SEC Final Rule Modernizes Statistical Disclosures for Banking Registrants
On September 11, 2020, the Securities and Exchange Commission (SEC) issued a final rule that substantially updates and expands statistical disclosure requirements for bank and savings and loan registrants that are currently set forth in the SEC's Industry Guide 3 (Guide 3). This marks the first time in over 30 years that the SEC has substantively revisited the statistical disclosures required of depositary institution and depositary holding company registrants. Notably, the final rule codifies the updated disclosure requirements in the new Subpart 1400 of Regulation S-K (Subpart 1400) and will rescind Guide 3.
The final rule generally became effective November 16, 2020 and will apply to fiscal years ending on or after December 15, 2021. Voluntary compliance with the final rule (but only in whole and not in part) will be accepted in advance of this applicability date, creating an imminent 2021-reporting-cycle decision point for depositary institution and depositary holding company registrants.
The following discussion is limited to the application of the final rule to domestic registrants only and so does not cover the relationship between IFRS and Guide 3 and Subpart 1400.
(a) General. In September 2019, the SEC proposed to substantively modify required statistical disclosures and to reorganize the resulting requirements by rescinding Guide 3 in its entirety, completely eliminating those Guide 3 disclosures that overlap with the disclosures otherwise required by SEC rules (particularly the rules governing Management's Discussion & Analysis (MD&A) disclosures) and US GAAP, and codifying into the new Subpart 1400 particular Items of Guide 3 that do not otherwise overlap with disclosures required by SEC rules or US GAAP, while also adding certain new credit ratio disclosure requirements. The new Subpart 1400 applies to banks, bank holding companies, savings and loan associations, and savings and loan holding companies (referred to as "banking institutions" in this Advisory).
The last substantive revision of Guide 3, in 1986, predated certain changes in US GAAP disclosure requirements, particularly accounting for current expected credit losses, resulting in significant overlap and some redundancy between Guide 3 required disclosures and other disclosure requirements. In addition, SEC rules with respect to financial statement disclosure (Regulation S-X) call for much shorter financial statement periods than are currently called for by Guide 3, and the scaled disclosure regimes in the SEC rules applicable to Smaller Reporting Companies and Emerging Growth Companies are currently not available to such registrants under Guide 3.
(b) Guide 3. As currently in effect, Guide 3 generally applies to disclosures in registration statements and annual reports filed with the SEC by banking institution registrants, though other registrants engaging in lending and deposit-taking activities also currently provide Guide 3 disclosures to the extent applicable. Guide 3 disclosure requirements are broken out by items, with the following Items calling for disclosures regarding the following topics:
- Item I average balance sheets and analyses of net interest earnings
- Item II the registrant's investment portfolio
- Items III and IV–the registrant's loan portfolio and loan loss experience, respectively
- Item V—the registrant's deposits
- Item VI—measures of return on equity and assets
- Item VII— short-term borrowings of the registrant
Most of the above disclosures (unless otherwise specifically indicated within a subsection of the relevant item), are required as of the end of each reported period or as of the end of the latest reported period. The term "reported period" is defined in General Instruction 3 of Guide 3 as follows:
(a) each of the last three fiscal years of the registrant, except as is provided in paragraphs (b) and (c) below;
(b) each of the last five fiscal years of the registrant with respect to Items III and IV, except as is provided in paragraph (c) below;
(c) each of the last two fiscal years with respect to all items, if the registrant had assets of less than $200 million or net worth of $10 million or less as of the end of its latest fiscal year; and
(d) any additional interim period necessary to keep the information from being misleading.
The reported period does not include an additional interim period under paragraph (d) above merely because an income statement is presented for such additional interim period, but the reported period does include such an additional period if a material change in the information presented or the trend evidenced thereby has occurred.
(c) Final Rule. The SEC's approach to "modernizing" the disclosures required under Guide 3 is to codify certain disclosure items into the new Subpart 1400, eliminating certain other required disclosure items, and streamlining certain other disclosure items by eliminating line items and reducing the number of years for which disclosure is required, as further discussed below.
(i) Reporting Periods. The final rule aligns the reporting periods currently required by Guide 3 with the periods required by the SEC rules applicable to financial statements.
(ii) Eliminated Disclosures. The final rule eliminates the following Guide 3 disclosures due to their overlap with the SEC rules or US GAAP, and affected registrants will no longer be required to provide any such disclosure, unless otherwise required by SEC rules or US GAAP, as applicable:
- Short-term borrowing disclosures called for by Item VII.1 and .2
- Book valuation information, maturity analysis of book valuation information, and disclosures related to investments exceeding 10% of stockholders' equity called for by Item II
- Loan category disclosure, loan portfolio risk elements disclosure, and the other interest-bearing assets disclosure called for by Item III
- The analysis of loss experience disclosure called for by Item IV.A
- Disclosure called for by Item VI related to return on assets, return on equity, dividend payout, and equity to assets ratios (since these ratios are not specific to bank and savings and loan registrants)
(iii) Codified Disclosures. The final rule codifies the following Guide 3 disclosure items in the new Subpart 1400, as none of them were determined by the SEC to have significant overlap with the requirements found elsewhere in the SEC rules or US GAAP:
- All of the average balance sheet and yield/rate disclosures called for by Item I and most of the deposit disclosures called for by Item V (with some revisions, as discussed below)
- Weighted average yield disclosure called for by Item II.B
- Loan maturity and sensitivity interest rate disclosures called for by Item III.B (with some revisions, as discussed below)
- Allocation of the allowance for loan loss disclosure called for by Item IV.B (with the allocation now to be based on the loan categories as disclosed under US GAAP in the registrant's financial statements, as discussed below)
- Ratio of net charge-offs disclosure called for by Item IV.A (but on a disaggregated basis for each of the loan categories in the registrant's financial statements, as discussed below)
In addition, the SEC aligned the investment categories in Item II.B and the loan categories in Items II.B, IV.A, and IV.B of Guide 3 with the debt security and loan categories, respectively, required under US GAAP in financial statements. The final rule also further disaggregates the categories of interest-earning assets and interest-bearing liabilities called for by Item I of Guide 3 and requires disclosure of the net charge-off ratio on a disaggregated basis based on the US GAAP loan categories.
(iv) New Credit Ratio Disclosures. The final rule requires disclosure of three additional credit ratios for bank and savings and loan registrants. A discussion of the components used to calculate these ratios and the factors that led to material changes in these ratios is also required.
(v) Uninsured Deposits. The final rule adds two new categories of deposit disclosure items related to uninsured deposits: the portion of deposit accounts in excess of the FDIC or similar state deposit insurance threshold (both generally and for US time deposits) and other investment or deposit accounts that are otherwise uninsured (both generally and for time deposits).
Detailed Discussion of the Final Rule
(a) Reporting Periods. Currently, Guide 3 requires five years of loan portfolio and summary of loan loss experience data and three years of all other information. There is, however, an exception for those registrants with less than $200 million of assets or $10 million of net worth, which may instead present only two years of information.
In response to comments that the SEC received regarding the five-year requirement being very burdensome and difficult to obtain for some affected registrants, the final rule now defines "reported period" in the new Subpart 1400 as "each annual period required by Regulation S-X or Form 1-A, as well as any additional interim period subsequent to the most recent fiscal year if a material change in the information or the trend evidenced thereby has occurred." The applicable SEC rules generally require two years of balance sheet and three years of income statement information (except with respect to smaller reporting companies, which may present two years of income statement information, and emerging growth companies, which may present two years of financial statements in the registration statement related to the initial public offering of their own securities). Substantially consistent with the current requirements under Guide 3, interim period disclosures will be required only when there is a material change in the information presented or a new trend develops.
In addition, with respect to credit ratios disclosure, in contrast to the proposed rule, the final rule likewise limits the required credit ratio disclosures to the periods for which financial statements are required, consistent with the requirements for periodic reports and registration statements.
(b) Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis. Currently, Item I.A of Guide 3 calls for disclosure of balance sheets that show the average balances of significant categories of assets and liabilities (including all categories of interest-earning assets and interest-bearing liabilities). Item I.B calls for disclosure of (a) for interest-earning assets, (i) interest on the average amount of each major category, (ii) average yield for each major category, (iii) average yield on all categories collectively, and (iv) net yield on all categories collectively; and (b) for interest-earning liabilities, (i) interest on the average amount of each major category, (ii) average rate paid for each major category, and (iii) average effective rate paid for all categories collectively. Item I.C calls for an analysis of volume and rate of interest income and interest expense (for the latest two fiscal years), segregated by each major category of interest-earning assets and interest-bearing liabilities into amounts that are attributable to changes in volume, changes in rates and changes in rates and volume.
The final rule codifies all of the average balance sheet, interest and yield/rate analysis, and rate/volume analysis disclosure items currently called for by Item I of Guide 3 (along with General Instruction 7 to, and Instruction 5 to Item I of, Guide 3, both of which Instructions relate to foreign activities) into Item 1402 of Regulation S-K. The final rule also requires registrants to disaggregate the categories of interest-earning assets and interest-bearing liabilities by requiring registrants to separate federal funds sold from securities purchased with agreements to resell and federal funds purchased from securities sold under agreements to repurchase, as well as to disaggregate commercial paper. Finally, unlike the proposed rule, the final rule clarifies that each average balance sheet disclosure item now codified in Item 1402(a) must be disaggregated only if material.
(c) Investment Portfolio. Currently, disclosure requirements related to a registrant's investment portfolio are called for by Item II of Guide 3. Of the existing requirements, the final rule codifies into Item 1403 of Regulation S-K, with modifications, Item II.B, which calls for the amount of each category of investment as of the end of the latest reported period, and the weighted average yield, for each of the following ranges of maturities: (i) one year or less, (ii) between one and five years, (iii) between five and ten years, and (iv) after ten years. However, rather than the categories currently used in Item II.B of Guide 3, Item 1403 of Regulation S-K will use the categories required by US GAAP—and only those not carried at fair value through earnings—to enhance the consistency and usefulness of such disclosures.
(d) Loan Portfolio. Currently, Item III of Guide 3 calls for disclosures with respect to the registrant's loan portfolio. Of the existing requirements, the final rule codifies into Item 1404 of Regulation S-K, with modifications, Item III.B, which calls for (a) a maturity analysis for each category of loans (other than mortgage real estate loans, installation loans, and lease financing) for the following maturity ranges: (i) one year or less, (ii) between one and five years, (iii) between five and ten years, and (iv) after ten years; and (b) a separate presentation of all loans due after one year with fixed versus floating or adjustable interest rates.
The final rule codifies the requirement to disclose maturity by loan category under Item III.B of Guide 3 into Item 1404 of Regulation S-K—but with the loan categories based on those categories required by US GAAP in financial statements of the registrant. In response to commenter feedback, the final rule also adds maturity categories to provide investors with sufficient information on the potential interest rate risk associated with the loans in the portfolio, separating the proposed "after five years" category into two categories: after five years through 15 years and after 15 years.
In addition, the final rule codifies the Guide 3 instructions stating that the determination of maturities be based on contractual terms, except as may vary due to a registrant's "rollover policy," (but clarifying that, to the extent non-contractual rollovers or extensions are included for purposes of measuring allowance for credit losses under US GAAP, such non-contractual rollovers or extensions should be included for purposes of the maturities classification), and requiring a brief discussion of the rollover policy.
The final rule also codifies the Item III.B disclosure requirement regarding the total amount of loans due after one year that have predetermined interest rates or floating or adjustable interest rates, with this disclosure also to be disaggregated by those loan categories disclosed in the registrant's US GAAP financial statements.
(e) Allowance for Credit Losses. Currently, Item IV.A of Guide 3 calls for a five-year analysis of loan loss experience, including the beginning and ending balances of the allowance for loan losses, charge-offs and recoveries by loan category, and additions charged to operations, as well as the ratio of net charge-offs to average loans outstanding. A brief discussion of those factors that influenced management's judgment in determining the amount of the additions charged to operating expense is also required. Item IV.B of Guide 3 calls for a breakdown of the allowance for loan losses by category and the percentage of loans in each category.
The final rule codifies in Item 1405 of Regulation S-K the requirement to provide a tabular allocation of the allowance for loan losses by category and the percentage of loans in each category, with such allocation now based on the loan categories as presented in the registrant's US GAAP financial statements, but does not require the rollforward of the allowance for loan loss disclosures currently called for by Item IV.A of Guide 3 because of this requirement's overlap with US GAAP.
The final rule also codifies the disclosure of the ratio of net charge-offs during the period to average loans outstanding into Item 1405 of Regulation S-K, though likewise based on the loan categories required to be disclosed in the registrant's US GAAP financial statements, rather than on a consolidated basis as currently called for by Guide 3.
(f) Credit Ratios (new disclosure requirement). In addition to the disclosure of net charge-offs during the period to average loans outstanding (discussed above), currently the only credit ratio called for by Guide 3, the final rule now codifies into Item 1405 of Regulation S-K the requirement to disclose the following credit ratios, including each component used in their calculation:
- Allowance for Credit Losses to Total Loans,
- Nonaccrual Loans to Total Loans, and
- Allowance for Credit Losses to Nonaccrual Loans.
The ratios listed above are to be disclosed on a consolidated basis, rather than by loan category. The final rule also requires a discussion of the factors that drove any material change in the ratios, or the components of the ratios, during the periods presented.
(g) Deposits. Currently, Items V.A and V.B of Guide 3 call for disclosures of the average amounts of and the average rates paid for specified deposit categories that exceed 10% of average total deposits. Item V.C calls for disclosure of the aggregate amount of deposits by foreign depositors in US offices, if material. Item V.D calls for a maturity analysis of time deposits (in amounts of $100,000 or more), and Item V.E calls for disclosure of time deposits in excess of $100,000 issued by foreign offices.
The final rule codifies the majority of the disclosures currently called for by Item V of Guide 3 into Item 1406 of Regulation S-K—but with certain revisions. The final rule replaces the "amount of outstanding domestic time certificates of deposit and other time deposits equal to or in excess of $100,000" by maturity disclosure called for by Item V.D of Guide 3 with a requirement to disclose the "amount of time deposits in uninsured accounts" by maturity. The final rule then requires a separate presentation of the following:
- US time deposits in amounts in excess of the FDIC insurance limit; and
- Time deposits that are otherwise uninsured (for example, US time deposits in uninsured accounts, non-US time deposits in uninsured accounts, or non-US time deposits in excess of any country-specified insurance fund) by time remaining until maturity of (i) 3 months or less; (ii) over 3 through 6 months; (iii) over 6 through 12 months; and (iv) over 12 months.
In addition, the final rule requires that bank and savings and loan registrants quantify the amount of uninsured deposits as of the end of each reported period. Unlike the proposed rule, the final rule permits a registrant to disclosed uninsured deposits at the reported date based on an estimate of uninsured deposits if it is not reasonably practicable to provide a precise measure of uninsured deposits; however, to do so, the registrant must disclose that such amounts are estimates, and such estimates must be based on the same methodologies and assumptions used for the bank or savings and loan registrant's regulatory reporting requirements.
The final rule defines "uninsured deposits" for bank and savings and loan registrants that are US federally insured depository institutions as "the portion of deposit accounts in US offices that exceed the FDIC insurance limit or similar state deposit insurance regimes and amounts in any other uninsured investment or deposit accounts that are classified as deposits and not subject to any federal or state deposit insurance regimes." In response to comments received regarding how the disclosure requirements should interact with overlapping regulatory regimes, the final rule clarifies that all registrants should determine the amount of uninsured deposits for purposes of Item 1406 of Regulation S-K based on the same methodologies and assumptions used for regulatory reporting requirements, to the extent applicable.
(h) Compliance Date. Registrants are required to apply the final rule beginning with the first fiscal year ending on or after December 15, 2021. (Registrants filing initial registration statements are not required to apply the final rule until an initial registration statement is first filed containing financial statements for a period on or after such date.) Until they are required to apply the final rule, depositary institution and depositary holding company registrants should continue to apply Guide 3; alternatively, voluntary early compliance is permitted, provided that the final rule is applied in its entirety from the date of early compliance.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.