[Federal Register Volume 76, Number 32 (Wednesday, February 16, 2011)]
[Proposed Rules]
[Pages 8946-8961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-3259]
[[Page 8946]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 229, 230, 232, 239, 240, and 249
[Release No. 33-9186; 34-63874; File No. S7-18-08]
RIN 3235-AK18
Security Ratings
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: This is one of several releases that we will be considering
relating to the use of security ratings by credit rating agencies in
our rules and forms. In this release, pursuant to the provisions of
Section 939A of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, we propose to replace rule and form requirements under
the Securities Act of 1933 and the Securities Exchange Act of 1934 for
securities offering or issuer disclosure rules that rely on, or make
special accommodations for, security ratings (for example, Forms S-3
and F-3 eligibility criteria) with alternative requirements.
DATES: Comments should be received on or before March 28, 2011.
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); or
Send an e-mail to [email protected]. Please include
File Number S7-18-08 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 S7-18-08. 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 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: Blair Petrillo, Special Counsel in the
Office of Rulemaking, Division of Corporation Finance, at (202) 551-
3430, or with respect to issuers of insurance contracts, Keith E.
Carpenter, Senior Special Counsel in the Office of Disclosure and
Insurance Product Regulation, Division of Investment Management, at
(202) 551-6795, 100 F Street, NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to rules and
forms under the Securities Act of 1933 (Securities Act),\1\ and the
Securities Exchange Act of 1934 (Exchange Act).\2\ Under the Securities
Act, we are proposing to amend Rules 134,\3\ 138,\4\ 139,\5\ 168,\6\
Form S-3,\7\ Form S-4,\8\ Form F-3,\9\ and Form F-4.\10\ We are further
proposing to rescind Form F-9\11\ and amend the Securities Act and
Exchange Act forms and rules that refer to Form F-9 to eliminate those
references.\12\ We are also proposing to amend Schedule 14A \13\ under
the Exchange Act.
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 17 CFR 230.134.
\4\ 17 CFR 230.138.
\5\ 17 CFR 230.139.
\6\ 17 CFR 230.168.
\7\ 17 CFR 239.13.
\8\ 17 CFR 239.25.
\9\ 17 CFR 239.33.
\10\ 17 CFR 239.34.
\11\ 17 CFR 239.39.
\12\ We propose to remove references to Form F-9 in Securities
Act Forms F-8 (17 CFR 239.38); F-10 (17 CFR 239.40); F-80 (17 CFR
239.41); and Form F-X (17 CFR 239.42), in Exchange Act Form 40-F (17
CFR 249.240f), and in the following rules: 17 CFR 200.800, 17 CFR
229.10, 17 CFR 230.134, 17 CFR 230.436, 17 CFR 230.467, 17 CFR
230.473, and 17 CFR 232.405.
\13\ 17 CFR 240.14a-101.
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I. Introduction
We are proposing today to remove references to credit ratings in
rules and forms promulgated under the Securities Act and the Exchange
Act. We proposed similar changes in 2008 but did not act on those
proposals.\14\ We are reconsidering the proposals at this time in light
of the requirements of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act'').\15\ Section 939A of the
Dodd-Frank Act requires that we ``review any regulation issued by [us]
that requires the use of an assessment of the credit-worthiness of a
security or money market instrument and any references to or
requirements in such regulations regarding credit ratings.'' Once we
have completed that review, the statute provides that we modify any
regulations identified in our review to ``remove any reference to or
requirement of reliance on credit ratings and to substitute in such
regulations such standard of credit-worthiness'' as we determine to be
appropriate.\16\
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\14\ See Security Ratings, Release No. 33-8940 (July 1, 2008)
[73 FR 40106] (``2008 Proposing Release''). In 2009, we re-opened
the comment period for the release for an additional 60 days. See
References to Ratings of Nationally Recognized Statistical Rating
Organizations, Release No. 33-9069 (Oct. 5, 2009) [74 FR 52374].
Public comments on both of these releases were published under File
No. S7-18-08 and are available at http://www.sec.gov/comments/s7-18-08/s71808.shtml. Comments also are available for website 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.
\15\ Public Law 111-203, 124 Stat. 1376 (2010).
\16\ See Section 939A of the Dodd-Frank Act.
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The amendments we are proposing today are substantially similar to
those proposed in 2008.\17\ Through both the 2008 comment period and
the 2009 comment period, we received 49 comment letters. As discussed
in more detail below, most of the commentators were opposed to the
proposal to amend Form S-3 and other related forms and rules.\18\
However, because the Dodd-Frank Act now provides that we remove
references to credit ratings from our regulations, we are re-proposing
these amendments to solicit comment on whether the proposed approach is
appropriate, what the impact on issuers
[[Page 8947]]
and other market participants would be and whether there are
alternatives that we should consider. We expect that we may receive
additional and different comments now that the modifications to our
rules and forms to remove references to credit ratings are set forth
pursuant to statute.
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\17\ The 2008 Proposing Release also included proposals related
to offerings of asset-backed securities where the requirements
contained references to credit ratings, a proposal to amend Rule
436(g) to apply to credit rating agencies that are not NRSROs, and a
proposal to remove references to credit ratings in the U.S. GAAP
reconciliation requirements. Those proposals are not being addressed
in this release. In April 2010 we proposed to remove references to
credit ratings as a requirement for shelf eligibility for offerings
of asset-backed securities. See Asset-Backed Securities, Release No.
33-9117 (Apr. 7, 2010) [75 FR 23328]. Among other things, the
proposal would have required risk retention by the sponsor as a
condition to shelf eligibility. Section 941 of the Dodd-Frank Act
contains a requirement that we issue rules jointly with bank
regulators regarding risk retention. In light of that requirement,
we are not currently addressing rules related to shelf-eligibility
for asset-backed offerings. In addition, Section 939G of the Dodd-
Frank Act provides that Rule 436(g) shall have no force or effect.
Finally, the proposals adopted in Foreign Issuer Reporting
Enhancements, Release No. 33-8959 (Sept. 23, 2008)[73 FR 58300],
provide that, for fiscal years ending on or after December 15, 2011,
all foreign private issuers must provide financial statements in
accordance with Item 18 of Form 20-F, which eliminates the reference
to credit ratings in that form with respect to reconciliation
requirements.
\18\ See Section II.A.2 below.
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We have considered the role of credit ratings in our rules under
the Securities Act on several occasions.\19\ While we recognize that
credit ratings play a significant role in the investment decision of
many investors, we want to avoid using credit ratings in a manner that
suggests in any way a ``seal of approval'' on the quality of any
particular credit rating or nationally recognized statistical rating
organization (``NRSRO''). Similarly, the legislative history indicates
that Congress, in adopting Section 939A, intended to ``reduce reliance
on credit ratings.'' \20\ In today's proposals, we seek to reduce our
reliance on credit ratings for regulatory purposes while also
preserving the use of Form S-3 (and similar forms) for issuers that we
believe are widely followed in the market. Nevertheless, our proposal
would cause some issuers that have relied or that could rely upon the
investment-grade criteria to lose eligibility for Form S-3 or Form F-3.
To the extent the proposals may result in loss of Form S-3 or Form F-3
eligibility for issuers currently eligible to use the form, we are also
requesting comment on other or additional eligibility criteria that may
be appropriate to retain eligibility for these issuers.
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\19\ See the 2008 Proposing Release for a discussion of the
history and background of references to credit ratings in rules and
regulations under the Securities Act. See also Credit Ratings
Disclosure, Release No. 33-9070 (Oct. 7, 2009) [74 FR 53086], which
includes a proposal to require disclosure regarding credit ratings
under certain circumstances.
\20\ See Report of the House of Representatives Financial
Services Committee to Accompany H.R. 4173, H. Rep. No. 111-517 at
871 (2010). The legislative history does not, however, indicate that
Congress intended to change the types of issuers and offerings that
could rely on the Commission's forms.
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II. Proposed Amendments
A. Primary Offerings of Non-Convertible Securities
1. Background of Form S-3 and Form F-3
Forms S-3 and F-3 are the ``short forms'' used by eligible issuers
to register securities offerings under the Securities Act. These forms
allow eligible issuers to rely on reports they have filed under the
Exchange Act to satisfy many of the disclosure requirements under the
Securities Act. Form S-3 and Form F-3 eligibility for primary offerings
also enables form eligible issuers to conduct primary offerings ``off
the shelf'' under Securities Act Rule 415.\21\ Rule 415 provides
considerable flexibility in accessing the public securities markets in
response to changes in the market and other factors. Issuers that are
eligible to register these primary ``shelf'' offerings under Rule 415
are permitted to register securities offerings prior to planning any
specific offering and, once the registration statement is effective,
offer securities in one or more tranches without waiting for further
Commission action. To be eligible to use Form S-3 or F-3, an issuer
must meet the form's eligibility requirements as to registrants, which
generally pertain to reporting history under the Exchange Act,\22\ and
at least one of the form's transaction requirements.\23\ One such
transaction requirement permits registrants to register primary
offerings of non-convertible securities if they are rated investment
grade by at least one NRSRO.\24\ Instruction I.B.2. provides that a
security is ``investment grade'' if, at the time of sale, at least one
NRSRO has rated the security in one of its generic rating categories,
typically the four highest, which signifies investment grade.
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\21\ 17 CFR 230.415.
\22\ See General Instruction I.A. to Forms S-3 and F-3. In order
to satisfy the issuer eligibility requirements of Form S-3 and Form
F-3 for non-ABS offerings, an issuer must be a U.S. company (for
Form S-3 only), must have a class of securities registered under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934 or be
required to file reports pursuant to Section 15(d) of the Exchange
Act, must have been a reporting company for at least 12 months, must
have filed its reports timely during that 12 month period, and must
not have defaulted on any debt or failed to pay a dividend with
respect to preferred stock since the end of the last fiscal year.
\23\ See General Instruction I.B to Forms S-3 and F-3. In
addition to permitting offerings of investment grade securities, an
issuer who meets the eligibility criteria in Instruction I.A. may
use Form S-3 or Form F-3 for primary offerings if the issuer has a
public float in excess of $75 million (or for other primary
offerings if the issuer does not have the minimum public float as
described in note 31 below), transactions involving secondary
offerings, and rights offerings, dividend reinvestment plans,
warrants and options. In addition, certain subsidiaries are eligible
to use Form S-3 or Form F-3 for debt offerings if the parent company
satisfies the eligibility requirements in Instruction I.A. and
provides the subsidiary a full and unconditional guarantee of the
obligations being registered by the subsidiary.
\24\ See General Instruction I.B.2. to Forms S-3 and F-3.
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The Form S-3 investment grade requirement was originally proposed
in 1981.\25\ In 1954, the Commission adopted a short form registration
statement on Form S-9, which permitted the registration of issuances of
certain high quality debt securities.\26\ The criteria for use of Form
S-9 related primarily to the quality of the issuer.\27\ While these
eligibility criteria set forth the type of issuer of high quality debt
for which Form S-9 was intended, the Commission believed that certain
of its requirements may have overly restricted the availability of the
form.\28\ At that time, the Commission believed that credit ratings
were a more appropriate standard on which to base Form S-3 eligibility
than specified quality of the issuer criteria, citing letters from
commentators indicating that short form prospectuses are appropriate
for investment grade debt because such securities are generally
purchased on the basis of interest rates and security ratings.\29\
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\25\ See Reproposal of Comprehensive Revision to System for
Registration of Securities Offerings, Release No. 33-6331 (Aug. 6,
1981) [46 FR 41902] (``the S-3 Proposing Release'').
\26\ Form S-9 was rescinded on December 20, 1976, because it was
being used by only a very small number of registrants. The
Commission believed the lack of usage was due in part to interest
rate increases which made it difficult for many registrants to meet
the minimum fixed charges coverage standards required by the form.
Adoption of Amendments to Registration Forms and Guide and
Rescission of Registration Form, Release No. 33-5791 (Dec. 20, 1976)
[41 FR 56301].
\27\ The criteria included requiring net income during each of
the registrant's last five fiscal years, no defaults in the payment
of principal, interest, or sinking funds on debt or of rental
payments for leases, and various fixed charge coverages. The use of
fixed charges coverage ratios, typically 1.5, was common in state
statutes defining suitable debt investments for banks and other
fiduciaries.
\28\ See the S-3 Proposing Release, supra note 25.
\29\ See Adoption of Integrated Disclosure System, Release No.
33-6383 (Mar. 3, 1982) [47 FR 11380]. Later, in 1992, the Commission
expanded the eligibility requirement to delete references to debt or
preferred securities and provide Form S-3 eligibility for other
investment grade securities (such as foreign currency or other cash
settled derivative securities). See Simplification of Registration
Procedures for Primary Securities Offerings, Release No. 33-6964
(Oct. 22, 1992) [57 FR 48970].
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When the Commission adopted Form S-3, it included a provision that
a primary offering of non-convertible debt securities may be eligible
for registration on the form if rated investment grade.\30\ This
provision provided issuers of debt securities whose public float did
not reach the required threshold, or that did not have a public float,
with an alternate means of becoming eligible to register offerings on
Form S-3.\31\ Consistent
[[Page 8948]]
with Form S-3, the Commission adopted a provision in Form F-3 providing
for the eligibility of a primary offering of investment grade non-
convertible debt securities by eligible foreign private issuers.\32\
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\30\ See General Instruction I.B.2. of Form S-3.
\31\ Pursuant to the revisions to Form S-3 and Form F-3 adopted
in 2007, issuers also may conduct primary securities offerings on
these forms without regard to the size of their public float or the
rating of debt securities being offered, so long as they satisfy the
other eligibility conditions of the respective forms, have a class
of common equity securities listed and registered on a national
securities exchange, and the issuers do not sell more than the
equivalent of one-third of their public float in primary offerings
over any period of 12 calendar months. See Revisions to Eligibility
Requirements for Primary Offerings on Forms S-3 and F-3, Release No.
33-8878 (Dec. 19, 2007) [72 FR 73534].
\32\ General Instruction I.B.2. of Form F-3. See Adoption of
Foreign Issuer Integrated Disclosure System, Release No. 33-6437
(Nov. 19, 1982) [47 FR 54764]. In 1994, the Commission expanded the
eligibility requirement to delete references to debt or preferred
securities and provide Form F-3 eligibility for other investment
grade securities (such as foreign currency or other cash settled
derivative securities). See Simplification of Registration of
Reporting Requirements for Foreign Companies, Release No. 33-7053A
(May 12, 1994) [59 FR 25810].
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Since the adoption of those rules relating to security ratings and
Form S-3 and Form F-3, other Commission forms and rules relating to
securities offerings or issuer disclosures have included requirements
that likewise rely on securities ratings.\33\ Among them are Form F-
9,\34\ Forms S-4 and F-4,\35\ and Exchange Act Schedule 14A.\36\
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\33\ This release addresses rules and forms filed by issuers
under the Securities Act and Schedule 14A under the Exchange Act. In
separate releases to be considered at a later date, the Commission
intends to propose rules to address other rules and forms that rely
on an investment grade ratings component.
\34\ See General Instruction I. of Form F-9.
\35\ See General Instruction B.1 of Form S-4 and General
Instruction B.1(a) of Form F-4.
\36\ See Note E and Item 13 of Schedule 14A.
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As discussed in more detail below, we are proposing today to revise
Instruction I.B.2. of Form S-3 and Form F-3 to provide that an offering
of non-convertible securities is eligible to be registered on Form S-3
and Form F-3 if the issuer has issued at least $1 billion of non-
convertible securities in transactions registered under the Securities
Act, other than equity securities, for cash during the past three years
(as measured from a date within 60 days of the filing of the
registration statement) and satisfies the other relevant requirements
of Form S-3 or Form F-3.
2. Comments Received on the 2008 Proposing Release
In 2008, we proposed to replace the investment grade criterion in
Instruction I.B.2. in Form S-3 (and the corresponding provision in Form
F-3) with the requirement that the issuer has issued at least $1
billion of non-convertible securities in transactions registered under
the Securities Act, other than equity securities, for cash during the
past three years (as measured from a date within 60 days of the filing
of the registration statement) and satisfied the other relevant
requirements of Form S-3 or Form F-3. As noted above, we received 49
comment letters regarding the 2008 Proposing Release. Most commentators
opposed the proposal to modify Form S-3 and Form F-3 to remove
references to credit ratings.\37\ When the 2008 Proposing Release was
published (and when we sought additional comment in 2009), however, we
were not subject to Section 939A of the Dodd-Frank Act.
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\37\ See letters from American Bar Association dated September
12, 2008 (``ABA I'') and October 10, 2008 (``ABA II''); American
Electric Power dated September 4, 2008 (``AEP''); Boeing Capital
Corporation dated September 24, 2008 (``Boeing''); Charles Scwab &
Co., Inc. dated September 5, 2008 (``Schwab''); Constance Curnow
dated August 28, 2008 (``Curnow''); Davis Polk & Wardwell dated
September 4, 2008 (``Davis Polk''); Debevoise & Plimpton dated
September 3, 2008 (``Debevoise''); Dominion Resources, Inc. dated
September 5, 2008 (``Dominion''); Edison Electric Institute dated
September 5, 2008 (``EEI I'') and December 3, 2009 (``EEI II'');
Incapital, LLC dated September 5, 2008 (``Incapital''); Manulife
Financial Corporation dated September 5, 2008 (``Manulife''); Mayer
Brown LLP dated September 4, 2008 (``Mayer Brown''); Mortgage
Bankers Association dated September 5, 2008 (``MBA''); PNM
Resources, Inc. dated September 5, 2008 (``PNM I'') and December 8,
2009 (``PNM II''); Securities Industry and Financial Markets
Association dated September 4, 2008 (``SIFMA I'') and December 8,
2009 (``SIFMA II''); Southern Company dated September 5, 2008
(``Southern I'') and December 8, 2009 (``Southern II''); WGL
Holdings, Inc. dated September 10, 2008 (``WGL''); Wisconsin Energy
Corporation dated September 5, 2008 (``Wisconsin Energy''); and Xcel
Energy Inc. dated December 8, 2009 (``Xcel'').
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In addition to the commentators who were generally opposed to
amending Form S-3 and Form F-3, several commentators were opposed to
replacing the reference to credit ratings with a requirement that in
order to be eligible to use Form S-3 and Form F-3, companies would have
to have issued at least $1 billion of non-convertible securities in
offerings registered under the Securities Act, other than equity
securities, for cash during the previous three years.\38\ Two
commentators believed the proposal would make Form S-3 less available
to high quality investment grade issuers, weakening their ability to
efficiently raise funds in the public market while potentially opening
up short form registration to non-investment grade issuers.\39\ One
commentator believed that the amount of its outstanding debt securities
is not relevant to its market following and that increasing the amount
of debt issued would not increase its market following.\40\ Some
commentators thought the $1 billion threshold should be lower.\41\ One
commentator suggested that a range of $300 to $500 million would be
more consistent with the threshold for equity issuers.\42\ Several
commentators objected to the three year look-back period.\43\ Some of
these commentators thought that the amount of outstanding debt (as
opposed to the amount of debt issued over a three-year period) of an
issuer provides a more reliable measure of market interest for debt
securities than public float provides for investors in equity
securities.\44\
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\38\ See letters from AEP, Boeing, Dominion, EEI I, EEI II,
Southern I, Southern II, PNM I, PNM II, WGL, Wisconsin, ABA II,
Xcel.
\39\ See letters from SIFMA and Boeing.
\40\ See letter from WGL.
\41\ See letters from National Association of Real Estate
Investment Trusts dated September 5, 2008 (``NAREIT''); Xcel, PNM
II, Southern II and EEI II.
\42\ See letter from NAREIT.
\43\ See letters from Dominion, EEI I, EEI II, PNM II, Southern
II and Xcel.
\44\ See letters from WGL and NAREIT.
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Commentators also disputed our preliminary belief that few issuers
who are currently eligible to use Form S-3 and Form F-3 would not be
eligible to use Form S-3 and Form F-3 if the proposal were adopted.\45\
One commentator estimated that 25-30 electric utilities would be
adversely affected by the proposal.\46\ We received specific comments
from utility companies, real estate investment trusts (REITs) and
commentators representing issuers of insurance contracts stating that
the proposal would no longer allow them to use Form S-3 and the shelf
offering process.\47\ Some commentators also believed that if the
proposal were adopted these companies would conduct more private and
offshore offerings.\48\ Some of these commentators also believed that
if the proposals were adopted raising funds in the private markets
would increase the cost of capital.\49\
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\45\ In the 2008 Proposing Release, we estimated that six
issuers who had filed on Form S-3 in the first half of 2008 would
have been required to use Form S-1 if the proposal had been in
place. See 2008 Proposing Release, supra note 14, at 40111.
Commentators indicated that they thought a greater number of issuers
would be affected if the proposal were adopted. See letters from ABA
II, EEI II, Southern II and PNM II.
\46\ See letter from EEI I.
\47\ See letters from AEP, APS, Dominion, EEI I, EEI II,
Manulife, Merrill, PNM I, PNM II, Southern I, Southern II, WGL,
Wisconsin Energy, NAVA, Inc., dated September 5, 2008 (``NAVA''),
NAREIT, Sutherland dated September 5, 2008 (``Sutherland I''),
Sutherland dated December 8, 2009 (``Sutherland II''), and Xcel.
\48\ See letters from ABA I, ABA II, PNM II, Southern II and
Xcel.
\49\ See letters from Xcel, EEI II and Southern II.
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As discussed in more detail below, the 2008 Proposing Release also
included proposed changes to other Securities Act and Exchange Act
rules and forms similar to those proposed today, although we did not
receive
[[Page 8949]]
significant feedback on those proposed changes.
3. Proposal
(i) Replace Investment Grade Rating Criterion With Minimum Registered
Debt Issuance Threshold
Today we are proposing to revise the transaction eligibility
criteria for registering primary offerings of non-convertible
securities on Forms S-3 and F-3. Notwithstanding the comments we
received on the 2008 Proposing Release, we preliminarily believe that
the proposal discussed below is the most workable alternative for
determining whether an issuer is widely followed in the marketplace so
that Form S-3 and Form F-3 eligibility and access to the shelf offering
process is appropriate. Nevertheless, as discussed in section (ii)
below, we also recognize that this proposal would cause some issuers
that have used or that could rely upon the investment-grade criteria to
lose Form S-3 or Form F-3 (and thereby shelf) eligibility. The
legislative history does not indicate that Congress intended to change
the types of issuers and offerings that could rely on the Commission's
forms. Accordingly, we have considered several mechanisms to avoid this
consequence, including attempting to replace the investment grade
criteria with other criteria intended to replicate key characteristics
of investment-grade securities, identifying certain classes or
characteristics of issuers that are most likely to rely solely upon the
investment grade criteria for Form S-3 or Form F-3 eligibility in order
to craft special eligibility criteria for these issuers, or providing
for ``grandfathering'' in the application of new rules removing the
investment-grade criteria in order to allow issuers that have recently
offered securities on Form S-3 or Form F-3 in reliance on the
investment grade criteria to retain Form S-3 or Form F-3 eligibility.
Each of these mechanisms is a means to provide consistency in the
treatment of these issuers for purposes of establishing eligibility for
Form S-3 or Form F-3. We have included extensive requests for comment
regarding potential mechanisms that might allow more consistent
treatment of these issuers to the greatest extent possible.
As proposed, the instructions to Forms S-3 and F-3 would no longer
refer to security ratings by an NRSRO as a transaction requirement to
permit issuers to register primary offerings of non-convertible
securities for cash. Instead, these forms would be available to
register primary offerings of non-convertible securities if the issuer
has issued (as of a date within 60 days prior to the filing of the
registration statement) for cash at least $1 billion in non-convertible
securities in offerings registered under the Securities Act, other than
common equity, over the prior three years.\50\
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\50\ See proposed General Instruction I.B.2. of Forms S-3 and F-
3. We are also proposing to delete Instruction 3 to the signature
block of Forms S-3 and F-3.
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We are proposing to revise the form eligibility criteria using the
same method and threshold by which the Commission defined an issuer of
non-convertible securities, other than common equity, that does not
meet the public equity float test as a ``well-known seasoned issuer''
(WKSI).\51\ Similar to our approach with WKSIs, we believe that having
issued $1 billion of registered non-convertible securities over the
prior three years would generally correspond with a wide following in
the marketplace. These issuers generally have their Exchange Act
filings broadly followed and scrutinized by investors and the
markets.\52\ We believe that a wide following in the marketplace makes
Form S-3 and Form F-3 appropriate for these issuers because information
about them is generally readily available. As a result, we believe
replacing the investment grade criterion with a standard based on the
definition of WKSIs is appropriate. This approach is designed to
identify those issuers that are followed by the markets such that it is
appropriate to allow incorporation by reference of subsequently filed
Exchange Act reports into the Securities Act registration statement and
delayed offerings off of the shelf. We realize, however, that some
offerings by issuers of lower credit quality may be registered for sale
on Form S-3 and Form F-3 if our proposal is adopted. We solicit comment
on whether our proposal would result in companies for whom Form S-3 and
Form F-3 would not be appropriate now being able to register offerings
on Form S-3 or Form F-3.\53\
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\51\ See Securities Offering Reform, Release No. 33-8591 (Jul.
19, 2005) [70 FR 44722]. For purposes of debt issuers, an issuer is
a well-known seasoned issuer if it satisfies the various
requirements for WKSIs in Securities Act Rule 405 (such as not being
an ``ineligible issuer'' or an issuer of asset-backed securities)
and it has issued within the last three years at least $1 billion
aggregate principal amount of non-convertible securities, other than
equity, for cash in primary offerings registered under the
Securities Act.
\52\ See Securities Offering Reform, Release No. 33-8501 (Nov.
3, 2004) [69 FR 67392].
\53\ All issuers also would be required to satisfy the other
conditions of the Form S-3 and Form F-3 eligibility requirements,
including those regarding reporting status.
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In determining compliance with the proposed $1 billion threshold,
we would use the same standards that are used in determining whether an
issuer is a WKSI.\54\ Specifically:
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\54\ See Securities Offering Reform, supra note 51.
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Issuers would be permitted to aggregate the amount of non-
convertible securities, other than common equity, issued in registered
primary offerings during the prior three years;
Issuers would be permitted to include only such non-
convertible securities that were issued in registered primary offerings
for cash--they would not be permitted to include registered exchange
offers; \55\ and
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\55\ Issuers would not be permitted to include the principal
amount of securities that were offered in registered exchange offers
by the issuer when determining compliance with the $1 billion non-
convertible securities threshold. A substantial portion of these
offerings involve registered exchange offers of substantially
identical securities for securities that were sold in private
offerings. In those cases, the original sale to an ``initial
purchaser'' in a private offering is made in reliance upon, for
example, the exemption of Securities Act Section 4(2), and is often
immediately followed by a resale by the initial purchasers to
investors pursuant to the safe harbor provided by Rule 144A. Such a
transaction is not registered and is not carried out under the
Securities Act's disclosure or liability standards. Moreover, in the
subsequent registered exchange offers, purchasers may not be able,
in certain cases, to avail themselves effectively of the remedies
otherwise available to purchasers in registered offerings for cash.
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Parent company issuers only would be permitted to include
in their calculation the principal amount of their full and
unconditional guarantees, within the meaning of Rule 3-10 of Regulation
S-X,\56\ of non-convertible securities, other than common equity, of
their majority-owned subsidiaries issued in registered primary
offerings for cash during the three-year period.
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\56\ 17 CFR 210.3-10.
Also consistent with the WKSI standard, the aggregate principal amount
of non-convertible securities that would be permitted to be counted
toward the $1 billion issuance threshold would be issued in any
registered primary offering for cash, on any form (other than Form S-4
or Form F-4). In calculating the $1 billion amount, issuers generally
would be permitted to include the principal amount of any debt and the
greater of liquidation preference or par value of any non-convertible
preferred stock that were issued in primary registered offerings for
cash.\57\
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\57\ In determining the dollar amount of securities that have
been registered during the preceding three years, issuers would use
the same calculation that they use to determine the dollar amount of
securities they are registering for purposes of determining fees
under Rule 457. 17 CFR 230.457.
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Although the proposed standard and the WKSI standard are both based
on a $1 billion minimum offering history, issuers seeking to rely on
the new standard would not be required to
[[Page 8950]]
qualify as a WKSI. Specifically, unlike WKSIs, the new Form S-3 and
Form F-3 eligibility test could be met by issuers that are ``ineligible
issuers'' as defined in Rule 405.
(ii) Impact of Proposals
We preliminarily anticipate that under the proposed threshold some
high yield debt issuers that are not currently eligible to use Form S-3
would become eligible. On the other hand, the proposed changes would
result in some issuers currently eligible to use Form S-3 and Form F-3
becoming ineligible. Based on a review of non-convertible securities
issued in the U.S. from January 1, 2006 through August 15, 2008, we
estimate that approximately 45 issuers who were previously eligible to
use Form S-3 (and who had made an offering during the review period)
would no longer be able to use Form S-3 for offerings of non-
convertible securities other than equity securities.\58\ As noted
below, the data does not measure the effect of the proposed rules on
issuers who were previously eligible to use Form S-3 but did not make a
public offering during the review period. We further estimate that
approximately eight issuers who were previously ineligible to use Form
S-3 or Form F-3 would be eligible to use those forms if the proposals
are adopted.
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\58\ Our staff used a commercial database to determine offerings
of non-convertible debt and preferred securities made during the
review period. They then used filters available through other
commercial databases to exclude from the sample issuers of
unregistered offerings (when identifiable), issuers with a free
float capitalization in excess of $75 million and issuers who had
guarantees from a parent with a free float capitalization in excess
of $75 million. Free float capitalization is the proportion of
shares available to ordinary investors (generally excluding employee
holdings and holdings of 5% or more of the shares) multiplied by the
market capitalization of the company. As a result, free float
capitalization excludes shares in its calculation that would be
included in the determination of market capitalization for purposes
of determining eligibility under Instruction I.B.1. of Form S-3. The
staff believes that using the free float definition did not affect
the estimate of companies who made offerings during the review
period who would no longer be eligible to use Form S-3 because it
resulted in additional companies in the review sample. The staff
then used additional computer-based filters to estimate the number
of issuers who made offerings during the review period who would not
have satisfied the eligibility criteria for Form S-3 and F-3 if the
proposal was adopted because they had issued less than $1 billion of
non-convertible securities over the previous three years. Because
the commercial databases used do not unambiguously identify
registered offerings and because commercial databases sometimes
contain data-entry errors, the staff then reviewed this set of
issuers manually by comparing the issuance data from the commercial
databases to filings in the EDGAR database. The staff's review
resulted in the exclusion of issuers who did not appear in the EDGAR
database (and had thus never made a registered offering), issuers
who appear in EDGAR but had either never made a registered offering
or who had not completed a registered offering within the timeframe
for the sample and whose registered offerings were so rare that they
likely would not have been included in the data set even if the
timeframes had been shifted forward or back, issuers who had filed
automatic shelf registration statements, issuers whose debt was
guaranteed by a parent who was eligible to use Form S-3 or Form F-3,
issuers of asset-backed securities, issuers who had registered
offerings on Form N-2 and issuers who had issued in excess of $1
billion of non-convertible securities within the previous three
years. This review resulted in an estimate of approximately 40
companies who made offerings during the review period who would no
longer be eligible to use Form S-3 or Form F-3 if the proposals are
adopted. Based on a review of filings made by issuers of certain
insurance company contracts during the review period, the staff
estimates that approximately five issuers of certain insurance
contracts registered on Form S-3 during this time period would be
ineligible to use Form S-3 if the proposals are adopted. Those five
issuers have been included in the 45 issuers noted in the text
above. See note 61 and related text for a discussion of the
insurance contracts.
While the data may be helpful in considering the potential
general effect of the proposed amendment, the scope of the data is
limited. We note that a survey covering a different time period
would have produced different results, particularly in light of
market volatility in the time period. In addition, the data reviewed
does not take into account issuers who would have been eligible to
offer non-convertible securities on Form S-3 solely in reliance on
Instruction I.B.2., but chose not to do so.
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Request for Comment
We request comment on all aspects of the proposal. We have included
specific questions below in order to facilitate responses from
interested parties. In particular, in light of comments received on the
2008 Proposal, we have included requests for comment related to
provisions of the proposals that may have a significant effect on
utility companies, issuers of insurance contracts and REITs. We also
seek comment from other categories of issuers who would be similarly
affected by our proposals.
1. We recognize that the proposals, if adopted, could change the
number and types of issuers currently eligible to use Form S-3 or Form
F-3. Should Section 939A of the Act be read as simply requiring the
removal of references to credit ratings but otherwise have no effect on
the number and type of issuers eligible to use our forms? If so, should
the new eligibility criteria be designed to replicate, as closely as
possible, the existing pool of eligible issuers? What would be the
advantages and disadvantages of such an approach?
2. Is the cumulative registered offering amount for the most recent
three-year period the appropriate threshold at which to differentiate
issuers? If so, is $1 billion appropriate? If not, should the threshold
be higher (e.g., $1.25 billion) or lower (e.g., $500 or $750 million),
and, if so, at what level should it be set? Please explain your
reasoning for a different threshold. We estimate, based on our staff's
review of non-convertible offerings, that a threshold of $750 million
would result in approximately four of the companies excluded under the
$1 billion threshold being eligible to use Form S-3, and that a
threshold of $500 million would result in approximately 11 of the
issuers excluded under the $1 billion threshold being eligible to use
Form S-3.
3. Are there any transactions that currently meet the requirements
of current General Instruction I.B.2. that would not be eligible to use
the form under the proposed revision? Are there any transactions that
do not meet the current Form S-3 or Form F-3 eligibility requirements
for investment grade securities, but now would be eligible under the
proposed revision, that should not be eligible? If practicable, provide
information on the frequency with which such offerings are made.
4. We understand based on comments received on the 2008 Proposing
Release and our staff's review of offerings of non-convertible
securities that wholly owned, state-regulated operating subsidiaries of
utility companies currently are eligible to register offerings in
reliance on Instruction I.B.2. of Form S-3 and would no longer be
eligible to use Form S-3 if the proposals are adopted because they
would not be able to satisfy the $1 billion threshold.\59\ Should we
include a provision in Forms S-3 and F-3 that would allow these
companies to continue to register offerings of non-convertible
securities on Form S-3 or Form F-3 even if they do not satisfy the $1
billion threshold? Would the regulation by state utility commissions
indicate that Form S-3 and Form F-3 are appropriate for these issuers?
\60\ Should we condition such eligibility on the issuer's parent also
being eligible to register a primary offering on Form S-3 or F-3? Are
there other conditions we should consider? Are there reasons these
companies should not be able to file on Form S-
[[Page 8951]]
3 or F-3? Would such a provision result in issuers who are not
currently eligible to use Form S-3 or F-3 becoming eligible? If so,
would this result be appropriate? If such a provision would result in
issuers who are not currently eligible to use Form S-3 or F-3 becoming
eligible, what would be the impact on the substance of information
available to investors and its accessibility? If it should be limited,
how could the provision be tailored so that it would be limited to
issuers currently eligible to file on Form S-3 or F-3? Should a
provision for Form S-3 eligibility have different conditions than a
provision for Form F-3 eligibility?
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\59\ Our staff review of filings between January 1, 2006 and
August 15, 2008 indicates that an estimated 29 utility companies
that used Form S-3 during the relevant period would be ineligible
under the proposed amendments. One commentator on the 2008 Proposing
Release indicated that the proposal would affect 25-30 utility
companies. See note 46 above.
\60\ One commentator on the 2008 Proposing Release indicated
that ``state regulators, typically through public utility
commissions, regulate the operations of many U.S. investor owned
electric utilities. Typically, a regulated utility may not issue
debt securities without the prior approval of its state utility
commission, which premises approval on a determination that the
issuance is consistent with the public good.'' See letter from EEI.
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5. We understand based on comments received on the 2008 Proposing
Release and our staff's review of offerings of non-convertible
securities that issuers of certain insurance contracts (e.g., contracts
with so-called ``market value adjustment'' features \61\ and contracts
that provide guaranteed benefits in connection with assets held in an
investor's mutual fund, brokerage, or investment advisory account)
currently eligible to register offerings in reliance on Instruction
I.B.2. of Form S-3 would no longer be eligible to use Form S-3 if the
proposals are adopted because they would not be able to satisfy the $1
billion threshold.\62\ Should we include a provision in Forms S-3 and
F-3 that would allow these companies to continue to register offerings
of such contracts on Form S-3 or Form F-3 even if they do not satisfy
the $1 billion threshold? Should such a provision be limited to
companies that are subject to the supervision of the insurance
commissioner, bank commissioner, or any agency or officer performing
like functions, of a state or territory of the United States or the
District of Columbia? Should we also limit eligibility to an issuer
that files an annual statement of its financial condition with, and is
supervised and its financial condition examined periodically by, the
insurance commissioner, bank commissioner, or any agency or officer
performing like functions of the issuer's domiciliary jurisdiction?
Should we condition eligibility for such a provision on the issuer's
capital adequacy as assessed with reference to risk-based capital
standards under the insurance laws of the issuer's state of domicile or
other relevant jurisdiction? If so, what level of risk-based capital
should be required? Should we condition eligibility for such a
provision on the issuer's parent being eligible to register a primary
offering on Form S-3 or F-3? Should we also require that the securities
offered not constitute an equity interest in the issuer and be subject
to regulation under the insurance laws of the domiciliary jurisdiction
of the issuer? Should we also provide that the value of the securities
to be offered does not vary according to the investment experience of a
separate account? Are there other conditions we should consider?
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\61\ Market value adjustment (``MVA'') features have
historically been associated with annuity and life insurance
contracts that guarantee a specified rate of return to purchasers.
In order to protect the insurer against the risk that a purchaser
may take withdrawals from the contract at a time when the market
value of the insurer's assets that support the contract has declined
due to rising interest rates, insurers sometime impose an MVA upon
surrender. Under an MVA feature, the insurer adjusts the proceeds a
purchaser receives upon surrender prior to the end of the guarantee
period to reflect changes in the market value of its portfolio
securities supporting the contract.
\62\ As discussed in note 58 above, we estimate that five of
these issuers that used Form S-3 during the relevant period would be
ineligible to use Form S-3 if the proposal is adopted.
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6. Would a provision like that described in the preceding question
result in issuers of insurance contracts who are not currently eligible
to use Form S-3 or F-3 becoming eligible? If so, would this result be
appropriate? If such a provision would result in issuers who are not
currently eligible to use Form S-3 or F-3 becoming eligible, what would
be the impact on the substance of information available to investors
and its accessibility? How could the provision be tailored so that it
would be limited to issuers of insurance contracts that are currently
eligible to file on Form S-3 or F-3? Should a provision for Form S-3
eligibility have different conditions than a provision for Form F-3
eligibility?
7. We understand based on comments received on the 2008 Proposing
Release and our staff's review of offerings of non-convertible
securities that wholly-owned operating partnerships of exchange-listed
REITS currently are eligible to register offerings in reliance on
Instruction I.B.2. of Form S-3 and would no longer be eligible to use
Form S-3 if the proposals are adopted because they would not be able to
satisfy the $1 billion threshold.\63\ Should we include a provision in
Forms S-3 and F-3 that would allow these companies to continue to
register offerings of non-convertible securities on Form S-3 or F-3
even if they do not satisfy the $1 billion threshold? Should we
condition such eligibility on the issuer's parent also being eligible
to register a primary offering on Form S-3 or F-3? Are there other
conditions we should consider? Are there reasons these companies should
not be able to file on Form S-3 or F-3? Would such a provision result
in issuers who are not currently eligible to use Form S-3 or F-3 to
become eligible? If so, would this result be appropriate? If such a
provision would result in issuers who are not currently eligible to use
Form S-3 or F-3 becoming eligible, what would be the impact on the
substance of information available to investors and its accessibility?
If it should be limited, how could the provision be tailored so that it
would be limited to issuers currently eligible to file on Form S-3 or
F-3? Should a provision for Form S-3 eligibility have different
conditions than a provision for Form F-3 eligibility?
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\63\ We estimate that approximately six operating partnership
subsidiaries of REITs that used Form S-3 or Form F-3 during the
relevant period would be ineligible to register offerings on Form S-
3 or F-3 if the proposals are adopted.
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8. Assuming there are issuers currently eligible to use Form S-3 or
Form F-3 that would not be eligible to use those forms if the proposals
are adopted, should such issuers be eligible under the new rules? If
so, should we provide for their continued eligibility through
``grandfathering?'' If we were to adopt rules that have the effect of
``grandfathering'' currently eligible issuers, how should such a
provision be crafted? Should issuers' eligibility be measured from the
date of the enactment of the Dodd-Frank Act, the date of this proposal,
or some other date? Why? How would we determine the population of
issuers eligible for any ``grandfathering?'' Would these issuers have
an investment grade ``issuer rating,'' or would ratings typically used
to meet the current From S-3 and Form F-3 eligibility requirements be
issued for each security on an offering by offering basis? If the
ratings are issued in connection with each offering of a security, then
how could we determine whether such an issuer is eligible under a
``grandfathering provision?'' Should we provide that issuers that have
relied on the investment grade eligibility criterion in the past may
continue to use Form S-3 or Form F-3 for offerings of non-convertible
securities if the issuers are otherwise eligible to use the forms?
Would that approach be consistent with Section 939A of the Dodd-Frank
Act? If so, should there be a timing requirement, such as requiring
that an issuer have conducted an offering under current Instruction
I.B.2. within the past three years? Should there be other conditions?
Should there be a time limit going forward, such as allowing these
``grandfathered'' issuers to use Form S-3 and Form F-3 for three years
from the effective date of the proposed amendments? Are there other
ways these issuers could remain eligible to
[[Page 8952]]
use Form S-3 or Form F-3? Are there specific characteristics that
should be required to be met that would enable these issuers to retain
Form S-3 or Form F-3 eligibility? Assuming there are issuers currently
ineligible to use Form S-3 and Form F-3 that would become eligible if
the proposals are adopted, should we condition their eligibility on any
specific characteristics?
9. Is there a reason that this Form S-3 and Form F-3 eligibility
requirement should not mirror the registered offering amount
requirement for the debt-only WKSI definition?
10. Should the measurement time period for a dollar-volume issuance
threshold (whether set at $1 billion, as proposed, or at some other
level) be longer or shorter than three years (e.g., four or five years
or one or two years)? If so, why? Would it be more appropriate for the
threshold to include non-convertible securities, other than common
equity, outstanding rather than issued in registered transactions over
the prior three years?
11. In determining compliance with the dollar-volume threshold,
should issuers be permitted to include only securities issued in
registered primary offerings for cash, as proposed? Should issuers be
permitted to include registered exchange offers or private offerings?
12. Is there a better alternative for Form S-3 and Form F-3
eligibility for non-convertible securities? By what metrics could one
measure the market following for debt issuers? Is there an alternative
definition of ``investment grade debt securities'' that does not rely
on NRSRO ratings and adequately meets the objective of relating short-
form registration to the existence of widespread following in the
marketplace?
13. Does the proposed eligibility based on the amount of prior
registered non-convertible securities issued serve as an adequate
replacement of the investment grade eligibility condition?
14. Is having a wide following in the market an appropriate basis
for determining Form S-3 and Form F-3 eligibility criteria? Are there
other criteria on which such eligibility should be based? What
characteristics should an issuer eligible to use Form S-3 and Form F-3
have? What standard could we use in Form S-3 and Form F-3 to ensure
those characteristics are present? If having a wide following in the
market is an appropriate standard, would the alternatives on which we
have requested comment (e.g., ``grandfathering'' certain issuers)
result in issuers with a wide following in the market being eligible to
use Form S-3 and Form F-3?
15. Should there be an eligibility requirement based on a minimum
number of holders of non-convertible securities issued pursuant to
registered offerings? If so, should this threshold be limited to
securities issued for cash, or should securities issued pursuant to
registered exchange offerings also be included? Should the number of
holders be 300 or 500, by analogy to our registration and
deregistration rules relating to equity securities or some other
number? \64\ Would linking the eligibility requirement to the number of
holders help to assure market following? If the number of holders would
be an appropriate alternative, how should that number be determined?
For example, if debt securities are registered in the name of the
record holder, is there a reliable and workable method for determining
the number of beneficial holders?
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\64\ See Exchange Act Rule 12g-4 [17 CFR 240.12g-4].
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16. Transactions in most non-asset backed debt securities are
currently required to be reported by broker/dealers who are members of
the Financial Industry Regulatory Authority (FINRA). Such transactions
are reported through the Trade Reporting and Compliance Engine (TRACE)
which is administered by FINRA. Instead of, or in addition to, the
proposed $1 billion threshold we have proposed, should we base Form S-3
and Form F-3 eligibility on the average daily volume of trading as
reported in TRACE over a specified period of time (e.g., six months or
12 months)? Would issuers be able to manipulate such a standard? Would
allowing Form S-3 and F-3 eligibility for companies with an average
daily volume of trading as reported in TRACE of all of the securities
of a non-ABS issuer that were offered and sold pursuant to a
registration statement for the six or 12 months prior to the filing of
the registration statement be appropriate? Would using such a standard
result in companies' Form S-3 and Form F-3 eligibility changing too
frequently? Is this volatility problematic, and are there ways we could
mitigate it? How would the number and types of issuers eligible to use
Form S-3 and Form F-3 under a TRACE volume standard compare to the
number and issuers eligible to use Form S-3 and Form F-3 currently?
Would using volume of transactions reported in TRACE instead of the $1
billion standard result in a different set of companies being Form S-3
or Form F-3 eligible or would it result in roughly the same companies
being Form S-3 or Form F-3 eligible? Are there particular companies who
would be eligible to use Form S-3 or Form F-3 under the $1 billion
standard but not under a TRACE volume standard? Are there particular
companies that would be eligible to use Form S-3 or Form F-3 under the
TRACE volume standard but not under the $1 billion standard?
17. Should there be a different standard for eligibility of foreign
private issuers to use Form F-3? If so, explain why and what a more
appropriate criteria would be.
18. Does the $1 billion threshold of registered offerings in the
prior three years present any issues that are unique to foreign private
issuers, especially those that may undertake U.S. registered public
offerings as only a portion of their overall plan of financing, and how
might these problems be addressed? Would it be appropriate to provide a
longer time period for measurement, or to include unregistered, public
offerings of securities for cash outside the United States?
19. Should we include a Form S-3 eligibility category for any
issuer that is subject to substantive state or federal regulation such
as broker/dealers that must satisfy net capital requirements? What
types of issuers would be able to use Form S-3 under such a provision?
Would it result in a significant number of new issuers being eligible
to use Form S-3? Is state or federal regulation, or a particular kind
of state or federal regulation (e.g., approval of capital
transactions), an appropriate measure for determining Form S-3
eligibility? Why or why not? Should such an approach be even broader
and allow for Form S-3 eligibility of issuers that control entities
subject to substantive state or federal regulation such as bank holding
companies that control banks subject to federal or state regulation? Is
there a comparable approach that would be appropriate for foreign
private issuers?
20. Should we base Form S-3 and Form F-3 eligibility on the metrics
used by NRSROs in determining a rating? Are there certain key metrics
such as debt, revenue, profit margin, cash flow to debt ratios,
interest coverage ratios and return on assets that we should include?
How could we account for differences in industry to make the metrics
appropriate for all companies without undue complexity? Would these
metrics (or other appropriate metrics) be easy for companies to
calculate for purposes of determining Form S-3 and Form F-3
eligibility?
21. Should we base Form S-3 and Form F-3 eligibility on the
presence of
[[Page 8953]]
certain covenants in the indenture? Are there covenants or other
provisions that would indicate that an offering was appropriate for
Form S-3 and Form F-3 eligibility? \65\ What would those covenants be,
and how would they serve as an indicator that Form S-3 and Form F-3
eligibility was appropriate?
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\65\ In this regard, we note that the Credit Roundtable has
published a white paper setting forth model covenants for investment
grade bond deals. The white paper includes model provisions for
change of control, step-up coupons, limitation on liens and priority
debt, reporting obligations and voting by series. The paper is
available at their Web site http://www.creditroundtable.org.
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22. Are there elements from the proposed rules and the alternatives
on which we have requested comment that could be combined into an
appropriate standard for determining Form S-3 and Form F-3 eligibility?
If so, what would such a standard include?
B. Form F-9
Form F-9 allows certain Canadian issuers \66\ to register
investment grade debt or investment grade preferred securities that are
offered for cash or in connection with an exchange offer, and which are
either non-convertible or not convertible for a period of at least one
year from the date of issuance.\67\ Under the form's requirements, a
security is rated ``investment grade'' if it has been rated investment
grade by at least one NRSRO, or at least one Approved Rating
Organization, as defined in National Policy Statement No. 45 of the
Canadian Securities Administrators (``CSA'').\68\ This eligibility
requirement was adopted as part of a 1993 revision to the MJDS
originally adopted by the Commission in 1991 in coordination with the
CSA.\69\
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\66\ Form F-9 is the Multijurisdictional Disclosure System
(``MJDS'') form used to register investment grade debt or preferred
securities under the Securities Act by eligible Canadian issuers.
\67\ Securities convertible after a period of at least one year
may only be convertible into a security of another class of the
issuer.
\68\ See General Instruction I.A. to Form F-9.
\69\ See Amendments to the Multijurisdictional Disclosure System
for Canadian Issuers, Release No. 33-7025 (Nov. 3, 1993) [58 FR
62028]. See also Multijurisdictional Disclosure and Modifications to
the Current Registration and Reporting System for Canadian Issuers,
Securities Act Release No. 33-6902 (Jun. 21, 1991) [56 FR 30036].
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In the 2008 Proposing Release, we proposed to eliminate the
requirement in Form F-9 that allows Canadian issuers to register
certain debt securities if they were rated investment grade by an
NRSRO. We did not propose to change the eligibility requirement in Form
F-9 that allows Canadian issuers to register certain debt securities if
they are rated investment grade by an Approved Rating Organization (as
defined under Canadian regulations). We did not receive significant
comment on this proposal.
We have considered modifying this 2008 proposal to further revise
Form F-9 in order to comply with Section 939A of the Dodd-Frank Act.
However, after further analysis, rather than further revising the form,
we are instead proposing to rescind Form F-9. Due to Canadian
regulatory developments since the publishing of the 2008 Proposing
Release, we no longer believe that keeping Form F-9 as a distinct form
would serve a useful purpose. Under Form F-9, an eligible issuer has
been able to register investment grade securities using audited
financial statements prepared pursuant to Canadian generally accepted
accounting principles (Canadian GAAP) without having to include a U.S.
GAAP reconciliation. In contrast, a MJDS filer must reconcile its home
jurisdiction financial statements to U.S. GAAP when registering
securities on a Form F-10.\70\ However, the CSA has recently adopted
rules that will require Canadian reporting companies to prepare their
financial statements pursuant to International Financial Reporting
Standards as issued by the International Accounting Standards Board
(``IFRS'') beginning in 2011.\71\ Foreign private issuers that prepare
their financial statements in accordance with IFRS are not required to
prepare a U.S. GAAP reconciliation.\72\ Since a Canadian issuer will
not have to perform a U.S. GAAP reconciliation under IFRS, the primary
difference between Form F-9 and Form F-10 will be eliminated. Once the
Canadian IFRS-related amendments become effective,\73\ the disclosure
requirements for an investment grade securities offering registered on
Form F-10 will be the same as the disclosure requirements for one
registered on Form F-9, resulting in Form F-9 becoming dispensable.
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\70\ See Item 2 under Part I of Form F-10 (17 CFR 239.40). Form
F-10 is the general MJDS registration statement that may be used to
register securities for a variety of offerings, including primary
offerings of equity and debt securities, secondary offerings, and
exchange offers pursuant to mergers, statutory amalgamations, and
business combinations.
\71\ See, for example, CSA IFRS-Related Amendments to Securities
Rules and Policies (2010), which are available at: http://www.osc.gov.on.ca/documents/en/Securities-Category5/rule_20101001_52-107_ifrs-amd-3339-supp3.pdf. Canadian reporting companies that
are U.S. registrants may elect to prepare their financial statements
in accordance with U.S. GAAP. See Part 3.7 of National Instrument
52-107.
\72\ See Item 17(c) of Form 20-F.
\73\ Canadian reporting issuers and registrants with financial
years beginning on or after January 1, 2011, will be required to
comply with the new IFRS requirements. For companies with a year-end
of December 31, 2011, the initial reporting period under IFRS will
be the first quarter ending March 31, 2011. See the ``Transition to
International Financial Reporting Standards'' of the Ontario
Securities Commission (``OSC''), which is available at: http://www.osc.gov.on.ca/en/ifrs_index.htm?wloc=141RHEN&id=21789EN.
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In addition, MJDS filers have infrequently used Form F-9. Since
January 1, 2007, only 21 issuers have filed Form F-9 for fewer than 40
registration statements. In light of its infrequent use and
dispensability, we propose to eliminate Form F-9 in its entirety.\74\
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\74\ We further propose to eliminate all references to Form F-9
in our rules and forms, including the reference to Form F-9 in Form
40-F. As a result, a Form F-9-eligible Canadian company which
currently has an Exchange Act reporting obligation solely with
respect to investment grade securities would be required to file its
annual report on Form 20-F.
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Request for Comment
23. The Commission requests comment on whether we should rescind
Form F-9, as proposed. Is there a reason that we should retain that
form despite the pending effectiveness of the CSA IFRS-related
amendments and the infrequency of Form F-9's use?
24. Instead of rescinding the form, should we amend Form F-9 to
eliminate references to credit ratings by an NRSRO in order to comply
with Section 939A of the Dodd-Frank Act by replacing those references
with a requirement that an issuer has issued (as of a date within 60
days prior to the filing of the registration statement) for cash at
least $1 billion in non-convertible securities, other than equity
securities, through registered primary offerings over the prior three
years?
25. As noted above, in 2008 the Commission's proposal did not
change a Canadian issuer's ability to use Form F-9 to register debt or
preferred securities meeting the requirements of current General
Instruction I.A. if the securities are rated ``investment grade'' by at
least one Approved Rating Organization (as defined in National Policy
Statement No. 45 of the Canadian Securities Administrators). If we
retain Form F-9, should we, in addition to eliminating the criterion
related to securities rated investment grade by an NRSRO, also
eliminate the criterion related to securities rated investment grade by
an Approved Rating Organization? In light of Section 939A of the Dodd-
Frank Act, would it be appropriate to eliminate the reference to an
Approved Rating Organization even though it ultimately refers to
Canadian law?
[[Page 8954]]
C. Ratings Reliance in Other Forms and Rules
1. Forms S-4 and F-4 and Schedule 14A
Proposals relating to Form S-4, F-4 and Schedule 14A were also
included in the 2008 Proposing Release. We did not receive significant
separate comment on these proposals and are re-proposing them as they
were proposed in the 2008 Proposing Release. Forms S-4 and F-4
essentially include the Form S-3 and Form F-3 eligibility criteria by
allowing registrants that meet the registrant eligibility requirements
of Form S-3 or F-3 and are offering investment grade securities to
incorporate by reference certain information.\75\ Similarly, Schedule
14A permits a registrant to incorporate by reference if the Form S-3
registrant requirements in Instruction I.A. are met and action is to be
taken as described in Items 11, 12 and 14 \76\ of Schedule 14A, which
concerns non-convertible debt or preferred securities that are
``investment grade securities'' as defined in General Instruction
I.B.2. of Form S-3.\77\ In addition, Item 13 of Schedule 14A allows
financial information to be incorporated into a proxy statement if the
requirements of Form S-3 (as described in Note E to Schedule 14A) are
met. Because the Commission proposes to change the eligibility
requirements in Forms S-3 and F-3 to remove references to ratings by an
NRSRO, the Commission believes the same standard should apply to the
disclosure options in Forms S-4 and F-4 based on Form S-3 or F-3
eligibility. That is, a registrant will be eligible to use
incorporation by reference in order to satisfy certain disclosure
requirements of Forms S-4 and F-4 to register non-convertible debt or
preferred securities if the issuer has issued (as of a date within 60
days prior to the filing of the registration statement) for cash at
least $1 billion in non-convertible securities, other than common
equity, through registered primary offerings over the prior three
years. Similarly, we propose to amend Schedule 14A to refer simply to
the requirements of General Instruction I.B.2. of Form S-3, rather than
to ``investment grade securities.'' As a result, an issuer would be
permitted to incorporate by reference into a proxy statement if the
issuer satisfied the requirements of Instruction I.A. of Form S-3, the
matter to be acted upon related to non-convertible securities and was
described in Item 11, 12 or 14 of Schedule 14A and the issuer had
issued (as of a date within 60 days of the date the definitive proxy is
first sent to security holders) for cash at least $1 billion in non-
convertible securities, other than common equity, through registered
primary offerings over the prior three years.
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\75\ See General Instruction B.1 of Forms S-4 and Form F-4.
\76\ Item 11 of Schedule of 14A provides for solicitations
related to the authorization or issuance of securities other than an
exchange of securities. Item 12 provides for solicitations related
to the modification or exchange of securities. Item 14 provides for
solicitations related to mergers, consolidations and acquisitions.
\77\ See Note E of Schedule 14A.
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Request for Comment
26. Are the amendments we have proposed for Forms S-4 and F-4
appropriate?
27. Are the proposed amendments to Schedule 14A appropriate? Would
there be a significant impact on the way proxy filings are made as a
result of the new criteria?
2. Securities Act Rules 138, 139 and 168
Other Securities Act rules also rely on credit ratings. Rules 138,
139, and 168 under the Securities Act provide that certain
communications are deemed not to be an offer for sale or offer to sell
a security within the meaning of Sections 2(a)(10) \78\ and 5(c) \79\
of the Securities Act when the communications relate to an offering of
non-convertible investment grade securities. These communications
include the following:
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\78\ 15 U.S.C. 77b(a)10.
\79\ 15 U.S.C. 77e(c).
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Under Securities Act Rule 138, a broker's or dealer's
publication about securities of a foreign private issuer that meets F-3
eligibility requirements (other than the reporting history
requirements) and is issuing non-convertible investment grade
securities;
Under Securities Act Rule 139, a broker's or dealer's
publication or distribution of a research report about an issuer or its
securities where the issuer meets Form S-3 or F-3 registrant
requirements and is or will be offering investment grade securities
pursuant to General Instruction I.B.2. of Form S-3 or F-3, or where the
issuer meets Form F-3 eligibility requirements (other than the
reporting history requirements) and is issuing non-convertible
investment grade securities; and
Under Securities Act Rule 168, the regular release and
dissemination by or on behalf of an issuer of communications containing
factual business information or forward-looking information where the
issuer meets Form F-3 eligibility requirements (other than the
reporting history requirements) and is issuing non-convertible
investment grade securities.
The Commission proposes to revise Rules 138, 139, and 168 to be
consistent with the proposed revisions to the eligibility requirements
in Forms S-3 and F-3 since in order to rely on these rules the issuer
must either satisfy the public float threshold of Form S-3 or F-3, or
issue non-convertible investment grade securities as defined in the
instructions to Form S-3 or F-3 as proposed to be revised. We included
the same proposal in the 2008 Proposing Release and did not receive
significant comment separate from the comment on the revised
eligibility in Forms S-3 and F-3.
Request for Comment
28. Should the Commission revise Rules 138, 139, and 168 as
proposed?
3. Rule 134(a)(17)
Securities Act Rule 134(a)(17) \80\ permits the disclosure of
security ratings issued or expected to be issued by NRSROs in certain
communications deemed not to be a prospectus or free writing
prospectus. In the 2008 Proposing Release, we proposed to revise the
rule to allow for disclosure of ratings assigned by any credit rating
agency, not just NRSROs. We received little comment on this proposal.
One commentator was opposed to the proposal because it would allow
unregulated credit rating agencies to publicly disclose ratings
``without having published its track record, rating procedures and
methodologies'' and other information required to be disclosed by
NRSROs.\81\ We are proposing today to remove Rule 134(a)(17) in order
to remove the safe harbor for disclosure of credit ratings assigned by
NRSROs, since we believe providing a safe harbor that explicitly
permits the presence of a credit rating assigned by an NRSRO is not
consistent with the purposes of Section 939A. Although we considered
continuing the safe harbor for any disclosure regarding credit ratings,
similar to what we proposed in 2008, at this point, we preliminarily
believe that such an approach without any limiting principle
[[Page 8955]]
would not be consistent with the otherwise limited disclosures covered
by Rule 134. We note that removing the safe harbor for this type of
information would not necessarily result in a communication that
included this information being deemed to be a prospectus or a free
writing prospectus. The proposal would simply result in there no longer
being a safe harbor for a communication that included this information.
Instead, the determination as to whether such information constitutes a
prospectus would be made in light of all of the circumstances of the
communication.
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\80\ 17 CFR 230.134(a)(17). These disclosures generally appear
in ``tombstone'' ads or press releases announcing offerings. A
communication is eligible for the safe harbor if the information
included is limited to such matters as, among others, factual
information about the identity and business address of the issuer,
title of the security and amount being offered, the price or a bona
fide estimate of the price or price range, the names of the
underwriters participating in the offering and the name of the
exchange where such securities are to be listed and the proposed
ticker symbols.
\81\ See letter from Realpoint.
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Request for Comment
29. Should we continue to provide a safe harbor for communications
that include disclosure of ratings information? Would it be appropriate
to allow such communication regarding a security rating assigned by any
credit rating agency and not limit the safe harbor to NRSRO ratings? If
the credit rating agency is not an NRSRO, is it appropriate to require
additional disclosure to that effect? Do issuers include credit ratings
in Rule 134 communications?
III. General Request for Comments
We request and encourage any interested person to submit comments
regarding:
The proposed amendments that are the subject of this
release;
Additional or different changes; or
Other matters that may have an effect on the proposals
contained in this release.
We request comment from the point of view of companies, investors, and
other market participants. With regard to any comments, we note that
such comments are of great assistance to our rulemaking initiative if
accompanied by supporting data and analysis of the issues addressed in
those comments.
In addition, we request comment on the following:
30. Should the Commission include a phase-in for issuers beyond the
effective date to accommodate pending offerings or effective shelf
registration statements on Form S-3 or Form F-3? If so, should a phase-
in apply only to particular rules, such as Form S-3 and Form F-3
eligibility? As proposed, compliance with the new standards would begin
on the effective date of the new rules. Will a significant number of
issuers have their offerings limited by the proposed rules without a
phase-in? If a phase-in is appropriate, should it be for a certain
period of time (e.g., six months or 12 months) or only for the term of
an effective registration statement?
31. What impact on competition should the Commission expect were it
to adopt the proposed non-convertible debt eligibility requirements?
Would any issuers that currently take advantage, or are eligible to
take advantage of the investment grade condition and are planning to do
so, be adversely affected? Is the ability to offer debt off the shelf a
significant competitive advantage that the Commission should be
concerned about limiting only to large debt issuers?
32. How can we balance any competitive issues with limiting shelf
eligibility to widely followed issuers?
IV. Paperwork Reduction Act
A. Background
Certain provisions of the proposed rule amendments contain a
``collection of information'' within the meaning of the Paperwork
Reduction Act of 1995 (PRA).\82\ The Commission is submitting these
proposed amendments and proposed rules to the Office of Management and
Budget (OMB) for review in accordance with the PRA.\83\ An agency may
not conduct or sponsor, and a person is not required to comply with, a
collection of information unless it displays a currently valid control
number. The titles for the collections of information are:
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\82\ 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
\83\ Although we are proposing amendments to Form S-4, Form F-4
and Schedule 14A, we do not anticipate any changes to the reporting
burden or cost burdens associated with these forms, or the number of
respondents as a result of the proposed amendments.
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``Form S-1'' (OMB Control No. 3235-0065);
``Form S-3'' (OMB Control No. 3235-0073);
``Form F-1'' (OMB Control No. 3235-0258);
``Form F-3'' (OMB Control No. 3235-0256);
``Form F-9'' (OMB Control No. 3235-0377); and
``Form F-10'' (OMB Control No. 3235-0380).
We adopted all of the existing regulations and forms pursuant to
the Securities Act or the Exchange Act. These regulations and forms set
forth the disclosure requirements for registration statements and proxy
statements that are prepared by issuers to provide investors with
information. Our proposed amendments to existing forms and regulations
are intended to replace rule and form requirements of the Securities
Act and the Exchange Act that rely on security ratings with alternative
requirements.
The hours and costs associated with preparing disclosure, filing
forms, and retaining records constitute reporting and cost burdens
imposed by the collection of information. There is no mandatory
retention period for the information disclosed, and the information
disclosed would be made publicly available on the EDGAR filing system.
B. Summary of Collection of Information Requirements
The threshold we are proposing for issuers of non-convertible
securities who are otherwise ineligible to use Form S-3 or Form F-3 to
conduct primary offerings because they do not meet the aggregate market
value requirement is designed to capture those issuers with a wide
market following. The Commission expects that under the proposed
threshold, the number of companies in a 12-month period eligible to
register on Form S-3 or Form F-3 for primary offerings of non-
convertible securities for cash will decrease by approximately 14
issuers for Form S-3 and one issuer for Form F-3.\84\ We expect that
the issuers filing on Form S-1 and F-1 will increase by the same
amounts.
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\84\ In note 58 and the related text, we estimate that for
offerings that occurred between January 1, 2006 and August 15, 2008
(approximately 31 months) that a net of 37 issuers would have become
ineligible to use Form S-3 if the proposals had been adopted (45
issuers who would become ineligible minus eight issuers who would
become newly eligible). Applying that number to a 12-month period
would result in approximately 14 companies becoming ineligible to
use Form S-3 (thus requiring them to use Form S-1). We have further
estimated that a proportional number of Form F-3 filers would be
required to file on Form F-1 if the proposals are adopted. These
estimates are made solely for purposes of the PRA and are intended
to reflect our estimate of the average number of respondents in any
given year that may be affected by the proposed rules. The number of
actual filers may be higher or lower than our estimates.
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In addition, because these proposed amendments relate to
eligibility requirements, rather than disclosure requirements, the
Commission does not expect that the proposed revisions will impose any
new material recordkeeping or information collection requirements.
Issuers may be required to ascertain the aggregate principal amount of
non-convertible securities issued in registered primary offerings for
cash, but the Commission believes that this information should be
readily available and easily calculable.
We are also proposing to rescind Form F-9, which is the form used
by qualified Canadian issuers to register investment grade securities.
Because of recent Canadian regulatory developments, we no longer
believe that keeping Form F-9 as a distinct form would serve a useful
purpose. In
[[Page 8956]]
addition, Canadian issuers have infrequently used Form F-9. As a result
of the proposal to eliminate Form F-9, we believe there would be an
additional five filers on Form F-10.\85\ We do not believe that the
burden of preparing Form F-10 will change because the information
required by Form F-10 is the same as that required by Form F-9.
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\85\ Based on a review of Commission filings, since January 1,
2007, only 21 issuers have filed on Form F-9. As a result, we
estimate that over a 12-month period, approximately five additional
Form F-10s will be filed.
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C. Paperwork Reduction Act Burden Estimates
For purposes of the Paperwork Reduction Act, we estimate that there
will be no annual incremental increase in the paperwork burden for
issuers to comply with our proposed collection of information
requirements. We do estimate, however, that the number of respondents
on Forms S-1, F-1 and F-10 will increase as a result of the proposals.
As a result, the aggregate burden hour and professional cost numbers
will increase for those forms due to the additional number of
respondents. We also expect that the number of respondents will
decrease for Forms S-3 and F-3, which will reduce the aggregate burden
hour and professional costs for those forms.\86\ These estimates
represent the average burden for all companies, both large and small.
For each estimate, we calculate that a portion of the burden will be
carried by the company internally, and the other portion will be
carried by outside professionals retained by the company. The portion
of the burden carried by the company internally is reflected in hours,
while the portion of the burden carried by outside professionals
retained by the company is reflected as a cost. We estimate these costs
to be $400 per hour. A summary of the proposed changes is included in
the table below.
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\86\ We propose to rescind Form F-9, which will eliminate the
PRA burden for that form, but we expect that the number of
respondents on Form F-10 will increase as a result.
Table 1--Calculation of Incremental PRA Burden Estimates
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Current Proposed Increase/ Proposed Increase/ Proposed
annual annual Current (decrease) burden Current (decrease) in professional
responses responses burden in burden hours (E) professional professional costs =
(A) (B) hours (C) hours (D) = C+D costs (F) costs (G) F+G
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form S-1....................................... 768 782 186,414 3,398 189,812 $223,697,200 $4,077,814 $227,775,014
Form S-3....................................... 2,065 2,051 236,959 (1,607) 235,352 284,350,500 (1,927,800) 282,422,700
Form F-1....................................... 42 43 18,975 452 19,427 22,757,400 541,843 23,299,243
Form F-3....................................... 106 105 4,426 (42) 4,384 5,310,600 (50,100) 5,260,500
Form F-10...................................... 75 80 469 31 500 562,500 37,500 600,000
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Total...................................... .......... .......... .......... 2,232 .......... ............ 2,679,257 ............
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D. Solicitation of Comments
We request comments in order to evaluate: (1) Whether the proposed
collection of information is necessary for the proper performance of
the functions of the agency, including whether the information would
have practical utility; (2) the accuracy of our estimate of the burden
of the proposed collection of information; (3) whether there are ways
to enhance the quality, utility, and clarity of the information to be
collected; and (4) whether there are ways to minimize the burden of the
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.\87\
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\87\ We request comment pursuant to 44 U.S.C. 3506(c)(2)(B).
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Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-18-08.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-18-08, and be submitted to the Securities and Exchange
Commission, Office of Investor Education and Advocacy, 100 F Street,
NE., Washington, DC 20549-0213. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication of this release. Consequently, a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication.
V. Cost-Benefit Analysis
A. Proposed Amendments
As discussed above, we are proposing rule amendments pursuant to
Section 939A of the Dodd-Frank Act to eliminate references to credit
ratings in our rules in order to reduce reliance on credit ratings.\88\
Today's proposals seek to replace rule and form requirements of the
Securities Act and the Exchange Act that rely on security ratings by
NRSROs with alternative requirements that do not rely on ratings.
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\88\ See note 20 above and related text.
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The Commission is proposing to revise the transaction eligibility
requirements of Forms S-3 and F-3 and other rules and forms that refer
to these eligibility requirements. Currently, these forms allow issuers
who do not meet the forms' other transaction eligibility requirements
to register primary offerings of non-convertible securities for cash if
such securities are rated investment grade by an NRSRO. The proposed
rules would replace this transaction eligibility requirement with a
requirement that, for primary offerings of non-convertible securities
for cash, an issuer must have issued in the previous three years (as of
a date within 60 days prior to the filing of the registration
statement) at least $1 billion aggregate principal amount of non-
convertible securities, other than common equity, in registered primary
offerings for cash. We are also proposing to remove Rule
[[Page 8957]]
134(a)(17) so that disclosure of credit ratings information is no
longer covered by the safe harbor that deems certain communications not
to be a prospectus or a free writing prospectus. Finally, we are
proposing to rescind Form F-9.
We are sensitive to the costs and benefits imposed by our rules.
The discussion below focuses on the costs and benefits of the proposals
we are making to implement the Dodd-Frank Act within our discretion
under that Act, rather than the costs and benefits of the Dodd-Frank
Act itself. The two types of costs and benefits may not be entirely
separable to the extent that our discretion is exercised to realize the
benefits intended by the Dodd-Frank Act.
B. Benefits
The proposed amendments would prescribe a different standard for
determining which issuers are eligible to register offerings on Form S-
3 or Form F-3. To the extent that some of these issuers were previously
unable to avail themselves of the shelf offering process and forward
incorporation by reference, they will now have faster access to capital
markets and incur lower transaction costs.\89\ In addition, the new
Form S-3 and Form F-3 eligibility requirement of at least $1 billion of
debt issued in registered offerings over the last three years is easily
calculable, which will benefit issuers by facilitating their compliance
with the requirement.
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\89\ We estimate that there are approximately eight issuers who
will become eligible to use Form S-3 who were not previously
eligible. See note 58 and related text.
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We believe the benefits of rescinding Form F-9 would be to reduce
redundancy by having multiple forms with the same requirements which
would streamline the registration process for Canadian issuers.
C. Costs
To the extent that the $1 billion eligibility threshold results in
issuers who were previously eligible to use Forms S-3 and F-3 to
register primary offerings of non-convertible securities to register on
Form S-1,\90\ this would result in increased costs of preparing and
filing registration statements.\91\ This would result in additional
time spent in the offering process, and issuers would incur costs
associated with preparing and filing post-effective amendments to the
registration statement. In addition, the resulting loss of the ability
to conduct a delayed offering ``off the shelf'' pursuant to Rule 415
under the Securities Act would result in costs due to the uncertainty
an issuer might face regarding the ability to conduct offerings quickly
at advantageous times.
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\90\ We estimate that approximately 45 issuers who were
previously eligible to file on Form S-3 will no longer be eligible
if the proposals are adopted. See note 58 and related text.
\91\ The ability to conduct primary offerings on short form
registration statements confers significant advantages on eligible
companies in terms of cost savings and capital formation. The time
required to prepare and update Form S-3 or F-3 is significantly
lower than that required for Forms S-1 and F-1 primarily because
registration statements on Forms S-3 and F-3 can be automatically
updated. Forms S-3 and F-3 permit registrants to forward incorporate
required information by reference to disclosure in their Exchange
Act filings. In addition, companies that are eligible to register
primary offerings on Form S-3 and Form F-3 generally are able to
conduct offerings on a delayed basis ``off the shelf'' without
further staff review and clearance, which results in significant
flexibility and efficiency for companies. See Section IV, above, for
a discussion of the estimates of the paperwork costs of preparing
and filing on Form S-1 associated with the proposed amendments that
we have prepared for purposes of the PRA.
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We believe that the proposed amendments could result in some
issuers who are currently required to file on Form S-1 or Form F-1
becoming eligible to use Form S-3 or Form F-3. This could result in a
cost to investors as there would be less information present in the
prospectuses for these companies than there was previously. As a
result, investors would have to seek out the Exchange Act reports (for
example, by accessing the SEC Web site) of these issuers for company
information which would no longer appear in the prospectus. However, we
believe these costs would be mitigated to the extent that the proposed
$1 billion eligibility threshold captures issuers with a wide market
following for whom incorporation by reference of Exchange Act reports
is more appropriate.
We do not expect the elimination of Form F-9 to result in any costs
because issuers that would register debt on Form F-9 will be able to
register debt on Form F-10. Form F-10's disclosure requirements will be
the same as those under Form F-9 once the CSA IFRS-related amendments
become effective in 2011.
If the proposed amendment to remove Rule 134(a)(17) is adopted,
there could be a cost to investors if ratings information is less
available to them, to the extent such ratings information is useful to
investors. In addition, to the extent that issuers decide to continue
to include ratings information in communications that previously were
made in reliance on the Rule 134 safe harbor, they may incur costs in
order to ascertain whether including such information would require
compliance with prospectus filing requirements.
D. Request for Comments
We request comment on all aspects of this cost-benefit analysis,
including identification and assessment of any costs and benefits not
discussed herein. We seek comment and data on the value of the benefits
identified. We also welcome comments on the accuracy of the cost
estimates in each section of this analysis, and request that
commentators provide data that may be relevant to these cost estimates.
In addition, we seek estimates and views regarding these costs and
benefits for particular covered institutions, including small
institutions, as well as any other costs or benefits that may result
from the adoption of these proposed amendments.
Specifically, we ask the following:
Would there be any significant transition costs imposed on
issuers as a result of the proposals, if adopted? Please be detailed
and provide quantitative data or support, as practicable.
VI. Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation
Section 23(a) of the Exchange Act \92\ requires the Commission,
when making rules and regulations under the Exchange Act, to consider
the impact a new rule would have on competition. Section
23(a)(2)prohibits the Commission from adopting any rule which would
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. Section 2(b) of the
Securities Act \93\ and Section 3(f) of the Exchange Act \94\ require
the Commission, when engaging in rulemaking that requires it 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 would promote efficiency, competition,
and capital formation.
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\92\ 15 U.S.C. 78w(a).
\93\ 15 U.S.C. 77b(b).
\94\ 15 U.S.C. 78c(f).
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Our preliminary analysis indicates that the proposed amendments
will have two distinct effects. First, some issuers currently eligible
to register primary offerings of non-convertible securities on Forms S-
3 and F-3 and to use the shelf offering process would lose their
eligibility. Second, some issuers will become newly eligible to use
Forms S-3 and F-3 and the shelf offering
[[Page 8958]]
process. We believe that the proposed rules will likely result in a net
decrease in eligible issuers, which is why the proposed rules may
reduce efficiency and hamper capital formation. Issuers who are no
longer eligible to register offerings on Form S-3 and Form F-3 (e.g.,
investment grade debt issuers who do not meet the proposed $1 billion
eligibility threshold) and avail themselves of the shelf offering
process may now face relatively higher issuance costs, which would
negatively affect efficiency and capital formation of those issuers. As
noted throughout this release, we anticipate that the number of such
issuers would be small, and we have requested comment on whether other
provisions should be adopted that would further reduce the number of
affected issuers.
The Commission believes that the proposal to rescind Form F-9 could
reduce confusion regarding the appropriate form to use for the
registration of securities by Canadian issuers, which could result in
increased market efficiency.
The Commission solicits comment on whether the proposed amendments
changing the Forms S-3 and F-3 eligibility requirements for registering
primary offerings of non-convertible securities, and rescinding Form F-
9 and Rule 134(a)(17), if adopted, would promote or burden efficiency,
competition, and capital formation. The Commission also requests
comment on whether the proposed amendments would have harmful effects
on investors or on issuers who could use Form S-3 and Form F-3 for
primary offerings of non-convertible securities, or on issuers of
investment grade securities that would otherwise use Form F-9 and what
options would best minimize those effects. Finally, the Commission
requests comment on the anticipated effect of disclosure requirements
on competition in the market for credit rating agencies. The Commission
requests commentators to provide empirical data and other factual
support for their views, if possible.
VII. Regulatory Flexibility Act Certification
The Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that
the amendments contained in this release, if adopted, would not have a
significant economic impact on a substantial number of small entities.
The proposed amendments would:
Amend the Securities Act Form S-3 and Form F-3 eligibility
requirements for primary offerings of non-convertible securities if the
issuer has issued (as of a date within 60 days prior to the filing of
the registration statement) for cash at least $1 billion in non-
convertible securities, other than common stock, through registered
primary offerings, within the prior three years;
Amend Forms S-4 and F-4 and Schedule 14A to conform with
the proposed Form S-3/F-3 eligibility requirements;
Amend Securities Act Rules 138, 139, and Rules 168 to be
consistent with the proposed Form S-3/F-3 eligibility requirements;
Remove Rule 134(a)(17); and
Remove Form F-9 and all references to that form in our
forms and rules.
We are not aware of any issuers that currently rely on the rules that
we propose to change or any issuers that would be eligible to register
under the affected rules that is a small entity. In this regard, we
note that credit rating agencies rarely, if ever, rate the securities
of small entities. We further note most security ratings are obtained
and used by the issuer. Issuers are generally required to pay for these
security ratings and the cost of these ratings relative to the size of
a debt or preferred securities offering by a small entity would
generally be prohibitive. Finally, based on an analysis of the language
and legislative history of the Regulatory Flexibility Act, we note that
Congress did not intend that the Regulatory Flexibility Act apply to
foreign issuers. Accordingly, some of the entities directly affected by
the proposed rule and form amendments will fall outside the scope of
the Regulatory Flexibility Act.
For these reasons, the proposed amendments would not have a
significant economic impact on a substantial number of small entities.
VIII. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\95\ a rule is ``major'' if it has resulted, or is likely
to result in:
---------------------------------------------------------------------------
\95\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
An annual effect on the U.S. economy of $100 million or
more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposal would be a ``major rule''
for purposes of the Small Business Regulatory Enforcement Fairness Act.
We solicit comment and empirical data on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment, or
innovation.
IX. Statutory Authority and Text of Proposed Rule and Form Amendments
We are proposing the amendments contained in this document under
the authority set forth in Sections 6, 7, 10, 19(a) of the Securities
Act and Sections 14 and 23(a) of the Exchange Act.
List of Subjects in 17 CFR Parts 200, 229, 230, 232, 239, 240, and
249
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND
REQUESTS
Subpart N--Commission Information Collection Requirements Under the
Paperwork Reduction Act: OMB Control Numbers
1. The authority citation for part 200, subpart N, continues to
read as follows:
Authority: 44 U.S.C. 3506; 44 U.S.C. 3507.
2. Amend Sec. 200.800 by removing from paragraph (b) the entry for
``Form F-9''.
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
3. The general authority citation for part 229 continues to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll,
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.
* * * * *
4. Amend Sec. 229.10 by removing the second sentence from
paragraph (c) introductory text, and the last sentence from paragraph
(c)(1)(i).
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
5. The authority citation for part 230 continues to read in part as
follows:
[[Page 8959]]
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, 80a-37, and
Pub. L. 111-203, Sec. 939A, 124 Stat. 1376, (2010) unless otherwise
noted.
* * * * *
6. Amend Sec. 230.134 by revising paragraph (a) introductory text,
revising paragraph (a)(6), and removing and reserving paragraph
(a)(17). The revisions read as follows:
Sec. 230.134 Communications not deemed a prospectus.
* * * * *
(a) Such communication may include any one or more of the following
items of information, which need not follow the numerical sequence of
this paragraph, provided that, except as to paragraphs (a)(4), (a)(5),
and (a)(6) of this section, the prospectus included in the filed
registration statement does not have to include a price range otherwise
required by rule:
* * * * *
(6) In the case of a fixed income security with a fixed (non-
contingent) interest rate provision, the yield or, if the yield is not
known, the probable yield range, as specified by the issuer or the
managing underwriter or underwriters and the yield of fixed income
securities with comparable maturity and security rating;
* * * * *
(17) [Reserved]
* * * * *
7. Amend Sec. 230.138 by revising paragraph (a)(2)(ii)(B)(2) to
read as follows:
Sec. 230.138 Publications or distributions of research reports by
brokers or dealers about securities other than those they are
distributing.
(a) * * *
(2) * * *
(ii) * * *
(B) * * *
(2) Is issuing non-convertible securities and the registrant meets
the provisions of General Instruction I.B.2. of Form F-3 (referenced in
Sec. 239.33 of this chapter); and
* * * * *
8. Amend Sec. 230.139 by revising paragraphs (a)(1)(i)(A)(1)(ii)
and (a)(1)(i)(B)(2)(ii) to read as follows:
Sec. 230.139 Publications or distributions of research reports by
brokers or dealers distributing securities.
(a) * * *
(1) * * *
(i) * * *
(A)(1) * * *
(ii) At the date of reliance on this section, is, or if a
registration statement has not been filed, will be, offering non-
convertible securities and meets the requirements for the General
Instruction I.B.2. of Form S-3 or Form F-3 (referenced in Sec. 239.13
and 239.33 of this chapter); or
* * * * *
(B) * * *
(2) * * *
(ii) Is issuing non-convertible securities and meets the provisions
of General Instruction I.B.2. of Form F-3 (referenced in Sec. 239.33
of this chapter); and
* * * * *
9. Amend Sec. 230.168 by revising paragraph (a)(2)(ii)(B) to read
as follows:
Sec. 230.168 Exemption from sections 2(a)(10) and 5(c) of the Act for
certain communications of regularly released factual business
information and forward-looking information.
* * * * *
(a) * * *
(2) * * *
(ii) * * *
(B) Is issuing non-convertible securities and meets the provisions
of General Instruction I.B.2. of Form F-3 (referenced in Sec. 239.33
of this chapter); and
* * * * *
10. Amend Sec. 230.467 by removing:
a. ``F-9,'' from the heading;
b. ``Form F-9 or'' and ``Sec. 239.39 or'' from the second sentence
of paragraph (a); and
c. ``Form F-9 or'' from the first sentence of paragraph (b).
11. Amend Sec. 230.473 by removing ``F-9 or'' and ``Sec. 239.39
or'' from paragraph (d).
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
12. The authority citation for part 232 continues to read in part
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *
13. Amend Sec. 232.405 by removing:
a. ``both Form F-9 (Sec. 239.39 of this chapter) and'' from the
second sentence of Preliminary Note 1;
b. ``either Form F-9 or'' from paragraphs (a)(2) introductory text,
(a)(3) and (a)(4); and
c. ``both Form F-9 and'' and ``Form F-9 and'' in the second
sentence of Note to Sec. 232.405, and ``both Form F-9 and'' in the
penultimate sentence of Note to Sec. 232.405.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
14. The authority citation for part 239 continues to read in part
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll, 78mm, 80a-
2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29,
80a-30, 80a-37, and Pub. L. No. 111-203, Sec. 939A, 124 Stat. 1376,
(2010) unless otherwise noted.
* * * * *
15. Amend Form S-3 (referenced in Sec. 239.13) by:
a. Revising General Instruction I.B.2.; and
b. Removing Instruction 3 to the signature block.
The revision reads as follows:
Note: The text of Form S-3 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-3
Registration Statement Under the Securities Act of 1933
* * * * *
General Instructions
I. Eligibility Requirements for Use of Form S-3
* * * * *
B. Transaction Requirements. * * *
2. Primary Offerings of Non-convertible Securities. Non-convertible
securities to be offered for cash by or on behalf of a registrant,
provided the registrant, as of a date within 60 days prior to the
filing of the registration statement on this Form, has issued in the
last three years at least $1 billion aggregate principal amount of non-
convertible securities, other than common equity, in primary offerings
for cash, not exchange, registered under the Act.
* * * * *
16. Amend Form S-4 (referenced in Sec. 239.25) by revising General
Instruction B.1.a.(ii)(B) to read as follows:
Note: The text of Form S-4 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-4
Registration Statement Under the Securities Act of 1933
* * * * *
General Instructions
* * * * *
B. Information With Respect to the Registrant.
1. * * *
[[Page 8960]]
a. * * *
(ii) * * *
(B) Non-convertible debt or preferred securities are to be offered
pursuant to this registration statement and the requirements of General
Instruction I.B.2. of Form S-3 have been met; or
* * * * *
17. Amend Form F-3 (referenced in Sec. 239.33) by:
a. Revising General Instruction I.B.2.; and
b. Deleting Instruction 3 to the signature block.
The revision reads as follows:
Note: The text of Form F-3 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form F-3
Registration Statement Under the Securities Act of 1933
* * * * *
General Instructions
I. Eligibility Requirements for Use of Form F-3
* * * * *
B. Transaction Requirements * * *
2. Primary Offerings of Non-convertible Securities. Non-convertible
securities to be offered for cash provided the issuer, as of a date
within 60 days prior to the filing of the registration statement on
this Form, has issued in the last three years at least $1 billion
aggregate principal amount of non-convertible securities, other than
common equity, in primary offerings for cash, not exchange, registered
under the Act.
* * * * *
18. Amend Form F-4 (referenced in Sec. 239.34) by revising General
Instruction B.1(a)(ii)(B).
The revision reads as follows:
Note: The text of Form F-4 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form F-4
Registration Statement Under the Securities Act of 1933
* * * * *
General Instructions
* * * * *
B. Information With Respect to the Registrant
1. * * *
a. * * *
(ii) * * *
(B) Non-convertible debt or preferred securities are to be offered
pursuant to this registration statement and the requirements of General
Instruction I.B.2. of Form F-3 have been met; or
* * * * *
19. Amend Form F-8 (referenced in Sec. 239.38) by removing ``Form
F-9,'' from each of paragraph A.(3) of General Instruction III and
paragraph B. of General Instruction V.
Note: The text of Form F-8 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Sec. 239.39 [Removed and reserved]
20. Remove and reserve Sec. 239.39 (referencing Form F-9).
21. Amend Form F-10 (referenced in Sec. 239.40) by removing ``Form
F-9,'' from each of paragraph C.(4) of General Instruction I and
paragraph B. of General Instruction III.
Note: The text of Form F-10 does not, and this amendment will
not, appear in the Code of Federal Regulations.
22. Amend Form F-80 (referenced in Sec. 239.41) by removing ``Form
F-9,'' from each of paragraph A.(3) of General Instruction III and
paragraph B. of General Instruction V.
Note: The text of Form F-80 does not, and this amendment will
not, appear in the Code of Federal Regulations.
23. Amend Sec. 239.42 as follows:
a. Remove ``F-9,'' wherever it appears in the heading and in
paragraphs (a) and (e).
b. Amend Form F-X (referenced in Sec. 239.42) by removing ``F-9,''
from each of paragraphs (a) and (e) of General Instruction I, and each
of paragraphs (a) and (c) of General Instruction II.F.
Note: The text of Form F-X does not, and this amendment will
not, appear in the Code of Federal Regulations.
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
24. The general authority citation for part 240 is revised to read
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78o-4, 78p, 78q, 78s,
78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3,
80b-4, 80b-11, and 7201 et seq.; 18 U.S.C. 1350, 12 U.S.C.
5221(e)(3), and Pub. L. 111-203, Sec. 939A, 124 Stat. 1376, (2010)
unless otherwise noted.
* * * * *
25. Amend Sec. 240.14a-101 by revising Note E(2)(ii) to read as
follows:
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Notes
* * * * *
E. * * *
(2) * * *
(ii) Action is to be taken as described in Items 11, 12, and 14 of
this schedule which concerns non-convertible debt or preferred
securities issued by a registrant meeting the requirements of General
Instruction I.B.2. of Form S-3 (referenced in Sec. 239.13 of this
chapter); or
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
26. 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.
* * * * *
27. Amend Sec. 249.240f by:
a. Removing ``F-9,'' in paragraph (a); and
b. Removing in paragraph (b)(4) the phrase ``; provided, however,
no market value threshold need be satisfied in connection with non-
convertible securities eligible for registration on Form F-9 (Sec.
239.39 of this chapter)''.
c. In Form 40-F (referenced in Sec. 249.240f) by:
i. Removing ``F-9,'' from paragraph (1) of General Instruction A;
ii. Removing from paragraph (2)(iv) of General Instruction A the
phrase ``; provided, however, that no market value threshold need be
satisfied in connection with non-convertible securities eligible for
registration on Form F-9''; and
iii. Revising paragraph (2) of General Instruction C to read as
follows:
Note: The text of Form 40-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 40-F
* * * * *
General Instructions
* * * * *
C. * * *
(2) Any financial statements, other than interim financial
statements, included in this Form by registrants registering securities
pursuant to Section 12 of the Exchange Act or reporting pursuant to the
provisions of Section 13(a) or 15(d) of the Exchange Act must be
reconciled to U.S. GAAP as required by Item 17 of Form 20-F under the
Exchange Act, unless this Form is filed with respect to a reporting
obligation under Section 15(d) that arose solely as a result of a
filing made
[[Page 8961]]
on Form F-7, F-8, or F-80, in which case no such reconciliation is
required.
Dated: February 9, 2011.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-3259 Filed 2-15-11; 8:45 am]
BILLING CODE 8011-01-P