Since the 1960s, the United Stated Securities and Exchange Commission (SEC or Commission) has implemented several “Guides” for business disclosure by certain SEC registrants involved in banking, oil and gas, real estate, insurance, and mining activities. In particular, Industry Guide 3, Statistical Disclosure by Bank Holding Companies (Guide 3) requires bank holding companies and other registrants with material lending and deposit activities to comply with various qualitative disclosures on their respective assets, liabilities and stockholders’ equity, investment portfolios, interest rates and interest rate differentials, loan portfolios, summaries of loan loss experience, deposits, and return on equity and assets and short-term borrowings. Guide 3 has changed little since the 1960s; meanwhile, United States Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) have modernized significantly since.^[1]

On September 17, 2019, the SEC proposed rules to update disclosures for banking registrants. Namely, the proposed amendments would, while maintaining the integrity of Guide 3: rescind Guide 3; codify and modernize certain Guide 3 disclosure guidelines in a new Subpart 1400 of Regulation S-K; and eliminate certain similarities and redundancies between Guide 3 guidelines and existing SEC Rules. The comment process followed, and on September 11, 2020, almost one year later, the SEC announced it has adopted rules to update the statistical disclosure requirements for banking registrants. These changes, as explained by SEC Chairman Jay Clayton, “are designed to elicit better disclosures for investors and add efficiencies to the compliance efforts of registrants.”^[2] Changes, key developments, and final rules described below will have a mandatory compliance date for registrants starting with fiscal years ending on or after December 15, 2021, with the exception for the rescission of 17 CFR 229.801(c) and 229.802(c) (rescission of Guide 3), which will be effective January 1, 2023. Until then, registrants will have some time to evaluate and process these updates and should continue to refer to Guide 3 for assistance until an initial registration statement is first filed containing financial statements for a period on or after the mandatory compliance date.

(1) Generally

Entities Covered. The new rules will apply to domestic and foreign bank holding companies, banks, and savings and loan associations. Article 9 of Regulation S-X will be amended to bring savings and loan holding companies into the scope of these new rules.

Timing of Implementation. As mentioned above, the new rules will apply to fiscal years ending on or after December 15, 2021; nevertheless, the SEC will accept voluntary compliance with the new rules prior to such date.

Effect on Audit or XBRL Requirements. The disclosures required by the new rules will not have to be audited and will not have to be subject to SEC’s XBRL requirements, as they are not required to be presented in the notes to the financial statements. This will continue to allow registrants the flexibility to determine where Guide 3 disclosures are provided.

(2) Guide 3 Rescinded

As previously mentioned, Guide 3 was promulgated as SEC guidance as opposed to an actual SEC rule. The Guide 3 rescission will be effective January 1, 2023, replaced and codified by a new set of rules in new Subpart 1400 of Regulation S-K. SEC registrants will be required to apply the new rules beginning with fiscal years ending on or after December 15, 2021, unless a registrant voluntarily chooses to adopt the new rules early. Regardless of when whether a registrant adopts the new rules, until it does, it will have to continue to apply the existing Guide 3 requirements. In addition to the rescission of Guide 3, SEC did not codify certain Guide 3 requirements, such as the requirement on loan category disclosures, loan portfolio risk elements, and other interest-bearing asset disclosures.

(3) Codify & Modernize

Allowance for Credit Losses. The new rules will now require the tabular allocation of the allowance disclosure of the ratio of net charge-offs during the period to average loans outstanding based on the loan categories already required to be disclosed in a registrant’s GAAP or IFRS financial statements rather than on a consolidated basis as required by Guide 3.

Deposits. The new rules require registrants to quantify the amount of uninsured deposits as of the end of each reported period. Uninsured deposits include amounts in deposit accounts that exceed the FDIC insurance limit or similar state deposit insurance regimes and amounts in any other uninsured investment or deposit accounts classified as deposits and not subject to any federal or state deposit insurance regimes. This definition is intended to clarify that the amount to be disclosure for uninsured deposits is based on the portion of the account balance, which is greater than FDIC insurance limit. This change is intended to reduce some of the comparability concerns for registrants operating in different jurisdictions.

Disclosure of Additional Credit Ratios. The new rules will require registrants to provide three additional credit ratios during the periods presented: (i) allowance for credit losses to total loans, (ii) allowance for credit losses to nonaccrual loans, and (iii) nonaccrual loans to total loans. This new rule also requires a discussion of the factors that drove material changes for each credit ratio discussed.

Distribution of Assets, Liabilities of Stockholders’ Equity; Interest Rates and Interest-Earning Assets and Liabilities. The SEC codified the average balance sheet, rate/volume analysis, and interest and yield/rate analysis disclosure items currently in Item I of Guide 3. Additionally, the codification will require registrants to separate both federal funds sold from securities purchased with agreements to resell and federal funds purchase from securities sold under agreements to repurchase and disaggregate commercial paper. Here, commercial paper consists of short-term promissory notes issued primarily by corporations. Notably, however, the new rules only require the disaggregation of interest-earning assets and interest-bearing liability that are considered material.

Investment in Debt Securities. Item 1403 of Regulation S-K codifies the requirements with respect to disclosure of weighted average yield for each range of maturities by category of debt securities, yet modernizes Guide 3 disclosures in that registrants may use categories required by GAAP or IFRS rather than the categories currently listed under existing Guide 3.

Loan Portfolio. The new rules codify existing Guide 3 requirements, which require disclosure of maturity by loan category, and total amount of loans due after one year that have (i) predetermined interest rates and (ii) floating or adjustable interest rates according to loan categories disclosed in such registrants GAAP or IFRS financial statements. The new rules also codify existing Guide 3 requirements that require maturities to be determined according to contractual terms. The new rules will expand loan portfolio disclosures by requiring a separation of the “after five years” maturity category, wherein registrants must categorize these by (i) after five years through 15 years, and (ii) after 15 years. The new rules will no longer allow registrants to exclude real-estate mortgage, installment loans to individuals and lease financing. The SEC noted registrants should be following loan categories as described in their respective GAAP or IFRS financial statements, which don’t allow for these exclusions but allow immaterial loans to be in the “other” category.

Reporting Period. Subpart 1400 generally reduces the reporting periods required under Guide 3 and now aligns them with pertinent annual periods required by SEC rules for a registrant’s financial statements as well as GAAP and IFRS reporting periods. Wherein Guide 3 requires statistical disclosures for each “reported period” where such definition can last over five years depending on the disclosure (defined generally as (i) five years of loan portfolio and summary of loan loss experience data, (ii) three years for all other information, except that (iii) for all types of information, registrants with less than $200 million of assets or $10 million or less of net worth may choose to present only two years of the required information. This also includes any interim period required to keep the information from being misleading). Subpart 1400 defines “reported period” as (i) for all disclosures, each annual period required by SEC rules for a registrant’s financial statements and (ii) any additional interim period subsequent to the most recent fiscal year-end if a material change in the information presented or the trend evidenced thereby has occurred.

(4) Eliminate Similarities and Duplicative Items

Harmonization with GAAP and IFRS. To keep up with the changes and modernizations with GAAP and IFRS since the 1960s, the new rules have been updated to eliminate both inconsistencies with GAAP and IFRS as well as to eliminate overlap with applicable requirements in GAAP and IFRS, both of which are standards available to SEC registrants. For example, the SEC did not codify the rollforward aspect of the allowance for loan disclosure, as this is already required under GAAP and IFRS.

Elimination of Return on Equity and Assets, Short-Term Borrowings, and Others. The SEC did not codify Item VI of Guide 3 (calling for the ratios on return on assets, return on equity, dividend payout and equity to assets ratios); Item VII of Guide 3 (short-term borrowings) and other miscellaneous items, such as lack of codifications of book value information, the maturity analysis of book value information; and disclosures related to investments exceeding 10 percent of stockholders’ equity called for by Item II of Guide 3, because the SEC believes these are already covered by existing SEC rules.

____

Practical Considerations

Guide 3 has not been substantively updated for more than 30 years. These changes are just another example of the SEC’s “disclosure effectiveness initiative.” The SEC’s economic analysis of the rescission of Guide 3 notes affected entities will likely experience a decline in compliance costs as a result of the removal of overlapping disclosure items and reduced reporting periods. However, the adopting release notes the reduction may be offset by an increase in costs associated with complying with the three new credit ratio disclosure requirements and the additional disaggregated disclosure requirements. Given that public companies will look to their independent public accountants to validate and provide comfort on the various disclosures provided by the new rules, we recommend early engagement with their accountants.

A complete copy of the rules is available here.