Release No. 33-8501

Release No. 34-50624

Release No. IC-26649

International Series Rel. No. 1282

69 Fed. Reg. 67391 - Nov. 17, 2004

Securities Offering Reform

ACTION: Proposed rule.

Table of Contents

VII. Additional Exchange Act Disclosure Proposals

A. Risk Factor Disclosure

Many Securities Act registration statements require an analysis of the risks associated with an investment in an issuer's securities. Items 503(c) of Regulation S-K and Regulation S-B ³⁷¹ describe that required disclosure as a ''discussion of the most significant factors that make the offering speculative or risky.'' The risk factor section is intended to provide investors with a clear and concise summary of the material risks to an investment in the issuer's securities.

We propose to extend risk factor disclosure to annual reports on Forms 10-K and registration statements on Form 10.³⁷² We are not proposing to extend this requirement to Forms 10-KSB or Form 10-SB. As with risk factor disclosure that is required in Securities Act registration statements, risk disclosure in Exchange Act registration statements and annual reports would describe the most significant factors that may adversely affect the issuer's business, operations, industry or financial position, or its future financial performance. Risk factor disclosure under the Exchange Act would be the same type of Item 503 disclosure as in a Securities Act registration statement, other than information about a particular securities offering. We also are proposing that the risk factor disclosure in Exchange Act reports be written in accordance with the same ''plain English'' standards as apply to risk factor disclosure in Securities Act registration statements.³⁷³ Our proposals would also require quarterly updates to the risk factors disclosure to reflect any material changes from risks previously disclosed in Exchange Act reports. They would not otherwise require a restatement or repetition of risk factors in quarterly reports.

The proposed requirement to include risk factor disclosure in Exchange Act filings would, we believe, further enhance the contents of Exchange Act reports and their value in informing investors and the markets. Further, requiring risk factor disclosure in Exhange Act registration statements and annual reports, would enhance the ability of reporting issuers to incorporate risk factor disclosure from Exchange Act reports into Securities Act registration statements to satisfy the risk factor disclosure requirements.³⁷⁴

We are proposing to require updated risk factor disclosure in quarterly reports because we believe that issuers who are required to file quarterly reports already need to undertake a review of changes in their operations, financial results and conditions and other circumstances in order to prepare the other portions of the quarterly report, including the financial statements and MD&A.³⁷⁵ Therefore, we believe that issuers should be able to, on a quarterly basis, identify changes to risk factors affecting them.

We proposed including risk factor disclosure in the 1998 proposals, and

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many commenters supported this requirement.³⁷⁶ Other commenters opposed any risk factor disclosure requirement for Exchange Act reports, for varying reasons, including that the information is already included elsewhere in the reports, an increased burden on issuers, and possible increased litigation arising from the risk disclosure.³⁷⁷ Commenters also suggested that the risk factor disclosure standard should be similar to that contained in Securities Act Section 27A-- ''important factors that could cause actual results to differ materially from those in forward-looking statements''--rather than the standard reflected in Item 503 of Regulation S-K. ³⁷⁸ Because one of our goals is to further integrate the Securities Act and the Exchange Act, we believe it is important to establish consistent disclosure standards. We, therefore, are proposing to require compliance with Item 503, i.e. the most significant risks facing an issuer. We also note that the Section 27A provisions are aimed at providing protections where forward-looking statements are included, rather than providing protections for all discussions of the risks facing an issuer, but observe that issuers could appropriately use risk factor disclosure to identify a number of the factors referenced in Section 27A.

Request for Comment

Should we require risk factor disclosure about specific matters that are in addition to those referred to in Item 503 of Regulation S-K? If so, what are they?

Are there ways, in addition to those we have used in Item 503 and our plain English rules and our guidance on MD&A,³⁷⁹ to ensure that issuers include meaningful, rather than boilerplate, risk factor disclosure?

Should we extend risk factor disclosure requirements to Forms 10-KSB and 10-SB?

B. Disclosure of Unresolved Staff Comments

Because enhanced Exchange Act reporting provides a principal element of support for, and is at the core of, today's proposals, it is important that issuers timely resolve any staff comments on their Exchange Act reports. It is possible, however, that the procedural changes we are proposing would eliminate some of the incentives issuers have to respond to comments on their Exchange Act reports in a timely manner. In particular, with automatic effectiveness, well-known seasoned issuers would not be subject to the possibility that effectiveness of a Securities Act registration statement could be delayed while comments are resolved. In addition, all shelf eligible issuers would have to file new registration statements only every three years. Staff in the Division of Corporation Finance has begun to review more Exchange Act reports and will continue to do so in keeping with the mandate in the Sarbanes-Oxley Act as well as our view of the importance of the role of an issuer's Exchange Act reports. Under the circumstances and with the greater flexibility given in our proposals to communications outside the statutory prospectus and offering procedures, we think it is necessary to establish added incentives for accelerated filers to timely resolve outstanding staff comments on their Exchange Act reports.

We are proposing to require all accelerated filers to disclose, in their annual reports on Forms 10-K or 20-F, written comments our staff made in connection with review of Exchange Act reports that the issuer believes are material that were issued more than 180 days before the end of the fiscal year covered by the annual report and which remain unresolved as of the date of the filing of the Form 10-K or Form 20-F. The disclosure would be required to be sufficient to disclose the substance of the comments. Staff comments that have been resolved, including those that the staff and issuer have agreed would be addressed in future Exchange Act reports, would not need to be disclosed. Issuers would be able to include their position regarding any such unresolved comments.

Through the Form 10-K and Form 20-F disclosure, accelerated filers (including those issuers eligible for shelf registration and automatic shelf registration) would disclose long unresolved comments. This is designed to compensate for immediate effectiveness for well-known seasoned issuers, elimination of the two year limitation, and for increased emphasis by the staff of Exchange Act reports for all shelf registrants.³⁸⁰

Request for Comment

Should we require disclosure of unresolved staff comments in quarterly reports as well?

Is 180 days the right timeframe to resolve outstanding staff comments? Is it too short? Is it too long?

Should the 180 days be calculated from the date of the initial written comment letter from the staff, regardless of comments received after that date that relate to or arise from the original comments or issuer responses to the original comments?

Should we require the proposed disclosure of unresolved comments to also appear in Form 10-KSB reports filed by small business issuers?

Should we require the proposed disclosure of unresolved comments to also appear in Form 40-F?

Should we require issuers to list each outstanding comment in its disclosure by repeating the comment verbatim as issued by the staff? Should we permit issuers to paraphrase or summarize the outstanding staff comments?

Are there more appropriate means to provide incentives to timely resolve staff comments?

Should issuers have to disclose comments that have been resolved and will be addressed in future Exchange Act reports?

Should we require disclosure of all unresolved comments without regard to a materiality assessment by the issuer?

Should the staff have a role in determining which unresolved comments should be disclosed?

Should the staff have to address issuer responses to outstanding written comment on Exchange Act reports within a particular timeframe after the response has been submitted by the issuer on EDGAR? If yes, what timeframe?

C. Disclosure of Status as Voluntary Filer Under the Exchange Act

Our filing system does not prohibit issuers that are otherwise not required to file Exchange Act reports with us from filing those reports voluntarily. In most cases, voluntary filers are issuers who have, at some point, completed a registered offering under the Securities Act and have continued to file Exchange Act reports even after their reporting

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obligation under Exchange Act Section 15(d) has been suspended.³⁸¹

We are proposing to include a box on the cover page of Forms 10-K, 10-KSB, and 20-F for an issuer to check if it is filing reports voluntarily. The box would be for informational purposes only. An issuer's filing obligation would be unaffected by an incorrectly checked box.

We believe that it is important that investors and other market participants are aware that an issuer is a voluntary filer and thus, may cease to file its Exchange Act reports at any time and for any reason without notice. In addition, our communications and procedural proposals do not permit voluntary filers to become seasoned issuers. Identification of voluntary filers would enable us to monitor their use of our proposed communications rules as well as our other regulatory requirements.

Request for Comment

Are there alternative means of addressing the issues posed by voluntary filers? Should we stop accepting voluntary filings and instead allow voluntary filers to register under Section 12(g) of the Exchange Act on a basis where they are exempted from certain provisions of the Exchange Act that do not apply to them? If so, should we limit any possible exclusions only to voluntary filers that have only issued debt in registered offerings? Should there be any other limitations?

Should we require disclosure of voluntary filer status on Form 40-F? If not, why not?

³⁷¹ See Item 503(c) of Regulation S-K [17 CFR 229.503(c)] and Item 503(c) of Regulation S-B [17 CFR 228.503(c)].

³⁷² See proposed amendments to Form 10-K and Form 10. Form 20- F (the form used for annual reports and Exchange Act registrations for foreign private issuers) already requires risk factor disclosure. See Item 3.D. of Form 20-F. The 1998 proposals also proposed risk factor disclosure in annual reports. The Advisory Committee Report contained similar recommendations. See the Advisory Committee Report note 20 at Section II.B.4.

³⁷³ Securities Act Rule 421 requires issuers to write and design their risk factor disclosure in registration statements using plain English principles. See also Updated Staff Legal Bulletin No. 7 (June 7, 1999), question no. 3. The plain English rules applicable to Securities Act registration statements already apply to risk factor disclosure in Exchange Act reports incorporated by reference into Securities Act registration statements.

³⁷⁴ We note that many issuers have included risk factor disclosure in their Exchange Act reports for a number of years. See comment letter in File No. S7-30-98 from the Business Roundtable.

Issuers may already include risk factor disclosure in their Exchange Act reports for varying reasons, including to take advantage of the safe harbor for forward looking statements in Securities Act Section 27A and the bespeaks caution defense developed through case law. See, e.g., In re Donald Trump Sec. Litig., 7 F.3d at 371; P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 97 (2d Cir., 2004); In re Sprint Corp. Sec. Litig., 232 F. Supp. 2d 1193 (D. Kan. Sept. 30, 2002).

³⁷⁵ Moreover, issuers will already have in place disclosure controls and procedures and internal controls over financial reporting that should alert them to new or changing material risks affecting the issuer.

³⁷⁶ See, e.g., comment letters in File No. S7-30-98 from the ABA; ACCA; Ernst & Young LLP; New York City Bar; NASAA; the Philadelphia Bar Association; and Sullivan & Cromwell.

³⁷⁷ See, e.g., comment letters in File No. S7-30-98 from the CIT Group, Inc.; Joseph Grundfest; Intel Corporation; and Navistar International Corporation.

³⁷⁸ See, e.g., comment letters in File No. S7-30-98 from the American Society of Corporate Secretaries; and the Business Roundtable.

³⁷⁹ See the 2003 MD&A Release note 33; Commission Statement About Management's Discussion and Analysis of Financial Condition and Results of Operations, Release No. 33-8056, (Jan. 22, 2002) [67 FR 3746]; Interpretive Release: Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures, Release No. 33-6835 (May 18, 1989) [54 FR 22427].

³⁸⁰ Shelf registration statements allow an issuer to take down securities at any time during the year, even when staff comments on its Exchange Act reports may be pending.

³⁸¹ Exchange Act Section 15(d) suspends automatically its application to any issuer that would be subject to the filing requirements of that section where, if other conditions are met, on the first day of the issuer's fiscal year, it has fewer than 300 holders of record of the class of securities that created the Section 15(d) obligation.