As readers of this publication know, in order to address the expected new U.S. regulatory capital requirements, a number of U.S. bank holding companies have been creating new finance company subsidiaries. This article discusses a variety of SEC rules and regulations that simplify the registration process for using these entities, as well as certain limitations.
Using the Parent Company’s Registration Statement. Under General Instruction I.C of SEC Form S-3, a wholly owned subsidiary of an S-3 eligible company can utilize the parent company’s short form shelf registration statement for primary offerings of investment grade securities. This provision enables these subsidiaries to take advantage of the parent company’s reporting status for purposes of effecting a shelf registration. This will be the case whether or not the parent corporation is a “WKSI” or a “non-WKSI” (including a WKSI that has become an “ineligible issuer”).
Separate Financial Statements? Regulation S-X governs the financial statement requirements for registration statements and for periodic reports. Under Rule 3-10 of Regulation S-X, separate financial statements for a subsidiary with a parent guarantee are not required to be set forth in a registration statement if (a) that subsidiary is 100% owned (whether directly or indirectly) by the parent corporation, and if (b) the securities issued by the subsidiary are “fully and unconditionally” guaranteed by the parent corporation. Rule 3-10, as amended in 2000, builds upon some of the SEC’s prior no-action guidance.
The SEC reached this position due to its reasoning:
“…if a finance subsidiary issues debt securities guaranteed by its parent company, full disclosure of the finance subsidiary's financial information would be of little value. Instead, investors would look to the financial status of the parent company that guaranteed the debt to evaluate the likelihood of payment.”
What Is a Finance Subsidiary? A subsidiary will be a “finance subsidiary” if “it has no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company.” If this condition is satisfied, then no financial information about it will be required in the parent company’s financial statements. The parent company’s financial statements must include a footnote stating that this entity is a 100%-owned finance subsidiary of the parent company and that the parent company has fully and unconditionally guaranteed the securities.
New Form 10-K and Form 10-Q Requirements? When creating a new SEC registrant, the “sponsor” will of course ask whether or not it is creating a burdensome and potentially expensive ongoing disclosure obligation under the Exchange Act. However, this need not be the case—under Rule 12h-5 under the Exchange Act, these financing subsidiaries are not required to file separate periodic reports.
What Is a Full and Unconditional Guarantee? Under Rule 3-10, for a guarantee to be deemed “unconditional,” when an issuer of a guaranteed security fails to make a scheduled payment, the guarantor is obligated to make the scheduled payment immediately and, if it doesn't, any holder of the guaranteed security may immediately bring suit directly against the guarantor for payment of all amounts due and payable.
However, under the rules, a guarantee will not be “full and unconditional” if it is not operative until some time after default. For example, a subsidiary guarantee would not satisfy this condition if the debt holder must first proceed against the parent issuer, and then only proceed against the subsidiary if a certain amount of time has passed without payment.
