On September 11, 2020, the Securities and Exchange Commission (the “SEC”) adopted final rules applicable to banks, bank holding companies, savings and loan associations, and savings and loan holding companies that will, among other things, (i) replace Industry Guide 3, (ii) be codified in a new subpart 1400 of Regulation S-K, (iii) update and expand the statistical disclosure requirements applicable to the covered registrants, and (iv) eliminate the Industry Guide 3 disclosures that overlap with existing SEC disclosure rules, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), or International Financial Reporting Standards (“IFRS”). The rules are among the SEC’s latest efforts to modernize disclosure requirements and intended to ensure investors have access to more meaningful and relevant information about such registrants to facilitate their investment and voting decisions.
The disclosures required by new Subpart 1400 of Regulation S-K are not required to be presented in any specific location in the registrant’s disclosure document and are expressly not required to be included in the notes to the financial statements. Thus, if the disclosures are provided outside the financial statements, they would neither be required to be audited, nor subject to the SEC’s requirement to file financial statements in a machine-readable format using XBRL.
The new rules apply to both domestic and foreign registrants, but also provide exemptions to IFRS registrants from certain of the disclosure requirements. Significantly, however, the SEC did not codify in the new rules the “undue burden or expense” accommodation to foreign registrants in General Instruction 6 to existing Guide 3; rather, it noted that all registrants, not just foreign registrants, can avail themselves of relief from providing information that is “unknown and not reasonably available to the registrant” pursuant to Rule 409 under the Securities Act of 1933, as amended, and Rule12b-21 under the Securities Exchange Act of 1934, as amended, making it clearer in the new rules that domestic registrants may also avail themselves of the relief from providing such information.
For purposes of Subpart 1400 of Regulation S-K, the term “reported period” means each annual period for which SEC rules require a registrant to provide financial statements. Interim period disclosures are required only if there is a material change in the information or the trend evidenced by the previously provided disclosures.
The new rules generally reflect the reporting changes, including the issuance of new accounting standards, that have taken place for banking registrants since the SEC’s last updated Industry Guide 3. The new rules require disclosure about:
- Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis) – The new rules codify the requirement to disclose all of the average balance sheet, interest and yield/rate analysis and rate/volume analysis disclosure items currently included in Item I of Industry Guide 3, along with General Instruction 7 and Instruction 5 of Item I of Industry Guide 3. The rules also will require, if material, registrants to disaggregate the categories of interest-earning assets and interest-bearing liabilities required to be disclosed and will specifically require, if material, registrants to separate (1) federal funds sold from securities purchased with agreements to resell and (2) federal funds purchased from securities sold under agreements to repurchase and to disaggregate commercial paper.
- Investment Portfolio – The new rules codify the requirement to disclose weighted average yield for each range of maturities by category of debt securities required to be disclosed in the registrant’s U.S. GAAP or IFRS financial statements, rather than those categories currently called for by Item II.B of Industry Guide 3. The disclosure requirement would apply, however, only to debt securities that are not carried at fair value through earnings. Because there is substantial overlap with U.S. GAAP and IFRS disclosure requirements, the new rules do not require the disclosure of the following items listed in Item II of Industry Guide 3: (a) book value information; (b) the maturity analysis of book value information; and (c) the disclosures related to investments exceeding 10% of stockholders’ equity.
- Loan Portfolio – The new rules codify the requirement to disclose the maturity by loan category disclosure currently called for by Item III.B of Industry Guide 3, with the loan categories based on the categories required by U.S. GAAP or IFRS in the financial statements, but the final rules also require additional maturity categories to provide investors with more detailed information on the potential interest rate risk associated with the loans in the portfolio. The final rules also codify the existing Industry Guide 3 instruction stating the determination of maturities should be based on contractual terms, and to the extent non-contractual rollovers or extensions are included for purposes of measuring the allowance for credit losses under U.S. GAAP or IFRS, such non‑contractual rollovers or extensions should be included for purposes of the maturities classification and the policy should be briefly disclosed.
The new rules also codify the requirement to disclose the total amount of loans due after one year that have (a) predetermined interest rates or (b) floating or adjustable interest rates currently called for by Item III.B of Industry Guide 3, disaggregated by the loan categories disclosed in the registrant’s U.S. GAAP or IFRS financial statements (recognizing that registrants may aggregate immaterial loan categories into an “other” loan category, or may combine immaterial loan categories with the most comparable material loan category). Registrants will no longer be permitted, however, to: exclude from these disclosures real estate-mortgage, installment loans to individuals and lease financing loan categories; or aggregate foreign loans to governments and official institutions, banks and other financial institutions, commercial and industrial, and other loans, as currently permitted under Item III.B of Industry Guide 3.
The new rules also will require two additional maturity categories for large portfolios: (1) after five years through 15 years, and (2) after 15 years. The additional maturity categories are intended to capture for investor consideration the maturity periods of commonly offered residential mortgage loan products, such as 15-year and 30-year residential mortgages.
Finally, the new rules do not retain the following Industry Guide 3 disclosure items because they call for disclosures that are reasonably similar to disclosures already required by SEC rules, U.S. GAAP, or IFRS: (1) the loan category disclosures called for by Item III.A of Industry Guide 3; (2) the loan portfolio risk elements disclosure called for by Item III.C of Industry Guide 3, which among other disclosures, included disclosure of loan concentrations exceeding 10% of loans that are not otherwise disclosed in the loan category disclosure in Item III.A and disclosure of cross border outstandings to borrowers in each foreign country where such outstandings exceed 1% of total assets; and (3) the other interest bearing assets disclosure called for by Item III.D of Industry Guide 3.
- Allowance for Credit Losses – The new rules codify the requirement to disclose the ratio of net charge-offs during the period to average loans outstanding based on the loan categories required to be disclosed in the registrant’s U.S. GAAP or IFRS financial statements, instead of on a consolidated basis as called for by Industry Guide 3. Registrants will also be required to provide the tabular allocation of the allowance disclosure called for by Item IV.B of Industry Guide 3, except that the allocation will be based on the loan categories presented in or reconciling to the U.S. GAAP financial statements. The final rules also codify the requirement to disclose disaggregated net charge-off ratios, but they do not codify the disclosure items in Item IV of Industry Guide 3 that overlap with U.S. GAAP and IFRS and do not require any disclosures related to the New Credit Loss Standard or IFRS 9.
- New Credit Ratios Disclosure – As discussed above, the new rules will require the existing Item IV.A of Industry Guide 3 ratio disclosure of net charge-offs during the period to average loans outstanding to be disclosed by the loan categories disclosed in the registrant’s U.S. GAAP or IFRS financial statements. In addition, the new rules will require disclosure of the following new credit ratios on a consolidated basis, along with each of the components used in their calculation: (1) Allowance for Credit Losses to Total Loans; (2) Nonaccrual Loans to Total Loans; and (3) Allowance for Credit Losses to Nonaccrual Loans. The rules will also require a discussion of the factors that drove material changes in the ratios, or related components, during the periods presented. As discussed above, the credit ratios will be required for each annual period for which SEC rules require financial statements, and any additional interim period if there was a material change in the information or the trends evidenced by the previously provided disclosures. The rules do not require disclosure of the ratio of nonaccrual loans to total loans or the allowance for credit losses to nonaccrual loans for IFRS registrants, as there is no concept of nonaccrual loans in IFRS.
- Deposits – The new rules codify the majority of the deposit disclosure items in Item V of Industry Guide 3, with some revisions. The new rules will require a separate presentation of: (1) U.S. time deposits in amounts in excess of the FDIC insurance limit, and (2) time deposits that are otherwise uninsured (including, for example, U.S. time deposits in uninsured accounts, non-U.S. time deposits in uninsured accounts, or non-U.S. time deposits in excess of any country-specified insurance fund), by time remaining until maturity of: (A) three months or less; (B) over three through six months; (C) over six through 12 months; and (D) over 12 months. The rules define uninsured deposits for bank and savings and loan registrants that are U.S. federally insured depository institutions as the portion of deposit accounts in U.S. 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. Foreign bank and savings and loan registrants will be required to disclose how they define uninsured deposits for purposes of this disclosure given that the definition varies from jurisdiction to jurisdiction.
The new rules do not require a few existing Industry Guide 3 disclosures to be perpetuated in registrant disclosure materials. For example, none of return on assets, return on equity, a dividend payout ratio, or an equity to assets ratio is required to be disclosed because, among other reasons, these ratios are not unique to bank and savings and loan registrants. Furthermore, the short-term borrowing disclosure items in Item VII of Industry Guide 3 are not required to be disclosed in their current form. Rather, they are included in and dispersed among other portions of the new rule. Finally, the other existing disclosure items in Item VII of Industry Guide 3 were excluded from the new rule because they are believed to be substantially covered by existing SEC rules and the financial statement requirements.
The rules will apply to fiscal years ending on or after December 15, 2021, with voluntary early compliance permitted. Industry Guide 3 will be rescinded effective January 1, 2023.