SEC Proposal to Amend Financial Disclosure Rules for Guaranteed and Secured Debt Securities
On Oct. 2, the Federal Register published the Securities and Exchange Commission’s (SEC) July 24 proposal to amend SEC Rules 3-10 & Rule 3-16 of Regulation S-X governing disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities. In its release accompanying the proposal, the SEC noted its concern that the compliance burdens associated with the current guarantor disclosure regime may be deterring issuers from issuing guaranteed debt securities in SEC registered transactions. The proposal, developed in conjunction with the SEC’s ongoing Disclosure Effectiveness Initiative, is intended to “simplify and streamline the financial disclosure requirements” associated with the issuance of guaranteed debt securities.
Nareit plans to submit a comment to the SEC regarding the proposal. Please sign up here by COB Oct. 22, 2018 if you would like to be on the task force to help prepare this letter. Comments are due to the SEC by Dec. 3.
Relevant to many REITs, the current Regulation S-X rules for issuing guaranteed debt securities require that each issuer and guarantor of debt securities in a registered offering must file financial statements (including full audited annual financial statements and unaudited interim financial statements), unless the subsidiary guarantor or subsidiary issuer is 100% owned by the parent company. Current rules also require that each relevant guarantee be full and unconditional and that multiple guarantees be joint and several. The proposal would replace the condition that a subsidiary issuer or guarantor be 100% owned with a condition that it be consolidated in the parent company’s consolidated financial statements. It would also eliminate the requirements that subsidiary guarantees be unconditional and/or joint and several.
The proposal may benefit certain REITs structured as an umbrella partnership REIT (UPREIT) that issue registered debt securities through their non-100% owned operating partnership subsidiaries (OPs). As noted above, because the proposal would eliminate the current requirement that a subsidiary issuer or guarantor be 100% owned by the parent company, some UPREITs with OPs that are not 100% owned by the REIT may no longer need to register and maintain their OPs as separate SEC registrants. This could simplify and reduce the costs of raising capital in transactions when SEC-registered debt securities are issued by the OP and guaranteed by the REIT, or the reverse.
The SEC set forth a helpful table in Appendix A of the proposal that compares the existing Regulation S-X rules with the proposal. Highlights include:
| ▪ | Replacing detailed condensed consolidating financial information with supplemental financial and non-financial information about the issuers, guarantors and guarantees — referred to in the release as “Proposed Alternative Disclosures” as defined in the proposal. |
| ▪ | Reducing the number of reporting periods for which the summarized financial information must be presented. |
| ▪ | Allowing the Proposed Alternative Disclosures to be provided outside of the financial statements and the notes to the financial statements, thereby avoiding the requirement for this information to be audited and tagged for XBRL. |
The SEC has requested public comment on topics including whether the proposal should use consolidation of the subsidiary issuer or guarantor under the applicable accounting standards as an eligibility condition, and if so, whether this would adequately enable investors and financial analysts to understand relevant credit risk. The SEC has also asked for comment on whether the proposed condition that each issuer and guarantor be a consolidated subsidiary of the parent be limited to certain types of entities and whether a consolidated subsidiary that has issued and outstanding debt that is convertible into its own voting shares should be ineligible for relief.
Contact
Tony Edwards, EVP & general counsel ( tedwards@nareit.com ); Victoria Rostow, SVP, policy & regulatory affairs ( vrostow@nareit.com ); George Yungmann, SVP, financial standards ( gyungmann@nareit.com ); or Christopher Drula, VP, financial standards ( cdrula@nareit.com )