Regulation S-X 3.13 – You Can Ask for a Break!

By: George M. Wilson, SEC Institute

Many of us have likely been in the position of reviewing an SEC disclosure requirement and thinking that the exact form of the requirement may not fit our particular circumstances. Sometimes we may believe such situations could create incremental work and cost while not providing particularly meaningful information to investors.


Is there any way to seek a discussion and discover a potentially better way to provide useful information to investors? It turns out, yes!


At the SEC’s conference in Washington, D.C. in early December, both Chair Jay Clayton and CorpFin Director William Hinman emphasized that the SEC is encouraging companies to consider using an historically little mentioned rule to avoid potentially complex costly disclosures that don’t provide material information to investors.


Regulation S-X Rule 3.13

210.3-13   Filing of other financial statements in certain cases.

The Commission may, upon the informal written request of the registrant, and where consistent with the protection of investors, permit the omission of one or more of the financial statements herein required or the filing in substitution therefor of appropriate statements of comparable character. The Commission may also by informal written notice require the filing of other financial statements in addition to, or in substitution for, the statements herein required in any case where such statements are necessary or appropriate for an adequate presentation of the financial condition of any person whose financial statements are required, or whose statements are otherwise necessary for the protection of investors.


Such requests will certainly require judgment, and both Chair Clayton and CorpFin Director Hinman emphasized that requests will be granted only when they are consistent with the goals of investor protection. That said, if an alternative to a formal rule will provide the information investors need Rule 3.13 can help avoid delay and unnecessary costs.


Director Hinman and CorpFin Chief Accountant Mark Kronforst (who you have likely heard will be leaving the SEC soon) discussed these process related issues:


First, all fact patterns are different, and it is important to not make any assumptions about how the process will work.


If you have a simple question you could begin by using the contact information in the CorpFin Financial Reporting Manual to get an initial plan in place.


The staff prefers that a formal request begin with email.


In your communication with the staff it is very important to explain all facts concisely and completely.


You should support you position with a clear explanation of why is it consistent with investor protection.


Early involvement of auditors also makes these requests proceed more smoothly.


The staff is working to respond promptly to each request and you should hear back in about 10 days unless the request is made during one of the periods when CorpFin is very busy.


Examples of areas where requests may arise include:


Significance tests – if one of the three parts of this test seems out of the norm then there may be other, more appropriate, considerations in making a determination whether separate financial statements are useful.


Pre-and post-acquisition periods for rule 3.05 – when appropriate it may be best to use an analysis that is less mechanical and focuses on trend issues that are meaningful and helps assess how the acquisition may impact on post-acquisition results.


Predecessor/Successor issues – relevance of stub periods may not be as relevant or reliable carve out F/S may not be possible to build. For example, it may be that abbreviated financial statement may provide the information that investors need.


IFRS financial statements may be acceptable for some acquisitions and equity method investees – if company could be a foreign private issuer the staff may accept IFRS financial statements.


Mechanical compliance with a rule sometimes is not the best way to provide investors with the information they need. It is a good thing to know that there are alternatives. So, when you think you are in this situation, go talk to the staff!



As always, your thoughts and comments are welcome!


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