In past years, the SEC has engaged in a number of public requests for comments for possible revisions to Guide 3.[2] On September 11, 2020, after a comment process, which commenced in 2019, the SEC announced that it has adopted rules to update and expand the statistical disclosures that institutions covered by Guide 3 must provide to investors, considering changes in this sector over the past 30 years. The new rules also eliminate certain disclosure items that are duplicative of other SEC rules and/or are required to be disclosed in financial statements using U.S. GAAP or IFRS.
In the SEC’s press release announcing the adoption of the final rules, SEC Chairman Jay Clayton stated that “the changes . . . are designed to elicit better disclosures for investors and add efficiencies to the compliance efforts of registrants.”[3][4]
Key Developments
Guide 3 Rescinded. Guide 3 was promulgated over 30 years ago as SEC guidance rather than an actual SEC rule. Per the SEC Final Rule, Guide 3 will be rescinded effective January 1, 2023, and replaced by a new set of rules, which are to be codified in a new subpart 1400 of Regulation S-K (the general regulation setting forth the disclosure requirements for various SEC filings used by SEC registrants, including annual reports on Form 10-K and periodic reports on Form 8-K).[5] While the existing Guide 3 rescission date is not until January 1, 2023,[6] SEC registrants will be required to apply the new rules beginning with fiscal years ending on or after December 31, 2021, unless such registrants voluntarily choose to early adopt the new rules (as described below). Until then, registrants will be required to continue to apply the existing Guide 3 requirements. As has been the practice over the last decade or more, we expect that issuers engaged in Rule 144A transactions will also continue to seek to comply with Guide 3 until it has been replaced with the new rules.
Entities Subject to the New Rules — the new rules will apply to domestic and foreign bank holding companies, banks, savings and loan holding companies, and savings and loan associations.
Applicability to Foreign Registrants — the new rules will apply to foreign registrants. However, those foreign registrants that use IFRS will be exempt from certain disclosure requirements that are not applicable under IFRS. While the new rules will not codify the undue burden or expense accommodation for foreign registrants in existing Guide 3, the SEC did note that all registrants, including foreign registrants, can always use the “unknown and not reasonably available to the registrant” accommodation under Rule 409 of the U.S. Securities Act of 1933, as amended, and Rule 12b-21 promulgated under the U.S. Securities Exchange Act of 1934, as amended.
Timing of Implementation — the new rules will (i) be effective 30 days after publication in the Federal Register and (ii) apply to fiscal years ending on or after December 15, 2021. However, the SEC will accept voluntary compliance with the new rules prior to such date. The rules amend Regulation S-K but make no changes to the companion Regulation S-X, which sets forth the principal accounting requirements applicable to SEC filings, with the exception of a change to Article 9 described below.
Coordination with U.S. GAAP and IFRS — the new rules are intended to eliminate inconsistencies and overlap with applicable requirements under U.S. GAAP and IFRS, the two accounting standards available to SEC registrants. Commentators noted that this had increasingly become a source of confusion for registrants and investors as both U.S. GAAP and IFRS had been modified significantly and Guide 3 had remained unchanged. In some instances, this had led to different disclosure requirements in a registrant’s SEC reporting documents and its financial statements and, in other instances, there was a significant amount of overlap between the reporting standards, which the new rules are intended to eliminate. We do expect that SEC registrants and 144A issuers (and underwriters of their securities) will nonetheless look to their independent accountants to help validate and provide customary comfort on the various tabular and other disclosures required by the new rules. We therefore recommend that issuers consult with their independent accountants as early as possible on the timing and nature of presentation to be certain that there is clarity on how the new rules are to be addressed.
No Effect on Audit or XBRL Requirements — the disclosures required by the new rules are not required to be presented in the notes to the financial statements. As such, the disclosures will not have to be audited, and they will not be subject to the SEC’s XBRL requirements.
Reporting Periods — disclosures will be required for each annual period presented and any additional interim period, but only if a material change in the information or trends evidenced thereby has occurred.
Changes to Article 9 of Regulation S-X — given that the new rules will apply to savings and loan holding companies and savings and loan associations, Article 9 of Regulation S-X will also be amended to bring these registrants within their scope.
Principal New Disclosure Requirements
Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential — the new rules codify the existing Guide 3 requirements in respect of the average balance sheet, interest and yield/rate analysis, and rate/volume analysis disclosure items, with the main change being that registrants will now be required to (i) separate (x) federal funds sold from securities purchased with agreements to resell and (y) federal funds purchased from securities sold under agreements to repurchase and (ii) disaggregate commercial paper. As adopted, the rules only require the disaggregation of interest-earning assets and interest-bearing liabilities, if material.
Investment Portfolio — the new rules codify the existing Guide 3 requirements in respect of disclosure of the weighted average yield for each range of maturities by category of debt securities. However, in a significant departure from the existing guidance, registrants can now use the categories required by U.S. GAAP or IFRS rather than the categories currently listed under existing Guide 3. As mentioned above, this should prove beneficial to investors as it eliminates inconsistency from the SEC disclosure and registrants’ financial statements. In another simplifying change, the new rules will only apply to debt securities that are not carried at fair value through earnings. Finally, the SEC did not codify the following existing Guide 3 requirements on (i) book value information, (ii) the maturity analysis of book value information and (iii) the disclosures related to investments exceeding 10% of stockholders’ equity.
Loan Portfolio
- The new rules codify the existing Guide 3 requirements in respect of disclosing maturity by loan category and the total amount of loans due after one year that have (i) predetermined interest rates and (ii) floating or adjustable interest rates according to the loan categories disclosed in the registrant’s U.S. GAAP or IFRS financial statements. Further, the SEC codified the requirement that maturities should be determined according to contractual terms and that non-contractual rollovers or extensions should be included (and explained) for purposes of classifying a loan’s maturity.
- In an effort to provide investors with more information to analyze a registrant’s interest rate risk, the new rules expand on the existing Guide 3 requirements by separating the “after five years” maturity category into two categories: (i) after five years through 15 years and (ii) after 15 years.
- However, in a significant departure from the existing Guide 3, the new rules will no longer allow the (i) exclusion of real estate-mortgage, installment loans to individuals and lease financing or (ii) aggregation of foreign loans to governments and official institutions, banks and other financial institutions, commercial and industrial and other loans. In making this determination, the SEC cited that registrants should be following the loan categories as set forth in their U.S. GAAP or IFRS financial statements, which do not allow these exclusions but rather permit immaterial loans to be classified in an “other” category.
- Further to its simplification mandate, the SEC did not codify the existing Guide 3 requirements on loan category disclosures, loan portfolio risk elements and other interest-bearing assets disclosures.
Allowance for Credit Losses
- In perhaps one of the areas of most change, the new rules codify the existing Guide 3 requirements in respect of disclosing the ratio of net charge-offs during the period to average loans outstanding. However, that ratio is now to be 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 currently set forth in existing Guide 3.
- Similarly, while the new rules codify the tabular allocation of the allowance disclosure, such allocation will also now be based on the loan categories required to be disclosed in the registrant’s U.S. GAAP financial statements, instead of the loan categories specified in the existing Guide 3. This rule will not apply to IFRS registrants as IFRS already has a similar requirement.
- In an effort to eliminate overlap, the SEC did not codify the rollforward aspect of the allowance for loan loss disclosure given that that is already required under U.S. GAAP and IFRS.
- The final rules do not include any additional disclosure relating to the New Credit Loss Standard (IFRS 9) as the SEC deemed that additional information was not necessary, given the various new requirements in U.S. GAAP and IFRS.
- Finally, in another major change, the new rules will require registrants to provide the following three additional credit ratios (as well as a discussion of the factors that drove material changes therein) during the periods presented: (i) allowance for credit losses to total loans, (ii) nonaccrual loans to total loans and (iii) allowance for credit losses to nonaccrual loans.
Deposits
- The final 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 U.S. 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 making changes in the final rules, the SEC clarified that the amount to be disclosed for uninsured deposits is based on the portion of the account balance greater than the FDIC insurance limit and that registrants may consider other similar state deposit insurance regimes in evaluating whether a deposit is insured. The SEC also indicated that it had eliminated the reference to “individual” deposits in the revised definition to address commenter feedback seeking clarity on whether uninsured deposits are measured based on each individual account or include all accounts or persons to whom the insurance limits apply.
- The SEC specifically stated that consistent with the proposal, “the final rules require foreign bank and savings and loan registrants to disclose the definition of uninsured deposits appropriate for their country of domicile. However, in response to commenter concerns about how the proposed disclosure requirements would interact with overlapping regulatory regimes, the final rules specify that all registrants should determine the amount of uninsured deposits for purposes of Item 1406 based on the same methodologies and assumptions used for regulatory reporting requirements, to the extent applicable. This clarification better aligns the final rules with U.S. bank regulatory reporting requirements and provides some additional parameters for foreign registrants that may operate in several different jurisdictions and therefore may be subject to different insurance regimes.”[7]
- The final rules do not expressly reference other investment products such as mutual funds, annuities or life insurance policies or otherwise address whether such products would be considered uninsured deposits as some commenters requested. We believe bank and savings and loan registrants already evaluate whether any particular product is subject to an FDIC insurance regime, or similar state deposit insurance regimes, and therefore additional guidance is unnecessary.
- Finally, the rules require disclosure of (i) U.S. time deposits in excess of the FDIC insurance limit and (ii) time deposits that are otherwise uninsured 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 SEC noted that while U.S. GAAP requires disclosure of time deposits that meet or exceed the insured limit, it does not require this information to be disaggregated into the same maturity categories. The SEC also observed that U.S. GAAP does not require disclosure of time deposits that are otherwise uninsured by time remaining until maturity, and IFRS does not specifically require any of the deposit disclosures of Regulation S-K.
Return on Assets — Existing Guide 3 has required disclosure of four specific ratios for each reported period: (i) return on assets, (ii) return on equity, (iii) a dividend payout ratio and (iv) an equity to assets ratio. In the final rules, the SEC determined there was no need to address these items as these ratios are not unique to depository institutions. Further, the SEC’s guidance on financial statement analysis already suggests that registrants identify and discuss key performance measures when they are used to manage the business and would be material to investors.[8][9]
Short Term Borrowings — The new rules codify the requirement to disclose average balance and related average rates paid for each major category of interest-bearing liability disclosures currently called for by the existing Guide 3, and to further require disaggregation of the major categories of interest-bearing liabilities to include those referenced in the existing Guide 3 and Regulation S-X. Other disclosures in the existing Guide 3 on short term borrowings were not codified in the new subpart due to the belief that these are already addressed by existing financial statement requirements.
Going Forward
These new SEC rules are a very significant update of a former Guide that has not been modernized for over 30 years. The new rules make significant effort to coordinate accounting related disclosures with U.S. GAAP and IFRS and to reflect the various changes in how banks, savings and loans companies and other financial institutions today conduct their business.
We continue to see the need for discussion and further coordination with registrants’ independent accountants, and we expect further clarifications to be made in coming years as registrants begin implementing the new rules.
Please feel free to contact any of the Shearman attorneys listed below for further information on this significant rule change.
