3.1 Overview
In certain offerings under the Securities Act, the securities of an
issuer may be collateralized (hereafter referred to as “collateralized securities”)
with the securities of one or more of its affiliates.1 Generally, an issuer collateralizes its securities with those of its
consolidated subsidiaries; however, in some circumstances an issuer may
collateralize its securities with those of an unconsolidated affiliate as well.
References to affiliates in this chapter refer to both consolidated subsidiaries and
unconsolidated affiliates. In addition, in practice, the issuer of a debt security
would generally pledge the equity security of its affiliate as collateral.
Collateral is typically defined as a borrower’s pledge of an asset
as security to protect a lender’s interests. Sometimes, the issuer registering debt
securities pledges the securities (e.g., the common stock) of one or more of its
affiliates as collateral to the debt security holders in the event of a default. If
the issuer were to default, the debt security holder could enforce the collateral
provisions and become a holder of the securities of the affiliate(s) whose
securities were pledged as collateral. By obtaining the affiliate’s securities in
the event of the issuer’s default, the investor in a registrant’s debt securities
becomes an investor in the securities of the registrant’s affiliate.
Consequently, while investors in collateralized securities may rely
on an issuer’s consolidated financial statements as their primary source of
information when making investment decisions, they may also find it useful to
consider supplemental details about the affiliates of the issuer whose securities
are pledged. Accordingly, Rule
13-02, requires registrants to provide certain financial and
nonfinancial disclosures about (1) any affiliates whose securities have been pledged
as collateral and (2) the collateral arrangement, if material (see Section 3.2).
Note that if an issuer pledges an affiliate’s asset rather than its
capital stock (e.g., its property, plant, or equipment) to collateralize registered
debt issuances, such a pledge would not trigger the reporting requirements discussed
in this chapter. Also, as indicated in paragraph 2640.1 of the FRM, if a
registrant has previously issued collateralized securities and files a new
registration statement unrelated to those securities, the disclosures discussed
herein “are not required in registration statements that register the offer and sale
of securities that are not collateralized by an affiliate’s securities, even if
another collateralized security of the registrant offered and sold on a registered
basis is outstanding.”
Footnotes
1
As defined in Regulation S-X, Rule 1-02(b), the term
affiliate or affiliates means “an affiliate of, or a person
affiliated with, a specific person is a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled
by, or is under common control with, the person specified.”