United States: SEC Proposes Rules To Simplify And Streamline Disclosures Of Subsidiary Guarantors In Debt Offerings

On July 24, the Securities and Exchange Commission voted to propose rule amendments to simplify and streamline the financial disclosure requirements applicable to debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant's securities.

The proposed amendments to Rules 3-10 and 3-16 of Regulation S-X would focus disclosures on information that is material to investors given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens for registrants. 

Background

Both Rules 3-10 and 3-16 affect disclosures made in connection with registered debt offerings and subsequent periodic reporting:

  • Rule 3-10 requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, but also provides several exceptions to that requirement. These exceptions are typically available for individual subsidiaries of a parent company when certain conditions are met, including that the parent company provides certain disclosures in its consolidated financial statements. If the conditions are met, separate financial statements of each qualifying subsidiary issuer and guarantor may be omitted.

  • Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant.

Proposed Amendments to Rule 3-10

Under the proposed amendments, Rule 3-10 would continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and nonfinancial disclosure about the subsidiary issuers and/or guarantors and the guarantees ("Proposed Alternative Disclosures"). Similar to the existing rule, the proposed rule would provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. Proposed Rule 13-01, contained in new Article 13 of Regulation S-X, would specify the disclosure requirements for the accompanying proposed disclosures. The proposed amendments would

  • replace the condition that a subsidiary issuer or guarantor be 100% owned by the parent company, with a condition that it be consolidated in the parent company's consolidated financial statements;

  • replace Consolidating Information with summarized financial information, as defined in Rule l-02(bb)(l) of Regulation S ("Summarized Financial Information"), of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented;

  • expand the qualitative disclosures about the guarantees and the issuers and guarantors;

  • eliminate quantitative thresholds for disclosure and require disclosure of additional information that would be material to holders of the guaranteed security;

  • permit the Proposed Alternative Disclosures to be provided outside the footnotes to the parent company's audited annual and unaudited interim consolidated financial statements in the registration statement covering the offer and sale of the subject securities and any related prospectus, and in certain reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act") shortly thereafter;

  • require that the Proposed Alternative Disclosures be included in the footnotes to the parent company's consolidated financial statements for annual and quarterly reports, beginning with the annual report for the fiscal year during which the first bona fide sale of the subject securities is completed;

  • eliminate the requirement to provide pre-acquisition financial statements of recently acquired subsidiary issuers and guarantors; and

  • require the Proposed Alternative Disclosures for as long as the issuers and guarantors have an Exchange Act reporting obligation with respect to the guaranteed securities rather than for so long as the guaranteed securities are outstanding.

The proposed amendments would simplify and streamline the rule structure in several ways. Most significantly, under proposed Rules 3-10(a) and 3-10(a)( 1) there would be only a single set of eligibility criteria that would apply to all issuer and guarantor structures instead of having separate sets of criteria in each of the five exceptions in existing Rules 3-10(b) through (f). Similarly, the requirements for the Proposed Alternative Disclosures would be included in a single location within proposed Rule 13-01, rather than spread among the multiple subsections of existing Rule 3-10.

Proposed Amendments to Rule 3-16 and Relocation to Rule 13-02

The proposed amendments to the disclosure requirements in Rule 3-16 would be amended and relocated to proposed Rule 13-02, in new Article 13 of Regulation S-X.  Among other things, the proposed amendments would

  • replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and nonfinancial disclosures about the affiliate(s) and the collateral arrangement, as a supplement to the consolidated financial statements of the registrant that issues the collateralized security;

  • permit the proposed financial and nonfinancial disclosures to be located in filings in the same manner as described above for the disclosures related to guarantors and guaranteed securities; and

  • replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the proposed financial and nonfinancial disclosures in all cases, unless they are immaterial to holders of the collateralized security.

The proposal will be subject to a 60-day public comment period.  A table summarizing the proposal changes is attached hereto as Appendix A .  A full copy of the proposed amendments may be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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