Release No. 33-6485

September 23, 1983

Definition of Terms

ACTION: Final Rule.

SUMMARY: The Commission announces the adoption of new Rule 158, which defines certain terms for purposes of the last paragraph of Section 11(a) of the Securities Act of 1933. The Rule is intended to provide clarity and certainty with respect to these terms by building upon the Integrated Disclosure System.

EFFECTIVE DATE: (Immediately upon publication in the Federal Register).

FOR FURTHER INFORMATION CONTACT: Barry Mehlman, (202) 272-2573, Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission announces the adoption of new Rule 158, which defines the terms "earning statement", "made generally available to its security holders" and "effective date of the registration statement" for purposes of the last paragraph of Section 11(a) of the Securities Act of 1933 (the "Securities Act") 15 U.S.C. 77a et seq. (1976 and Supp. IV 1980). Consistent with the Integrated Disclosure System, ¹ the Rule defines such terms with reference to certain reports filed pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") 15 U.S.C. 78a set seq. (1976 and Supp. IV 1980).

I. Background

In April 1983, the Commission published for comment Rule 158 defining the terms "earning statement", "made generally available to its security holders" and "effective date of the registration statement" for purposes of the last paragraph of Section 11(a). ² That paragraph imposes a reliance requirement upon purchasers of securities in a registered offering if the purchase is made after the registrant has made generally available to its security holders an earning statement covering a period of at least twelve months beginning after the effective date of the registration statement.

Historically, no clear guidelines have existed for determining the meaning of and standards for satisfying the terms and conditions of the last paragraph of Section 11(a). In addition, over the years, a wide variety of practices have developed with respect to the form and content of the earning statement and with respect to demonstrating general availability to security holders. In view of the absence of clear guidelines, the differing practices which had developed, and particularly the establishment of the Integrated Disclosure System, which makes use under the Securities Act of existing reports filed pursuant to the Exchange Act, the Commission believed that it would be appropriate to define the terms in the last paragraph of Section 11(a).

Commentator response to proposed Rule 158 was overwhelmingly favorable. ³ In addition, some commentators suggested modifying or clarifying certain provisions of the Rule. The Commission is adopting the Rule with modifications to reflect certain of the specific comments. These modifications are discussed below.

II. Discussion

A. Earning Statement

Paragraph (a) of Rule 158, as adopted, is modified in five respects: (1) the Commission has determined to allow statements of income in one or any combination of Exchange Act reports to satisfy the requirements of paragraph (a) of the Rule, provided that certain conditions are met; (2) the Commission has modified paragraph (a) to allow statements of income meeting the requirements of Rule 14a-3(b) 17 CFR 240.14a-3(b) under the Exchange Act for annual reports to satisfy the requirements of that paragraph; (3) the Commission has revised paragraph (a) to allow a subsidiary issuing debt securities guaranteed by its parent to meet the requirements of that paragraph if the parents income statements satisfy the requirements of paragraph (a) and information respecting the subsidiary is included to the same extent as was presented in the registration statement; (4) the Commission has added a provision to provide explicitly that paragraph (a) is nonexclusive; and (5) the Commission has added provisions applicable to foreign private issuers (described separately below).

In the Proposing Release, the Commission indicated that only optional cumulative twelve month income statements in reports on Form 10-Q 17 CFR 249.308a would be deemed "sufficient" for purposes of paragraph (a). Several commentators objected to this proposal, arguing that it would have the effect of making mandatory the filing of optional cumulative twelve month income statements in reports on Form 10-Q and, to the extent it did not and three month Form 10-Q reports were interspersed with twelve month Form 10-Q reports, it would confuse rather than inform investors. These commentators suggested that the Rule be modified to allow the filing of Exchange Act reports for the twelve month period specified in Section 11(a) to meet the requirements of paragraph (a), regardless of whether statements of income in reports on Form 10-Q contain three or twelve month information.

In view of these comments, the Commission has determined to allow statements of income in one or any combination of Exchange Act reports to satisfy the requirements of paragraph (a) of the Rule, provided that certain conditions are met. Thus, an "earning statement" shall be sufficient for purposes of the last paragraph of Section 11(a) if the information specified in the last paragraph of Section 11(a): (1) is contained in one report or any combination of reports on Form 10-K 17 CFR 249.310, Form 10-Q, Form 8-K 17 CFR 249.308 or in the annual report to security holders pursuant to Rule 14a-3; and (2) meets the requirements of Item 8 of Form 10-K, Part I, Item I of Form 10-Q of Rule 14a-3(b) under the Exchange Act.

Permitting one or any combination of Exchange Act reports containing the required information for statements of income to satisfy the "earning statement" requirement of paragraph (a) means that the information in the "earning statement" may be contained in multiple documents. ⁴ The Commission believes that this change satisfies the purposes underlying Section 11(a). Under the Integrated Disclosure System, the information contained in Exchange Act reports is available to the public, regardless of the number of disclosure documents in which it is contained. Thus, twelve month financial information for an issuer is generally available even though it may be contained in several documents.

The Commission also is expanding paragraph (a) to allow statements of income in the annual report to security holders to satisfy the requirements of that paragraph. Because the requirements for statements of income pursuant to Rule 14a-3(b) are uniform with those for Form 10-K, ⁵ the Commission believes that it is appropriate to allow statements of income prepared in accordance with Rule 14a-3(b) to satisfy the requirements of paragraph (a).

It also was suggested that the Commission amend paragraph (a) to provide that an earning statement of a parent guarantor satisfies the earning statement requirement of both the parent guarantor and the subsidiary where the subsidiary issues debt securities guaranteed by the parent. Because this change would be consistent with the staffs administrative practice under the Securities Act in connection with the disclosure required in registration statements, the Commission has determined to modify paragraph (a) to permit a subsidiary issuing debt securities guaranteed by its parent to meet the requirements of that paragraph if the parents income statements satisfy the criteria of paragraph (a) and information respecting the subsidiary is included to the same extent as was presented in the registration statement. ⁶

There were a number of suggestions as to how paragraph (a) could be clarified. For example, some commentators expressed concern that, because of the reference to Item 8 of Form 10-K, paragraph (a) may be construed to require audited financial information for earning statements and requested that this be clarified. While the Commission does not believe that it is necessary to amend the rule in this regard, it notes that financial information in earning statements under paragraph (a) need not be audited. ⁷ Because current practice does not mandate audited earning statements, requiring an audit for earning statements under Rule 158 would impose an undue burden on registrants.

Finally, a number of commentators suggested that a nonexclusivity provision be added to paragraph (a). Because this change would be consistent with paragraph (b) of the Rule, the Commission is amending paragraph (a) to provide that an "earning statement" not meeting the requirements of that paragraph may otherwise be sufficient for purposes of Section 11(a).

B. General Availability

Paragraph (b) of Rule 158 is adopted substantially as proposed. The Commission has determined not to modify paragraph (b) to include nonreporting registrants in the Rule or to impose additional requirements on registrants not qualified to use forms S-2 or S-3. The Commission has added the annual report to security holders, which is supplied to the Commission pursuant to Rule 14a-3(c), to the means specified for meeting the general availability requirement of that paragraph and has added provisions applicable to foreign private issuers (described separately below).

In the Proposing Release, the Commission requested specific comment as to whether paragraph (b) should be broadened to include registrants not subject to Sections 13 or 15(d) of the Exchange Act. Commentators opposing the inclusion of non-reporting registrants indicated that the voluntary filing of Exchange Act reports by non-reporting registrants would be an unexpected occurrence and, thus, would not make the earning statement "generally available." On the other hand, commentators favoring the inclusion of non-reporting registrants asserted that most are foreign issuers and that information comparable to that filed by reporting registrants is available and is readily assimilated into the market place.

The Commission has determined not to include non-reporting registrants in the Rule. Because only reporting registrants are required to file periodic reports under the Exchange Act, the Commission believes that the voluntary filing of Exchange Act reports by non-reporting registrants would not make the earning statement "generally available" within the meaning of the Rule. In addition, the Commission believes that the number of registrants that have made public offerings within a preceding twelve month period, but no longer have a reporting obligation under Section 15(d) of the Exchange Act, ⁸ is small. Because the Rule is non-exclusive, these registrants can meet the general availability requirement of the last paragraph of Section 11(a) in ways other than those specified in the Rule. If the number of such registrants becomes larger, however, the Commission will reconsider whether non-reporting registrants should be covered by the Rule.

In the Proposing Release, the Commission also requested specific comment as to whether the filing of Exchange Act reports should be sufficient to establish general availability in the case of registrants not qualified to use Forms S-2 or S-3 or whether additional requirements should be imposed on such registrants. Most of the commentators addressing this point believed that additional requirements should not be imposed on S-1 registrants, indicating that Exchange Act reports are readily available for reporting companies and are not affected by the nature of the reporting company. Because S-1 registrants file the same Exchange Act reports as registrants qualified to use Forms S-2 or S-3 and since these reports are in the Commissions disclosure system and readily available to the investing public, the Commission does not believe it is necessary to impose additional requirements on registrants not qualified to use Forms S-2 or S-3.

It also was suggested that paragraph (b) be modified to allow the annual report to security holders pursuant to Rule 14a-3 to meet the general availability requirement of that paragraph. The Commission believes that this change is appropriate for several reasons. First, the Integrated Disclosure System is premised on the concept of equivalency of information and, accordingly, the annual report to security holders contains the same minimum disclosure package, including statements of income, which is required to be included in the Form 10-K. ⁹ Second, copies of the annual report to security holders, while not deemed to be filed with the Commission, are required to be supplied to the Commission ¹⁰ and thus are in the Commissions disclosure system and readily available to the investing public. And, of course, by definition, such reports are disseminated to the registrants security holders.

Accordingly, the Commission has determined to amend paragraph (b) to permit the annual report to security holders to satisfy the general availability requirement of that paragraph. Copies of the annual report to security holders will be deemed to meet the general availability requirements of paragraph (b) at the time the copies are sent to the Commission pursuant to the requirements of Rule 14a-3(c).

While some commentators believed that the Commission should set forth additional ways in which an earning statement can be made "generally available," ¹¹ the Commission does not believe such action is appropriate. Tying the general availability requirement to the Exchange Act reporting system provides certainty and avoids the problems inherent in setting standards for alternatives. Moreover, approving additional ways in which an earning statement can be made "generally available" is unnecessary because the Rule is nonexclusive.

C. Effective Date

Paragraph (c) of Rule 158 is adopted substantially as proposed. It provides that for purposes of the last paragraph of Section 11(a) the "effective date of the registration statement" is deemed to be the latest to occur of three dates. These dates are: (1) the effective date of the initial registration statement; (2) the effective date of a post-effective amendment, which next precedes a particular sale of securities by the registrant, that is filed for the purposes enumerated in Item 512(a) of Regulation S-K; ¹² and (3) the filing date of an Exchange Act report incorporated by reference into a registration statement, subsequent to its effective date and next preceding a particular sale of securities by the registrant, if such report takes the place of an otherwise required post-effective amendment. The Commission has relocated the phrase "next preceding a particular sale by the registrant of registered securities to the public" in paragraph (c)(2) in order to make clear that the phrase applies to each of subclauses (i), (ii) and (iii).

D. Foreign Private Issuers

In the Proposing Release, the Commission indicated its intention to adopt comparable provisions, either in Rule 158 or in a separate rule, for foreign private issuers that file annual reports on Form 20-F 17 CFR 249.220f and requested specific comment as to: (1) the extent to which earning statements on Form 6-K 17 CFR 249.306 reports should come within the definition of the term "earning statement" for purposes of the last paragraph of Section 11(a) and (2) which reports should be deemed to have been made generally available to security holders for such purposes.

A number of commentators suggested that foreign private issuers filing periodic reports on Forms 20-F and 6-K should come within the purview of the Rule. They asserted that the rationale of relying on the Exchange Act reporting system in order to make the earning statement generally available applies equally to foreign private issuers.

In view of these comments, and the establishment of the Integrated Disclosure System for foreign private issuers which is comparable to the Integrated Disclosure System for domestic registrants, ¹³ the Commission has determined to include foreign private issuers in Rule 158. Thus, under paragraph (a) of the Rule, an "earning statement" of a foreign private issuer eligible to use Form 20-F shall be sufficient for purposes of the last paragraph of Section 11(a) if the information specified in the last paragraph of Section 11(a): (1) is contained in one or any combination of reports on Form 20-F or 6-K; and (2) meets the requirements of Item 17 of Form 20-F. Similarly, under paragraph (b) of the Rule, foreign private issuers may use Form 20-F and Form 6-K to meet the general availability requirement of that paragraph.

III. Statutory Authority

Rule 158 is being adopted pursuant to Sections 6, 7, 10 and 19(a) of the Securities Act of 1933.

IV. Effective Date

In view of the clarifying nature of Rule 158, the absence of costs or burdens imposed on registrants by the Rule and the interest expressed in making the Rule effective immediately, the Commission has determined to make Rule 158 effective upon publication in the Federal Register.

List of Subjects in 17 CFR Part 230

Reporting requirements, Securities.

V. Text of Proposal

In accordance with the foregoing, Title 17, Chapter II, of the Code of Federal Regulations is amended as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

By adding §230.158 to read as follows:

§230.158 Definitions of certain terms in the last paragraph of section 11(a).

(a) An "earning statement" made generally available to security holders of the registrant pursuant to the last paragraph of section 11(a) of the Act shall be sufficient for the purposes of such paragraph if (1) there is included the information required for statements of income contained either (i) in Item 8 of Form 10-K (§249.310 of this chapter), Part I, Item 1 of Form 10-Q (§249.308a of this chapter), or Rule 14a-3(b) (Section 240.14a-3(b) of this chapter) under the Securities Exchange Act of 1934, or (ii) in Item 17 of Form 20-F (Section 249.220f of this chapter), if appropriate; and (2) the information specified in the last paragraph of section 11(a) is contained in one report or any combination of reports either (i) on Form 10-K, Form 10-Q, Form 8-K (Section 249.308 of this chapter), or in the annual report to security holders pursuant to Rule 14a-3 under the Securities Exchange Act of 1934, or (ii) on Form 20-F or Form 6-K (Section 249.306 of this chapter). A subsidiary issuing debt securities guaranteed by its parent will be deemed to have met the requirements of this paragraph if the parents income statements satisfy the criteria of this paragraph and information respecting the subsidiary is included to the same extent as was presented in the registration statement. An "earning statement" not meeting the requirements of this paragraph may otherwise be sufficient for purposes of the last paragraph of section 11(a).

(b) For purposes of the last paragraph of section 11(a) only, the "earning statement" contemplated by paragraph (a) of this Rule shall be deemed to be "made generally available to its security holders" if the registrant (1) is required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 and (2) has filed its report or reports on Form 10-K, Form 10-Q, Form 8-K, Form 20-F, or Form 6-K, or has supplied to the Commission copies of the annual report sent to security holders pursuant to Rule 14a-3(c), containing such information. A registrant may use other methods to make an earning statement "generally available to its security holders" for purposes of the last paragraph of section 11(a).

(c) For purposes of the last paragraph of section 11(a) only, the "effective date of the registration statement" is deemed to be the date of the latest to occur of (1) the effective date of the registration statement: (2) the effective date of the last post-effective amendment to the registration statement, next preceding a particular sale by the registrant of registered securities to the public filed for purposes of (i) including any prospectus required by section 10(a)(3) of the Act. (ii) reflecting in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement, or (iii) including any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in the registration statement, or (3) the date of filing of the last report of the registrant incorporated by reference into the prospectus, and relied upon in lieu of filing a post-effective amendment for purposes of paragraphs (c)(2)(i) and (ii) of this rule, next preceding a particular sale by the registrant of registered securities to the public.

(Secs. 6, 7, 10, 19(a), 48 Stat. 78, 81, 85; secs. 205, 209, 48 Stat. 906, 908; sec. 8, 68 Stat. 685; sec. 308(a)(2), 90 Stat. 57; 15 U.S.C. 77f, 77g, 77j, 77s(a))

By the Commission.

George A. Fitzsimmons

Secretary

¹See Release No. 33-6383 (March 3, 1982) 47 FR 11380. Because the Integrated Disclosure System utilizes the term "registrant," see Rule 405 17 CFR 230.405, the Commission has amended Rule 158 to refer to a "registrant" instead of an "issuer."

² Release No. 33-6464 (April 22, 1983) 48 FR 19392 ("Proposing Release").

³ The Commission received twenty-six comment letters in response to the proposed Rule. The comment letters and a highlight of the comments prepared by the staff are available for inspection and copying at the Commissions Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549 (See File No. S7-972).

⁴ For example, such information may be contained in three Form 10-Qs and one Form 10-K. Alternatively, such information may be contained in two Form 10-Qs one Form 10-K and one Form 8-K, or in any other combination of Exchange Act reports, or the annual report to security holders, that covers the twelve month period specified in the last paragraph of Section 11(a).

⁵See Release No. 33-6234 (September 2, 1980) 45 FR 63682.

⁶ Pursuant to Staff Accounting Bulletin No. 53 (June 13, 1983) 48 FR 28230, subsidiaries issuing debt securities guaranteed by a parent are subject to differing levels of disclosure in their registration statements. Where the subsidiary is wholly owned, has no independent operations and the guarantee is full and unconditional, separate financial statements for the subsidiary are not required. Where the guarantee is full and unconditional and where the subsidiary is wholly owned, but has more than minimal independent operations, summary financial information for the subsidiary must be provided. Where the subsidiary is not wholly owned or where the guarantee is not full and unconditional, all financial information for the subsidiary specified by the applicable registration form is required.

⁷ However, both Form 10-K and Rule 14a-3(b) require that financial statements in annual reports be audited. Thus, when a registrant uses its Form 10-K or annual report to security holders to meet the general availability requirement of paragraph (b), the income statement contained therein necessarily will be audited.

⁸ Under Section 15(d) a registrants obligation to file periodic reports under Section 13(a) of the Exchange Act is automatically suspended if, at the beginning of the fiscal year following the effective date of the registration statement, the securities of the class to which the registration statement relates are held of record by less than three hundred persons.

⁹ Release No. 33-6231 (September 2, 1980) 45 FR 63630.

¹⁰ Rule 14a-3(c) under the Exchange Act requires that seven copies of the annual report sent to security holders be mailed to the Commission, solely for its information, not later than the date on which such report is first sent or given to security holders or the date on which preliminary copies of solicitation material are filed with the Commission pursuant to Rule 14a-6(a) 17 CFR 240.14a-6(a), whichever date is later. The report is not deemed to be "filed" with the Commission or subject to the liabilities of Section 18 of the Exchange Act.

¹¹ For example, some commentators suggested that publishing an earning statement in a financial journal or sending informal quarterly reports to security holders should be deemed to be acceptable ways of making an earning statement "generally available" within the meaning of paragraph (b) of Rule 158.

¹² Item 512(a) of Regulation S-K 17 CFR 229.512 sets forth undertakings which must be included in a registration statement if securities are registered pursuant to Rule 415 17 CFR 230.415. These undertakings require the filing of a post-effective amendment: (a) to include any prospectus required by Section 10(a)(3) of the Securities Act; (b) to reflect any facts or events arising after the effective date which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; or (c) to include any new material information, or any materially changed information, with respect to the plan of distribution.

¹³See Release No. 33-6437 (November 19, 1982) 47 FR 54764.