Release No. 33-8591

Release No. 34-52056

Release No. IC-26993

Financial Reporting Rel. No. 75

International Series Rel. No. 1294

70 Fed. Reg. _____ - ____

Table of Contents

Securities Offering Reform

VII. Additional Exchange Act Disclosure Provisions

A. Risk Factor Disclosure

1. Scope of Requirement

As we stated in the Proposing Release, many Securities Act registration statements require disclosure of the risks associated with an investment in an issuer’s securities. Items 503(c) of Regulation S-K and Regulation S-B⁵⁸⁸ 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 are adopting substantially as proposed a new item requiring risk factor disclosure in annual reports on Forms 10-K and Exchange Act registration statements on Form 10.⁵⁸⁹ We are not extending this requirement to Forms 10-KSB or Form 10-SB. The new item applies the standard for risk factor disclosure in Securities Act registration statements to Exchange Act registration statements and annual reports.⁵⁹⁰ As such, risk factor disclosure under the Exchange Act will be the same type of disclosure as required in a Securities Act registration statement by Item 503, other than information about a particular securities offering.⁵⁹¹ We are not requiring asset-backed issuers to include risk factor disclosure in their annual reports on Form 10-K. We agree with commenters who noted that disclosure requirements in a Form 10-K for asset-backed issuers varies considerably under Regulation AB from corporate issuers.⁵⁹² These requirements, along with the fundamental structure of most asset-backed securities offerings involving standalone trusts, make this requirement inappropriate for asset-backed issuers.

We also are adopting as proposed the requirement that the risk factor disclosure in Forms 10 and 10-K be written in accordance with the same “plain English” standards as apply to risk factor disclosure in Securities Act registration statements.⁵⁹³ The amendments as adopted also provide for quarterly updates to reflect material changes from risk factors as previously disclosed in Exchange Act reports. The amendments do not otherwise require, and we discourage, unnecessary restatement or repetition of risk factors in quarterly reports.

As we stated in the Proposing Release, the requirement to include risk factor disclosure in Forms 10 and 10-K will, we believe, further enhance the contents of Exchange Act reports and their value in informing investors and the markets.⁵⁹⁴ Further, requiring risk factor disclosure in Exchange Act registration statements and annual reports will enhance the ability of reporting issuers to incorporate risk factor disclosure from these Exchange Act reports into Securities Act registration statements to satisfy the risk factor disclosure requirements.⁵⁹⁵ Because one of our goals is to further integrate disclosures under the Securities Act and the Exchange Act, we believe it is important to establish consistent disclosure standards for risk factor disclosure.

We are adopting the proposed requirements for 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, financial condition, and other circumstances in order to prepare the other portions of the quarterly report, including the financial statements and MD&A.⁵⁹⁶ Therefore, we believe that issuers should be able, on a quarterly basis, to update risk factors to reflect material changes from previously disclosed risk factors.

2. Comments on Risk Factor Disclosure Requirement

While some commenters supported the proposal generally, others suggested modifications to the risk factor requirement.⁵⁹⁷ For example, several commenters suggested we should require risk factors only “where appropriate.”⁵⁹⁸ Other commenters did not believe a separate risk factor section was necessary because reporting companies already included risk disclosures in various sections of their annual reports.⁵⁹⁹Commenters also noted that the proposed language was more extensive than Item 503(c).⁶⁰⁰ A number of commenters thought we should extend the requirement for risk factor disclosure to small business issuers.⁶⁰¹ Further, at least one commenter was concerned about the proposal to require updated risk factor disclosures in quarterly reports.⁶⁰²

We have made modifications to the language in the proposals as we considered appropriate. While we are providing risk factor disclosure to be included “where appropriate,” and have eliminated duplicative language, we continue to believe that a risk factor section in Exchange Act annual reports and registration statements will, where appropriate, be beneficial to investors.

B. Disclosure of Unresolved Staff Comments

As we stated in the Proposing Release, because enhanced Exchange Act reporting provides a principal element of support for, and is at the core of, the rules we are adopting today, 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 adopting today may eliminate some of the incentives issuers have to respond to and resolve comments on their Exchange Act reports in a timely manner. In particular, with immediate effectiveness, well-known seasoned issuers will not be subject to the possibility that effectiveness of a Securities Act registration statement could be delayed while comments are being resolved. In addition, all shelf eligible issuers will 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 requirements of the Sarbanes-Oxley Act⁶⁰³ as well as our view of the importance of an issuer’s Exchange Act reports. Under these circumstances, and with the greater flexibility given in the rules we are adopting today to communications outside the statutory prospectus and offering procedures, we think it is appropriate for accelerated filers and well-known seasoned issuers to disclose outstanding staff comments that remain unresolved for a substantial period of time.

1. Disclosure Requirement

We are adopting substantially as proposed the requirement that all entities defined as accelerated filers and well-known seasoned issuers disclose, in their annual reports on Form 10-K or Form 20-F, written comments our staff made in connection with a review of Exchange Act reports that:

• the issuer believes are material;

• were issued more than 180 days before the end of the fiscal year covered by the annual report;⁶⁰⁴ and

• remain unresolved as of the date of the filing of the Form 10-K or Form 20-F.⁶⁰⁵

The disclosure must be sufficient to disclose the substance of the comments. Staff comments that have been resolved, including those that the staff and issuer have agreed will be addressed in future Exchange Act reports, do not need to be disclosed. Issuers can provide other information, including their position regarding any such unresolved comments.

2. Comments on Disclosure of Outstanding Comments

Many commenters did not support the proposed disclosure of outstanding comments.⁶⁰⁶ These commenters believed that issuers already have sufficient incentives to comply with staff comments and that the disclosure may not provide meaningful information to investors.⁶⁰⁷ Some commenters suggested that well-known seasoned issuers should be able to choose to either comply with the disclosure requirement or abstain from conducting an offering until the comments have been resolved.⁶⁰⁸ One commenter was concerned about potential liability that might arise from the disclosure of the unresolved comments.⁶⁰⁹

For the reasons noted above, we believe that disclosure of outstanding comments is an important component of the rules that we are adopting today. Because the disclosure requirement applies only to comments issued more than 180 days before the issuer’s fiscal year end that remain unresolved at the filing date, we believe that, in most circumstances, this will provide issuers with more than enough time to address and resolve issues. Moreover, we are not modifying the language from the proposal to allow issuers the choice to either disclose or refrain from offering securities in registered offerings because we believe the disclosures are important to the entire market.

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

As we noted in the Proposing Release, our filing system does not prohibit issuers that are not required to file Exchange Act reports 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 obligation under Exchange Act Section 15(d) has been suspended.⁶¹⁰

We are adopting the proposal 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. However, the box is for disclosure purposes only and an issuer’s filing obligation will be unaffected by an incorrectly checked box.

We believe that it is important that investors and other market participants are aware that an issuer that is a voluntary filer is not required to continue to file Exchange Act reports and may cease to file its Exchange Act reports at any time and for any reason without notice. In addition, our communications and procedural rules we are adopting today do not treat voluntary filers as reporting issuers or seasoned issuers. As we indicated above, voluntary filers desiring treatment as reporting issuers should register a class of their securities under the Exchange Act.⁶¹¹ Identification of voluntary filers will enable market participants and us to identify voluntary filers.

Commenters on voluntary filers generally thought that voluntary filers should be treated as seasoned issuers because many of them have contractual obligations to file reports.⁶¹² Some commenters were concerned that it would be difficult for certain foreign private issuers to assess their voluntary filer status because of issues relating to calculating the number of U.S. holders of record.⁶¹³

We are adopting as proposed the requirement for voluntary filers to disclose their status on the cover of Form 10-K, Form 10-KSB, and Form 20-F. To date, we have permitted voluntary filers to submit their reports to us through EDGAR. We believe it is important to be able to assess whether issuers are subject to our reporting and other requirements arising from their reporting status. We do not believe that calculation of the number of U.S. holders is a significant obstacle to unregistered foreign private issuers’ determination of their voluntary filer status.

⁵⁸⁸ 17 CFR 229.503(c) and 17 CFR 228.503(c).

⁵⁸⁹ See 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 25, at Section II.B.4.

⁵⁹⁰ See Item 503(c) of Regulation S-K. We recognize that a risk factor discussion in a Form 10-K may not be necessary or appropriate in all cases, depending on the issuer.

⁵⁹¹ We have revised the item from the proposal to eliminate the added language which caused concern that a different standard for risk disclosure would apply to annual reports on Form 10-K and registration statements on Form 10 from that required for Securities Act registration statements. We believe that the added language was redundant of the existing language of Item 503 and, therefore, unnecessary.

⁵⁹² See, e.g., letters from ABA-ABS; ASF; BMA-ABS; and CMSA.

⁵⁹³ Securities Act Rule 421 [17 CFR 230.421] 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.

⁵⁹⁴ 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 BRT. 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 (3d Cir. 1993); P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 97 (2d Cir., 2004); and In re Sprint Corp. Sec. Litig., 232 F. Supp. 2d 1193 (D. Kan. Sept. 30, 2002).

⁵⁹⁵ We note that incorporation by reference of risk factors in Exchange Act reports may not fully satisfy the Securities Act disclosure obligations. For example, additional offering-related risks may need to be included in Securities Act registration statements.

⁵⁹⁶ 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.

⁵⁹⁷ See, e.g., letters from ABA; AICPA; Alston; BDO Seidman; BRT; Deloitte; E & Y; KPMG; NYCBA; and PwC.

⁵⁹⁸ See, e.g., letters from ABA; Davis Polk; NYSBA; and S & C. The proposed disclosure requirement omitted the qualifier that risk factors should only be disclosed “where appropriate.” In addition, commenters believed that risk factors are not appropriate for issuers of asset-backed securities. See, e.g., letters from ASF; BMA-ABS; and CMSA.

⁵⁹⁹ See, e.g., letters from BRT; Intel; and SCSGP.

⁶⁰⁰ As proposed, the risk factor disclosure would have required a discussion of the most significant factors with respect to the registrant’s business, operations, industry, or financial position that may have a negative impact on the registrant’s future financial performance. See, e.g., letters from ABA; Alston; and S & C.

⁶⁰¹ See, e.g., letters from ABA; AICPA; Alston; BDO Seidman; KPMG; NYSBA; and PwC.

⁶⁰² See letter from Fried Frank.

⁶⁰³ See Section 408 of the Sarbanes-Oxley Act.

⁶⁰⁴ The 180-day time period begins from the date of the first comment letter that specifically raises the issue, which may be later than the date of the initial comment letter on the filing.

⁶⁰⁵ The requirement to disclose outstanding comments applies to both domestic and foreign registrants. The term “accelerated filer,” which is defined in Exchange Act Rule 12b-2 [17 CFR 240.12b-2], does not distinguish between domestic and foreign issuers. Accelerated filers who file reports on Form 20-F are not subject to accelerated deadlines because that Form, unlike Form 10-K, does not include accelerated deadlines for filing. Nevertheless, any registrant that meets the definition of accelerated filer is subject to the disclosure requirement for outstanding comments.

⁶⁰⁶ See, e.g., letters from AICPA; Alston; BDO Seidman; BRT; Cleary; CSFB; Deloitte; E & Y; KPMG; Intel; Merrill Lynch; Morgan Stanley; SCSGP; and TBMA.

⁶⁰⁷ See, e.g., letters from AICPA; BDO Seidman; and E & Y.

⁶⁰⁸ See, e.g., letters from ABA; Alston; CSFB; and NYSBA.

⁶⁰⁹ See letter from TBMA.

⁶¹⁰ 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.

⁶¹¹ See Exchange Act Section 12(g) [15 U.S.C. 78l(g)].

⁶¹² See, e.g., letters from ABA and Alston.