Search within this section
Select a section below and enter your search term, or to search all click PwC SEC volume
Favorited Content
SEC 4540 - Disclosures relating to affiliates whose securities collateralize securities registered or being registered
Publication date: 28 Feb 2023
us PwC SEC Volume 4540
[Editor’s note: In March 2020 the SEC adopted significant changes to its disclosure requirements relating to affiliates whose securities collateralize securities that are registered or being registered. See SEC Release No. 33-10762, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (SEC Release 33-10762). The new and amended rules became effective January 4, 2021, subject to voluntary early compliance and the transition provisions described below and in Section VI of SEC Release 33-10762.]
[Editor’s note: The SEC staff has published interpretive guidance pertaining to the SEC’s disclosure requirements relating to collateralized securities in SEC FRM 2600.]
.1 General
A collateral pledge is a common type of credit enhancement that issuers use to reduce their cost of capital. A pledge is a residual equity interest that could potentially give the secured party a direct claim to the pledged asset in the event of a default.
The SEC maintains disclosure requirements applicable to registered securities that are collateralized by the pledge of an affiliate’s securities. These requirements are based on the overarching belief that investors make their investment decisions relating to these types of securities primarily based on the registrant’s consolidated financial statements with supplemental details about the affiliate whose securities are pledged as collateral. The SEC’s disclosure requirements applicable to these types of securities are primarily set forth in S-X 3-16 and S-X 13-02.
- S-X 3-16 contains the disclosure requirements applicable to securities issued and outstanding before January 4, 2021 if the registrant had not, prior to that date, provided financial statements under the requirements of that rule. See SEC 4540.4.
[Editor’s note: The codified transaction provisions with respect to the continued applicability of S-X 3-16 don’t make specific reference to the presence of collateral release provisions. However, section VI.B of SEC Release 33-10762, footnote 6 to the SEC’s Small Business Compliance Guide relating to SEC Release 33-10762, and SEC FRM 2650.1 do make reference to the presence of collateral release provisions.]
- S-X 13-02 and related rules (e.g., S-X 10-01(b)(10)) contain the disclosure requirements applicable to securities issued on or after January 4, 2021 and to securities issued and outstanding before January 4, 2021 if the registrant had, prior to that date, provided financial statements under the requirements of S-X 3-16. See SEC 4540.2 and .3.
[Editor's note: It is important to recognize the distinction between a collateral pledge and a guarantee when evaluating the applicable disclosure requirements. These two common types of credit enhancements are treated differently under the U.S. securities laws, and the SEC's disclosure requirements relating to collateral pledges are distinct from its disclosure requirements relating to guarantees. See SEC 4530 for a discussion of the disclosure requirements relating to guarantors and issuers of guaranteed securities that are registered or being registered. Depending on the circumstances, a particular affiliate may be subject to the disclosure requirements applicable to collateralized securities and those applicable to guaranteed securities. For instance, if a consolidated subsidiary is a guarantor of its parent's registered debt and the parent has also pledged the subsidiary's common stock as collateral for that registered debt, then the parent should consider both sets of requirements.]
.11 Common transaction structures and examples
Below are two commonly encountered transaction structures relating to the SEC’s disclosure requirements pertaining to collateralized securities.
Transaction Structure 1:
Facts: Company X is an SEC registrant with 5 consolidated subsidiaries. In September 2023, Company X intends to file a registration statement on Form S-3 for the offer and sale of $500 million of debt. The debt will be secured by a pledge of the common stock of each of Company X’s five subsidiaries.
Analysis: Company X must provide, to the extent material, the disclosures required by S-X 13-02 in connection with its Form S-3 and periodic reports (e.g., Form 10-K and Form 10-Q) subsequent to the effective date of the Form S-3.
Transaction Structure 2:
Facts: In September 2023, Company Y, a private company, sold a new issue of notes in a transaction that was exempt from registration under Securities Act Rule 144A. The notes are collateralized by the common stock of Company Y's wholly-owned U.S. subsidiaries: Subsidiary D and Subsidiary E. In connection with the initial sale, Company Y agreed to exchange the unregistered notes for notes that are registered under the Securities Act. The exchange offer will be registered on Form S-4 in November 2023.
Analysis: In connection with the exchange offer, Company Y is registering (i.e., on Form S-4) securities (i.e., the exchange notes) that are collateralized by the securities (i.e., the common stock) of one or more affiliates (i.e., Subsidiary D and Subsidiary E). Accordingly, Company Y must provide, to the extent material, the disclosures required by S-X 13-02 in connection with its Form S-4 and periodic reports (e.g., Form 10-K and Form 10-Q) subsequent to the effective date of the Form S-4.
[Editor's note: The SEC’s requirements contained in S-X 3-16 and S-X 13-02 apply even if less than 100 percent of the securities of a particular affiliate are pledged. The requirements of S-X 3-16 and S-X 13-02 do not apply to collateral arrangements for securities that are not registered or being registered (e.g., a bank revolving line of credit) or to collateral arrangements in which the collateral is not a security (e.g., a pledge of property, plant and equipment). For instance, the provisions of S-X 13-02 do not directly apply to the materials that were prepared in connection with the private placement referred to in Transaction Structure 2 (i.e., the debt issued in the private placement was not registered or being registered). However, Company Y may wish to consult with its legal counsel regarding any significant differences between the private offering materials and the requirements of a Securities Act registration statement. Many companies prepare the offering materials used in connection with a private placement in a manner that does not differ significantly from the disclosures that will be provided in connection with the subsequent exchange offer registration statement. When there are significant differences, those differences are oftentimes highlighted in the private offering materials. Additionally, there may be covenants that require inclusion in the private offering materials of all financial information as if the securities were issued in a transaction that is registered with the SEC.]
.2 Disclosures required by S-X 13-02
S-X 13-02 requires a registrant to make specified disclosures (to the extent material) for each security that is (i) subject to Section 13(a) or 15(d) of the Securities Exchange Act or (ii) being registered under the Securities Act, that is collateralized by a security of one or more of the registrant’s affiliates. The term affiliate is defined in S-X 1-02(b).
The disclosure requirements of S-X 13-02 are set forth in S-X 13-02(a) and include both non-financial disclosures (S-X 13-02(a)(1)-(3)) and financial disclosures (S-X 13-02(a)(4) and (5)).
.21 Non-financial disclosures required by S-X 13-02(a)(1)-(3)
Non-financial disclosures include a description of:
- the securities pledged as collateral;
- the affiliates whose securities are pledged;
- the terms and conditions of the collateral arrangement; and
- whether a trading market exists for the pledged securities.
Additionally, each affiliate whose securities are pledged as collateral and the identity of the pledged security(ies) are required to be identified in an exhibit to the applicable filing. See, for example, S-K 601(b)(22).
.22 Financial disclosures required by S-X 13-02(a)(4) and (5)
Financial disclosures include the summarized financial information described in S-X 1-02(bb)(1) of each affiliate whose securities are pledged as collateral with an accompanying note that briefly describes the basis of presentation. The summarized financial information required by S-X 13-02(a)(4) includes the financial information of all subsidiaries that would be consolidated by an affiliate whose securities have been pledged as collateral, even if the securities of the affiliate’s consolidated subsidiaries were not pledged as collateral.
[Editor’s note: The treatment of subsidiaries that would be consolidated by an affiliate whose securities have been pledged as collateral under S-X 13-02(a)(4) is different from the treatment of non-issuer/non-guarantor subsidiaries of issuers and guarantors in the summarized financial information required by S-X 13-01(a)(4). See SEC FRM 2620.1 and SEC 2620.2. See also SEC 4530.32 for information relating to S-X 13-01(a)(4), if applicable.]
In addition to the line items specified by S-X 1-02(bb)(1), S-X 13-02(a)(4)(iii) requires separate line items for an affiliate’s amounts due from, amounts due to, and transactions with (i) the registrant, (ii) any of the registrant’s subsidiaries not included in the summarized financial information of the affiliates, and (iii) related parties.
The summarized financial information of each affiliate that is consolidated in the registrant’s financial statements may generally be presented on a combined basis with appropriate eliminations. See S-X 13-02(a)(4)(iv) for additional guidance, including guidance regarding the potential need to provide disaggregated summarized financial information. See SEC FRM 2620.4 for a discussion of situations in which less than 100% of an affiliate’s ownership interests are pledged as collateral.
[Editor’s note: In SEC Release 33-10762, the SEC stated that “a registrant should consider materiality and exercise judgment in determining the appropriate level of aggregation of affiliates based on the nature of the disclosure. In this regard, it may be useful to consider quantitative factors, such as the financial significance of the affected affiliates, and qualitative factors, such as the nature of the facts and circumstances applicable to the affiliates. For example, if the trading market for an affiliate’s security is the same as some but not all affiliates, and such similar affiliates represent a substantial portion of the summarized financial information of the combined affiliates, aggregation of the summarized financial information of such affiliates may be appropriate depending on the facts and circumstances. Conversely, it may not be appropriate to aggregate the summarized financial information of such affiliates where the trading markets for the securities are different” (footnote omitted).]
S-X 13-02(a)(4) provides additional detail and instructions for the preparation of the summarized financial information.
.221 Disclosure of pre-acquisition summarized financial information in connection with a Securities Act registration statement (S-X 13-02(a)(5))
Disclosure of pre-acquisition summarized financial information is required in a Securities Act registration statement filed in connection with the offer and sale of a collateralized security if:
(i) the registrant acquired a significant business after the date of the registrant’s most recent balance sheet included in its consolidated financial statements; and
(ii) the acquired business, one or more of the acquired business’s subsidiaries, or the acquired business and one or more of its subsidiaries are affiliates whose securities collateralize the registrant’s collateralized security.
If pre-acquisition summarized financial information is required under S-X 13-02(a)(5), it would follow the form, content and periods specified in S-X 13-02(a)(4) for each recently acquired affiliate whose securities collateralize the registrant’s collateralized security referred to in S-X 13-02(a)(5). See S-X 13-02(a)(5) for additional information, including additional guidance relating to whether a significant business has been acquired and the treatment of acquisitions of a group of related businesses.
[Editor’s note: The disclosure specified by S-X 13-02(a)(5) is only required in a Securities Act registration statement. It is not required to be included in Exchange Act periodic reports (e.g., Form 10-K or Form 10-Q).]
.23 Periods for which summarized financial information is required
Summarized financial information is required as of and for the most recently ended fiscal year and year-to-date interim period included in the registrant’s consolidated financial statements. For instance, a U.S. calendar year-end SEC registrant that follows the disclosure requirements of S-X 13-02 would provide the following information in the indicated filing:
Filing |
Required summarized financial information |
||
Form 10-Q for the nine-month period ended September 30, 2024 |
As of December 31, 2023 and as of and for the nine-month period ended September 30, 2024. |
||
The S-X 13-02 disclosures are required in annual and quarterly reports as long as the registrant has a reporting obligation under Exchange Act Section 15(d) with respect to the registered collateralized securities. See SEC FRM 2640.3.
.24 Other disclosures required by S-X 13-02(a)(6) and (7)
In addition to the specific disclosures referred to in S-X 13-02(a)(1)-(5), S-X 13-02(a)(6) and (7) require disclosure of:
- any financial and narrative information about each affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral; and
- sufficient information so as to make the financial and non-financial information presented not misleading.
.25 Location of the S-X 13-02 disclosures
The registrant may elect to provide the disclosures required by S-X 13-02 in a footnote to its consolidated financial statements, or in management’s discussion and analysis of financial condition and results of operations (MD&A).
If the disclosures are not included in the consolidated financial statements or in MD&A, the registrant must include the disclosures in its prospectus immediately following “Risk Factors,” if any, or immediately following the pricing information described in S-K 105. See S-X 13-02(b).
[Editor’s note: We expect most companies will provide the disclosures required by S-X 13-02 in MD&A or another location outside of the financial statements. Irrespective of the location, we expect companies will be considering the controls around the disclosures.]
.26 Audit requirements relating to the S-X 13-02 disclosures
If the registrant elects to provide the S-X 13-02 disclosures in a footnote to its audited consolidated financial statements, the disclosures must be audited (including consideration of related internal control over financial reporting, as applicable). If the registrant provides the S-X 13-02 disclosures outside the audited consolidated financial statements, then the disclosures do not need to be audited. See SEC FRM 2610.2.
.3 Frequently asked questions relating to S-X 13-02
.301 Are there any bright-line, quantitative thresholds which govern the requirements to provide disclosure under S-X 13-02?
As noted above, the disclosures specified in S-X 13-02 are required to the extent material. S-X 13-02 generally does not specify bright-line quantitative thresholds for the inclusion of disclosures.
Additionally, S-X 13-02(a)(4)(vi)(A) and (B) describe two non-exclusive circumstances in which the summarized financial disclosures may be omitted. Disclosure is a condition to omission. See SEC FRM 2610.2.
If a registrant determines that not all of the required financial information is material, the information that is not material may be omitted without additional disclosure or explanation.
[Editor’s note: In SEC Release 33-10762, the SEC stated “[a] registrant’s responsibility to determine whether the disclosures specified in Rule 13-02 are material is not different from how it assesses materiality in connection with other information it files with the Commission.”]
.302 Do the disclosure requirements of S-X 13-02 apply to non-subsidiary affiliates, such as a non-subsidiary controlled affiliate or a controlling affiliate?
S-X 13-02 does not include requirements specific to non-subsidiary affiliates. In the rare circumstances where the affiliate is not a consolidated subsidiary of the registrant, S-X 13-02(a)(6) and (7) would require the registrant to provide any financial and narrative information about each such affiliate if the information would be material for investors to evaluate the pledge of the affiliate’s securities as collateral and sufficient information so as to make the financial and non-financial information presented not misleading. In SEC Release 33-10762, the SEC stated that “[b]ecause the unconsolidated affiliate’s financial information is not included in the registrant’s consolidated financial statements, in these circumstances disclosure beyond what is specified in Rule 13-02(a)(1) through (4) may need to be provided. In this regard, separate financial statements of the unconsolidated affiliate may be necessary to satisfy the requirements of Rules 13-02(a)(6) and (7)” (footnote omitted). See SEC FRM 2620.3.
.303 Would the disclosure requirements of S-X 13-02 apply to a variable interest entity consolidated by the registrant under the applicable accounting framework?
The disclosure requirements of S-X 13-02 would apply to a variable interest entity that meets the definition of an affiliate and is consolidated by the registrant under the applicable accounting framework (e.g., Accounting Standards Codification 810, Consolidation, by the registrant that applies U.S. generally accepted accounting principles).
.304 Are the disclosures required by S-X 13-02 applicable to Form 10-Q?
Yes. See S-X 10-01(b)(10). As noted in SEC 4540.221, however, the disclosure of pre-acquisition summarized financial information pursuant to S-X 13-02(a)(5) is only required in connection with a Securities Act registration statement filed in connection with the offer and sale of the collateralized securities.
.305 Does the 74-day grace period provided in S-X 3-05(b)(4)(i)(B) which may be available in connection with financial statements of a recently acquired business also apply to the pre-acquisition summarized financial information of a recently acquired affiliate specified by S-X 13-02(a)(5)?
No. In SEC Release 33-10762, the SEC acknowledged that pre-acquisition summarized financial information may be required before the pre-acquisition financial statements are required by S-X 3-05. The SEC indicated that they “believe investors in a registered debt offering should be provided with information about affiliates whose securities are pledged in advance of an investment decision.” They also noted that the level of detail disclosure required by S-X 13-02(a)(5) is significantly less than full financial statement requirements of S-X 3-05.
.306 Does a parent company’s ability to cease providing disclosures under S-X 3-10 and S-X 13-01 relating to subsidiary issuer/guarantors as described in SEC 4530.23 also apply to the disclosures under S-X 13-02?
.307 Do the disclosure requirements of S-X 13-02 apply to smaller reporting companies, foreign private issuers and Regulation A issuers?
Yes, with some modifications as indicated in the relevant rules and form requirements. See, for example:
- S-X 8-01(d) and S-X 8-03(b)(7) with respect to smaller reporting companies;
- Instruction 1 to Item 8 of Form 20-F with respect to foreign private issuers; and
- Part F/S(b)(7)(ii) of Form 1-A, Item 7(g)(2) of Form 1-K, and Item 3(e)(2) of Form 1-SA with respect to Regulation A issuers.
[Editor’s note: Smaller reporting companies, foreign private issuers and Regulation A issuers should look to the requirements of the specific form they are using or rule(s) they are subject to. See SEC FRM Note to Section 2610.1.]
.308 Are S-X 13-02 disclosures required in registration statements that register the offer and sale of securities that are not collateralized by an affiliate’s securities, even if the registrant has other registered collateralized securities outstanding?
No. See SEC FRM 2640.1.
.4 S-X 3-16
[Editor’s note: As noted above, the requirements of S-X 3-16 continue to apply to each registered security issued and outstanding before January 4, 2021 for which the registrant had not, prior to that date, provided the financial statements required by S-X 3-16. See the introductory text to S-X 3-16, the introductory text to S-X 13-02, and section VI.B of SEC Release 33-10762. See also the first editor’s note at the beginning of SEC 4540. The most likely place where the requirements of S-X 3-16 will apply is in Form 10-K. Therefore, the discussion in SEC 4540.4 is focused solely on the application of S-X 3-16 to Form 10-K. For SEC staff interpretations guidance regarding S-X 3-16, see section 2600 of the version of the Division of Corporation Finance Financial Reporting Manual updated through October 30, 2020.]
When applicable, S-X 3-16 requires a registrant’s Form 10-K to include separate financial statements for each of a registrant's affiliates whose securities constitute a "substantial portion of the collateral" for any class of securities that is registered. The corresponding requirement applicable to smaller reporting companies is set forth in S-X 8-01(d).
.41 The “substantial portion of the collateral” test
An affiliate's securities are deemed to constitute a “substantial portion of the collateral” if the aggregate principal amount, par value, or book value of the affiliate’s securities as carried by the registrant or the market value of the affiliate’s securities (whichever is greatest) equals 20 percent or more of the principal amount of the secured class of securities.
- The term "market value" should be read as "fair value" and applies even if the affiliate's securities are not traded on an exchange or over-the-counter market.
- The denominator of the “substantial portion of the collateral” test should be based on the outstanding principal balance of the registered debt as of end of the most recent fiscal year.
[Editor's note: If the amount of securities outstanding has decreased (e.g., because some portion of the securities has been extinguished), then the denominator of the “substantial portion of the collateral” test will decrease (as compared to the denominator in the calculation when the securities were originally issued). This has the effect of increasing the likelihood that an affiliate's financial statements will constitute a substantial portion of the collateral (i.e., because the denominator has decreased).]
- The “substantial portion of the collateral” test should be performed for each affiliate whose securities collateralize registered securities (including holding companies).
[Editor’s note: In multi-tier organizational structures, a lower tier subsidiary may trigger the requirement to provide S-X 3-16 financial statements at multiple levels within the organization. The fact that the financial statements of an operating company and its intermediate parent holding company are nearly identical may serve as a basis to seek relief from the SEC staff but generally does not serve as sufficient basis for omission in the absence of preclearance.]
- The “substantial portion of the collateral” test should be performed separately for each class of securities that have different terms even if issued under the same indenture.
- The “substantial portion of the collateral” test should be performed using information as of the end of the most recent fiscal year for which audited financial statements would be required in the filing.
.42 Financial statement requirements
The affiliate financial statements to be provided under S-X 3-16 are those that the affiliate would provide if it were a registrant and required to file financial statements. See S-X 3-16(a). We understand that the affiliate's financial statements must comply with relevant sections of Regulation S-X, Staff Accounting Bulletins, and other SEC staff interpretive guidance.
[Editor’s note: The SEC staff has indicated that affiliate’s financial statements generally do not need to include EPS or segment information (if they are not otherwise required); however, the SEC’s other financial reporting rules in Regulation S-X should be followed.]
If the affiliate's securities constitute a substantial portion of the collateral as of the end of the most recently completed fiscal year, then the affiliate's financial statements would be required for all periods (i.e., not just periods in which the affiliate's securities constitute a substantial portion of the collateral).
[Editor’s note: The “substantial portion of the collateral” test is used to determine whether a particular affiliate's financial statements are required to be provided when S-X 3-16 is applicable. The test does not determine which financial statements are required (e.g., how many periods).]
When considering S-X 3-16, the term financial statements should be interpreted broadly. S-X 3-16 is not limited to the primary financial statements of the affiliate (e.g., financial statements of an equity method investee under S-X 3-09 or financial statement schedules under S-X 5-04 may be required).
[Editor's note: We believe any significance tests (e.g., relating to S-X 3-09) should be assessed based on the affiliate, not the registrant.]
The SEC staff has previously indicated that a registrant that properly suspends its reporting obligations with respect to registered collateralized debt under Exchange Act Section 15(d) is no longer required to file financial statements under S-X 3-16.
The SEC staff has also indicated that if the pledged securities cease to be pledged as collateral (either by operation of the underlying indenture or by consent of the debt holders) prior to the end of the most recent period for which S-X 3-16 financial statements would be required, S-X 3-16 financial statements are not required. Ordinarily, this will also be the case if pledged securities cease to be pledged as collateral after the end of the most recent reporting period, but before the corresponding annual report is due. However, there may be situations involving adverse credit events occurring after the end of the most recent period that warrant presentation of S-X 3-16 financial statements with full disclosure of the circumstances and current status of the collateral.
.43 Frequently asked questions relating to S-X 3-16
.432 When S-X 3-16 applies, for which periods are an affiliate's financial statements required to be presented in a Form 10-K?
The financial statements that are required by S-X 3-16 are those that the affiliate would provide if it were a registrant and required to file financial statements. Generally, the affiliate's financial statements included in Form 10-K will include audited balance sheets as of the end of each of the two most recently completed fiscal years and audited statements of comprehensive income, cash flows, and changes in equity for each of the three most recently completed fiscal years.
[Editor's note: The “substantial portion of the collateral” test performed as of the end of the most recently completed fiscal year is the determining factor for whether a particular affiliate's financial statements are required to be included in the Form 10-K when S-X 3-16 is applicable. If an affiliate's securities did not constitute a substantial portion of the collateral in connection with a prior year's assessment under S-X 3-16, but as of the end of the most recently completed fiscal year the affiliate's securities do constitute a substantial portion of the collateral, then the affiliate's financial statements are required for all periods.]
.433 May an affiliate's annual financial statements included in a Form 10-K under S-X 3-16 be presented on an unaudited basis for years in which the substantial portion of the collateral test does not equal or exceed 20 percent?
No. The affiliate's annual financial statements included in a Form 10-K under S-X 3-16 must be audited for all periods presented. This conclusion is consistent with the underlying principle in S-X 3-16 that the affiliate's financial statements should be the financial statements that it would file if it were a registrant and required to file financial statements. If the affiliate were a registrant and required to file financial statements in a Form 10-K, its annual financial statements would need to be audited for all periods presented.
[Editor's note: The audit requirement in S-X 3-16 operates differently as compared to the audit requirement relating to equity method investees under S-X 3-09. Under S-X 3-09, the investee's annual financial statements may be presented on an unaudited basis for annual periods in which the investee did not meet the significance threshold.]
.434 May a registrant that is required to file its Form 10-K as either an accelerated filer or a large accelerated filer file the affiliate's audited financial statements using the deadlines applicable to a non-accelerated filer?
We understand that the financial statements required by S-X 3-16 must be filed at the same time the registrant files its Form 10-K. This is true even if the subsidiary would have more time to file its own financial statements if it were a standalone registrant.
For instance, assume Company Z, a calendar year-end large accelerated filer, is required to include the financial statements of Subsidiary J (a non-accelerated filer) in its Form 10-K pursuant to S-X 3-16. Company Z must include Subsidiary J's financial statements in its Form 10-K no later than 60 days after year-end. This is true even though Subsidiary J (as a non-accelerated filer) would not have been required to file a Form 10-K until 90 days after year-end (if Subsidiary J were a standalone registrant).
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
