SEC Division of Corporation Finance Director Keith Higgins recently suggested that the SEC will review the rules requiring separate financial statements or separate financial information under certain circumstances for acquired companies, investees, and guarantors. This review will be conducted as part of the SEC’s project to improve its disclosure regime. Although Higgins’s April remarks noted that the information may be quite material to investors, he also observed that the application of these rules may be challenging at times and compliance can be costly. We encourage the SEC Staff to seek information from investors and analysts regarding whether they use the separate financial information and, if so, under what circumstances.

Higgins suggested that the Staff consider whether the rules should have bright-line tests or a more general principle of materiality. Although we believe that the separate financial information should be required only when it is material to investors, we also believe that bright-line tests facilitate and ensure more consistent compliance. Accordingly, we recommend that, based on information from investors and analysts about their use of the separate financial information, the Staff consider revisions to the rules that eliminate, to the extent appropriate, the requirement to file the separate financial information when it is unlikely that the information would be useful to investors and analysts.

With respect to financial statements for acquired companies or to-be-acquired companies, we recommend that the Staff consider whether the company’s income should be evaluated based on a five-year average, which is the approach that reporting companies generally use to determine the pretax income for the denominator of the income significance test. In addition, we suggest that consideration be given to whether the pretax income test should be based on the reporting company’s and the acquired or to-be-acquired company’s pretax income, excluding unusual charges, expenses, or revenue.

With respect to financial statements for investees, we recommend that the Staff consider changes to the significance tests as applied to the reporting company and the investee that are similar to those changes recommended in the prior paragraph. In addition, we recommend that the Staff consider eliminating the requirement for separate financial statements for investees for any year other than the most recent fiscal year or for years during the three-year period when the investee did not meet the significance test. In addition, we recommend that the Staff eliminate the requirement for investee financial statements when the reporting company no longer owns an interest in the investee because such financial statements are presumably not material to an investor’s decision to invest in the company.

With respect to financial statements or condensed consolidating financial information for guarantors, we recommend that the Staff evaluate the use of that financial information. The detailed information is probably not material to investors in many cases.