. Second, the
proposed amendments would promote consistent disclosure among all
companies, providing information that is increasingly important to
investors. Our existing MD&A requirements are largely performance
standards, designed to elicit disclosure unique to the particular
company.
Finally, we believe that requiring additional short-term borrowings
information in MD&A is the most effective way to elicit the disclosure
both for small entities. MD&A's existing emphasis on liquidity and
capital resources, as well as identification of significant
uncertainties and events, makes the placement of the disclosure as part
of MD&A an appropriate choice. Because the proposed disclosure of
short-term borrowings is intended to supplement the discussions of
liquidity and capital resources already required to be provided by
smaller reporting companies under existing rules, we believe the
inclusion of the proposed requirements in MD&A would reduce redundant
disclosure requirements and promote investors' understanding of this
important and, at times highly complex, information.
We seek comment on whether we should exempt small entities from any
of the proposed amendments or scale the proposed disclosure
requirements to reflect the characteristics of small entities and the
needs of their investors.
G. 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:
How the proposed amendments can achieve their objective
while lowering the burden on small entities;
The number of small entities that may be affected by the
proposed amendments;
The existence or nature of the potential impact of the
proposed amendments on small entities discussed in the analysis; and
How to quantify the impact of the proposed amendments.
Respondents 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 proposed rule amendments are adopted, and
will be placed in the same public file as comments on the proposed
amendments themselves.
IX. Statutory Authority and Text of the Proposed Amendments
The amendments contained in this release are being proposed under
the authority set forth in Sections 6, 7, 10, 19(a) and 28 of the
Securities Act and Sections 12, 13, 14, 15(d), 23(a) and 36 of the
Exchange Act.
List of Subjects in 17 CFR Parts 229 and 249
Reporting and recordkeeping requirements, Securities.
Text of the Proposed Amendments
For the reasons set out in the preamble, the Commission proposes to
[[Page 59888]]
amend Title 17, Chapter II, of the Code of Federal Regulations as
follows:
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
1. The authority citation for Part 229 continues to read in part as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 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,
78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless
otherwise noted.
* * * * *
2. Amend Section 229.303 by:
a. Removing the phrase ``paragraphs (a)(1) through (5) of this
Item'' and adding in its place ``paragraphs (a)(1) through (a)(6) of
this Item'' in the second sentence of the introductory text of
paragraph (a);
b. Revising paragraphs (a)(4)(ii)(A), (a)(4)(ii)(C) and
(a)(4)(ii)(D), and (a)(5)(ii)(A), (a)(5)(ii)(B) and (a)(5)(ii)(C);
c. Redesignating the ``Instructions to paragraph 303(a) (4)'' to
directly follow paragraph (a)(4)(ii)(D);
d. Adding a new paragraph (a)(6) directly above the ``Instructions
to paragraph 303(a)'';
e. Revising the fourth sentence of Instruction 8 to paragraph
303(a);
f. Revising Instruction 9 to paragraph 303(a);
g. Adding the phrase ``, except as provided in Instruction 8 to
paragraph 303(b)'' at the end of the first sentence of Instruction 3 of
the Instructions to paragraph (b) of Item 303;
h. Adding Instruction 8 to the Instructions to paragraph (b) of
Item 303; and
i. Revising paragraph (d).
The revisions and additions read as follows:
Sec. 229.303 (Item 303) Management's Discussion and Analysis of
Financial Condition and Results of Operations.
* * * * *
(a) * * *
(4) * * *
(ii) * * *
(A) Any obligation under a guarantee contract that has any of the
characteristics identified in FASB ASC Topic 460, Guarantees, paragraph
460-10-15-4, as may be modified or supplemented, and that is not
excluded from the initial recognition and measurement provisions of
FASB ASC paragraphs 460-10-15-7, 460-10-25-1, and 460-10-30-1;
(B) * * *
(C) Any obligation, including a contingent obligation, under a
contract that would be accounted for as a derivative instrument, except
that it is both indexed to the registrant's own stock and classified in
stockholders' equity in the registrant's statement of financial
position, and therefore excluded from the scope of FASB ASC Topic 815,
Derivatives and Hedging, pursuant to FASB ASC subparagraph 815-15-
74(a), as may be modified or supplemented;
(D) Any obligation, including a contingent obligation, arising out
of a variable interest (as defined in the FASB ASC Master Glossary, as
may be modified or supplemented) in an unconsolidated entity that is
held by, and material to, the registrant, where such entity provides
financing, liquidity, market risk or credit risk support to, or engages
in leasing, hedging or research and development services with, the
registrant.
(5) * * *
(ii) * * *
(A) Long-Term Debt Obligation means a payment obligation under
long-term borrowings referenced in FASB ASC Topic 470, Debt, paragraph
470-10-50-1, as may be modified or supplemented.
(B) Capital Lease Obligation means a payment obligation under a
lease classified as a capital lease pursuant to FASB ASC Topic 840,
Leases, as may be modified or supplemented.
(C) Operating Lease Obligation means a payment obligation under a
lease classified as an operating lease and disclosed pursuant to FASB
ASC Topic 840, as may be modified or supplemented.
* * * * *
(6) Short-term Borrowings. (i) In tabular format, provide for each
category of short-term borrowings specified in paragraph (a)(6)(iii) of
this Item and for the periods specified in paragraph (a)(6)(v) of this
Item:
(A) The average amount outstanding during each reported period and
the weighted average interest rate thereon;
(B) The amount outstanding at the end of each reported period and
the weighted average interest rate thereon;
(C) (1) For registrants that are financial companies, the maximum
daily amount outstanding during each reported period or
(2) For registrants that are not financial companies, the maximum
month-end amount outstanding during each reported period; and
(D) For any of the amounts referred to in paragraphs (a)(6)(i)(A),
(B) or (C) of this Item, disaggregate the amounts in the table by
currency, interest rate or other meaningful category, to the extent
presentation of separate amounts is necessary to promote understanding
or to prevent aggregate amounts from being misleading, and include a
footnote to the table indicating the method of disaggregation and any
other pertinent data relating to the calculation of the amounts
presented, including, without limitation, the timing and exchange rates
used for currency translations.
(ii) Discuss the registrant's short-term borrowings, including the
items specified in paragraphs (a)(6)(ii)(A) through (D) of this Item to
the extent necessary to an understanding of such borrowings and the
current or future effect on the registrant's financial condition,
changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources:
(A) A general description of the short-term borrowings arrangements
included in each category (including any key metrics or other factors
that could reduce or impair the company's ability to borrow under any
of such arrangements and whether there are any collateral posting
arrangements) and the business purpose to the registrant of such short-
term borrowings;
(B) The importance to the registrant of such short-term borrowings
in respect of its liquidity, capital resources, market-risk support,
credit-risk support or other benefits;
(C) The reasons for any material differences between average short-
term borrowings and period-end borrowings; and
(D) The reasons for the maximum outstanding amounts in each
reported period, including any non-recurring transactions or events,
use of proceeds or other information that provides context for the
maximum amount.
(iii) As used in this paragraph (a)(6), the term ``short-term
borrowings'' includes amounts payable for short-term obligations that
are:
(A) Federal funds purchased and securities sold under agreements to
repurchase;
(B) Commercial paper;
(C) Borrowings from banks;
(D) Borrowings from factors or other financial institutions; and
(E) Any other short-term borrowings reflected on the registrant's
balance sheet.
(iv) As used in this paragraph (a)(6), the term ``financial
company'' means a registrant that, during the reported period, is
engaged to a significant extent in the business of lending, deposit-
taking, insurance underwriting or providing investment advice, or is a
[[Page 59889]]
broker or dealer as defined in Section 3 of the Exchange Act (15 U.S.C.
78c), and includes, without limitation, an entity that is, or is the
holding company of, a bank, a savings association, an insurance
company, a broker, a dealer, a business development company as defined
in Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)(48)), an investment adviser, a futures commission merchant, a
commodity trading advisor, a commodity pool operator, or a mortgage
real estate investment trust.
(v) Information required by this paragraph (a)(6) shall be
presented for each of the three most recent fiscal years, and, in the
case of annual reports filed on Form 10-K (referenced in Sec.
249.310), information for the registrant's fourth fiscal quarter
presented in accordance with the requirements for interim periods set
forth in Instruction 8 to paragraph (b) of this Item 303; provided that
a registrant that is a smaller reporting company may provide the
information required for each of the two most recent fiscal years in
accordance with paragraph (d) of this Item 303 and, in the case of
annual reports filed on Form 10-K (referenced in Sec. 249.310), is not
required to include information for the fourth fiscal quarter.
Instruction 1 to Paragraph 303(a)(6): Where a registrant meets the
definition of financial company, but also has operations that do not
involve lending, deposit-taking, insurance underwriting, providing
investment advice, or broker or dealer activities, it may present the
information specified in Item 303(a)(6)(i) separately for such
operations. In doing so, the registrant may disclose averages and
maximum amounts for such operations using the rules and instructions
applicable to registrants that are not financial companies, provided
that it must disclose averages computed on a daily average basis and
maximum daily amounts for its operations that fall within the
definition of financial company. For purposes of making this
segregation, the registrant should make the distinction assuming the
business in question were itself a registrant. Additional information
should be presented by footnote to enable readers to understand how the
registrant's operations have been grouped for purposes of the
disclosure.
Instruction 2 to Paragraph 303(a)(6): For registrants that are
financial companies, averages called for by paragraph (a)(6) of this
Item are averages computed on a daily average basis (which means the
amount outstanding at the end of each day, averaged over the reporting
period). For all other registrants, the basis used for calculating the
averages must be identified, and the averaging period used must not
exceed a month.
Instruction 3 to Paragraph 303(a)(6): As used in this Item
303(a)(6), the maximum daily amount outstanding during a reported
period means the largest amount outstanding at the end of any day in
the reported period, and the maximum month-end amount outstanding
during a reported period means the largest amount outstanding at the
end of the last day of any month in the reported period.
Instructions to Paragraph 303(a):
* * * * *
8. * * * However, registrants may elect to voluntarily disclose
supplemental information on the effects of changing prices as provided
for in FASB ASC Topic 255, Changing Prices, or through other
supplemental disclosures. * * *
9. Registrants that elect to disclose supplementary information on
the effects of changing prices as specified by FASB ASC Topic 255 may
combine such explanations with the discussion and analysis required
pursuant to this Item or may supply such information separately with
appropriate cross-reference.
* * * * *
(b) * * *
Instructions to Paragraph 303(b):
* * * * *
8. Notwithstanding anything to the contrary in this Item 303, a
registrant that is not a smaller reporting company must include the
disclosure required pursuant to (a)(6) of this Item for each interim
period for which financial statements are included or required to be
included by Article 3 of Regulation S-X (17 CFR 210.3-01 to 3.18), and
for the registrant's fourth fiscal quarter in the case of an annual
report filed on Form 10-K (referenced in Sec. 249.310), and must
provide an updated discussion and analysis of the information
presented. The discussion and analysis should also highlight any
material changes from prior periods. For purposes of interim period
disclosures of short-term borrowings required by paragraph (a)(6) of
this Item, the term ``reported period'' used in paragraph (a)(6) of
this Item means the most recent interim period presented or, in the
case of an annual report filed on Form 10-K (referenced in Sec.
249.310), the registrant's fourth fiscal quarter.
* * * * *
(d) Smaller reporting companies. A smaller reporting company, as
defined in Sec. 229.10(f)(1) of this Chapter, may provide the
information required in paragraphs (a)(3)(iv) and (a)(6) of this Item
for the last two most recent fiscal years of the registrant if it
provides financial information on net sales and revenues and on income
from continuing operations for only two years. For interim periods, a
smaller reporting company is not required to follow Instruction 8 to
paragraph 303(b) and, instead, must discuss material changes to the
information specified in paragraphs (a)(4) and (a)(6) of this Item from
the end of the preceding fiscal year (and, if included, from the
corresponding interim balance sheet date of the preceding fiscal year)
to the date of the most recent interim balance sheet provided. In the
case of an annual report filed on Form 10-K (referenced in Sec.
249.310), a smaller reporting company is not required to provide
information for the fourth quarter of the most recent fiscal year.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
3. The authority citation for part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
* * * * *
4. Form 8-K (referenced in Sec. 249.308) is amended by:
a. Revising paragraph (c)(4) of Item 2.03; and
b. Removing paragraph (e) of Item 2.03.
The revisions read as follows:
Note: The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 8-K
* * * * *
Item 2.03 Creation of a Direct Financial Obligation or an Obligation
Under an Off-Balance Sheet Arrangement of a Registrant
* * * * *
(c)* * *
(4) A short-term borrowing, as defined in Item 303(a)(6)(iii) of
Regulation S-K (17 CFR 229.303(a)(6)(iii)), that arises other than in
the ordinary course of business.
* * * * *
5. Form 20-F (referenced in Sec. 249.220f) Item 5 is amended by:
a. Revising paragraphs (a) and (d) of Item 5.E.2;
b. Adding Item 5.H; and
c. Adding Instructions to Item 5.H after the ``Instructions to Item
5.F''.
The revisions and additions read as follows:
[[Page 59890]]
Note: The text of 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.
* * * * *
2. * * *
(a) Any obligation under a guarantee contract that has any of the
characteristics identified in FASB ASC Topic 460, Guarantees, paragraph
460-10-15-4, as may be modified or supplemented, excluding the types of
guarantee contracts described in FASB ASC paragraphs 460-10-15-7, 460-
10-25-1, and 460-10-30-1;
(b) * * *
(c) * * *
(d) Any obligation, including a contingent obligation, arising out
of a variable interest (as defined in the FASB ASC Master Glossary, as
may be modified or supplemented) in an unconsolidated entity that is
held by, and material to, the company, where such entity provides
financing, liquidity, market risk or credit risk support to, or engages
in leasing, hedging or research and development services with, the
company.
* * * * *
H. Short-Term Borrowings
1. In tabular format, provide for each category of short-term
borrowings specified in Item 5.H.3 of this Form and for the periods
specified in Item 5.H.5 of this Form:
(a) The average amount outstanding during each reported period and
the weighted average interest rate thereon;
(b) The amount outstanding at the end of each reported period and
the weighted average interest rate thereon;
(c)(i) For companies that are financial companies, the maximum
daily amount outstanding during each reported period or
(ii) For companies that are not financial companies, the maximum
month-end amount outstanding during each reported period; and
(d) For any of the amounts referred to in (a), (b) or (c) of this
Item 5.H.1, disaggregate the amounts in the table by currency, interest
rate or other meaningful category, to the extent presentation of
separate amounts is necessary to promote understanding or to prevent
aggregate amounts from being misleading, and include a footnote to the
table indicating the method of disaggregation and any other pertinent
data relating to the calculation of the amounts presented, including,
without limitation, the timing and exchange rates used for currency
translations.
2. Provide a discussion of the company's short-term borrowings,
including the items specified in paragraphs (a) through (d) of this
Item 5.H.2 to the extent necessary to an understanding of such
borrowings and the current or future effect on the company's financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources:
(a) A general description of the short-term borrowings included in
each category (including any key metrics or other factors that could
reduce or impair the company's ability to borrow under any of such
arrangements and whether there are any collateral posting arrangements)
and the business purpose to the company of such short-term borrowings;
(b) The importance to the company of such short-term borrowings in
respect of its liquidity, capital resources, market-risk support,
credit-risk support or other benefits;
(c) The reasons for any material differences between average short-
term borrowings and period-end borrowings; and
(d) The reasons for the maximum outstanding amounts in each
reported period, including any non-recurring transactions or events,
use of proceeds or other information that provides context for the
maximum amount.
3. As used in this Item 5.H, the term ``short-term borrowings''
means amounts payable for short-term obligations that are:
(a) Federal funds purchased and securities sold under agreements to
repurchase;
(b) Commercial paper;
(c) Borrowings from banks;
(d) Borrowings from factors or other financial institutions; and
(e) Any other short-term borrowings reflected in the company's
balance sheet.
4. As used in this Item 5.H, the term ``financial company'' means a
company that, during the reported period, is engaged to a significant
extent in the business of lending, deposit-taking, insurance
underwriting or providing investment advice, or is a broker or dealer
as defined in Section 3 of the Exchange Act (15 U.S.C. 78c), and
includes, without limitation, an entity that is or is the holding
company of, a bank, a savings association, an insurance company, a
broker, a dealer, a business development company as defined in Section
2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), an investment adviser, a futures commission merchant, a
commodity trading advisor, a commodity pool operator, or a mortgage
real estate investment trust.
5. Information required by this Item 5.H shall be presented for
each of the three most recent fiscal years.
* * * * *
Instructions to Item 5.H:
1. Notwithstanding Item 5.H.3, the categories of short-term
borrowings disclosed pursuant to Item 5.H of this Form may be based on
the classifications for such types of short-term borrowings used under
the comprehensive set of accounting principles that the company uses to
prepare its primary financial statements, so long as the disclosure is
provided at a level of detail that satisfies the objective of this Item
5.H disclosure requirement.
2. Where a company meets the definition of financial company, but
also has operations that do not involve lending, deposit-taking,
insurance underwriting, providing investment advice, or broker or
dealer activities, it may present the information specified in Item
5.H.1 of this Form separately for such operations. In doing so, the
company may disclose averages and maximum amounts for such operations
using the rules and instructions applicable to companies that are not
financial companies, provided that it must disclose averages computed
on a daily average basis and maximum daily amounts for its operations
that fall within the definition of financial company. For purposes of
making this segregation, the company should make the distinction
assuming the business in question were itself a registrant. Additional
information should be presented by footnote to enable readers to
understand how the company's operations have been grouped for purposes
of the disclosure.
3. For companies that are financial companies, averages called for
by this Item 5.H are averages computed on a daily average basis (which
means the amount outstanding at the end of each day, averaged over the
reporting period). For all other companies, the basis used for
calculating the averages must be identified, and the averaging period
used must not exceed a month.
4. As used in this Item 5.H, the maximum daily amount outstanding
during a reported period means the largest amount outstanding at the
end of any day in the reported period, and the maximum month-end amount
[[Page 59891]]
outstanding during a reported period means the largest amount
outstanding at the end of the last day of any month in the reported
period.
* * * * *
Dated: September 17, 2010.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-23743 Filed 9-27-10; 8:45 am]
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