On July 24, the SEC proposed amendments to Rule 3-10 of Regulation S-X for guarantors and issuers of guaranteed securities registered or being registered, as well as the financial disclosure requirements in Rule 3-16 of Regulation S-X for affiliates whose securities collateralize securities registered or being registered. Here is the proposing release. The proposed changes are intended to provide investors with material information given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens to registrants. The proposal will be subject to a 60-day public comment period.
Background of Rules 3-10 and 3-16 of S-X
Both Rules 3-10 and 3-16 affect disclosures made in connection with registered debt offerings and subsequent periodic reporting:
- Rule 3-10(a) states that every issuer of a registered security that is guaranteed and every guarantor of a registered security must file the financial statements required for a registrant by Regulation S-X. Rules 3-10(b) – (f) set forth five exceptions to this general rule, which permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met, including that the parent company provides the alternative disclosures, which usually consists of highly-detailed condensed consolidating financial information.
- 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
The proposed amendments to the guarantor disclosures would, among other things:
- 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 condensed consolidating financial information with summarized financial information, as defined in Rule 1-02(bb)(1) of Regulation S-X, of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented;
- permit the proposed 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 Exchange Act reports filed during the first fiscal year in which the first bona fide sale of the securities is completed; however, the disclosures would be required to 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; and
- require the proposed financial and non-financial disclosures for as long as the issuers and guarantors have an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding.
Proposed Amendments to Rule 3-16
The proposed amendments to the pledgor 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 non-financial 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 non-financial 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 non-financial disclosures in all cases unless they are immaterial to holders of the collateralized security.
Proposed Rules Will Allow Greater Filing Flexibility
The proposed rules should be welcome news for any issuer that is contemplating, or has issued, registered debt with guarantors or pledgors. Even for those companies that may not be contemplating a registered debt offering, the proposal should give more flexibility when filing an omnibus shelf registration statement that includes debt securities.
In the past, the SEC Staff has said that simply registering the guarantees will trigger Rule 3-10 financial disclosures even when a takedown of debt securities has not occurred. (For example, see this comment letter.) Complying with existing guarantor and pledgor financial disclosures was often a massive undertaking for public companies to prepare and in many cases added little value to investors in a registered debt offering. Contrast this with a typical offering memorandum in a similar Rule 144A deal where it only includes revenues, operating income (or similar metric) when available, assets and liabilities of the issuers and guarantors as a consolidated group, and the non-guarantor subsidiaries as a consolidated group.