CONCEPT RELEASE-BUSINESS AND FINANCIAL DISCLOSURE REQUIRED BY REGULATION S-X

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Rule 3-05, Financial Statements of Business Acquired or to be Acquired1 The accounting standards require disclosure to enable investors to understand the nature and financial

effect of a business combination. Some of disclosures requirements by the accounting standards are the same as those required by Rule 3-05 and the related requirements. Others, such as pro forma financial information are similar although the pro forma information REQUIRED BY Article 11 of Reg S-X is more detailed and requires the filing of Form 8-K registration statement. Reg 3-05 requires historical financial statements of acquired entity and the accounting standards do not

2 There are changes to these requirements the SEC should consider in order to add quality and utility of this disclosure by average investors. For instance, there are suggestions of changing the requirements of Article 11 in order for pro forma information to help readers investors understand the target performance of the combined company post-merger. In my view, synergy is the most important information investor needs to evaluate the merger but the challenge is to minimize the gap between the target synergy and the actual synergy. The problem is that registrant tends to overestimate this information just to win a vote from shareholders. The second problem is the issue of asymmetric of information putting the registrant in a difficult position to estimate the right value of the acquiree and the difficult road toward the merger. The third problem is the difficulty of predicting any regulatory outcome and external factors (customers, community, union,…)

3 The lack of reliable data (private company and foreign companies) affect the significance test it is why I recommend the SEC to revise this rule and add the quality, attractiveness and reliability to the S-X Rule 1-02 (w). As we know tests we now use can be affected by just a little manipulation of impairment valuation change. It is why it makes sense to accept revenue test and fair value investment test as new tools to test company for significance. I believe the incoming revenue recognition rule will not impact this position. It does not matter that companies leaders must work very hard to win on the market share price competition (maximization of shareholder value) for this test. Investors must understand why these companies did choose or are not choosing to ‘marry’ [merge] each other based on how others are valuing them. (external valuators, customers by the revenues and market place by market share price) Investors voting on this merger will evaluate this information based on external assessments (both are not under pressure or have not incentive to lie or inflate any value)

4 Pretax income test can be manipulated and will result into questionable positive /negative tests. Fair value investment test can increase utility of this information because it is simple to understand by average investor. In short, this test is not ‘ora-quick’ test to keep, SEC must eliminate these tests with chains of questionable and aggressive results and replace it with the reliable tests.

5 SEC can improve the utility of the pro forma information by increasing its frequency (quarterly and annually). SEC should not change its methodologies, add any comparative pro form income statements or modify the requirements the restrictions for pro forma income adjustments. Aggregate small acquisitions requirements must provide pro forma information if they test positive for significance in annual basis after updating it regularly. When registrant cannot provide a pro forma disclosure because of lack of data or reliable data (private and/or foreign acquire), it should be required to provide abbreviated narrative disclosure if the auditor determines this fact

6 Yes, SEC should modify the requirement to provide Rule 3-05 financial statements by filing pro forma information for impending acquisitions that are individually significant or insignificant but significant as aggregate; all under SA 1933 and SEA 1934. SEC should allow companies to cure noncompliance with S-X 3-

05 with a reduction of the ‘black out’ period to a year and provide relief from complying with US GAAP and US GAAS in certain cross border transactions where financial statements of the target must either be prepared in accordance with US GAAP or reconcile under item 18 of Form 20-F.

7 No, I did read no complaint related to this amount of time, 71 days to file form 8-K/A to include pro forma disclosure or comply with Rule S-X 3-05 is sufficient time to collect, assess, disclose .

8 Certain registration statements should continue to require accelerated and additional disclosures as compared to the Form 8-K requirements

9 The proposed significance tests will determine the nature and extent of disclosure under Rule 3-0510 These proposed changes in significance tests will add quality and reliability to this information. At the same

token, I believe it will add the utility of this information by average reasonable investors. These revenue test and fair value investment test are easy to assess, collect and provide to the investing public

11 The proposed changes I did describe on top will improve the readability of this disclosure and its understanding by shareholders who will make an informed decision during the merger vote and approval.

12 I recommend a full replacement of the actual tests of significance with just 2 tests –revenue test and fair value investment test but I do not favor rising any percentage threshold at this time

13 Merger is tied to the top executive compensation package. It is tied to their reputation and megalomaniac goal and vision. That said executives have incentives to lie for financial and non-financial incentives. It is why I will not recommend the SEC to shift control from the prescriptive disclosures to the principle disclosure oriented giving top executives opportunities to merge just to increase their compensation package or/and goal of leading a big company. In sum, let registrants comply to prescriptive rules a least to empower consistency among registrants.

14 Foreign private issuers must provide similar disclosure on Form 6-K because it will align the disclosure philosophy. It will be issue about data and data sharing but if the acquiree is a US registrant it will be easy. It will be some kind of reconciliation or use of IFRS and negotiation with local regulators

15 Scaled disclosure must apply to EGC with abbreviated disclosure requiring less data (mostly historical data)16 Investment companies deserve different Rule 3-5 applied to the size of investment filed on Form N2. That

said, it will make sense for the SEC to revisit investment companies rules and add requirement of pro forma schedule of investments after fair value investment test.

17 At this time, FASB is working on what it calls clarifying the definition of business. There is an exposure draft which is still under re-deliberation. That said, we can not say at this time what will be the final rule of the definition of business. In the meantime, I believe we must keep relying on the definition of business under S-X Article 11-01 (d)

Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons18 Rule S-X 3-09 dictated the financial information needed to disclose equity method investees. This rule

requires summarized financial information for annual disclosure on Form 10-K or N6 and interim disclosure on Form 10-Q for the aggregate of all equity method investees if significance tests, ruled by 1-02 (w), exceeds 10 %. There are costs and operational challenges to obtain stub financial statements for only a portion or quarter of the year.

19 SEC should revise the rule and apply the proposed S-X rule 1-03(w) for tests. Registrants need reliable data in order to prepare a good disclosure to help investors make an informed investment and voting decisions.

20 Beside reliable data, the cost of the disclosure and its low utility, SEC should limit the scope of s-x rule 3-09 to equity method investees that are not carried at fair value. No audited financial disclosure should be required for disposed equity investment. Changes to the requirements in the year of acquisition can facilitate compliance and reduce pre-filing requests for exemption and waivers to the SEC staff. This will give more opportunities for registrant to add quality, transparency and reliability to their disclosure but it may not directly increase the utility of the information by average reasonable investors and sophisticated investors may find it more useful

21 Investors may not need interim financial information about equity method investees under Article 10 and S-X Rule 8-03, without any adverse change since precedent year end or quarter end

22 Summarized financial information will be more useful to investors (mostly sophisticated investors) if it is disclosed separately for individually material investees. SEC should consider adding disclosure of the respective ownership interest to this requirement. If this disclosure can cause any competitive harm to the registrant, it will be omitted and the reason of this omission must be disclosed.

23 Yes, it will be appropriate for the SEC to revisit Rule 3-09 and correct it because it is one of its subsets24 It is less useful that means with a little trust from investors but it does not make any financial sense to

spend that much for an insignificant information.25 Yes, significance tests if performed well, can appropriately determine the nature, timing and extent of

disclosure under Rule 3-09 and the related requirements26 I did already indicate proposed changes to Rule 1-02 (w) with just 2 tests, revenue tests and fair value

investment tests for significance tests. The only challenge to this proposed test is the reliability of the data of the company

27 With the proposed changes to the test, it will add reliance and readability to the disclosure helping investors to make an informed investment and voting decisions.

28 No, SEC should not shift control of the significance test to the management of the registrant. The first concern is a lack of consistency and the second is the lack of incentive for management to provide a reliable test.

29 Others are recommended the use of greater than 10% for individual significance test, greater than 20% for the aggregate of individually insignificant equity investees and greater than 80% for audited financial statements, I am not sure they will test better

30 I do not believe that interim disclosure should become optional. The interim financial information should be based on material adverse changes since previous year end and quarter end. SEC must determine what to omit, when and how

31 SRC and EGC must provide a scaled disclosure because of lack of reliable data and the size of their investment

32 Investment companies should follow a different standard of S-X Rule 3-09. For instance, their test of significance should be based on fair value investment test. In addition, we can create 2 groups of investment companies, investment in an operating portfolio business (with summarized financial information) and investment in an entity accounted for as an investment company (with schedule of investments)

Rule 3-10- Financial Statements of Guarantors and Issuers of Guaranteed SECURITIES Registered or Being Registered33 This information allows investors to evaluate the capacity of payment of debts at the due date. The

challenge for investors is to understand how rating analysts and others did assess this issuer’s capacity.34 Experts preparers are complaining about condensed consolidating financial information, its costs and

complexity leading to restatement after errors and reputational costs. If the condensed consolidating financial information is complex to prepare, is it complex to understand? Who to blame? A poor training or complex requirements to comply with? If investors can understand this information coupled with rating analyst assessment, it can be for them to make an informed investment and voting decision.

35 Preparers have said that it is difficult and complex to prepare it. If the SEC cannot simply its requirements, it can substitute it with an audited summarized financial information both the issuers and guarantors. One of these changes can add clarity, attractiveness and utility of this information by investors in making an informed investment and voting decisions

36 This information is useful by institutional professional investors but for a disclosure to be effective, it must be addressed to average reasonable investors

37 To increase the utility of a consolidating information, SEC must revisit its content requirements and add

clarity, that means simplify it without jeopardizing the quality of this information relied by investors to make an investment and voting decision

38 SEC should not shift control of the content of interim of consolidating information from the regulators to the Top management of the registrant. In addition, it will make sense for a company to disclose this selected financial information in its interim period only if there has been material adverse changes in the financial condition of the obligated group since the most recently reported annual or interim information report

39 Yes, S-X rule 3-10 (g) should require separate audited financial statement for recently acquired subsidiary guarantor/issuers for the most recent fiscal year or interim period only if the subsidiary guarantor/issuers are significant

40 Alternative Disclosure does influence the structure of guarantee relationship, guarantor must be able to afford the full and unconditional guarantee or it will be reputational and rating costs to the parent and subsidiary and their shareholders

41 If the parent owns for example 90% of the subsidiary and manages it this subsidiary like it owns it in full, I believe it will make sense for this parent to assume all responsibilities regardless of NCI as a guarantor of this subsidiary.

42 It must meet the definition of full and unconditional guarantee to become legally enforceable to the parent. After a default but without enforcement proceeding, this included delayed enforceability; it will make sense to allow the continuity of the Alternative disclosure for the guarantee because there are still a lot of windows for negotiation and modification to avoid this actual legal default.

43 Recently acquired guarantors can provide an abbreviated narrative disclosure.44 No parent company should continue to provide Alternative disclosure during the period which the securities

are outstanding; But, if the subsidiary did file for form 15, its shares will not trade and it will be no reason to continue the Alternative Disclosure but the parent can start making an abbreviated narrative disclosure until the extinguishment of this default debt. It will be like dealing with subsidiary/parent that have no independent assets although it was just a conversion from public to private.

45 SRC and EGC must be subject to scaled disclosureRule 3-16, Financial Statements of Affiliates Whose Securities COLLATERALIZE an Issue Registered or Being Registered46 Yes, Rule 3-16 requirements influence the structure of collateral arrangements. It should be noted that Rule

3-16 requires separate financial statements of affiliate that collateralize an issuance if their securities constitute a substantial portion of collateral. Securities constitute a substantial portion of collateral under S-X rule 3-16 if the aggregate principal account, par value, book value or market value of the securities pledged as collateral, whichever is the greatest equals 20% or more of the principal account of the collateralized securities. If this agreement is structured to avoid S-X rule 3-16, investors will never know that pledges of subsidiary stock had been used as capital raising option in this transaction. Was this issuer able to pay this debt when it was due? Was it a good deal for the company and its shareholder? If investors cannot answer these questions without huge effort, they did not understand this transaction therefore they will not make an informed investment and voting decision.

47 Rule 3-16 and Rule 4-08 (b) are used separately. Separately, Rule 4-08 (b) of Regulation S-X requires disclosures in the notes to a registrant’s annual financial statements of amounts of assets of pledged, mortgaged or otherwise subject to lien. First challenge is that 4.08 (b) rules does not require any threshold limitation. Another challenge is that Rule 3-16 is limited to pledged securities. Only the pledge feature can trigger 3-16 disclosure.

48 Investors should be informed about the amount of collateralized securities originally issued. There are no real challenge in providing this information. But the way the test is performed is challenging to others, may be there is an easy way out without undermining the quality of information provided to investors

49 The difference between Rules 3-16 and 4-08 can be confusing and use to confuse investors, I believe that focus on summarized and audited financial information can add clarity and attractiveness to the disclosure for investors in their responsibilities to make investment and voting decision.

50 The problem is not the substantial portion of collateral test at the end of each fiscal year, investor does not need a separate audited financial statements for the subsequent year even though its test was positive (20% or more of the original amount of securities offered). For subsequent annual report, when it is significant, registrant can just provide a summarized audited financial report

51 To improve the utility of Rule 4-08 footnote disclosure, SEC must revisit this rule to expand it to the FPI and other credit enhancements, this will bring a new crowd who will read it and rely on it in making an informed investment and voting decision. Another way is to require subsequent interim financial report for significant affiliates.

52 It will be appropriated to revisit the requirements to provide Rule 3-16 financial statement and provide to investors the number of instances in which the collateral pledge of securities is involved in connection with registered securities subject to S-X 3-16

53 Yes, we can revisit the test used in applying Rule 3-16 and add more comparability to it54 SRC and EGC must be subject to scaled disclosure55 SEC should revisit its rules and act on:

Rule 3-06 of Regulation S-X ( periods of 8 to 12 months must satisfy one fiscal year) Use of audited pre-acquisition periods to comply with disclosure requirements Requirements pertaining to individually insignificant acquisitions

56 I am not a good promoter of extensive business related language because of its low utility level and errors, that said, if we cannot fix it or eliminate it, we must keep things where they are now

57 A good technology system must provide us with information at low cost, high speed, error free with less human effort (manual), it is why we must search the way to adapt to the proliferation of the technology but we must make sure that this information is secured from hackers and high tech criminals. In short, these adopted new rules related to new technology should not be above our Federal Securities regulation and laws.

58 Disclosure Effectiveness initiative was implemented to reduce information overload, we must keep in mind that no every investor will read and understand an average disclosure. It is why we must just write the disclosure to the average reasonable investor as our target audience.