Concept Release, Rule S-X 3-05 and 3-09 Securities Regulation SEC reporting

1. CONCEPT RELEASE-BUSINESSAND FINANCIALDISCLOSUREREQUIRED BY REGULATION S-X
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Rule 3-05, Financial Statementsof BusinessAcquiredor to be Acquired
1 The accountingstandardsrequire disclosure toenableinvestorstounderstandthe nature andfinancial
effectof a businesscombination. Some of disclosuresrequirementsbythe accountingstandardsare the
same as those requiredbyRule 3-05 and the relatedrequirements. Others,suchaspro formafinancial
informationare similaralthoughthe proformainformationREQUIREDBY Article 11 of RegS-X ismore
detailedandrequiresthe filingof Form8-Kregistrationstatement. Reg3-05 requireshistorical financial
statementsof acquiredentityandthe accountingstandardsdonot
2 There are changesto these requirementsthe SECshouldconsiderinordertoaddqualityandutilityof this
disclosure byaverage investors. Forinstance,there are suggestionsof changingthe requirementsof Article
11 in orderfor proforma information tohelpreadersinvestorsunderstandthe targetperformance of the
combinedcompany post-merger. Inmyview,synergyisthe mostimportantinformationinvestorneedsto
evaluate the mergerbutthe challenge istominimize the gapbetweenthe targetsynergyandthe actual
synergy. The problemisthatregistranttendstooverestimate thisinformationjusttowinavote from
shareholders. The secondproblemisthe issue of asymmetricof informationputtingthe registrantina
difficultpositiontoestimate the rightvalue of the acquiree andthe difficultroadtowardthe merger. The
thirdproblem isthe difficultyof predictinganyregulatoryoutcome andexternal factors(customers,
community,union,…)
3 The lack of reliabledata(private companyandforeigncompanies)affectthe significance testitiswhyI
recommendthe SECto revise thisrule andaddthe quality,attractivenessandreliabilitytothe S-XRule 1-02
(w). Aswe knowtestswe now use can be affectedbyjusta little manipulationof impairmentvaluation
change. It is whyitmakessense toaccept revenue testandfairvalue investmenttest asnewtoolstotest
companyfor significance. Ibelieve the incomingrevenuerecognition rule will notimpactthisposition. It
doesnotmatter that companiesleadersmustworkveryhardto winon the marketshare price competition
(maximizationof shareholdervalue)forthistest. Investors mustunderstandwhythese companies did
choose or are notchoosingto ‘marry’[merge] eachotherbasedonhow othersare valuingthem.(external
valuators,customersbythe revenuesandmarketplace bymarketshare price) Investorsvotingonthis
mergerwill evaluatethisinformationbased onexternal assessments(bothare notunderpressure orhave
not incentive tolie orinflateanyvalue)
4 Pretax income testcanbe manipulatedandwillresultintoquestionable positive /negative tests. Fairvalue
investmenttestcanincrease utilityof thisinformationbecause itissimpletounderstandbyaverage
investor. Inshort,thistestisnot ‘ora-quick’testtokeep,SECmusteliminate these testswithchainsof
questionable andaggressive resultsandreplace itwiththe reliable tests.
5 SEC can improve the utilityof the proformainformationbyincreasingitsfrequency(quarterlyand
annually). SECshouldnotchange itsmethodologies,addanycomparative proformincome statementsor
modifythe requirementsthe restrictions forproformaincome adjustments. Aggregate small acquisitions
requirementsmustprovide proformainformationif theytestpositiveforsignificance inannual basis after
updatingitregularly. Whenregistrantcannotprovide aproforma disclosure becauseof lackof data or
reliable data(private and/orforeignacquire),itshouldbe requiredtoprovide abbreviatednarrative
disclosure if the auditordeterminesthisfact
6 Yes,SEC shouldmodifythe requirementtoprovide Rule 3-05financial statements byfilingproforma
informationforimpendingacquisitionsthatare individuallysignificantorinsignificantbutsignificantas
aggregate;all underSA 1933 and SEA 1934. SEC shouldallow companiestocure noncompliance withS-X3-
05 witha reductionof the ‘blackout’ periodtoa yearand provide relieffromcomplyingwithUSGAAPand

2. US GAAS incertaincross bordertransactionswhere financialstatementsof the targetmusteitherbe
preparedinaccordance withUS GAAPor reconcile underitem18of Form20-F.
7 No,I didread no complaintrelatedtothisamountof time,71 daysto file form8-K/A toinclude proforma
disclosure orcomplywithRule S-X3-05 issufficienttime tocollect,assess,disclose.
8 Certainregistrationstatementsshouldcontinue torequire acceleratedandadditional disclosuresas
comparedto the Form 8-K requirements
9 The proposedsignificance testswill determine the nature andextentof disclosure underRule 3-05
10 These proposedchangesinsignificance testswilladdqualityandreliabilitytothisinformation. Atthe same
token,Ibelieve itwill addthe utilityof thisinformationbyaverage reasonableinvestors. These revenue
testand fairvalue investmenttestare easytoassess,collectandprovide tothe investingpublic
11 The proposedchangesIdid describe ontopwill improve the readabilityof thisdisclosure andits
understandingbyshareholderswhowill make aninformed decisionduringthe mergervote andapproval.
12 I recommendafull replacementof the actual testsof significance withjust2tests –revenue testandfair
value investmenttestbutIdo notfavor risingany percentage threshold atthistime
13 Merger istiedto the top executive compensationpackage. Itistiedtotheirreputationandmegalomaniac
goal and vision. Thatsaidexecutiveshave incentivestolie forfinancial andnon-financial incentives. Itis
whyI will notrecommendthe SECto shiftcontrol fromthe prescriptive disclosurestothe principle
disclosure orientedgivingtopexecutivesopportunitiestomerge justtoincrease theircompensation
package or/andgoal of leadingabig company. In sum, letregistrantscomplytoprescriptiverulesaleastto
empowerconsistencyamongregistrants.
14 Foreignprivate issuersmustprovide similardisclosureonForm6-K because itwill alignthe disclosure
philosophy. Itwill be issue aboutdataanddata sharingbut if the acquiree isa US registrantitwill be easy.
It will be some kindof reconciliationoruse of IFRSand negotiationwithlocal regulators
15 Scaleddisclosure mustapplytoEGC withabbreviateddisclosure requiringlessdata(mostlyhistorical data)
16 InvestmentcompaniesdeservedifferentRule 3-5appliedtothe size of investmentfiledonFormN2. That
said,itwill make sense forthe SECto revisitinvestmentcompaniesrulesandaddrequirementof proforma
schedule of investmentsafterfairvalue investment test.
17 At thistime, FASBisworkingonwhatit callsclarifyingthe definitionof business. There isanexposure draft
whichisstill underre-deliberation. Thatsaid,we can not say at thistime whatwill be the final rule of the
definitionof business. Inthe meantime,Ibelievewe mustkeeprelyingonthe definitionof businessunder
S-XArticle 11-01 (d)
Rule 3-09, Separate Financial Statementsof SubsidiariesNot Consolidatedand50 Percent or Less OwnedPersons
18 Rule S-X3-09 dictated the financial informationneededtodiscloseequitymethodinvestees. Thisrule
requiressummarizedfinancial informationforannual disclosure onForm10-K or N6 and interimdisclosure
on Form10-Q for the aggregate of all equitymethodinvesteesif significance tests,ruledby1-02 (w),
exceeds 10%. There are costs andoperational challengestoobtainstubfinancialstatementsforonlya
portionor quarterof the year.
19 SEC shouldrevise the rule andapplythe proposedS-Xrule 1-03(w) fortests. Registrantsneedreliabledata
inorder to prepare a gooddisclosure tohelpinvestorsmake aninformedinvestmentandvotingdecisions.
20 Beside reliable data,the costof the disclosure anditslow utility,SECshouldlimitthe scope of s-x rule 3-09
to equitymethodinvesteesthatare notcarriedat fair value. Noauditedfinancialdisclosure shouldbe
requiredfordisposedequityinvestment. Changestothe requirementsinthe yearof acquisitioncan
facilitate compliance andreduce pre-filingrequestsforexemptionandwaiverstothe SECstaff. This will
give more opportunitiesforregistranttoaddquality,transparencyandreliabilitytotheirdisclosure butit
may notdirectlyincrease the utilityof the information byaverage reasonable investorsandsophisticated
investorsmayfinditmore useful
21 Investorsmaynotneedinterimfinancial informationaboutequitymethodinvesteesunderArticle10and S-

3. X Rule 8-03, withoutanyadverse change since precedentyearendorquarterend
22 Summarizedfinancial informationwillbe more usefultoinvestors(mostlysophisticatedinvestors) if itis
disclosedseparately forindividuallymaterial investees. SECshouldconsideraddingdisclosure of the
respective ownershipinteresttothisrequirement. If thisdisclosurecancause any competitive harmtothe
registrant,itwill be omittedandthe reasonof thisomission mustbe disclosed.
23 Yes,it will be appropriate forthe SECto revisitRule 3-09 andcorrect it because itisone of itssubsets
24 It islessuseful thatmeanswithalittle trustfrominvestorsbutitdoesnotmake any financial sense to
spendthatmuch for an insignificantinformation.
25 Yes,significance testsif performedwell,canappropriatelydetermine the nature,timingand extentof
disclosure underRule 3-09and the relatedrequirements
26 I didalreadyindicate proposedchangestoRule 1-02 (w) withjust2 tests,revenue testsandfairvalue
investmenttestsforsignificance tests. The onlychallengetothisproposedtestisthe reliabilityof the data
of the company
27 Withthe proposedchangestothe test,itwill addreliance andreadabilitytothe disclosure helpinginvestors
to make an informedinvestmentandvotingdecisions.
28 No,SEC shouldnotshiftcontrol of the significance testtothe managementof the registrant. The first
concernis a lack of consistencyandthe second isthe lack of incentive formanagementtoprovide areliable
test.
29 Othersare recommendedthe use of greaterthan10% forindividual significance test,greaterthan20%for
the aggregate of individuallyinsignificantequityinvesteesandgreaterthan80% for auditedfinancial
statements,Iamnot sure theywill testbetter
30 I do notbelieve thatinterimdisclosure shouldbecomeoptional. The interimfinancial informationshould
be basedon material adverse changessince previousyearendandquarterend. SEC mustdetermine what
to omit,whenandhow
31 SRC and EGC must provide ascaleddisclosure because of lackof reliable dataandthe size of their
investment
32 Investmentcompaniesshould follow adifferentstandardof S-XRule 3-09. For instance,theirtestof
significance shouldbe basedonfairvalue investmenttest. Inaddition,we cancreate 2 groupsof
investmentcompanies,investmentinanoperatingportfoliobusiness(withsummarizedfinancial
information) andinvestmentinanentityaccountedforasan investmentcompany(withschedule of
investments)