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 security must have one of 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’s own ongoing reporting requirements.

Example 2-1

Registrant 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 debt securities that are guaranteed by A. Registrant A qualifies for the parent company condition because it (1) is a guarantor of the securities, (2) is an Exchange Act reporting company, and (3) files consolidated financial statements.

Example 2-2

Assume the same facts as in the example above, except that Registrant 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 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 guarantor or subsidiary issuer 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 instruments were often issued by special-purpose entities sponsored and guaranteed by a bank holding company. While such entities are 100 percent owned by bank holding companies, they may not be consolidated in accordance with ASC 810. On November 10, 2020, the SEC staff released a no-action letter stating that issuers of certain trust-preferred securities may continue to omit their separate financial statements despite failing to meet the consolidated subsidiary condition as long as certain specific criteria are met. See paragraph 2520.4 of the SEC Financial Reporting Manual (FRM) for more information.

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 imply that the obligation must be fixed. Floating, adjustable, or indexed 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 the 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) securities, and any guarantees are provided by one or more consolidated subsidiaries.
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.

The first eligible structure is one in which the parent company issues or co-issues a debt security with one or more consolidated subsidiaries. Any co-issuance must be on a joint and several basis (as described further below). Often, one or more consolidated subsidiaries may guarantee the debt security.

Example 2-3

Registrant A, an Exchange Act reporting company, issues 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 debt securities guaranteed by consolidated subsidiaries.

Example 2-4

Registrant A, an Exchange Act reporting company, co-issues debt securities with consolidated Subsidiary B 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.

Example 2-5

Registrant A, an Exchange Act reporting company, co-issues debt securities with consolidated Subsidiary B on a joint and several basis, and such securities are guaranteed by consolidated Subsidiary C. This structure qualifies for alternative disclosure under Rule 3-10 because the parent company is co-issuing debt securities with a consolidated subsidiary and the debt securities are guaranteed by a consolidated subsidiary.

The second eligible structure is one in which a consolidated subsidiary of the parent company issues a 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 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.

Example 2-6

Issuer B, an equity method investee of Registrant A, an Exchange Act reporting company, issues debt securities that are fully and unconditionally guaranteed by A. This structure does not qualify for alternative disclosure under Rule 3-10 because the issuer is not a consolidated subsidiary of the parent company.

Example 2-7

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

Example 2-8

Issuer B and Issuer C, which are both consolidated subsidiaries of Registrant A, an Exchange Act reporting company, co-issue debt securities that are fully and unconditionally guaranteed by A. This structure qualifies for alternative disclosure under Rule 3-10 because the issuers are consolidated subsidiaries of the parent company and the parent company has fully and unconditionally guaranteed the securities.

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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.