The amended rules center on the provision of material that is relevant and useful in investment decisions regarding guarantees and other credit enhancements. The rules also eliminate the prescriptive requirements that have imposed unnecessary burdens and incentivized issuers of securities with guarantees and other credit enhancements to offer and sell those securities on an unregistered basis. The result should be improving disclosure and reducing the SEC registration-related compliance burdens for issuers, which includes eliminating the time once needed to collect information that is now not required. Protections for investors that would otherwise not be present in an unregistered offering can also be applied in these situations.

Specifically, the SEC voted to adopt amendments to financial disclosure requirements for guarantors and issuers of guaranteed securities registered or being registered under Rule 3-10 of Regulation S-X. Also included are affiliates whose securities collateralize securities registered or being registered under Rule 3-16 of Regulation S-X. Rule 3-10 will be altered and partly relocated to new Rule 13-01. Rule 3-16 will be replaced with requirements in new Rule 13-02. New Rules 13-01 and 13-02 will comprise new Article 13 in Regulation S-X.

As they are written, Rules 3-10 and 3-16 both affect disclosures made in connection with registered debt offerings and subsequent periodic reporting. In general, the amendments are intended to:

• Improve the rules by requiring disclosures focus on the information that is material given the specific facts and circumstances and by making the disclosures easier to understand


• Reduce compliance costs for registrants and encourage potential issuers to offer guaranteed or collateralized securities on a registered basis, which would afford investors protections not typically provided in offerings conducted on an unregistered basis


• Facilitate, through lower costs and burdens, issuers’ flexibility to include guarantees or pledges of affiliate securities as collateral when they structure debt offerings, which may then increase the number of registered offerings that include these credit enhancements and result in a lower cost of capital and an increased level of investor protection

Rule 3-10

Rule 3-10 currently requires financial statements to be filed for all issuers and guarantors of securities that are registered or being registered. It also provides several exceptions to that requirement, such as those available for individual subsidiaries of a parent company when certain conditions are met, including that the parent company provides certain disclosures in its consolidated financial statements. If those conditions are met, disclosures may omit separate financial statements of each qualifying subsidiary issuer and guarantor.

Under the new amendments, Rule 3-10 will continue to permit this omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about these topics. The new rule will provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements as Rule 3-10 currently does. New Rule 13-01 does have accompanying amended disclosure requirements, which:

• Replace the condition that a subsidiary issuer or guarantor be completely (100%) owned by the parent company with a new condition that it be consolidated in the parent company’s consolidated financial statements.


• Replace condensed consolidating financial information (specified in existing Rule 3-10) with certain new financial and non-financial disclosures. The amended financial disclosures will be comprised of summarized financial information (defined in Rule 1-02(bb)(1) of Regulation S-X) of the issuers and guarantors. This information may be presented on a combined basis and reduce the number of periods presented. Among other matters, the amended non-financial disclosures will expand the qualitative disclosures about the guarantees, the issuers, and guarantors. Disclosure of additional information about each guarantor will still be required if it would be material for investors to evaluate the sufficiency of the guarantee.


• Permit the amended disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings.


• Require the amended financial and non-financial disclosures for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities. This is in contrast to current guidelines which require disclosure for as long as the guaranteed securities are outstanding.

Rule 3-16

Rule 3-16 currently requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, which is based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant.

The disclosure requirements in this rule will be replaced with amended disclosure requirements in new Rule 13-02. Among other things, the amendments will:

• Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and non-financial disclosures about the affiliate(s) and the collateral arrangement. This will be a supplement to the consolidated financial statements of the registrant that issues the collateralized security. The registrant will be permitted to provide the amended financial and non-financial disclosures outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings.


• 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.

Existing Rule 3-16 will remain in place for transitional purposes.

These amendments will become effective on January 4th, 2021. Voluntary compliance with them will be accepted in advance of this date.

Sources:

SEC Amends Rules to Improve Disclosure and Encourage Issuers to Conduct Debt Offerings on a Registered Basis (www.sec.gov)

Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (www.sec.gov)