By: Kevin Strachan
On September 18, 2019, the SEC released proposed changes (1) to Industry Guide 3, Statistical Disclosure by Bank Holding Companies, commonly referred to as “Guide 3.” Guide 3 is a set of disclosure requirements applicable to SEC-registered bank holding companies and savings and loan holding companies. The proposal would rescind Guide 3 in its entirety, while codifying certain of its disclosures in a new Subpart 1400 of Regulation S-K. A number of disclosures previously required in Guide 3 would be dropped altogether, generally because they are broadly duplicative of GAAP required disclosures.
Guide 3 was originally adopted in 1976, and the last substantive revision occurred in 1986. Beginning in 2016, the SEC has communicated a desire to update Guide 3 and requested comments from the public (2). In the almost five years 2015 through 2019, the SEC has issued only six comments in which they cited Guide 3, compared to 125 in the five years 2010-2014.
If I am not public, why do I care?
While there is a substantial disconnect between what the SEC deems material to the users of bank financial statements and what bank investors want to see, the proposed revisions reflect (or at least acknowledge) the comments of investors and other users of bank financial statements and, accordingly, they provide some insight as to what investors value in a bank’s financial disclosures.
Guide 3 is most relevant to a bank looking to conduct an initial public offering, either through a registered offering filed with the SEC or an offering statement under Regulation A. The reforms eliminate a number of disclosures for banks conducting an IPO that will continue to benefit banks in the years following an IPO.
Substance of Changes
Certain disclosures under the previous Guide 3 required registrants to disclose information going back five years, while GAAP and the other SEC reporting requirements only required at most three years of historical financial information. The release proposes to require this information only for the years for which financial statements are required, which is three years for most registrants and two years for many banks (including most bank IPOs, recent IPOs that qualify as emerging growth companies (EGCs), and banks qualifying as smaller reporting companies (SRCs), which after 2018 amendments includes most registrants with less than $250 million public float or less than $100 million in revenues).
The SEC has proposed to drop two elements of Guide 3—a requirement that Return on Equity and Assets be disclosed and certain disclosures of short-term borrowings. With respect to ROA and ROE, the SEC noted that these are not banking-specific, and that, to the extent such ratios constitute key performance indicators for a bank (or any registrant), they should be disclosed in MD&A. Furthermore, both ratios are relatively easily ascertainable from the average balance sheet required elsewhere in current Guide 3 and the proposed Regulation S-K Subpart 1400. The SEC has proposed to eliminate the short term borrowings disclosure primarily because these disclosures are typically provided in the average balance sheet, a separate Guide 3 requirement (and perhaps the most useful Guide 3 requirement) that is being codified.
Certain loan loss disclosures have been eliminated as Guide 3 was viewed as redundant and conflicting with respect to GAAP disclosures required of banks. CECL adoption will undoubtedly impact this area of disclosure as well.
One of the most glaring ways in which Guide 3 was outdated was in its requirement to report separately deposit accounts of $100,000 or more. The release proposes to index this threshold to the FDIC insurance limit, matching the GAAP requirement and future-proofing the regulation from any changes to the current $250,000 insurance limit. Interestingly, the $100,000 number was actually established back in 1976 when the deposit insurance limit was only $40,000; the disclosure threshold matching the deposit insurance from 1980-2008 was somewhat of a coincidence. Regardless, the failure to update a financial reporting threshold in 43 years is perhaps the clearest indication that Guide 3 was due for an update.
One proposal increasing the disclosure burden is the addition of three new credit ratios: (1) Allowance for Credit Losses to Total Loans, (2) Nonaccrual Loans to Total Loans and (3) Allowance for Credit Losses to Nonaccrual Loans. These ratios are calculated on a consolidated basis. Guide 3 currently requires a fourth credit ratio, Net Charge-offs to Average Loans, also calculated on a consolidated basis. The release proposes to expand the Net Charge-offs to Average Loans disclosure by requiring that it be provided for each loan category. The SEC cited as evidence that this information is helpful the fact that many banks disclose this information even though not currently required by GAAP or SEC requirements. These ratios are required to be disclosed for a five-year period for banks that are conducting an IPO or an initial offering under Regulation A.
Although the SEC characterizes the proposed changes as “streamlining,” there are a number of elements of the proposal that, in the SEC’s own estimation, will increase the time burden of preparing the affected filings. Of course, that represents an additional burden each year, without taking into account the costs of incorporation the new rules into the financial reporting process.
Ability to Comment
The SEC will accept comments for 60 days after the proposal is published in the Federal Register, which has not yet occurred as of this writing. The comment deadline will likely be around the end of November.
The SEC’s press release containing a link to the proposal can be found here: https://www.sec.gov/news/press-release/2019-179.(2)
For example, see the comments from the ABA: https://www.aba.com/-/media/archives/commentletters/secabaresponsetosecguide3proposal.pdf and Crowe Horwath: https://www.sec.gov/comments/s7-02-17/s70217-1837921-154863.pdf. A number of accounting firms commented, as did a few investors and users of financial statements.