Defining Issues | March 2020

SEC rule affects financial disclosures of certain registered debt instruments

SEC adopts rule amendments to streamline disclosures and encourage issuers to conduct registered debt offerings. Here we summarize the changes to disclosures for issuers and guarantors of guaranteed securities and affiliates whose securities collateralize issuers’ securities (S-X Rules 3-10 and 3-16, respectively).

Applicability

SEC Release No. 33-10762; 34-88307; File No. S7-19-18

  • Issuers and guarantors of registered debt, debt offerings being registered or private debt offerings with registration rights
  • Issuers and their affiliates whose securities are pledged as collateral for securities registered or being registered

Relevant dates

  • Effective on January 4, 2021; voluntary compliance before effective date is permitted.

Key impacts

The SEC adopted final rules amending Rules 3-10 and 3-16 of Regulation S-X and creating new Article 13 to improve the financial disclosure requirements for guarantors and issuers of guaranteed securities and affiliates whose securities collateralize issuers’ securities.

The rules are also intended to reduce the cost of compliance for issuers and encourage companies to offer guaranteed or collateralized securities on a registered basis.

The amendments to Rule 3-10 (not exhaustive):

  • Revise the eligibility conditions that permit the omission of separate financial statements of subsidiary issuers and guarantors to two eligible structures:
    • A parent issues or co-issues the security, jointly and severally, and with one or more of its consolidated subsidiaries; or
    • A consolidated subsidiary issues the security, or co-issues with one or more other consolidated subsidiaries, and the security is fully and unconditionally guaranteed by the parent
  • Require the parent company to provide supplemental financial and nonfinancial disclosures about the subsidiary issuers and/or guarantors and the guarantees ('alternative disclosures'), which are included in new Rule 13-01, when the separate financial statements of the subsidiary issuers and guarantors are omitted
  • Replace condensed consolidating financial information with summarized financial information, which may be presented on a combined basis when certain requirements are met
  • Reduce the number of periods presented to the most recently ended fiscal year and interim period included in the issuer’s consolidated financial statements
  • Require disclosure of additional information about each guarantor that is material for investors to evaluate the sufficiency of the guarantee
  • Permit the alternative disclosures to be provided outside of the notes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings, or as a note to the audited consolidated financial statements
  • Eliminate the requirement to provide pre-acquisition financial statements of recently acquired subsidiary issuers and guarantors, but require in certain instances summarized pre-acquisition financial information about significant recently acquired subsidiary issuers and guarantors
  • Require the alternative disclosures for as long as an issuer or guarantor has an Exchange Act reporting obligation

The amendments to Rule 3-16 (not exhaustive):

  • Require disclosure of financial and non-financial information, which includes summarized financial information, about the affiliate(s) and the collateral arrangement in accordance with new Rule 13-02
  • Eliminate the requirement to provide separate financial statements for each affiliate whose securities constitute a ‘substantial portion’ of the collateral
  • Require disclosure when information is material and eliminate bright-line threshold
  • Permit summarized financial information for each affiliate whose securities are pledged as collateral to be presented on a combined basis 
  • Reduce the number of periods presented to the most recently ended fiscal year and interim period included in the issuer’s consolidated financial statements
  • Permit the financial and nonfinancial disclosures to be provided outside of the notes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings, or as a note to the audited consolidated financial statements

 

 

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