Chapter 1 — Introduction
Debt or debt-like securities (see Section 2.2.3) that are issued by a registrant
(specifically, a parent company that meets the conditions discussed in
Section 2.2.1) and registered under the Securities Act of
1933 (the “Securities Act”) may be guaranteed by one or more consolidated
subsidiaries. In other cases, debt or debt-like securities may be co-issued by a
registrant and one or more of its consolidated subsidiaries. If the issuer fails to
make a payment on the debt or debt-like securities, the co-issuers or guarantors may
be obliged to make the payment. Under the Securities Act, guarantees of registered
debt or debt-like securities are considered securities themselves. As a result, both
the guaranteed debt or debt-like securities and the guarantees of those debt or
debt-like securities must be registered with the SEC unless they are exempt from
registration. Further, a registrant may pledge the securities of one or more
affiliates (which, in practice, are primarily equity securities) as collateral for
securities registered under the Securities Act (the “collateralized securities”). In
the event of a default, the holder of the collateralized securities may enforce the
collateral provisions and consequently become a holder of the affiliate’s
securities.
To ensure that investors receive relevant financial information
about (1) the issuer(s) and guarantor(s) of registered guaranteed debt or debt-like
securities and (2) affiliates whose securities collateralize registered securities,
Regulation S-X requires registrants to disclose certain information about those
entities and the related arrangements. However, although registration of guaranteed
debt or debt-like securities under the Securities Act can result in requirements for
both the issuer(s) of the guaranteed debt or debt-like security and the guarantor(s)
of the debt or debt-like security to file periodic reports (e.g., Forms 10-K and
10-Q) in accordance with Section 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”), Regulation S-X has provided relief from these requirements for the
subsidiary issuer(s) and guarantor(s) by allowing registrants to provide alternative
nonfinancial disclosures and alternative financial disclosures (collectively,
“alternative disclosures”) in lieu of such separate financial statements when
certain criteria have been met. In addition, Regulation S-X requires registrants to
provide certain financial and nonfinancial information about (1) affiliates whose
securities collateralize the registered securities and (2) the related collateral
arrangements. These requirements are based on the premise that investors in
guaranteed debt or debt-like securities and collateralized securities rely on the
consolidated financial statements of the registrant as their primary source of
financial information.
While Regulation
S-X, Rule 3-10, outlines the conditions that must be met for a
registrant to qualify for alternative disclosures (see Section
2.3), the specific disclosure requirements are set forth in Regulation S-X, Rule 13-01,
which requires the registrant to provide summarized financial information and other
narrative disclosures, to the extent material, of each guarantor and issuer of
guaranteed debt or debt-like securities and the related arrangements. Similarly,
Regulation S-X, Rule
13-02, requires the registrant to provide summarized financial
information and other narrative disclosures, to the extent material, of (1) each
affiliate whose securities collateralize the securities that are registered or being
registered and (2) the related collateral arrangements.
Note that if a registered security or security being registered
contains both a guarantee by one or more subsidiaries and a pledge of affiliates’
securities, the registrant must consider the disclosure requirements in both Rules
13-01 and 13-02 because (1) the guarantee and pledge constitute separate credit
enhancements and (2) the disclosure requirements for each may be different. As a
result, the alternative disclosures required for compliance with Rule 13-01 may
differ from those required by Rule 13-02, even if the affiliates whose securities
are pledged as collateral and the subsidiaries that guarantee the security are the
same entities.