SEC Adopts Rules for Disclosures

SEC Adopts Rules to Simplify and Streamline Disclosures for Registered Debt Offerings

On March 2, 2020, the SEC adopted amendments to simplify and streamline the financial disclosures required by Rules 3-10 and 3-16 of Regulation S-X in registered debt offerings and periodic reports thereafter.  The final rules retain many aspects of the proposed amendments from July 2018. Overall, the changes are intended to:

  • Better align the financial reporting requirements with the needs of investors by providing them with information that is material and easier to understand; and
  • Reduce the costs and burdens to registrants, thereby encouraging them to conduct more offerings on a registered basis.

The amendments are effective on January 4, 2021.  However, registrants may voluntarily apply the amendments to registration statements and periodic reports before that date.

Key Aspects of the Amendments:

Rule 3-10 of Regulation S-X (applicable to guarantors and issuers of guaranteed securities) is partly relocated to new S-X Rule 13-01. The amendments continue to allow issuers to omit separate financial statements of subsidiary issuers and guarantors when certain conditions are met, and:

  • Amend the condition that requires each subsidiary issuer or guarantor to be 100% owned by the parent company in order to omit its separate financial statements. Under S-X Rule 13-01, the subsidiary issuer or guarantor is only required to be consolidated in the parent company’s consolidated financial statements.
  • Replaces the current requirement to present condensed consolidating financial information for all periods presented in the consolidated financial statements. Under S-X Rule 13-01, summarized financial information2 will be required for issuers and guarantors (which may be presented on a combined basis) for the most recently completed fiscal year and subsequent year-to-date interim period included in the parent company’s consolidated financial statements.
  • Require expanded qualitative disclosures about the issuers and guarantors, the terms and conditions of the guarantees and how the issuer and guarantor structure and other factors may affect payments to holders of the guaranteed securities.
  • Require disclosure of information about each guarantor that would be material for investors to evaluate the sufficiency of the guarantee (consistent with existing disclosure requirements).
  • Permit registrants to provide the amended disclosures outside of the parent company’s annual and interim financial statements (meaning such disclosures would not be subject to audit or review procedures) in management’s discussion and analysis (MD&A). If the disclosures are not made in MD&A or voluntarily within the financial statements, they must be presented in a prospectus immediately following “Risk Factors,” if any, or immediately following pricing information described in Item 105 of Regulation S-K.
  • Permit a registrant to stop providing the financial and non-financial disclosures when the issuers and guarantors no longer have an Exchange Act reporting obligation with respect to the guaranteed securities, rather than requiring them for as long as the guaranteed securities are outstanding.

S-X Rule 3-16 (applicable to affiliates whose securities collateralize a registrant’s securities) is replaced with the requirements in new S-X Rule 13-02.  The amendments:

  • Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliate(s) and the collateral arrangement (disclosures which are permitted to be presented outside the financial statements).
  • Replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial.

The amendments to Rules 3-10, 13-01, 3-16 and 13-02 of Regulation S-X are also applicable to financial statements for a subsidiary of a smaller reporting company (SRC) that issues securities guaranteed by that SRC or if an SRC’s securities that are registered or being registered are collateralized by the securities of the SRC’s affiliates. The amended requirements under Rule 3-10 and new 13-01 of Regulation S-X also apply to asset-backed securities under Regulation S-K.

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