On March 2, 2020, the Securities and Exchange Commission (the "SEC") adopted amendments to Rules 3-10 and 3-16 under Regulation S-X relating to the financial and non-financial disclosure requirements of guarantors and issuers of guaranteed securities registered or being registered, and issuers' affiliates whose securities collateralize securities registered or being registered.1 The final amendments and rules are intended to reduce the disclosure burdens associated with registered securities that are guaranteed or have the benefit of collateral, thereby providing an incentive to use the registration process for offering such securities in lieu of issuing them in an unregistered offering.

The SEC adopted the amendments largely in the form proposed on July 24, 2018,2 with some significant revisions based on comments from market participants.

The amendments will be effective on January 4, 2021. However, voluntary compliance with the final amendments will be accepted in advance of the effective date.

I. Background

The final rules amend Rule 3-10 and create a new Rule 13-01 under Regulation S-X, which contains the specific disclosure requirements that a registrant must provide about subsidiary issuers or guarantors in a registered offering. The existing Rule 3-10(a) requires every issuer of a registered security that is guaranteed and every guarantor of a registered security to file financial statements required by Regulation S-X unless an exception applies. The amended rule is intended to provide investors with more meaningful information about subsidiary guarantors and permit the omission of separate financial statements when they would not provide more meaningful information to investors.

The final rules also amend Rule 3-16 and create a new Rule 13-02 under Regulation S-X, which contains the specific disclosure requirements that a registrant must provide about any affiliates whose securities are pledged as collateral and their collateral arrangements in a registered offering. The final rules replace the existing requirement to provide separate financial statements of an affiliate whose securities constitute a substantial portion of the collateral (20% or more of the principal amount of the securities being registered) with financial and nonfinancial disclosure requirements about the affiliate(s) and the collateral arrangement(s).

II. Amendments to Rule 3-10 and Partial Relocation to Rule 13-01

An overview of the amendments to Rule 3-10 and the new disclosure requirements of Rule 13-01 as adopted follows:

1. Conditions to Omitting the Financial Statements of a Subsidiary Issuer or Guarantor: Rule 3-10 as amended permits the omission of separate financial statements of a subsidiary issuer or guarantor in a registered offering of debt securities when the following conditions are met:

  • Parent Company Financial Statements Condition: The parent company's consolidated financial statements are filed with the SEC. Similarly to the SEC's release on this topic in 2000 (the "2000 Release")3, the definition of "parent company" will require the entity (1) to be an issuer or guarantor of the securities and (2) to be a Securities Exchange Act of 1934, as amended (the "Exchange Act") reporting company (or will become one as a result of the registration statement subject to the Securities Act of 1933, as amended (the "Securities Act")). Unlike the 2000 Release, which also requires the parent company to directly or indirectly own 100% of each subsidiary issuer and guarantor, the new definition only requires that the parent company consolidate each subsidiary issuer and guarantor in its consolidated financial statements.
  • Consolidated Subsidiary Condition: The subsidiary issuer or guarantor must be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards. This eliminates the distinction between subsidiaries in corporate form and those in other than corporate form, and expands the type of subsidiaries that are eligible to omit their financial statements. However, a company is required to provide specific disclosure about any material factors that may affect payments to holders, including the rights of a non-controlling interest holder.
  • Debt or Debt-Like Condition: The guaranteed security is a "debt or debt-like" security.
  • Eligible Issuer and Guarantor Structures Condition: One of following eligible issuer and guarantor structures is applicable (this two-prong framework replaces (and broadens) the five exceptions in the existing Rules 3-10(b) through (f)):
    • the parent company issues the security or co-issues the security, jointly and severally, with one or more of its consolidated subsidiaries; or
    • a consolidated subsidiary issues the security, or co-issues it with one or more other consolidated subsidiaries of the parent company, and the security is guaranteed fully and unconditionally by the parent company.

    Note that a subsidiary guarantee is no longer required to be "full and unconditional" in order to avoid the separate financial statement requirement. The rationale for the change is that, with a full and unconditional guarantee from the parent company, the parent consolidated financial statements would provide sufficient meaningful information to investors, even if a subsidiary's guarantee is not full and unconditional or a subsidiary guarantor is not wholly owned. This change may facilitate registered offerings of securities that are guaranteed by subsidiaries in foreign jurisdictions that place restrictions on upstream guarantees which would render such guarantees not full and unconditional.

Footnotes

1 For the full text of the release, see SEC, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant's Securities, SEC Release No. 33-10762 (March 2, 2020), available at https://www.sec.gov/rules/final/2020/33-10762.pdf (the "Adopting Release"). Unless otherwise specified, quoted statements in this memorandum are taken from the Adopting Release.

2 SEC Release No. 33-10526 (July 24, 2018) [83 FR 49630 (Oct. 2, 2018)] (the "Proposing Release"). We discussed the Proposing Release in our Firm Memorandum – SEC Proposes Amendments to Financial Disclosure Requirements under Regulation S-X(Aug. 15, 2018). March

3 See SEC, Financial Statements and Periodic Reports for Related Issuers and Guarantors, SEC Release No. 33-7878 [65 FR 51691 (Aug. 24, 2000)].

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Originally published by Cahill Gordon, March 2020

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.