SEC Proposes to Simplify and Streamline Disclosures for Registered Debt Offerings

SEC Proposes to Simplify and Streamline Disclosures for Registered Debt Offerings

In late July, the SEC proposed rule amendments to simplify and streamline the financial disclosures required in and subsequent to registered debt offerings. The proposal would amend Rule 3-10 of Regulation S-X applicable to guarantors and issuers of guaranteed securities and Rule 3-16 of Regulation S-X applicable to affiliates whose securities collateralize a registrant’s securities. The proposal follows the SEC’s Request for Comment on the Effectiveness of Financial Disclosures about Entities Other Than the Registrant[1] published in September 2015. The proposed changes are intended to better align the financial reporting requirements with the needs of investors by providing them with information that is material and easier to understand. They are also intended to reduce the costs and burdens to registrants, thereby encouraging them to conduct more offerings on a registered basis.


Rules 3-10 and 3-16 affect disclosures made in connection with registered debt offerings and subsequent periodic reporting.
Rule 3-10(a) states the general rule that every issuer of a registered security that is guaranteed[2] and every guarantor of a registered security must file the financial statements required for a registrant by Regulation S-X. The rule also sets forth five exceptions to this general rule. Each exception specifies conditions that must be met. If the conditions are met, separate financial statements of each qualifying subsidiary issuer and guarantor may be omitted, but the parent company must provide certain “Alternative Disclosures.”
The form and content of the Alternative Disclosures are determined based on the facts and circumstances and can range from a brief narrative to highly-detailed condensed consolidating financial information.
Subsidiary issuers and guarantors that are permitted to omit their separate financial statements under Rule 3-10 are also automatically exempt from Exchange Act reporting under Exchange Act Rule 12h-5. The parent company, however, must continue to provide the Alternative Disclosures for as long as the guaranteed securities are outstanding.
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.  Although affiliates whose securities are pledged as collateral are not registrants with respect to the collateralized security and are not generally subject to the related reporting requirements, existing Rule 3-16 requires financial statements as if the affiliates were registrants.

Summary of Proposed Amendments

Following is a summary of the significant proposed changes. The proposing release can be found here on the SEC’s website. Comments should be provided within 60 days following publication of the release in the Federal Register.
Rule 3-10
The proposed amendments would continue to follow the approach of permitting issuers to omit separate financial statements of subsidiary issuers and guarantors when certain conditions are met. However the conditions and the required Alternative Disclosures would change. The proposed amendments would:

  • Require disclosure of any quantitative or qualitative information that would be material to making an investment decision with respect to the guaranteed security.

  • Amend the condition that each subsidiary issuer or guarantor must be 100% owned by the parent company to omit its separate financial statements. The proposed rule would require that the subsidiary issuer or guarantor be a consolidated subsidiary of the parent company pursuant to the relevant accounting standards.

  • Require summarized financial information for the issuers and guarantors, which may be presented on a combined basis.[3] The summarized financial information would be required for only the latest year and subsequent interim period. This would replace the current requirement to provide condensed consolidating financial information for all periods presented in the consolidated financial statements.

  • Require expanded qualitative disclosures about the guarantees and the issuers and guarantors.

  • Permit the Alternative Disclosures to be provided outside the footnotes to the financial statements (such as in in MD&A) in the registration statement covering the offer and sale of the subject securities and any related prospectus as well as in Exchange Act reports required to be filed shortly thereafter. Subsequently, the Alternative Disclosures would need to be provided in footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements.

  • Permit a registrant to stop providing the Alternative Disclosures when the issuers and guarantors no longer have an Exchange Act reporting obligation with respect to the guaranteed securities, rather than requiring them for as long as the guaranteed securities are outstanding.

Rule 3-16
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. The financial disclosures would consist of summarized financial information similar to that to be provided by issuers and guarantors of guaranteed securities discussed above.


[1] Further information regarding the Request for Comment can be found here in our Flash Report. Our comment letter can be found here.
[2] A guarantee of a debt or debt-like security (“debt security”) is a separate security under the Securities Act and, as a result, offers and sales of these guarantees must be either registered or exempt from registration. If the offer and sale is registered, the issuer of the debt security and the guarantor must each file its own audited annual and unaudited interim financial statements required by Regulation S-X. Additionally, the offer and sale of the securities pursuant to a Securities Act registration statement causes the issuer and guarantor to become subject to reporting under Section 15(d) of the Exchange Act. Reporting under Section 15(d) requires filing periodic reports that include audited annual and unaudited interim financial statements for at least the fiscal year in which the related Securities Act registration statement became effective.
[3] The summarized financial information required would be that defined in Rule 1-02(bb) of Regulation S-X. This rule defines summarized financial information as “the presentation of summarized information as to the assets, liabilities and results of operations of the entity for which the information is required. Summarized financial information shall include the following disclosures:
           i. Current assets, noncurrent assets, current liabilities, noncurrent liabilities, and, when applicable, redeemable preferred stocks and noncontrolling interests (for specialized industries in which classified balance sheets are normally not presented, information shall be provided as to the nature and amount of the majority components of assets and liabilities);

           ii. Net sales or gross revenues, gross profit (or, alternatively, costs and expenses applicable to net sales or gross revenues), income or loss from continuing operations before extraordinary items and cumulative effect of a change in accounting principle, net income or loss, and net income or loss attributable to the entity (for specialized industries, other information may be substituted for sales and related costs and expenses if necessary for a more meaningful presentation).”