Image by Gerd Altmann from Pixabay

How did we get here?

On September 11, 2020, the SEC adopted new rules to “update and expand the statistical disclosures” that bank holding companies, banks, savings and loan holding companies, and savings and loan associations are required to provide to investors. The old regime – Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” – had not been meaningfully updated for more than 30 years.  There have been all sorts of developments since then, including new accounting standards, a financial crisis, and new disclosure requirements imposed by banking agencies. So it’s not surprising that the SEC began questioning the need to make changes to Industry Guide 3, requesting comments in 2017 and again with a proposed rule in September 2019.

So, what’s new?

The changes were implemented in part to eliminate overlaps with disclosures already required under SEC rules, U.S. GAAP, and International Financial Reporting Standards (“IFRS”), as well as to incorporate new accounting standards. Under the new rules, disclosures are required for each annual period presented (as well as any additional interim period should a material change in the information or trend occur), aligning these disclosures with the annual periods for financial statements.

The new requirements will reside in new Subpart 1400 of Regulation S-K, and Guide 3 will be eliminated (more on that below).  Some of the key disclosure areas in the new rules are as follows:

  • Distribution of assets, liabilities and stockholders’ equity; interest rates; and interest differential (Item 1402 of Regulation S-K)
    • Registrants must present average balance sheets, including interest-earning assets and interest-bearing liabilities, as well as an analysis of net interest earnings.
    • Registrants must also include certain disaggregated disclosures of its interest rates and interest differential analysis.
  • Investments in debt securities (Item 1403 of Regulation S-K)
    • Item 1403 streamlines investment portfolio disclosures by providing for a weighted average yield of debt securities by category.
  • Loan portfolio (Item 1404 of Regulation S-K)
    • Registrants will find more streamlined loan portfolio disclosures in line with the loan categories required under the registrant’s GAAP or IFRS financials.
  • Allowance for credit losses (Item 1405 of Regulation S-K)
    • Registrants will find more streamlined summary of loan loss experience disclosures.
    • Registrants will need to disclose credit ratios for: (1) allowance for credit losses to total loans outstanding at each period end; (2) nonaccrual loans to total loans outstanding at each period end; (3) allowance for credit losses to nonaccrual loans at each period end; and (4) net charge-offs during the period to average loans outstanding during the period.
  • Bank deposits (Item 1406 of Regulation S-K)
    • For each reported period, registrants must present separately the average amount of, and the average rate paid on, each of the following deposit categories that are in excess of 10 percent of average total deposits: (1) noninterest bearing demand deposits; (2) interest-bearing demand deposits; (3) savings deposits; (4) time deposits; and (5) other.

What to watch for?

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. Voluntary compliance with the new rules, however, will be accepted in advance of the mandatory compliance date. Additionally, Industry Guide 3 will be rescinded effective January 1, 2023. The SEC also amended related Article 9 of Regulation S-X, which covers consolidated financial statements.

Hopefully, companies will see a reduction in compliance costs under the new regime with the elimination of overlapping disclosures and reduced reporting periods. Of course, these costs may increase with the additional credit ratios and disaggregated disclosure requirements.