Chapter 2 — Guaranteed Debt Securities Registered or Being Registered

2.2 Eligibility Conditions for Providing Alternative Disclosures

Rule 3-10 allows registrants to provide alternative disclosures, as outlined in Rule 13-01, in lieu of separate financial statements of subsidiary issuers and guarantors if the following eligibility conditions are met:

The security must be issued or guaranteed by a parent company.
All issuers and guarantors must be consolidated subsidiaries of the parent company.
The security must be “debt or debt-like.“
The issuer and guarantor structure must match one of the two eligible structures.

The eligibility conditions are discussed in greater detail below; the content of the alternative disclosures is discussed in Section 2.3.

2.2.1 Parent Company Financial Statements Condition

As a starting point for eligibility, the parent company must (1) be an issuer or guarantor of the debt security, (2) be an Exchange Act reporting company or be in the process of filing a registration statement under the Securities Act, and (3) have filed consolidated financial statements. The alternative disclosures outlined in Rule 13-01 are predicated on the understanding that investors in guaranteed debt securities rely primarily on the consolidated financial statements of the parent company in making investment decisions; therefore, these conditions ensure that the parent company will be providing consolidated financial statements in accordance with the Exchange Act as part of the parent company’s own ongoing reporting requirements.

Example 2-1

Company A is an Exchange Act reporting company that files consolidated financial statements on Forms 10-K and 10-Q. Issuer B, a subsidiary of A, issues registered debt securities that are guaranteed by A. Company A meets the parent company condition because it (1) is a guarantor of the debt securities, (2) is an Exchange Act reporting company, and (3) files consolidated financial statements.

Example 2-2

Assume the same facts as in Example 2-1, except that Company A does not guarantee the debt securities of Issuer B. In this case, the parent company condition is not met and B may not rely on the alternative disclosures outlined in Rule 13-01.

2.2.2 Consolidated Subsidiary Condition

Another condition under Rule 3-10 is that the subsidiary issuer(s) or guarantor(s) must be a consolidated subsidiary of the parent company under the relevant accounting standards. In making this assessment, domestic registrants should consider ASC 810. If ASC 810 requires the parent company to consolidate the issuer or guarantor, the consolidated subsidiary condition is met. Whether a guarantor or issuer is consolidated depends solely on the requirements of ASC 810 and not the legal form or ownership interest. For example, issuers and guarantors need not be 100 percent owned by the parent company and may have noncontrolling interests. Alternatively, there may be circumstances in which a company that is 100 percent owned is not consolidated (e.g., the subsidiary is in bankruptcy or subject to foreign exchange restrictions). The consolidated subsidiary condition is important because the alternative disclosures outlined in Rule 13-01 are predicated on the understanding that investors in guaranteed debt securities rely primarily on the consolidated financial statements of the parent company in making investment decisions. If a subsidiary issuer or subsidiary guarantor is not consolidated into the parent company’s financial statements, such financial statements may be less relevant to the evaluation of the guarantee.

The SEC has granted a limited grandfather exception to the consolidated subsidiary condition for trust-preferred securities issued and outstanding before March 2, 2020. These trust-preferred securities are often issued by special-purpose entities, typically statutory trusts, that are sponsored and guaranteed by a bank holding company. While such special-purpose entities are 100 percent owned by bank holding companies, they may not be consolidated in accordance with ASC 810. The SEC’s November 10, 2020, no-action letter stated that the SEC’s Division of Corporation Finance will not recommend enforcement action to the SEC if issuers of certain trust-preferred securities continue to omit separate financial statements of the special-purpose entities after the recent amendments to Rule 3-10 become effective. See paragraph 2520.4 of the SEC Financial Reporting Manual (FRM) for more information.

Example 2-3
Issuer B, an equity method investee of Company A, an Exchange Act reporting company, issues registered debt securities that are fully and unconditionally guaranteed by A. This structure is not one of the eligible issuer and guarantor structures under Rule 3-10 because the issuer is not a consolidated subsidiary of the parent company.

2.2.3 Debt or Debt-Like Condition

Under Rule 3-10, the guaranteed security must also be debt or debt-like. The substance, rather than the form, of a security’s obligation determines whether it is debt or debt-like. This condition is met if the guaranteed security has the following characteristics:

(i) The issuer has a contractual obligation to pay a fixed sum at a fixed time; and

(ii) Where the obligation to make such payments is cumulative, a set amount of interest must be paid.

The term “set amount of interest” is not intended to mean “fixed amount of interest.” Floating rate, adjustable rate, or indexed rate securities will meet that condition as long as the amount of interest can be calculated on the basis of objective measures (e.g., the secured overnight financing rate) or other factors that are not determined by the issuer. In addition to fixed and variable-rate debt, other securities similar to debt may also qualify as being debt or debt-like (e.g., preferred securities that have payments terms substantially the same as debt). The determination of whether a security is debt or debt-like under Rule 3-10 may differ from the determination of whether the security should be classified as debt or equity in accordance with U.S. GAAP. Since this is a legal determination, a company should consider consulting with SEC legal counsel to determine whether securities are debt or debt-like.

2.2.4 Eligible Issuer and Guarantor Structures Condition

Finally, Rule 3-10 requires an issuer and guarantor structure to meet one of the following eligibility requirements:

The parent company issues or co-issues (on a joint and several basis with one or more of its consolidated subsidiaries) the securities. One or more consolidated subsidiaries may guarantee the debt security.
A consolidated subsidiary issues or co-issues (with one or more other consolidated subsidiaries of the parent company) the securities, and the securities are fully and unconditionally guaranteed by the parent company.

Overall, the option to provide disclosures in lieu of separate subsidiary issuer and guarantor financial statements would only be available when the parent company’s obligation is full and unconditional. Thus, under Rule 3-10, the parent company’s role as issuer, co-issuer, or full and unconditional guarantor with respect to the guaranteed debt security would determine whether the issuer and guarantor structure is eligible.

The first eligible structure can take one of two forms. In most instances, the parent company issues a debt security that is guaranteed by one or more consolidated subsidiaries; in other situations, the parent company co-issues a debt security with one or more consolidated subsidiaries, and other consolidated subsidiaries may guarantee the debt. This structure does not involve a guarantee by the parent company because the parent company issues or co-issues the debt security. However, all co-issuers must be consolidated subsidiaries that are jointly and severally liable under the security. Thus, this structure would obligate the parent company and its subsidiary co-issuer(s) to all the legal responsibilities of an issuer, including making scheduled payments on the security in full when they become due.

Example 2-4

Company A, an Exchange Act reporting company, issues registered debt securities guaranteed by three of its consolidated subsidiaries. This structure qualifies for alternative disclosure under Rule 3-10 because the parent company is issuing registered debt securities guaranteed by consolidated subsidiaries.

Example 2-5

Company A, an Exchange Act reporting company, co-issues registered debt securities with consolidated Subsidiary B on a joint and several basis. This structure qualifies for alternative disclosure under Rule 3-10 because the parent company co-issued debt with a consolidated subsidiary on a joint and several basis. Subsequently, B files for bankruptcy and A determines that it should no longer consolidate B. Upon bankruptcy, this structure no longer qualifies for alternative disclosure under Rule 3-10 because the parent company no longer consolidates the co-issuer of the debt security.

Example 2-6

Company A, an Exchange Act reporting company, co-issues registered debt securities with consolidated Subsidiary B on a joint and several basis, and such securities are guaranteed by consolidated Subsidiary C. Both B and C are eligible for alternative disclosure under Rule 3-10 because the parent company is co-issuing the debt securities with a consolidated subsidiary on a joint and several basis (in the case of B) and the guarantee provided is from a consolidated subsidiary (in the case of C).

The second eligible structure is one in which a consolidated subsidiary of the parent company issues a registered debt security guaranteed by the parent company on a full and unconditional basis. The debt security may also be guaranteed by other consolidated subsidiaries of the parent company; the guarantees by such subsidiaries may be, but are not required to be, full and unconditional. (Note that a guarantee is full and unconditional if (1) the guarantor has an immediate obligation to make a scheduled payment that the issuer of the guaranteed debt security fails to make and (2) investors in the guaranteed debt security could bring legal action against the guarantor for payment of all amounts due.) In this structure, another consolidated subsidiary of the parent company may also be a co-issuer. However, unlike the requirements for the first eligible structure, co-issuances do not need to be on a joint and several basis.

Example 2-7

Issuer B and Issuer C, which are both consolidated subsidiaries of Company A, an Exchange Act reporting company, co-issue registered debt securities that are fully and unconditionally guaranteed by A. This is an eligible structure under Rule 3-10 because the issuers are consolidated subsidiaries of the parent company and the parent company has fully and unconditionally guaranteed the debt securities. The co-issuance by B and C does not need to be joint and several.

Example 2-8

Issuer B, which is a consolidated subsidiary of Company A, an Exchange Act reporting company, issues registered debt securities that are fully and unconditionally guaranteed by A and also guaranteed by three other consolidated subsidiaries of A. Issuer B is eligible for alternative disclosure under Rule 3-10 because (1) it is a consolidated subsidiary of the parent company and (2) the parent company has fully and unconditionally guaranteed the debt securities. In addition, the other remaining guarantors are eligible for alternative disclosure under Rule 3-10 because they are consolidated subsidiaries.

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.