Financial reporting rules for issuers and guarantors of guaranteed securities

• Supercedes SAB 53 and related no-action letters

SEC summary

• Separate financials required, unless exempt

S-X Rule 3-10

• Financial reporting rules for issuers and guarantors of guaranteed securities
• Supercedes SAB 53 and related no-action letters

Rule 12h-5

• Related exemption from Exchange Act registration

Final release 33-7878 (2000)

• Note: Appendices have FAQs
• Proposal release 33-7649 (1999)
• Comment letters

S-X 3-10(a)

• Separate financials are required for issuers and guarantors of registered securities
• Unless exempt under S-X 3-10(b)-(f)

If exempt under S-X 3-10(b)-(f)

• Also exempt from Exchange Act registration

• Per Rule 12h-5(a)

• Can use modified financial reporting

• Condensed consolidating financial information can be provided in footnote to parent company financials in lieu of separate subsidiary financials -- 3-10(i)

• Consolidating breaks out financial items for separate legal entities
• Purpose of this information is to "distinguish the assets, liabilities, revenues, expenses, and cash flows of the entities that are legally obligated ...from those that are not."

• Alternatively, if subsidiary is a finance company (with no independent assets or operations) or if parent has no independent assets or operations, a specified narrative description can be used without any subsidiary financial information

• S-X 3-10(i) (8), (9) and (10)
• Reporting requirement continues so long as the subject securities are outstanding

Available under Rules 3-10(b)-(f)

• if exempt

Exemptions all require that

• 1) subsidiary issuer or guarantor must be "100% owned" -- S-X 3-10(h)(1) (thus, no competing equity interest)

• All outstanding voting shares and any outstanding securities convertible into voting shares
  must be owned, directly or indirectly, by parent company
• No-action relief can be sought where law of subsidiary's domicile requires
  director qualifying shares and the like
  E.g., Crown Cork & Seal Company, Inc. (3/10/97)
• Separate definition of "100% owned" for subsidiaries not in corporate form.
  See Appendix A to Final Release for FAQs on "100% owned"
  See Appendix C to Final Release for FAQs on "parent company" 

• 2) Guarantee must be "full and unconditional" -- S-X 3-10(h)(2) (so that payment obligations of issuer and guarantor

• Guarantor's liability cannot be less than issuer's
• Guarantor's payment schedule cannot differ from the issuer's payment schedule
  (e.g., no standstill period)
• Holder cannot be required to first exhaust its remedies against issuer
• Can have a "savings clause" for bankruptcy / fraudulent conveyance laws
• Guarantee can have different subordination terms

Rule 3-10(g)

• Separate financials required for significant, recently acquired subsidiaries

• Overrides any exemption available under Rules 3-10(b)-(f)
• Applies to parent registration statements only; not parent periodic reports
• Subsidiary still exempt from Exchange Act registration -- Rule 12h-5(b)
• Significant, if subsidiary's purchase price or book value is 20% or more of value of securities being registered
• Recently acquired, if not included in parent's audited financials for at least 9 months.
• See Appendix B to Final Release for FAQs on "recently acquired subsidiaries"

If exemption is lost

• Subsidiary must begin filing Exchange Act reports with full financials
• SEC encourages subsidiary to file promptly an Item 5 Form 8-K or a Form 6-K

• See Final release at III.C.3

• If exemption subsequently becomes available
  Subsidiary may request no-action relief

• See Final release at III.C.3

FPI parent with US subsidiary issuer/guarantor is not required to file any more frequently

• Form 20-F annual report / Form 6-K as required

• See Final release at III.C.7
• SEC FAQs (5.01.01)

See Note 3 to Reg S-B Item 310

• Applies Rule 3-10 to small business issuers

Manulife Financial

• SEC letter  3.15.05

Accounting Issues

Trust Preferred Securities