SEC Final Rule Release No. 33-10762, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities.
SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”
Rule 3-10 applies not only to registered guaranteed debt securities but also to guaranteed preferred securities whose payment terms are substantially similar to debt (e.g., trust preferred securities).
SEC Regulation S-X, Rule 3-16, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.”
SEC Regulation S-X, Rule 13-01, "Guarantors and Issuers of Guaranteed Securities Registered or Being Registered."
SEC Regulation S-X, Rule 13-02, "Affiliates Whose Securities Collateralize Securities Registered or Being Registered."
Rule 3-16 is retained for certain grandfathered securities. For more information, see Effective Date and Transition.
SEC Proposed Rule Release No. 33-10526, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities.
Exceptions also apply to subsidiaries that co-issue, rather than guarantee, securities issued by their parent company.
Existing Rule 3-10 defines an operating subsidiary as a subsidiary that is not a finance subsidiary, and it defines a finance subsidiary as a subsidiary that “has no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company.” The final rule largely aligns the definition of a finance subsidiary with that in existing Rule 3-10 and removes the definition of an operating subsidiary.
Rule 3-10 (h)(1) states that a “subsidiary is ‘100% owned’ if all of its outstanding voting shares are owned, either directly or indirectly, by its parent company. A subsidiary not in corporate form is 100% owned if the sum of all interests are owned, either directly or indirectly, by its parent company other than:
(i) Securities that are guaranteed by its parent and, if applicable, other 100%-owned subsidiaries of its parent; and
(ii) Securities that guarantee securities issued by its parent and, if applicable, other 100%-owned subsidiaries of its parent.”
Rule 3-10(h)(2) states that a “guarantee is ‘full and unconditional,’ if, when an issuer of a guaranteed security has failed to make a scheduled payment, the guarantor is obligated to make the scheduled payment immediately and, if it doesn’t, any holder of the guaranteed security may immediately bring suit directly against the guarantor for payment of all amounts due and payable.”
See footnote 10.
A parent company has no independent assets or operations if each of its total assets, revenues, income from continuing operations before income taxes, and cash flows from operating activities (excluding amounts related to its investment in its consolidated subsidiaries) is less than 3 percent of the corresponding consolidated amount.
Nonguarantor subsidiaries are minor when their total assets, stockholders’ equity, revenues, income from continuing operations, and cash flows from operating activities, individually and in the aggregate, are less than 3 percent of the parent company’s consolidated totals.
See footnote 10.
SEC Regulation S-X, Rule 10-01, “Interim Financial Statements.”
The basis of accounting used to present the financial information is the same as the SEC registrant’s, except that investments in subsidiaries are accounted for under the equity method rather than consolidated.
See SEC Regulation S-X, Rule 1-02(bb), “Definitions of Terms Used in Regulation S-X (17 CFR Part 210): Summarized Financial Information.”
Reporting obligations may be suspended under Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) or Exchange Act Rule 12h-3. For example, an entity may be eligible for suspension of its reporting obligation if, after the fiscal year of initial issuance, the securities of each class to which the registration is related are held of record by fewer than 300 persons at the beginning of the year.
The financial statements are required to be audited by a registered public accounting firm in accordance with the standards of the PCAOB.
The determination of whether a business has been acquired would be made in accordance with the definition of a business in SEC Regulation S-X, Rule 11-01(d).
SEC Regulation S-X, Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”
Rule 3-16(b) states that “securities of a person shall be deemed to constitute a substantial portion of collateral if the aggregate principal amount, par value, or book value of the securities as carried by the registrant, or the market value of such securities, whichever is the greatest, equals 20 percent or more of the principal amount of the secured class of securities” (emphasis added).
Registrants may omit the summarized financial information and related disclosures if (1) the “assets, liabilities and results of operations of the combined affiliates whose securities are pledged as collateral are not materially different than the corresponding amounts presented in the consolidated financial statements of the registrant” or (2) the “combined affiliates whose securities are pledged as collateral have no material assets, liabilities or results of operations.”
Unlike that which is presented for Rule 13-01, summarized financial information presented for Rule 13-02 would include an affiliate’s investment in another subsidiary even if that subsidiary does not collateralize the offering.
Historically, separate financial statements for affiliates that collateralize securities have not been required for Form 10-Q. However, the final rule requires the summarized financial information and nonfinancial disclosure in interim filings on Form 10-Q.
SEC Proposed Rule Release No. 33-10635, Amendments to Financial Disclosures About Acquired and Disposed Businesses.