March 3, 2020

SEC Amends Rules for Financial Disclosures of Registered Debt Offerings

Yesterday, the SEC voted to adopt amendments that significantly change the financial disclosure requirements for guaranteed debt offerings under Regulation S-X Rule 3-10 and Rule 3-16.  The changes are intended to improve the quality of disclosure and increase the likelihood that issuers register debt offerings and provide investors with protections they wouldn’t receive in unregistered offerings.

Here’s the 265-page release.  The SEC’s press release summarizes amendments to Rule 3-10, which will be amended and partly relocated to new Rule 13-01, high-lights include:

– 100% ownership replaced by consolidation

– Condensed consolidating financial information reduced

– Disclosure may be made outside the financial statement footnotes

– Disclosure ends when Exchange Act reporting ends

Here’s the SEC’s press release summary of the new Rule 13-01 high-lights:

– Replace the condition that a subsidiary issuer or guarantor be 100%-owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements

– Replace condensed consolidating financial information, as specified in existing Rule 3-10, with certain new financial and non-financial disclosures. The amended financial disclosures will consist of summarized financial information, as defined in Rule 1-02(bb)(1) of Regulation S-X, of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented. The amended non-financial disclosures, among other matters, will expand the qualitative disclosures about the guarantees and the issuers and guarantors. Consistent with the existing rule, disclosure of additional information about each guarantor will be required if it would be material for investors to evaluate the sufficiency of the guarantee

– Permit the amended disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings

– Require the amended financial and non-financial disclosures for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding

The SEC’s press release also summarizes amendments to Rule 3-16, which will be replaced with requirements in new Rule 13-02, high-lights for these amendments include:

– Separate financial statements for each affiliate whose securities are pledged replaced by financial & non-financial disclosures

– Disclosure required unless immaterial

Here’s the SEC’s press release summary of the new Rule 13-02 high-lights:

– Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security. The registrant will be permitted to provide the amended financial and non-financial disclosures outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings

– 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

If it seems like these amendments were a long time coming, they kind of were – John blogged about the proposed amendments back in July 2018.  The amendments will be effective January 4, 2021 but voluntary compliance is permitted starting now.

SEC Calendars ‘Open Meeting’: Private Offerings on Agenda

Last week, the SEC issued a Sunshine Act notice for an open meeting scheduled for tomorrow – March 4th.  Here’s the agenda saying:

The Commission will consider whether to propose rule amendments that would facilitate capital formation and increase opportunities for investors by expanding access to capital for entrepreneurs across the United States.  Specifically, the proposed amendments would simplify, harmonize, and improve certain aspects of the framework for exemptions from registration under the Securities Act of 1933 to promote capital formation while preserving or enhancing important investor protections. The proposed amendments seek to address gaps and complexities in the exempt offering framework that may impede access to investment opportunities for investors and access to capital for issuers.

In December, I blogged about the proposed amendments to expand the definition of accredited investors and last summer Liz blogged about the SEC’s concept release that included discussion of a lot of topics, including among other things, whether there should be any changes to streamline capital raising exemptions, especially Rule 506 of Reg D, Reg A, Rule 504 of Reg D, the intrastate offering exemption, and Regulation Crowdfunding and the accredited investor definition.  Since then, the concept release generated a lot of comment letters.

So, we’ll see what’s all included with the proposed amendments tomorrow and whether they can truly satisfy everyone.  We’ll be blogging about the meeting’s outcome and will post memos as they come in.

Regular Compliance Reporting Boosts Director Confidence

A recent study from FTI Consulting and Corporate Board Member found that director confidence in internal ethics and compliance programs is declining.  The study – based on interviews with over 300 public company directors – found that only 35% of survey respondents said they were “very confident” in their company’s internal compliance programs compared to 46% a year earlier.  The study lists several reasons that may have contributed to declining confidence such as increased complexity of rules and regulations, pace of change and disruption and uncertainty introduced by advanced technologies.

All is not lost though, the study also found that of directors who say they receive regular ethics or whistleblower reports, only 5% of those directors reported low confidence in the company’s internal ethics and compliance programs.  The study lists steps an organization can take to help bolster confidence among their directors, here’s an excerpt:

Take a hard look at the organization’s internal ethics and compliance programs and ensure they meet high standards in the following areas:

– Establish direct and autonomous reporting by the head of compliance to the board, or the audit committee

– Set formal metrics for the board to measure the effectiveness of the compliance program

– Ensure effective hotline and whistleblower processes and report activity to the board regularly

– Enhance compliance functions by using advanced technology

– Lynn Jokela