On September 17, the U.S. Securities and Exchange Commission (SEC or Commission) proposed rules to update the statistical disclosures that banking registrants provide to investors. The proposed amendments would rescind Industry Guide 3, Statistical Disclosure by Bank Holding Companies (Guide 3); codify, and largely streamline, certain Guide 3 disclosure guidelines in a new Subpart 1400 of Regulation S-K; and eliminate other Guide 3 disclosure guidelines that overlap with existing SEC rules, U.S. Generally Accepted Accounting Principles (U.S. GAAP) or International Financial Reporting Standards (IFRS). The proposed rules are intended to reduce the preparation burden and related costs for banking registrants, while enhancing comparability and consistency of disclosures for investors. Overall, we regard the proposed changes as a welcome, albeit long-overdue, development.
A high-level summary of the proposed amendments follows. For a more in-depth review (in tabular form) of the existing disclosure guidance, the amendments proposed to be codified in Regulation S-K and the Commission’s requests for comment, please click here.
Although the proposal does not add substantial new disclosure requirements, there are several areas in which more disclosure — in particular, further disaggregated disclosures and certain new credit ratio disclosures — would be required. In practice, however, banking registrants already commonly disclose these ratios, and the components used in their calculation are provided in regulatory reports filed with the U.S. banking agencies (and are generally required to be disclosed in their financial statements), so the incremental compliance burden for most registrants is not expected to be significant.
The proposed rules are the latest product of the SEC’s “disclosure effectiveness initiative,” an ongoing broad-based staff review of the Commission’s disclosure, presentation and delivery requirements, and they reflect the significant financial reporting changes, including the issuance of new accounting standards, that have occurred for registrants in the financial services industry since Guide 3 was first published in 1976 and last substantively revised in 1986. The proposal was informed by the feedback received on the SEC’s March 2017 Request for Comment on Possible Changes to Industry Guide 3, which considered how the Guide 3 disclosure regime could be improved. While the Request for Comment elicited a wide range of views, most commenters expressed support for an update to Guide 3.
The current proposal would have a varied impact on registrants’ disclosure compliance burdens and costs, and alter the mix of information that investors use to evaluate their performance and prospects. As a result, and to ensure that the Commission has input from a full range of market participants when crafting final rules, we encourage both U.S. and non-U.S. banking registrants to review the proposal, assess carefully how they would address the proposed disclosure requirements and consider submitting responses to the Commission’s requests for comment. Please contact any of the undersigned or your regular Sidley representative if you would like to discuss any or all aspects of the proposed amendments or would like assistance in submitting a comment letter to the Commission. The comment period closes on December 2.
Summary of Proposed Amendments
In summary, the proposed rules would rescind Guide 3; codify, and largely streamline, certain Guide 3 disclosure guidelines in a new Subpart 1400 of Regulation S-K; and eliminate other Guide 3 disclosure guidelines that overlap with existing SEC rules, U.S. GAAP or IFRS. Specifically, the proposed rules would, among other changes:
- expand the institutions that are subject to the proposed rules to include banks, savings and loan associations and savings and loan holding companies;
- generally reduce the reporting periods specified in Guide 3 to align with the relevant financial statement periods required by SEC rules;
- explicitly exempt foreign private issuers applying IFRS from certain disclosure requirements that are inapplicable under IFRS (e.g., detailed disclosure of nonaccrual loans and troubled debt restructurings);
- require disclosure of additional, disaggregated interest-earning asset and interest-bearing liability categories in average balance sheets and rate/volume tables;
- eliminate investment portfolio book value disclosures, maturity analysis of book value disclosures and disclosures related to investments exceeding 10% of stockholders’ equity called for by Guide 3, as they substantially overlap with U.S. GAAP and IFRS requirements;
- require disclosure of the weighted average yield of each category of debt securities not carried at fair value through earnings by maturity, based on the investment categories required to be presented in U.S. GAAP or IFRS financial statements rather than the categories specified in Guide 3;
- eliminate certain of the loan portfolio disclosures called for by Guide 3, such as loan category, risk elements and other interest-bearing assets disclosures, as reasonably similar disclosures are required by SEC rules, U.S. GAAP or IFRS;
- modify the categories of loans subject to loan maturity and interest rate sensitivity disclosure called for by Guide 3 to conform to those required to be disclosed in U.S. GAAP or IFRS financial statements;
- eliminate the analysis of loan loss experience disclosure called for by Guide 3, as that overlaps with existing SEC, U.S. GAAP or IFRS requirements;
- require disclosure of the breakdown of the allowance for loan losses based on the loan categories required to be presented in U.S. GAAP financial statements rather than the loan categories specified in Guide 3;
- require disclosure of the ratio of net charge-offs during the period to average loans outstanding, but on a more disaggregated basis than called for by Guide 3, based on the loan categories required to be presented in U.S. GAAP or IFRS financial statements;
- require disclosure of three additional credit ratios — allowance for credit losses to total loans, nonaccrual loans to total loans and allowance for credit losses to nonaccrual loans — along with each of the components used in their calculation, and a discussion of factors that led to material changes in the ratios or related components;
- retain the majority of the deposits disclosures called for by Guide 3, with some revisions, including requirements to disclose the amount of uninsured deposits and the amount of U.S. time deposits in excess of the FDIC insurance limit;
- eliminate the return on asset, return on equity, dividend payout and equity to assets ratio disclosures called for by Guide 3, as these are not unique to banking registrants (the SEC notes, however, that these disclosures should be included in MD&A when they are material to investors and necessary to an understanding of the registrant’s financial condition and results of operations);
- replace certain existing short-term borrowings disclosures called for by Guide 3 with required disclosure of the average balance and related average rate paid for each major category of interest-bearing liabilities; and
- expand the institutions that are subject to Article 9 of Regulation S-X to include savings and loan associations and savings and loan holding companies.