SEC Proposes to Simplify Debt Offering Disclosures

In July, the Securities and Exchange Commission (SEC) proposed amendments to streamline financial disclosure requirements for two categories of market participants:

• Guarantors and issuers of guaranteed securities
• Affiliates whose securities collateralize a registrant’s securities

Currently, guarantors and issuers are exempted from the requirement to file their financial statements if they are a subsidiary whose parent company provides additional disclosure in their own consolidated financial statements. The proposed amendments will expand the scope of this exemption by eliminating the 100% ownership requirement for subsidiaries. If the amendments are adopted, it will be necessary only for the subsidiary to be consolidated in the parent company’s consolidated financial statements.

The amendments would also replace “consolidating information” with “summarized financial information” of the issuers and guarantors. This information must be provided for only as long as the issuers and guarantors have reporting obligations with respect to the guaranteed securities, rather than for as long as the guaranteed securities are outstanding. Further, if a subsidiary issuer or guarantor has been recently acquired, it will no longer be required to provide pre-acquisition financial statements.

Finally, there would be only one set of eligibility criteria for all issuers and guarantors instead of separate criteria for each of the five exceptions in the rules. The provisions will also be moved to a single location in the rule to facilitate their use.

However, the amendments also contain certain new obligations. As proposed, requirements on qualitative disclosure will be expanded, the quantitative thresholds for disclosure will be eliminated, and the scope of disclosure will include other information that is material to the holders of the guaranteed security. When viewed as a whole, these changes mean the disclosure and the process will be simpler, but some new disclosure requirements will apply.

The SEC anticipates that by reducing compliance burdens, the amendments should encourage issuers to register debt offerings, thereby increasing investor protection. SEC Chair Jay Clayton stated that he saw firsthand “instances in which an issuer did not pursue SEC registration … because of the costs and, in particular, time burdens.” 

The proposal includes other significant changes that are set to apply to the registrants’ affiliates. Currently, registrants must provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold.

The proposed changes will allow affiliates whose securities are pledged as collateral to provide a different form of financial and nonfinancial disclosure, while the collateral arrangement would be added simply as a supplement to the registrants’ financial statements. The numerical threshold, however, will be eliminated. The proposal is subject to a 60-day comment period, which runs until (date).