SEC Adopts Rules to Simplify and Streamline Disclosures for Registered Debt Offerings

May 2020

On March 2, 2020, the SEC adopted amendments to simplify and streamline the financial disclosures required by Rules 3-10 and 3-16 of Regulation S-X in registered debt offerings and periodic reports thereafter.  The final rules retain many aspects of the proposed amendments from July 2018.1  Overall, the 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; and
  • Reduce the costs and burdens to registrants, thereby encouraging them to conduct more offerings on a registered basis.
The amendments are effective on January 4, 2021.  However, registrants may voluntarily apply the amendments to registration statements and periodic reports before that date. 
 
Key Aspects of the Amendments:
 
Rule 3-10 of Regulation S-X (applicable to guarantors and issuers of guaranteed securities) is partly relocated to new S-X Rule 13-01. The amendments continue to allow issuers to omit separate financial statements of subsidiary issuers and guarantors when certain conditions are met, and:
  • Amend the condition that requires each subsidiary issuer or guarantor to be 100% owned by the parent company in order to omit its separate financial statements. Under S-X Rule 13-01, the subsidiary issuer or guarantor is only required to be consolidated in the parent company’s consolidated financial statements.
  • Replaces the current requirement to present condensed consolidating financial information for all periods presented in the consolidated financial statements. Under S-X Rule 13-01, summarized financial information2 will be required for issuers and guarantors (which may be presented on a combined basis) for the most recently completed fiscal year and subsequent year-to-date interim period included in the parent company’s consolidated financial statements.
  • Require expanded qualitative disclosures about the issuers and guarantors, the terms and conditions of the guarantees and how the issuer and guarantor structure and other factors may affect payments to holders of the guaranteed securities.
  • Require disclosure of information about each guarantor that would be material for investors to evaluate the sufficiency of the guarantee (consistent with existing disclosure requirements).
  • Permit registrants to provide the amended disclosures outside of the parent company’s annual and interim financial statements (meaning such disclosures would not be subject to audit or review procedures) in management’s discussion and analysis (MD&A). If the disclosures are not made in MD&A or voluntarily within the financial statements, they must be presented in a prospectus immediately following “Risk Factors,” if any, or immediately following pricing information described in Item 105 of Regulation S-K.
  • Permit a registrant to stop providing the financial and non-financial 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.
 
S-X Rule 3-16 (applicable to affiliates whose securities collateralize a registrant’s securities) is replaced with the requirements in new S-X Rule 13-02.  The amendments:
 
  • 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 (disclosures which are permitted to be presented outside the financial statements).
  • 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.
 
The amendments to Rules 3-10, 13-01, 3-16 and 13-02 of Regulation S-X are also applicable to financial statements for a subsidiary of a smaller reporting company (SRC) that issues securities guaranteed by that SRC or if an SRC’s securities that are registered or being registered are collateralized by the securities of the SRC’s affiliates. The amended requirements under Rule 3-10 and new 13-01 of Regulation S-X also apply to asset-backed securities under Regulation S-K.
  
Refer to the Appendix for a comparison of the current and amended requirements under Rules 3-10 and 3-16.
 

Contacts

 
Tim Kviz
National Assurance Managing Partner
 
Paula Hamric
National Assurance Partner 
 
   
Sheri Fabian
National Assurance Partner
 
 

Appendix

The following table compares the current requirements under Rules 3-10 and 3-16 to the new requirements:
 
Financial statements of guarantors and issuers of guaranteed securities registered or being registered
  Current requirement (Rule 3-10 of Regulation S-X) Amended requirement (Rules 3-10 and 13-01 of Regulation S-X)
General rule Every issuer of registered security that is guaranteed and every guarantor of registered security must file financial statements required by Regulation S-X
 
Similar but requirements not expressly stated
Exceptions to general rule3 Omit separate financial statements of subsidiary issuers and guarantors under certain conditions (see below) and condensed consolidating financial information (alternative disclosures) provided in parent filing4
 
Similar except parent provides revised alternative disclosures
Eligibility
  • Finance or operating subsidiary issuer of securities guaranteed by parent
  • Subsidiary issuer of securities guaranteed by parent and one or more other subsidiaries of parent
  • Parent issues securities guaranteed by one or more of its subsidiaries
  • Parent issues/co-issues security jointly and severally with one or more of consolidated subsidiaries5, or
  • Consolidated subsidiary issues/co-issues security with one or more consolidated subsidiaries of parent that is guaranteed fully and unconditionally by parent
Conditions to omit financial statements of subsidiary issuers/guarantors6 Met eligibility above and7:
  • Consolidated financial statements of parent filed8
  • Each subsidiary issuer/guarantor 100% owned by parent
  • Each guarantee is full and unconditional or if multiple guarantors, joint and several9
  • Parent provides alternative disclosures in its financial statement notes10
  • Guaranteed security is debt or debt-like11
Met eligibility above and12:
  • Consolidated financial statements of parent filed13
  • Subsidiary issuer/guarantor is consolidated by parent
  • Issuer/guarantor structure meets those in Rule 3-10(a)(1)(i) or (ii) of Regulation S-X (See Eligibility)
  • Parent provides revised alternative disclosures, and
  • Guaranteed security is debt or debt-like (characteristics are similar to Rule 3-10 of Regulation S-X)
 
Parent definition Met all the following:
  • Issuer/guarantor of subject securities
  • Exchange Act reporting company (or will be one), and
  • Owns 100% of each subsidiary issuer/guarantor directly/indirectly
 
 
  • Similar to previous requirements except parent consolidates each subsidiary issuer/guarantor rather than required to own 100%
Alternative or Revised alternative disclosures -general If eligibility and other requirements above are met to omit separate financial statements of subsidiary issuer/guarantor, parent must provide alternative disclosures in notes to its financial statements, either brief narrative or consolidated information when:
  • Finance subsidiary and parent is only guarantor of securities
  • Parent of subsidiary issuer has no independent assets or operations, parent guarantees the securities, no subsidiary of parent guarantees the securities and any subsidiaries of parent other than issuer are minor and
  • Parent issuer has no independent assets or operations and all of parent subsidiaries, other than minor subsidiaries, guarantee the securities
Summarized financial information14 of each issuer/guarantor consolidated in parent financial statements presented on combined basis with summarized financial information of parent15:
  • Intercompany balances and transactions between issuers/guarantors whose financial information is presented on combined bases eliminated
  • Summarized financial information must exclude subsidiaries that are not issuers/guarantors even if otherwise consolidated.16 Amounts due to/from and transactions with subsidiaries that are not issuers/guarantors and related parties are presented on separate lines.
  • Information provided in accordance with above applicable to one or more but not all subsidiaries, separate disclosure of summarized financial information for applicable issuers/guarantors presented17
 
Alternative and revised alternative disclosures - Periods to be presented As of and for the same periods as the parent under Rule 3-10(i)(2) of Regulation S-X As of and for the year ended and year to date interim period included in parent consolidated financial statements
Alternative and revised alternative disclosures – non-financial disclosures and exhibit Disclose:
  • If true, that each subsidiary issuer/guarantor is 100% owned by parent, all guarantees full and unconditional or joint and several, as applicable
  • Restricted net assets per Rule 3-10(i)(10) of Regulation S-X, and
  • Certain types of restrictions on ability of parent or any guarantor to obtain funds from their subsidiaries
  • Any financial and narrative information about each guarantor if material for investors to evaluate sufficiency of guarantee and so financial information presented is not misleading
 
Disclose, if material:
  • Information about issuers/guarantors
  • How issuer/guarantor structure and other factors may affect payments to holder of guaranteed securities
  • Facts and circumstances specific to issuers/guarantors beyond what is already disclosed
 
New Exhibit 22 – list each subsidiary that is guarantor, issuer or co-issuer of securities registered or being registered that parent issues, co-issues or guarantees
Alternative and revised alternative disclosures – location and audit requirements Include in notes to parent consolidated financial statements.  Information to be audited for same periods as parent company financial statements
 
Include in notes to parent consolidated financial statements (required to be audited) or in MD&A (not required to be audited)18
Foreign private issuers Foreign private issuers – When required to comply with Rule 3-10 or 3-02 of Regulation S-X, the provision of financial statements for the periods in Item 8.A of Form 20-F is permissible Rule 3-10 of Regulation S-X applies to the financial statements of a subsidiary of a parent that is a foreign private issuer and that issues securities guaranteed by the parent
 
Recently acquired subsidiary issuers/guarantors Include in registration statement of parent one year of audited financial statements for any subsidiary issuer/guarantor based on criteria outlined in Rule 3-10(g) of Regulation S-X Requires pre-acquisition summarized financial information19 in registration statement of parent filed in connection with the offer or sale of the guaranteed security if significant business20 acquired and the subsidiary and/or one or more of its subsidiaries are obligated as issuers/guarantors 
 
 
 
 
Financial statements of affiliates21whose securities collateralize an issue registered or to be registered
  Current requirement (Rule 3-16 of Regulation S-X) Amended requirement (Rule 13-02 of Regulation S-X)
Financial statements and financial disclosure requirements Registrant to provide separate annual and interim financial statements22 for each affiliate whose securities are a substantial portion (see below) of collateral, based on a numerical threshold, for any class of registered securities as if the affiliate is a separate registrant
For each security collateralized by security of registrant’s affiliate or affiliate, disclose if material:
  • Description of securities pledged and affiliates whose securities are pledged as collateral
  • Description of terms and conditions of collateral arrangement
  • Description of trading market for affiliate’s security pledged as collateral or if no market23
  • For each affiliate whose securities are pledged as collateral, provide summarized financial information24 as required by Rule 13-02(a)(4) of Regulation S-X
 
Include Exhibit 2225 that lists each affiliates whose securities are pledged as collateral for securities registered or being registered along with securities pledged as collateral
Periods to be presented Financial statements required for periods under Rules 3-01 and 3-02 of Regulation S-X, not required in quarterly reports As of and for the most recently ended fiscal year and year-to-date interim period included in registrant’s consolidated financial statements, including quarterly reports
 
Location and Audit requirement Financial statements required to be audited for periods required under Rules 3-01 and 3-02 of Regulation S-X Include in notes to parent consolidated financial statements (required to be audited) or in MD&A (not required to be audited)26
 
Substantial portion definition Aggregate of greater of principal amount, par value, book value or market value of securities as carried by registrant equals 20 percent or more of principal amount of secured class of securities Include material disclosures required in Rule 13-02(a) of Regulation S-X and disclose any financial or narrative information about each affiliate if information is material to investors to evaluate pledge of affiliates’ securities as collateral27 and sufficient information to make financial and non-financial information not misleading28
 
Recently acquired affiliates whose securities are pledge as collateral No specific requirement to provide pre-acquisition financial information unless substantial portion test met Provide pre-acquisition summarized financial information in Securities Act registration statement if significant business29 acquired after date of its most recent balance sheet included in consolidated financial statements
 
Collateral release provisions Debt arrangements often allow for release of affiliate securities pledged as collateral if disclosure requirements under Rule 3-16 of Regulation S-X are triggered Amend Rule 3-16 of Regulation S-X to apply to each registered security issued and outstanding before January 4, 2021 and where registrant has not previously met requirement to provide financial statements
 
 
 
1 Refer to our BDO Alert for a summary of the proposal and background on S-X Rule 3-10 and 3-16.
The required summarized financial information is defined in S-X Rule 1-02(bb).  
3 When financial statements of parent are required to be filed, substitution of the financial statements of an entity that is not an issuer or guarantor of the registered security are not permitted
4 In all instances except a finance subsidiary issuer of securities guaranteed by its parent, the notes to parent financial statements include condensed consolidating financial information for the same period presented by the parent and include separate columns for the parent, subsidiary issuer, any other subsidiaries of parent on a combined basis, consolidating adjustments and the total consolidated amounts. Brief narrative permitted instead, under certain conditions.
5 If not, disclose term and conditions as per Rule 13-01(a)(2) of Regulation S-X
6 Subsidiary issuer/guarantor that may omit separate financial statements are also exempt from Exchange Act reporting under Rule 12h-5
7 Parent must continue to provide alternative disclosures for as long as guaranteed securities are outstanding, even if subsidiary issuer/guarantor could have suspended their reporting obligations under Exchange Act Rule 12h-3 or Section 15(d) of the Exchange Act                   
Based on Rule 3-01 and 3-02 of Regulation S-X
Regardless of whether guarantor is parent or subsidiary
10 Based on the criteria in Rule 3-10(i) of Regulation S-X
11 Characteristics include issuer has contractual obligation to pay a fixed amount at a fixed time and where obligation to make payment is cumulative, a set amount of interest must be paid
12 Parent may cease to provide revised alternative disclosures if subsidiary issuer/guarantor’s reporting obligations under Exchange Act Rule 15(d) is suspended automatically under Exchange Act Rule 15(d)(1) or compliance with Exchange Act rule 12h-3
13 Describe factors that impact payments to holders of guaranteed securities such as rights of non-controlling interest holder
14 In accordance with Rule 1-02(bb)(1) of Regulation S-X. Summarized financial information if certain conditions in 13-01(a)(4)(vi) apply, unless separate disclosure of summarized financial information is applicable to one or more, but not all, issuers/guarantors as noted above
15 Separate disclosure of financial information of non-guarantor subsidiaries no longer required
16 Issuer/guarantor investment in subsidiary that is not issuer/guarantor must not be presented
17 Narrative disclosure may be provided rather than summarized financial information if certain conditions apply
18 If revised alternative disclosures are not provided in MD&A, required to be provided following “Risk Factors” or if none, following pricing information in Item 105 of Regulation S-X
19 See Rule 13-01(a)(4) of Regulation S-X
20 See Rule 1-02(w) of Regulation S-X, substituting 20 percent for 10 percent based on a comparison of the most recent annual financial statements of the acquired business and parent
21 Defined in Rule 1-02(b) of Regulation S-X
22Financial statements required would be those as if affiliate were a separate registrant
23 When applicable to one or more but not all affiliates, separate disclosure applicable to those affiliates required
24 Balance sheet and income statement line items and accompanying notes that describe basis of presentation in accordance with Rule 1-02(bb)(1) of Regulation S-X and additional line items to comply with Rules 13-02(a)(6) and (7) of Regulation S-X as of and for the most recently ended fiscal year and year-to-date interim period included in parent’s consolidated financial statements
25 See Item 601(b)(22) of Regulation S-K
26 If revised alternative disclosures are not provided in MD&A, required to be provided following “Risk Factors” or if none, following pricing information in Item 105 of Regulation S-X
27 Rule 13-02(a)(6) of Regulation S-X
28 Rule 13-02(a)(7) of Regulation S-X
29 Based on Rule 11-01(d) of Regulation S-X