Bringing Banking Registration into the 21st Century: SEC Codifies New Disclosure Requirements for Banking Registrants

Written by Taher Kameli & Chathan Vemuri

For the past 30 years, the rules and requirements for banks and savings & loan registrants for making disclosures to investors have been a mess as they simply duplicated other rules and requirements of the Securities & Exchange Commission (SEC) and the U.S. Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS).[1] This failed to take into account major changes in financial reporting since 1986 when the last substantive update to Industry Guide 3, Statistical Disclosure by Bank Holding Companies, the guide published by the SEC’s Division of Corporation Finance detailing the disclosure requirements made of banking registrants.[2] However, these disclosure requirements may have been made more efficient, easier and faster to follow thanks to a new set of rules formally adopted by the SEC.

On September 11, 2020, the SEC adopted a final rule replacing Industry Guide 3 with a new Subpart 1400 of Regulation S-K.[3] This new subpart 1400 eliminates the overlap between the disclosure requirements for banking registrants and the accounting principles under the GAAP[4] and the IFRS.[5] They help streamline the existing Guide 3 disclosures and add new disclosure requirements and modify existing ones.[6] These new rules apply to both domestic and foreign registrants, with certain exemptions given for issuers applying the IFRS.[1] These new rules provide crucial updates to the existing statistical disclosures required of banks and savings and loan institutions.[2]

The new requirements include those that require banks and savings and loan registrants to “1.) [give] a disaggregated presentation of federal funds sold, securities purchased with agreements to resell, federal funds purchased, securities sold under agreements to repurchase, and commercial paper; 2.) adopt a modified presentation regarding investments in debt securities, 3.)  align loan categories with those in the financial statements for purposes of reporting loan maturities, and split the ‘after five years’ maturity category into two categories: a.) after five years through 15 years and b.) after 15 years; 4.) require the ratio of net charge-offs during the period to average loans outstanding during the period, to be provided for each loan category for which disclosure is required in the financial statements, instead of on a consolidated basis as called for by Guide 3; 5.) adopt disclosure requirements for three new credit ratios and require disaggregated disclosure of the ratio of net charge-offs to average loans by each loan category presented in the financial statements, along with a discussion of the factors that drove material changes in the ratios or related components of the ratios; and 6.) change the disclosure requiring time deposits, to include the addition of a requirement to disclose separately the amount of uninsured deposits as of the end of each reported period.”[3]

Although the final rules serve to ultimately replace Guide 3, they still incorporate its key provisions while adding to and revising them.[4] This is especially true with regards to distributions of assets, liabilities, and stockholders’ equity (Item I Guide 3)[5] Currently Item I of Guide 3 requires banking and savings and loan registrants to provide balance sheets that “show the average daily balances of significant categories of assets and liabilities, including all major categories of interest-earning assets and interest-bearing liabilities.”[6] It also requires banking registrants to disclose “the average yield for each major category of interest-earning asset, the average rate paid for each major category of interest-bearing liability, the average yield on all interest-earning assets, the average effective rate paid on all interest-bearing liabilities, and the net yield on interest-earning assets” as well as the “interest earned or paid on the average amount of each category of interest-earning asset and interest-bearing liability.”[7] The Final Rules under

Item 1402 of Regulation S-K codifies the requisite disclosures under Item 1 of Guide 3 while disaggregating the categories of interest-earning assets and interest-bearing liabilities.[1] It also stipulates that enumerated categories of interest-earning assets and interest-bearing liabilities must be included among the major categories for disclosure, if they are material.[2] The final rules also require that they segregate disclosures by foreign and domestic activities if the registrant is required to separately disclose its foreign activities in its consolidated financial statements, as well as include analyses in their disclosures to investors relating to net interest earnings, rates and volume variances.[3]

The new final rules will start to apply to fiscal years ending on or after December 15 of 2021 and they will be effective 30 days after publication in the Federal Register.[4] However, that does not stop banking registrants from voluntarily complying with the new rules on their own accord before December 2021.[5] This is permitted so long as the complying registrants apply the rules completely as soon as they start to do so.[6] Compliance will be mandatory once they are incorporated as Subpart 1400 of Regulation S-K.[7] These amendments will go far in helping potential investors have better and clearer information about these banking and savings and loan registrants and their business affairs, in order to make informed and successful investment and voting decisions. Banking and savings and loan registrants, on the other hand, will benefit by having greater trust from investors due to the streamlined nature of their disclosures and how that will boost transparency.

Please contact the Law Offices of Kameli & Associates at info@kameli.com or give us a call at +1 (312)-233-1000 if you have questions about these new Final Rules if you’re looking to understand how to invest in particular banking registrants or if you’re a banking or savings and loan institution needing advice as to what the new rules are and how to follow them so as to avoid any loss from having to switch over later.

[1] Id.

[2] Id.

[3] Final SEC Statistical Disclosure Rules for Banking Registrants, pwc (Sept. 17, 2020) https://www.pwc.com/us/en/cfodirect/assets/pdf/in-brief/us2020-06-sec-statistical-disclosures-rules-banking.pdf

[4] SEC Modernizes Disclosures for Banking Registrants, SEC.Gov (Sept. 11, 2020) available at https://www.sec.gov/news/press-release/2020-205

[5] Id.

[6] Id.

[7] Id.

[1] Final SEC Statistical Disclosures Rules for Banking Registrants, pwc (Sept. 17, 2020) available at https://www.pwc.com/us/en/cfodirect/publications/in-brief/sec-statistical-disclosures-rules-banking.html

[2] Id.

[3] Katherine Herbert, Dionne Rousseau, Michael Waters, SEC Modernizies and Codifies Disclosure Requirements for Banking Registrants, Nat’l Law Rev. vol. X No. 274 (Sept. 29, 2020) available at https://www.natlawreview.com/article/sec-modernizes-and-codifies-disclosure-requirements-banking-registrants

[4] SEC Finalizes Rules Updating Statistical Disclosure Requirements for Banking Registrants, Sullivan & Cromwell LLP (Sept. 25, 2020) https://www.sullcrom.com/files/upload/sc-publication-SEC-finalizes-rules-updating-banking-registrant-disclosure.pdf

[5] Id.

[6] Id.

[7] Id.

[1] SEC Finalizes Rules Updating Statistical Disclosure Requirements for Banking Registrants, Sullivan & Cromwell LLP (Sept. 25, 2020) https://www.sullcrom.com/files/upload/sc-publication-SEC-finalizes-rules-updating-banking-registrant-disclosure.pdf

 

[2] Id.

[3] Katherine Herbert, Dionne Rousseau, Michael Waters, SEC Modernizies and Codifies Disclosure Requirements for Banking Registrants, Nat’l Law Rev. vol. X No. 274 (Sept. 29, 2020) available at https://www.natlawreview.com/article/sec-modernizes-and-codifies-disclosure-requirements-banking-registrants

[4] Id.

[5] SEC Finalizes Rules Updating Statistical Disclosure Requirements for Banking Registrants, Sullivan & Cromwell LLP (Sept. 25, 2020) https://www.sullcrom.com/files/upload/sc-publication-SEC-finalizes-rules-updating-banking-registrant-disclosure.pdf

 

[6] Katherine Herbert, Dionne Rousseau, Michael Waters, SEC Modernizies and Codifies Disclosure Requirements for Banking Registrants, Nat’l Law Rev. vol. X No. 274 (Sept. 29, 2020) available at https://www.natlawreview.com/article/sec-modernizes-and-codifies-disclosure-requirements-banking-registrants