SEC Modernizes Banking Disclosure and Eliminates Industry Guide 3

On September 11, 2020, the Securities and Exchange Commission (“SEC”) adopted a final rule to modernize the statistical disclosures that banks, bank holding companies (“BHCs”), savings and loan associations, and savings and loan holding companies (“banking registrants”) have historically provided to investors according to Industry Guide 3, Statistical Disclosure by Bank Holding Companies (“Guide 3”).  The rule will eliminate Guide 3 and move the disclosure requirements into a new subpart of Regulation S-K (the “Item 1400 rules”).

Guide 3, first published in 1976, was intended to provide investors industry-specific information relevant to BHCs by requiring BHCs to provide tabular and narrative disclosure applicable to their banking operations in addition to the information required in periodic reports and registration statements.

Since Guide 3 was last revised in 1986, the SEC, the Financing Accounting Standards Board (“FASB”), and the International Accounting Standards Board have adopted new disclosure requirements and updated accounting standards, which have significantly changed financial reporting obligations.  In addition, the availability of the SEC’s Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”) has made registrants’ historical filings much more accessible to the public.  The implementation of the Item 1400 rules reflect the significant changes made in financial reporting in the last 30 years and are the next in a series of updates banks, BHCs, and similar registrants must adapt to following the 2008 financial crisis, Dodd-Frank implementation, and Basel Pillar 3 disclosure requirements. 

Longer Implementation Period
The new rules will be effective 30 days after publication in the Federal Register and will apply to fiscal years ending on or after December 15, 2021. This means that banking registrants will not be required to change their planned disclosure for their annual reports for fiscal year 2020, but will have to implement the new rules for 2021 reports. 

Summary of Key Changes

The final rule largely follows the SEC’s proposed rule with a few noteworthy changes. The following is a summary of the key updates:

  • Expand scope. The new rules will apply to both foreign and domestic registrants, including Regulation A issuers. In contrast, Guide 3 only applied to domestic registrants. Although the final rules explicitly expand the scope of the type of registrants required to provide Guide 3 disclosure, the SEC believes that there will be little effective impact of the change in scope for domestic registrants. The Item 1400 rules apply to banks, BHCs, savings and loan associations, and savings and loan holding companies, whereas Guide 3 by its terms only applied to BHCs. However, the prior industry practice was for any registrant who had material lending and deposit-taking activities to provide the Guide 3 disclosure.
  • Retain flexibility in disclosure location. The SEC is not requiring that the Item 1400 rules appear in any particular section of a banking registrant’s filings because they believed that providing registrants the flexibility as to where the disclosure appears will ultimately maximize the readability and usefulness of the information for investors and market participants. In addition, the disclosure is not required to be XBRL-tagged unless it appears in the notes to a registrant’s financial statements.
  • Harmonize reporting periods with financial statements. The Item 1400 rules reduce the reporting periods currently called for under Guide 3 and align the reporting periods with the number of years required to be reported in the financial statements filed with the report. Registrants will also have to provide disclosure for interim periods if there is a material change in the information provided pursuant to the Item 1400 rules or the trends shown in the disclosure. Guide 3 required BHCs to provide disclosures for each “reported period,” or five fiscal years of loan portfolio and loan loss data and three years of all other information.
  • Retain average balances and rate/volume disclosure. The Item 1400 rules largely codify what was included in Guide 3 and require disclosure of average daily balances of significant categories of assets and liabilities, including all major categories of interest-earning assets and interest-bearing liabilities, interest and yield/rate analysis and rate/volume analysis. In a departure from the proposed rules, the SEC determined in the final rule to require disaggregation of categories of interest-earning assets and interest-bearing liabilities only if material. In the proposed rule, the SEC would have required banking registrants to separate (1) federal funds sold and securities purchased with agreement to resell from interest-earning assets and (2) commercial paper and federal funds purchased and securities sold under repurchase agreements from interest-bearing liabilities. Instead, the SEC indicated that this disclosure should be included if it shows the drivers of the changes in interest-earning assets.
  • Eliminate most investment portfolio disclosures. The Item 1400 rules eliminate investment portfolio disclosures called for by Guide 3 that are duplicative of U.S. GAAP and IFRS financial statement requirements, including book value information, the maturity analysis of book value information, and disclosures related to investments that exceed 10% of stockholders’ equity. However, registrants are required to disclose weighted average yield of debt securities by maturity for securities that are not carried at fair value through earnings.
  • Remove certain loan portfolio disclosures. The Item 1400 rules do not include loan category disclosures, loan-risk portfolio elements, or interest-bearing asset disclosures that were required by Guide 3. Like the changes in investment portfolio disclosures, the SEC reasoned that similar disclosures are currently required by SEC rules, U.S. GAAP (including FASB’s credit loss standard (“CECL”)), or IFRS.
  • Retain loan maturity analysis. The Item 1400 rules retain the loan maturity analysis called for by Guide 3, but the loan categories will be based on the loan categories required to be disclosed in registrants’ U.S. GAAP or IFRS financial statements. In a departure from the proposed rule, the SEC will require more maturity categories than were included in the proposed rule to provide additional information about potential interest rate risk associated with loans in the portfolio. Those categories are: (a) within one year; (b) after one year through five years; (c) after five years through 15 years; and (d) after 15 years. The Item 1400 rules also codify the Guide 3 instruction that determination of maturity should be based on contractual terms and clarify the “rollover policy” by requiring registrants to briefly disclose the policy and how non-contractual rollovers or extensions are considered for maturities classification. In addition, the Item 1400 rules codify the requirement to present the total amount of loans due after one year that have (a) predetermined interest rates and (b) floating or adjustable interest rates, except that the rules require registrants to use the same loan categories that are disclosed in their financial statements.
  • Refine disclosure for allowance for loan losses and net charge-off ratio. Despite the recent implementation of CECL for some banking registrants and the delay of implementation for others, the Item 1400 rules will require particular credit loss disclosure. The Item 1400 rules require registrants to present the ratio of net charge-offs during the period to average loans outstanding. This ratio will be based on the disaggregated categories required by the registrant’s financial statements instead of average loans on a consolidated basis as is currently required. The SEC reasoned that some types of loans, like credit cards, have a higher net charge-off ratio as compared to residential real estate loans, and this disclosure will better help investors analyze trends in the loan portfolio. In addition, the Item 1400 rules will require a breakdown of the allocation of the allowance for loan losses called for by Guide 3 in tabular format (as opposed to narrative discussion) based on loan categories required to be disclosed in registrants’ financial statements. The Item 1400 rules eliminate the five-year analysis of loan loss experience and charge-offs that were required by Guide 3.
  • Add new credit ratios. In addition to the net charge-off ratio already required under Guide 3, the Item 1400 rules add three new required credit ratios: (1) allowance for credit losses to total loans; (2) nonaccrual loans to total loans; and (3) allowance for credit losses to nonaccrual loans. Banking registrants will also have to discuss factors that drove material changes in the ratios. The SEC reasoned that requiring these ratios should not be unduly burdensome for registrants because these consolidated ratios, or their components, are already reported to the SEC or registrants’ banking regulators. Notably, the SEC departed from the proposed rule and will not require newly public reporters to include five years of these credit ratios. Instead, registrants will only have to provide the ratios for the periods of the financial statements required by the registration statement or report. The approach taken in the Item 1400 rules is consistent with the SEC’s practice following the JOBS Act and FAST Act to streamline the disclosure required for emerging growth companies.
  • Retain and revise deposit disclosures. The Item 1400 rules retain most of the deposit disclosure requirements set forth in Guide 3, with several key revisions. The rules replace the requirement to disclose the amount of time deposits in excess of $100,000 with a requirement to disclose the amount of uninsured time deposits by maturity and to quantify the amount of the deposits that exceed the insured limit. The Item 1400 rules require separate presentation of time deposits in amounts in excess of the FDIC insurance limit and time deposits that are otherwise uninsured, by time remaining until maturity (three months or less, over three through six months, over six through 12 months, and over 12 months).
  • Eliminate performance ratios and short-term borrowings. The Item 1400 rules eliminate the disclosure of return on assets, return on equity, dividend payout, and equity to assets ratios required by Guide 3. The SEC reasoned that these ratios are not unique to banking registrants and the SEC’s guidance on management discussion and analysis regarding key performance indicators require these disclosures when necessary to an understanding of registrants’ financial condition and results of operations. Furthermore, the Item 1400 rules eliminate short-term borrowings disclosures called for by Guide 3, with a few exceptions. For example, the rules codify the requirement to disclose the average rate paid for each major category of interest-bearing liability and to disaggregate the main categories of interest-bearing liabilities as described above.

Next Steps
Although registrants are not required to comply with the new Item 1400 rules until the 2021 annual reporting season, companies should start evaluating the changes that may need to be made to their disclosure controls and procedures. New processes or data collection may be required for some of the newer items, like disaggregating the ratio of net charge-offs to average loans and new credit ratios, which may take time to implement and refine. If you would like more information on the elimination of Guide 3 and the implementation of the SEC’s new rule, which is available at this link, please contact a member of our Securities and Capital Markets team.

Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2020 Harter Secrest & Emery LLP