SEC proposes disclosure simplification and relief related to guarantors and collateralizations of securities has been saved
SEC proposes disclosure simplification and relief related to guarantors and collateralizations of securities
This Heads Up discusses the SEC’s recently issued proposed rule that would make specific amendments to simplify and streamline the disclosure requirements related to registered debt securities under SEC Regulation S-X, Rules 3-10 and 3-16.
On July 24, 2018, the SEC issued a proposed rule that would make specific amendments to simplify and streamline the disclosure requirements related to registered debt securities under SEC Regulation S-X, Rules 3-10 and 3-16, which currently require separate financial statements for:
- Subsidiary issuers and guarantors of registered debt securities unless certain exceptions for condensed consolidating financial information or other narrative disclosures are met.
- Affiliates that collateralize registered debt offerings if the affiliates’ securities are a substantial portion of the collateral.
The proposed rule indicates that the primary source of information that investors in guaranteed or collateralized debt rely on is the consolidated financial statements of the parent company. With respect to the disclosure requirements related to issuers and guarantors of guaranteed debt securities or affiliates whose securities collateralize debt, the proposed rule would:
- Replace the requirement under Rule 3-10 to provide condensed consolidating financial information with a requirement to provide summarized financial information and other narrative disclosures when certain conditions are met.
- Simplify the requirements under Rule 3-10 to qualify for exceptions to provide alternative disclosure rather than full audited financial statements (e.g., by replacing the requirement that a subsidiary issuer or guarantor be 100 percent owned with a requirement that it be consolidated in the parent company’s financial statements).
- Remove the requirement in Rule 3-10(g) to provide pre-acquisition financial statements for recently acquired subsidiary issuers and guarantors.
- Replace the requirement to provide separate financial statements for an affiliate that collateralizes a substantial portion of a security with a requirement to provide summarized financial information and other narrative disclosures.
- Reduce the periods for which summarized financial information is required to only the most recent annual and interim periods.
- Relocate part of Rule 3-10 and all of Rule 3-16 to a new Article 13 in Regulation S-X.
These highlights are discussed in the attached PDF.
In drafting the proposed rule, the SEC took into consideration constituents’ feedback on its September 2015 request for comment on the effectiveness of financial disclosures about entities other than the registrant. Several respondents to that request stated that because of the cost of complying with Rules 3-10 and 3-16, many debt offerings either (1) are not registered with the SEC (i.e., private placements) and therefore limit the protections available to investors or (2) are structured in a specific manner to avoid the requirements of Rules 3-10 and 3-16 and therefore potentially limit the security provided by guarantees or collateral. The SEC addressed these and other concerns in the proposed rule by offering disclosure simplification and relief for certain debt issuers, which may increase registered debt issuances and thus increase options available to the investing public.
Connecting the Dots
While the SEC’s September 2015 request for comment also focused on SEC Regulation S-X, Rules 3-05 and 3-09 (and related requirements), the new proposed rule does not address potential changes to these rules. The SEC has indicated that proposed amendments to Rules 3-05 and 3-09 may be issued in the future. For more information about such potential proposals, see the Disclosure Effectiveness Initiative section below. For more information about the application of Rules 3-05 and 3-09, see Deloitte’s A Roadmap to SEC Reporting Considerations for Business Combinations and A Roadmap to SEC Reporting Considerations for Equity Method Investees.
View the rest of the Heads Up.