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Let’s Talk About Regulation S-X

Let’s Talk About Regulation S-X

The Securities and Exchange Commission has opened another front in the Trump administration’s war on regulation, taking aim yet again at financial disclosure requirements.

On July 24, the SEC proposed amendments intended to streamline disclosure requirements related to registered debt offerings. The proposals would limit the amount of information required by two separate provisions of Regulation S-X, which despite its titillating name simply consists of guidelines on the form and content of public company financial statements. Specifically, the proposed changes impact Rule 3-10 (which applies to all guarantors and issuers of guaranteed securities), and Rule 3-16 (which applies to affiliates whose securities collateralize a registrant’s securities).

According to the SEC, the changes will make the disclosures easier to understand by, among other things, eliminating a lot of the extraneous junk that gets thrown into Rule 3-10 and 3-16 disclosures. To put it in the commission’s parlance, the changes will “focus disclosures on the information that is material given the specific facts and circumstances.” The Wall Street watchdog also argued that the changes would cut compliance costs for registrants.

The SEC’s objective with the proposed changes: Encourage more issuers to register their debt offerings, thereby reducing the number of unregistered offerings. The thinking goes that steering more debt offerings to the registered market will enhance investor protections.

“I have seen firsthand instances in which an issuer did not pursue SEC registration of a debt offering that included a subsidiary guarantee or pledge of affiliate securities as collateral because of the costs and, in particular, time burdens of these rules,” said SEC Chairman Jay Clayton in a press release announcing the proposed amendments. “The proposed rules are intended to make the disclosures easier for investors to understand and to encourage these offerings to be conducted on an SEC-registered basis.”

The announcement signals the commission’s increasing embrace of the Trump administration’s anti-regulation orientation. Following the January 2017 inauguration, a number of federal agencies went to work almost immediately on aggressive deregulation agendas. By contrast, the SEC proceeded judiciously when Clayton took charge a little more than a year ago.

More recently, however, the commission has begun to get serious about eliminating regulation of the financial system. Earlier in July, the SEC announced that it eased financial reporting requirements for roughly a thousand public companies by reclassifying them as “smaller reporting companies,” which face less stringent disclosure requirements. Besides raising the number of existing smaller reporting companies, the revisions ensured that more publicly registered companies will qualify for that reporting status going forward.

Although it’s unclear which pet project Clayton and the SEC will take up next, trends suggest another deregulation announcement in the near future is a good bet.

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