Release No. 33-6383

Release No. 34-18524

Release No. 35-22407

Release No. 39-700

Release IC-12264

Release ASR-306

47 Fed. Reg. 11466 - Mar. 16, 1982

Adoption of Integrated Disclosure System

ACTION: Final rules.

Table of Conents

III. Disclosure Provisions

A. Operation and Philosophy of Regulation S-K.

Since its initial adoption, ³⁵ Regulation S-K has evolved beyond a source of certain standardized registrant-related disclosure provisions to become a more complete compendium of disclosure requirements applicable to Securities Act and Exchange Act filings. ³⁶ This evolution was noted in the S-K Release and endorsed by the commentators. The adopted revisions represent a major step in the consolidation of disclosure requirements into Regulation S-K. The Commission intends to continue this consolidation of disclosure requirements in Regulation S-K. ³⁷

In general, Regulation S-K is not self-executing: inclusion of the information specified in the Regulation is required only to the extent a form or schedule governing a document specifically directs inclusion of the information prescribed by an Item of Regulation S-K. There are two exceptions to this general rule in the Regulation as adopted today. The Commission policies outlined in the General section of the Regulation with respect to projections and security ratings are applicable to all disclosure documents, without direct reference in the schedule or form to the specific provision of the Regulation setting forth such policies and whether or not the schedule or form incorporates any Item of Regulation S-K. Likewise, the Industry Guides listed in the last section of the Regulation are applicable to the disclosure documents indicated in the list, whether or not the applicable form or schedule refers to Regulation S-K or to the Industry Guide. ³⁸

B. Synopsis of Revisions.

The proposed reorganization of Regulation S-K into nine major sections met with the general approval of the commentators. However, to simplify CFR references, the numbering of the Items has been revised to permit direct citation to specific Items of the Regulation, rather than to the nine sections of the Regulation. The only changes to the proposed reorganization are an incorporation of the requirements regarding disclosure of the ratios of earnings to fixed changes in the Registration Statement and Prospectus Provisions section of the Regulation and the relocation of paragraph (a) of proposed Item 510 specifying the required description of indemnification provisions into the Miscellaneous section of the Regulation. The move of the ratio disclosure requirements from the Financial Information section reflects the fact that such information is required only in Securities Act filings and the move of the indemnification provisions is based on the fact that such disclosure is required in Form 10 registration statements under the Exchange Act, as well as in Securities Act filings.

There follows a brief discussion of the more substantive changes made to the Items as proposed in the S-K Release.

1. General.

the only change to the General section of the Regulation is the inclusion in paragraph (c) of the Commissions Policy on Security Ratings.

2. Item 101--Description of Business.

Since, as noted in the S-K Release, Items 101, 102, 103, 401, 402 and 403 of Regulation S-K will be the subject of future "sunset" review, no major reconsideration of these Items was undertaken. ³⁹ Commentators suggestions with respect to the Items will be considered in connection with such future rulemaking projects. Several changes have been made in Item 101, however, principally for clarification purposes.

Reference to required updating has been revised throughout the Regulation, including paragraphs (b)(2) and (d)(3) of Item 101, to make clear that such requirements apply where interim financial statements are included voluntarily, as well as where they are required by Regulation S-K to be included in the document.

Paragraph (c)(vii) has been revised to require the name of certain customers of the registrant and its subsidiaries only where the loss of such customer would have a material adverse effect on the registrant and its subsidiaries taken as a whole.

Paragraph (d) reflects two changes which make it parallel the provisions of paragraph (b) of Item 101. Subparagraph (1) refers to operating profit and loss of the registrants geographic area, rather than profitability and permits cross-reference to the financial statements where the required information is included therein. Neither of these revisions is intended to effect a substantive change.

3. Item 102--Description of Property.

Item 102 has been amended to delete the requirements of paragraph (b) with respect to oil and gas operations. The Commissions proposal to move the provisions of paragraph (b) into an Industry Guide was overwhelmingly endorsed by the commentators and such relocation has been effected. ⁴⁰ The provisions of paragraph (b) have been reformulated, without substantive change from those proposed in the S-K Release, as new Industry Guide 2 (Disclosure of Oil and Gas Operations).

While the Commission requested comment with respect to possible revision of Item 102 to permit disclosure of any kind of reserves with appropriate discussion, it has determined to postpone any consideration of such a change until the Financial Accounting Standards Board (the "FASB") completes its review of disclosures concerning oil and gas producing activities. ⁴¹

Instruction 5 to Item 102 was proposed to be revised to permit disclosure of less than proved or probable reserves in certain cases where the staff of the Commission could be shown that such disclosure was required by foreign law or was necessary to prevent the disclosure from being misleading. The conditions proposed as the basis for inclusion of such information were the subject of commentator criticism. As a result, Instruction 5 has been revised to permit disclosure of less than proved oil and gas reserves, or proved or probable reserves in other cases, where such information is required by foreign or state law to be disclosed in the document. The Instruction now also permits such reserve data to be disclosed where it has been provided previously to a person (or any of its affiliates) that is engaged in an acquisition of the registrant or its equity securities.

4. Items 103--Legal Proceedings.

Instruction 5 of proposed Item 103 reflects the adoption of amendments to the instruction relating to environmental disclosure which the Commission proposed in May 1981. ⁴² The proposed amendments were designed to establish thresholds for disclosure of environmental proceedings involving governmental authorities and would have required that registrants list, or make available upon request, the names and addresses of those governmental authorities from which to obtain compliance-related reports associated with disclosable environmental proceedings.

Most commentators who addressed the general effect of the proposals believed that adoption of materiality thresholds similar to those proposed would alleviate many of the problems experienced with the existing requirements. Clause (a) of Instruction 5, which requires disclosure of all environmental proceedings, including governmental proceedings, that are material to the business or financial condition of the registrant, was overwhelmingly endorsed by the commentators and is adopted without change.

Clause (b) of Instruction 5, which requires disclosure of damage actions or governmental proceedings involving potential monetary sanctions, capital expenditures, deferred charges or charges to income in which the amount involved, exclusive of interest and costs, exceeds 10 percent of current assets on a consolidated basis, was supported by the commentators, and it, too, is being adopted as proposed.

Proposed clause (c) would have required disclosure of governmental proceedings involving potential monetary sanctions unless the registrant reasonably believes that such proceedings will result in fines of less than $100,000. Although a majority of the commentators supported the addition of a dollar amount threshold, many contended that, in view of the difficulty in making meaningful predictions about the outcome of pending proceedings, it would be preferable to base disclosure on the actual damages imposed at the conclusion of the proceeding. The Commission believes, however, that after-the-fact disclosure would be less useful to investors and that the "reasonable belief" standard is appropriate because, as a number of commentators pointed out, it is similar to the standard registrants currently utilize for determining the proper accounting treatment of financial contingencies. ⁴³ The majority of commentators opined that the proposed $100,000 figure would be appropriate if the reasonable belief standard were adopted.

Several commentators believed that a burdensome data collection and evaluation effort would be required in order to determine whether the potential fines likely to be imposed in similar proceedings would meet the $100,000 threshold of clause (c). In response to this concern, the definition of "proceeding" is revised to clarify that aggregation of similar proceedings is not required for purposes of clause (c). It should be noted that since clause (c) concerns proceedings involving potential monetary sanctions, permit proceedings and requests for waivers or variances would not be disclosable pursuant to clause (c).

Several commentators asserted that the increasing number of legislative and regulatory provisions which arguably relate to environmental matters sometimes makes it difficult to determine whether disclosure is required because of the Instructions reference to proceedings arising from provisions "* * * otherwise relating to the protection of the environment." In order to eliminate any ambiguity in the language, the Commission is substituting the phrase "or primarily for the purpose of protecting the environment." Another change provides that aggregation of proceedings only is required with respect to proceedings involving the same "legal and factual" issues. Accordingly, the Commission is adopting clause (c) as proposed and amending the definition of "proceeding" in the manner described above. ⁴⁴

There was extensive adverse reaction to the proposal to delete the current provision allowing similar legal proceedings to be grouped and described generically. Because generic descriptions would be more efficient and may be more intelligible to investors, the option of a generic discussion is being retained in the final form of the Instruction.

Most Commentators criticized the proposal to require disclosure of the governmental authorities from whom compliance-related reports can be obtained. In view of these objections and the absence of any expressed desire for such information by a substantial number of investors, the Commission is withdrawing this proposed requirement.

Finally, the Commission solicited comment on the need for, and feasibility of, an additional provision which would require brief aggregate disclosure of the number of, and total amount involved in, governmental proceedings not otherwise subject to disclosure under proposed clause (a), (b) or (c). A large number of commentators argued that such a provision would reimpose most of the administrative burdens the proposed revisions sought to eliminate and that the resulting disclosures would be meaningless and confusing to investors. Consequently, the Commission has determined not to adopt such an additional provision.

5. Item 201--Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matter.

Other than clarifying changes, only two substantive changes have been made to Item 201. The first revises the "over-hang" disclosure required. The Commission has determined that specific disclosure requirements with respect to securities "over-hanging" the market for a registrants common equity is needed primarily where common equity securities are being registered on a Form S-1 or Form 10 and there is no established public trading market for such securities. In such cases, the likely development of a public trading market and the commencement of public reporting under the Exchange Act gives rise in itself to the possibility of a material market overhang. The deletion of the specific requirements of proposed paragraph (a)(3) with respect to market overhang does not rescind the general disclosure obligation to set forth those facts that the registrant knows which reasonably suggest that the historical market prices reported will be materially adversely affected by securities overhanging the market for the registrants common equity. Further, the reference in paragraph (a)(2) to common equity "which may be registered under the Securities Act for sale by security holders" has been revised to refer to common equity "that the registrant has agreed to register under the Securities Act for sale by security holders."

Paragraph (c) has been amended to permit cross-reference to descriptions of dividend limitations and discussion thereof in the financial statements and the managements discussion and analysis of financial condition and operating results, thereby eliminating duplicative disclosure of the terms of such restrictions. Where the current or future payment of dividends is, or is reasonably expected by the registrant to be, materially limited, such fact still must be noted in connection with the disclosure of information concerning dividends paid in the last two fiscal years.

Instruction 5 defining common equity has been deleted because a definition of common equity is included in Regulations C and 12B as adopted herein.

6. Item 202--Description of Registrants Securities.

In addition to clarifying changes, Item 202 incorporates one major revision. Paragraph (a)(5) with respect to anti-takeover provisions has been revised substantially. A number of provisions previously specified in paragraph (a)(5), such as classification of the board of directors, super-majority rules and restrictions on alienability of the stock are addressed in the list in paragraph (a)(1) of disclosable terms of the securities. Paragraph (a)(5) has been redrafted to require a discussion of the effect on control of the registrant of certain charter and by-law provisions where such provisions are effective only in the case of a major corporate transaction, such as a merger, liquidation, sale of substantially all assets or tender offer, and where they would delay, deter or prevent a change in control of the registrant.

7. Item 301--Selected Financial Data.

Item 301 has been amended to delete all reference to the ratio of earnings to fixed charges. The requirements applicable to disclosure of such ratio are included in Items 503 and 601 of Regulation S-K.

Instruction 2 to the Item also has been revised to delete reference to the qualified auditors report and to require instead a brief note as to matters affecting the comparability of the five year information, as well as certain contingencies.

8. Item 302--Supplementary Financial Information.

As the Commission noted in the S-K Release, because the criteria specified in paragraph (a) as to registrants required to include certain historical quarterly financial data appear to have little relevance to those upon which the integrated disclosure system is based, the Commission anticipates undertaking a reconsideration of the requirements in paragraph (a) in the near future. ⁴⁵

9. Item 503--Summary Information.

Risk Factors and Ratio of Earnings to Fixed Charges. Provisions regarding disclosure of the ratio of earnings to fixed charges are being adopted as paragraph (d) of Item 503. ⁴⁶ The provisions are located in the Registration Statement and Prospectus Provisions section of the Regulation because the ratio only is being required in certain Securities Act filings.

In addition to editorial changes of a clarifying nature, the proposed ratio rules have been changed in the following respects. First, the present practice of requiring the ratio of earnings to fixed charges in debt offerings and the combined ratio in preferred stock offerings is being retained. The Commission agrees with the view of many of the commentators that the combined ratio may not be meaningful to a potential debtholder since the preferred stockholder has a subordinate claim on the registrants earnings. Of course, registrants may choose to disclose one or both ratios in other filings.

Second, the proposal has been revised to incorporate Topic 9B of Staff Accounting Bulletin No. 40, which requires disclosure of the ratio of a registrants parent as well as the registrants ratio when the registrants parent company is artificially maintaining the registrants ratio of earnings to fixed charges, for example, in order to meet the minimum borrowing standard stipulated by a state agency. In addition, disclosure of the parents ratio is required if the registrants parent is guaranteeing the registrants debt securities or preferred stock.

Third, the proposed definition of earnings for purposes of computation of the ratio has been changed to exclude earnings from discontinued operations. Commentators believed that comparisons between years and companies would be facilitated by computation of the ratios on the basis of only continuing operations because such earnings are more stable and consistent.

Finally, Item 503(d) permits an earnings adjustment equal to the amortization of current and prior years capitalized interest. Many commentators agreed that such an adjustment was desirable but noted the problems involved in requiring such an adjustment in all situations.

10. Item 504--Use of Proceeds.

Instruction 6 has been revised to delete the "reasonably probable" test objected to by the commentators as too vague. Instead, the exception to the disclosure required by Instruction 6 will be available only where Regulation S-X would not require inclusion of financial statements of the company to be acquired and disclosure of the required information would jeopardize the acquisition.

11. Item 506--Dilution.

The requirement to discuss dilution has been revised to minimize instances where such disclosure would be required of more seasoned companies whose securities are selling on the basis of earnings, and where dilution of book value generally is not material to the investor.

12. Item 508--Plan of Distribution.

A new paragraph (j) has been added to this item to elicit disclosure regarding any principal underwriters intentions to sell to their discretionary accounts. As was the case pursuant to previous Item 2 of Form S-1, this disclosure is required only where the registrant was not subject to Exchange Act reporting requirements.

13. Item 510--Disclosure of Commission Position on Indemnification for Securities Act Liabilities.

As noted above, paragraph (a) of proposed Item 510 is adopted as Item 702 of Regulation S-K. Item 510 as adopted is comprised of paragraph (b) of proposed Item 510 without substantive change.

14. Item 512--Undertakings.

The undertaking specified in paragraph (a) has been revised by adding an instruction regarding managing underwriters as described below in the discussion of shelf registration.

15. Item 601--Exhibits.

A number of revisions have been made to Item 601 as proposed in the S-K release. The majority of these changes have been made in response to public comment and seek to clarify the description of the various exhibit items. Other revisions have been made in order to implement certain aspects of the integrated disclosure system.

a. Revisions to the exhibit table. ⁴⁷

Instruction 2 to the exhibit table has been revised in order to make clear that an exhibit filed with the Commission in connection with a Securities Act registration statement subsequently may be incorporated by reference as an exhibit to an Exchange Act report, even if such exhibit was not previously filed with every exchange on which the registrants securities have been listed.

Exhibit Item 1 (Underwriting agreements) will be required to be filed with all underwritten offerings on Form S-14, although this requirement had been proposed to be deleted. ⁴⁸ After reconsideration, the Commission has determined that this exhibit may be relevant in connection with transactions registered on that Form.

Exhibit Item 2 (Plan of acquisition, reorganization, arrangement, liquidation or succession) will be required to be filed with a report on Form 10-Q where such plan is described in the report. This change is made for clarification only, as Exhibit Item 19 (Previously unfiled documents) otherwise would require that this exhibit be filed.

Exhibit Item 9 (Voting trust agreement) will be required to be filed in connection with an annual report on Form 10-K. In light of the importance of this exhibit to shareholders, investors and others and the fact that this exhibit may be incorporated by reference from a previously filed document, the Commission does not believe that this requirement will place an undue burden upon registrants.

Exhibit Item 12 (Statement recomputation of ratios) will be required to be filed with all Securities Act registration statements for debt or preferred stock offerings.

b. Revisions to the description of exhibits.

Exhibit Item 1 (Underwriting agreement), as revised, may be filed with a report on Form 8-K, where such report is incorporated into a registration statement subsequent to its effectiveness.

Exhibit Item 4 (Instructions defining the rights of security holders--including indentures) has been revised for clarification and, with respect to Forms 8-K and 10-Q, to delete the requirement to file the exhibit where additional securities or indebtedness of a class outstanding are issued or reissued. Because the information elicited by such requirement is already on file with the Commission, there is no need for registrants to refile it.

Exhibit Item 5, paragraph (ii) (Opinion re legality) has been revised for clarification in response to public comment. The description, as revised, allows registrants to file either an opinion of counsel or an Internal Revenue Service determination letter regarding the legality of securities issued pursuant to a plan subject to the Employment Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.) both when the plan is adopted originally and when it is amended subsequently.

Exhibit Items 6 (Opinion re discount on capital shares) and 7 (Opinion re liquidation preferences) have been amended in response to comment to allow counsel to refer specifically to any applicable constitutional or statutory provisions in his opinion, rather than setting forth each provision.

Exhibit Item 10 (Material contracts) has been revised in response to comment to expand the exemption proposed to be included in paragraph (iii)(B)(6) to exempt wholly-owned subsidiaries of registered companies from filing copies of remunerative plans, contracts or arrangements in connection with the registration of non-voting preferred stock on Form S-2.

Exhibit Item 12 (Statement re computation of ratios) has been revised for clarification.

Exhibit Item 15 (Letter re un-audited financial information), as revised, may be filed with a report on Form 10-Q, where such report is incorporated by reference into a Securities Act registration statement. This revision has been adopted to give registrants the option of filing this letter with their Form 10-Q report, with their Securities Act registration statement or as an amendment thereto.

Exhibit Item 19 (Previously unfiled documents), which is primarily a quarterly updating requirement, has been rewritten for clarification only.

Exhibit Item 22 (Subsidiaries of the registrant) has been amended to allow registrants to incorporate by reference their list of subsidiaries if an accurate and complete list is contained in one document previously filed with the Commission.

Exhibit Item 24 (Consents of experts and counsel) has been revised to implement Rule 439. This revision gives registrants the option of filing an otherwise required consent as an exhibit to a report on Form 8-K, 10-Q or 10-K when such report is incorporated by reference into a Securities Act registration statement subsequent to its effectiveness.

Exhibit Items 24 and 25 (Power of attorney) have been revised to make clear that consents or powers of attorney may be filed in a separate part of the registration statement or document filed therewith, so long as a reference is made in the exhibit index to the part of the registration statement or document which contains such consent or power.

Exhibit Item 26 (Statement of eligibility of trustee) has been revised to make clear that such statement. Contained in a Form T-1, is also a filing under the Trust Indenture Act of 1939 and, therefore, for the convenience of the staff, shall be separately bound.

16. Item 702-- Indemnification of directors and officers.

This item is taken without substantive change from paragraph (a) of Proposed Item 510.

C. Security Ratings.

In the Security Ratings Release, the Commission announced its determination to permit registrants to disclose, on a voluntary basis, ratings assigned by nationally recognized statistical rating organizations ("NRSROs") to classes of debt securities, convertible debt securities and preferred stock in registration statements and in periodic reports. Prior to that time, the Commission staff has discouraged disclosure of security ratings except in limited circumstances. ⁴⁹

The Commission, however, had been reconsidering its position against disclosure of security ratings for several years. Public comment was solicited in 1977 concerning, among other things, the appropriateness of encouraging or requiring ratings disclosure and the impact of subjecting rating organizations to potential liability as experts under Section 11 of the Securities Act in connection with ratings disclosed in registration statements. ⁵⁰ On the basis of the comments received on the 1977 Release, the Commission had determined that it would not be appropriate to mandate disclosure of ratings. Nonetheless, it recognized the importance of security ratings to investors and the marketplace and the significance attached to ratings by various regulatory entities.

After further considering the benefit that investors may derive from security ratings disclosure and determining to condition the availability of proposed Form S-3, for certain issuers registering investment grade non-convertible debt securities, on the rating assigned to such securities, by an NRSRO, the Commission determined to permit disclosure of ratings in registration statements and in periodic reports. In the Security Ratings Release, the Commission set forth its views on certain matters to be considered when including a rating, such as the inclusion of additional information, additional ratings and rating changes.

The Commission also proposed two rule amendments to facilitate disclosure of ratings. First, a new paragraph (g) was proposed to be added to Rule 436 under the Securities Act to provide that a rating assigned by an NRSRO to debt and convertible debt securities and preferred stock would not be considered a part of a registration statement under Sections 7 and 11 of the Securities Act. The rule amendment would eliminate the requirement to file the consent of any NRSRO in connection with any registration statement disclosing such a rating, thus exempting the NRSRO from section 11 liability. The proposed exemption from section 11 liability was based on the practical problems of requiring the consent of NRSROs and the recognition that such organizations already are subject to the antifraud provisions of the federal securities laws. ⁵¹ Second, Rule 134 under the Securities Act was proposed to be amended to permit disclosure of security ratings assigned by NRSROs to debt and convertible debt securities and preferred stock in certain communications deemed not be a prospectus ("tombstone advertisements") on the basis that such disclosure is consistent with disclosure of security ratings in registration statements.

The Commission received approximately forty comment letters on its new policy and related proposals. Although some commentators objected to disclosure of security ratings in Commission filings under any circumstances, the majority of commentators supported voluntary disclosure of ratings and the proposed amendments. Commentators did request, however, additional guidance as to the application and operation of the new policy and rules.

The Commission continues to believe that ratings should be permitted to be disclosed in Commission filings and tombstone advertisements and that it is appropriate to exempt NRSROs from Section 11 liability if their ratings are included in Securities Act registration statements. Accordingly, the Commission today is affirming its new policy and adopting the proposed amendments to Rules 436 and 134. ⁵²

Furthermore, although disclosure of security ratings remains entirely voluntary, the Commission, as suggested by commentators, is setting forth its views on ratings disclosure in Regulation S-K in order to provide additional guidance and certainty. The Commission believes inclusion of the policy in Regulation S-K is consistent with the Regulations function as the repository of uniform disclosure requirements and with the treatment of the Commissions policy on projections, which also is set forth in Regulation S-K. The policy on security ratings, which is included in Regulation S-K after the policy on projections as paragraph (d) of the General section, clarifies the views of the Commission expressed in the Security Ratings Release, with certain modifications suggested by commentators or otherwise deemed appropriate.

The policy statement provides that ratings assigned by rating organizations to classes of debt securities, convertible debt securities and preferred stock may be included in registration statements ⁵³ and in periodic reports. The statement thus makes clear that disclosure of security ratings is not limited to Securities Act registration statements, but extends to certain Exchange Act filings as well. In addition, the statement makes clear the Commissions determination to permit disclosure of security ratings by rating organizations other than NRSROs. ⁵⁴ The Commission believes that, if a registrant determines that the rating of a non-NRSRO would be of interest to investors and the marketplace, it should not be prevented by the Commission from including such rating in its registration statement or periodic report. ⁵⁵

The statement also provides that security ratings assigned by NRSROs may be included in tombstone advertisements pursuant to Rule 134.

In paragraphs (1)(i) through (iii), the policy statement provides the Commissions views on certain matters, including additional disclosures, to be considered when including a security rating in a Securities Act filing. ⁵⁶ Paragraph (1)(i) sets forth certain basic considerations when filing a registration statement that includes a rating. First, the registrant should consider including every other available rating intended for public dissemination assigned to such class by an NRSRO that is materially different from any rating disclosed. The Commission has determined that, contrary to its position in the Security Ratings Release, it is not necessary for registrants to include additional available ratings that are not materially different. ⁵⁷ The clause "intended for public dissemination" in paragraph (1)(i) makes clear that disclosure of non-public ratings or of non-public preliminary indications of a rating is not intended.

Second, a registrant also should consider including certain limited additional information to provide the reader with a concise explanation of the fundamental characteristics of security ratings and to make clear the source of the rating from which an investor may obtain more detailed information. In this regard, the Commission does not intend that registrants include lengthy and detailed explanations of the ratings process. However, it does not agree with certain commentators that information other than the rating and name of the rating organization is so easily accessible that it would not be useful to investors and that it would be unduly burdensome for registrants to disclose. A concise explanation of the meaning of a rating would appear to be very helpful to investors, particularly in the case where more than one rating is disclosed, and would help to ensure that investors do not place undue emphasis on such ratings.

Third, if a registrant includes a rating assigned by a rating organization that is not an NRSRO, it should include the written consent of such organization as is required under section 7 of the Securities Act. With respect to ratings assigned by NRSROs, the registrant is referred to Rule 436(g) which contains the exemption from filing such organizations consents. ⁵⁸

Paragraphs (1)(ii) and (iii) of the policy statement set forth the Commissions views concerning the appropriate considerations in the event materially different additional ratings or rating changes become available subsequent to the filing of the registration statement. Paragraph (1)(ii) provides that, if a rating that was disclosed in the registration statement changes prior to the registration statements effectiveness, the rating change generally should be disclosed in the final prospectus. However, if there is a material change in a disclosed rating or if a materially different additional NRSRO rating becomes available, the registrant should consider amending the registration statement to disclose the additional rating or rating change and recirculating the preliminary prospectus.

The "materially different" standard, used in paragraph (1)(ii) to indicate when an additional NRSRO rating might necessitate amending the registration statement, has been substituted for the "substantially different" standard contained in the Security Ratings Release to provide more guidance to registrants and to avoid placing excessive burdens on registrants to amend their filings. Likewise, whereas the Security Ratings Release advised consideration of an amendment to the registration statement and recirculation of the preliminary prospectus in the case of any change in a disclosed rating, the policy statement makes clear that such consideration is appropriate only in the case of a "material change."

Paragraph (1)(iii) provides that, if a materially different additional NRSRO rating becomes available after effectiveness of the registration statement, or if there is a material change in a disclosed rating at any time while offers and sales are being made, the registrant should consider disclosing such additional NRSRO rating or rating change by means of a post-effective amendment or sticker to the prospectus pursuant to Rule 424(c) under the Securities Act. However, in the case of a registration statement on Form S-3, the registrant may incorporate such information by reference. As in paragraph (1)(ii), the "materially different" and "material change" standards are used to provide guidance and to avoid placing undue burdens on registrants.

Paragraphs (2)(i) and (ii) present the Commissions views as to the appropriate considerations when including a rating in an Exchange Act filing. Paragraph (2)(i) makes clear that, if a registrant includes a rating in an Exchange Act filing, it also should consider including any materially different additional NRSRO ratings and such additional information as would be considered for inclusion in a Securities Act registration statement disclosing a security rating. Finally, paragraph (2)(ii), consistent with current practice, provides that registrants, in the event of a material change in the ratings of their outstanding securities, should consider filing a periodic report disclosing such change.

³⁴ Disclosure of matters submitted to a vote of security holders by certain wholly-owned subsidiaries is not required by Form 10-Q.

³⁵ See Release No. 33-5893 (December 23, 1977) 42 FR 65554.

³⁶ The disclosure requirements being added to Regulation S-K were taken from Guides of general applicability (See the Guides Release and the S-K Release), from Regulation C provisions containing disclosure requirements (See the Regulation C Release), and from various rules and forms. The Commission has endeavored, to the extent practicable, to make the disclosure requirements of the various Securities Act and Exchange Act rules and forms consonant by substituting the uniform disclosure items of Regulation S-K for existing disclosure items. This substitution of Regulation S-K items has occurred in almost every form to some extent and is discussed in greater detail in the Securities Act Coordinating Release and the Exchange Act Coordinating Release, as well as in relation to amendments to particular forms discussed above. In addition, where forms contained a preexisting reference to an Item of Regulation S-K, the references have been revised to reflect the reorganized structure of Regulation S-K, as now adopted.

³⁷ The next step will be to expand Regulation S-K to include a list of currently applicable interpretive releases relating to disclosure in Commission filings to which Regulation S-K is applicable.

³⁸ See the 1982 Industry Guides Release.

³⁹ It should be noted that Items 401, 402 and 403 vary from those included in the S-K Release to the extent that the revisions proposed in Release No. 34-17517 are not reflected and the currently effective provisions of Items 4 and 6 of Regulation S-K which were proposed to be revised have been reinstated. See Note 2, supra.

⁴⁰ See the 1982 Industry Guides Release.

⁴¹ The Commission notes that the possible revisions of Item 102 elicited a wide range of responses. Three commentators supported the possible revision. Three commentators believed such disclosure is too speculative and would be generally misleading. Four other commentators suggested that the FASB project may have some bearing on this issue and therefore that the Commission may wish to wait until the FASB completes its project. See FASB Invitation to Comment on Disclosures About Oil and Gas Producing Activities (May 13, 1981).

⁴² Release No. 33-6315 (May 4, 1981) 46 FR 25638. 110 comment letters were submitted and are available for public inspection and copying at the Commissions Public Reference Room (File No. S7-884). The Commission has placed in the files a copy of highlights of the public comments prepared by the Division of Corporation Finance.

⁴³ See generally, Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 5: Accounting For Contingencies (1975).

⁴⁴ Several commentators raised questions about the types of matters covered by the term "proceeding." In a previous interpretive release the Commission expressed its views regarding the scope of the definition of "proceeding" and registrants should consult this release for further guidance. Release No. 33-6130 (September 27, 1979) 42 FR 44860.

⁴⁵ Item 302(b) has been revised to reflect the issuance of Statement of Financial Accounting Standards No. 54, "Financial Reporting and Changing Prices: Investment Companies."

⁴⁶ The requirements governing disclosure of the ratio of earnings to fixed charges were proposed initially in Release No. 33-6285 (February 6, 1981) 46 FR 12756 and reproposed without change in the S-K Release. No amendments to those provisions of Rules 13e-3 (17 CFR 240.13e-3) and 13e-4 (17 CFR 240.13e-4) and Schedules 13E-3 (17 CFR 240.13e-100) and 13E-4 (17 CFR 240.13e-101) relating to the ratio of earnings to fixed charges are being adopted because the Commission believes the transactions subject to those rules present unusual disclosure issues. Until reexamination of the ratio requirements in these rules, registrants are expected to compute the ratios in accordance with the Item 503(d) provisions adopted today.

⁴⁷ If the revisions to Form S-18 (17 CFR 239.28) are adopted as proposed, the exhibit table will be revised further to include a column setting forth those exhibits which will be required to be filed with such form. See Release No. 33-6388 (March 3, 1982).

⁴⁸ See the S-K Release, 46 FR at 41936.

⁴⁹ Security ratings have been permitted in investment company registration statements provided the rating organizations consent, or a waiver of consent, has been obtained. In addition, material changes in security ratings of registrants outstanding securities may be reported under Rule 408 under the Securities Act (17 CFR 230.408), Rule 12b-20 (17 CFR 240.12b-20), Rule 14a-9 (17 CFR 240.14a-9) of Schedule 14A under the Exchange Act or Item 5 of Form 8-K.

⁵⁰ Release No. 33-5882 (November 3, 1977) 45 FR 58414 (the "1977 Release").

⁵¹ Section 17(a) of the Securities Act and section 10(b) of the Exchange Act and Rule 10b-5 (17 CFR 240.10b-5) thereunder; and when registered as investment advisers, NRSROs are subject to section 206 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.)

⁵² The Commission wishes to make clear that its new policy and rules are limited to disclosure of security ratings. They do not extend to disclosure of policyholder ratings assigned to insurance companies. The Commission recently solicited public comment on whether disclosure of policyholder ratings should be permitted (Release No. 33-6376 (January 11, 1983) 47 FR 3130) and will resolve that issue after it has had an opportunity to consider any comments that may be received.

⁵³ In the case of investment company registration statements, such ratings may be included for debt securities being registered or in connection with the companys schedule of portfolio debt securities. In addition, investment companies will continue to be permitted to include security ratings assigned to their equity securities being registered, but may not be able to rely on Rule 436(g) in connection with such ratings in view of the Rules limitation to debt and convertible debt securities and preferred stock.

⁵⁴ The term "nationally recognized statistical rating organization" is stated in Rules 436 and 134, adopted today, to have the same meaning as in the Commissions uniform net capital rule. (17 CFR 240.15c3-1(c)(2)(vi)(F)). Several commentators objected that the net capital rule does not contain any specific definition of the term, and that, accordingly, rating organizations that are not NRSROs are not provided with sufficient guidance as to how to qualify as such. The Commission is not aware at this time of any substantial burden being imposed on rating organizations that are not NRSROs due to any absence of guidance in this area. Currently, the following organizations are accepted as NRSROs under the net capital rule: Standard & Poors Corporation; Moodys Investors Services, Inc.; Fitch Investors Services, Inc.; and Duff and Phelps, Inc. Accordingly, the Commission believes that the determination made by the Commission staff concerning NRSRO status for net capital rule purposes is sufficient at present for security ratings disclosure purposes.

⁵⁵ Inclusion of a rating assigned by a non-NRSRO in a Securities Act registration statement, however, would require the filing of the written consent of the rating organization under Section 7 of the Securities Act.

⁵⁶ Additional disclosures, other than the name of the rating organization, may not be necessary in certain circumstances, such as in connection with the inclusion of security ratings in managements discussion and analysis of financial condition and results of operations furnished pursuant to Item 303 of Regulation S-K.

⁵⁷ The additional ratings that should be considered to be disclosed are likewise limited to materially different NRSRO ratings in other paragraphs of the policy statement concerning additional ratings assigned subsequent to the filing of the registration statement and additional ratings in Exchange Act filings.

⁵⁸ Several commentators expressed concern about the effect the exemption from Section 11 liability for NRSROs would have on the liability of issuers, officers, directors and underwriters in connection with ratings. The Commission notes that disclosure of ratings is optional and, in any event, issuers may seek to obtain an NRSROs written consent.