United States: The SEC Issues A Request For Comment On Possible Changes To Industry Guide 3

 On March 1st, 2017, the Securities and Exchange Commission ("Commission") issued a request for comment ("RFC") seeking comment on Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" ("Guide 3").1 Guide 3, which applies to the description of business portions included or incorporated by reference in bank holding company (BHC) registration statements, was originally published in 1976, and was last updated in 1986.

The RFC seeks public input on a variety of issues, including how and to what extent Guide 3 can be improved, whether new or revised disclosure is needed, the elimination of duplicative or overlapping disclosure in Guide 3 and whether the Guide 3 disclosures, which are not Commission rules or requirements, should be codified as Commission rules.2 The RFC is also considering new disclosures that could be included in Guide 3 in order to address changes in the financial services industry. Last, the RFC asks whether registrants in the financial industry other than BHCs should be subject to the Guide 3 disclosures. The RFC is part of the Commission's disclosure effectiveness initiative undertaken during former Chair White's leadership.

Parallel Disclosure Regimes

One of the key questions in the RFC is whether any of the Guide 3 disclosures are currently provided by BHCs under other regulatory requirements, such as Commission rules, generally accepted accounting principles in the United States ("U.S. GAAP") or other regulatory regimes. If so, commenters are asked to consider whether those disclosures should stay in Guide 3, or be removed from Guide 3 and moved into the overlapping requirement. Commenters are also asked whether, in some situations, disclosures required under Commission or other regulatory requirements should instead be included in Guide 3. In this regard, the RFC demonstrates a sensitivity to the fact that today's financial institutions may be somewhat burdened by overlapping disclosure requirements, which potentially imposes unnecessary costs on the industry.

The other regulatory requirements affecting BHC disclosures in filings with the Commission are:

  • Article 9 of Regulation S-X, which sets forth the Commission's rules for the form and content of consolidated BHC financial statements, and financial statements for banks included in filings with the Commission ("Article 9");
  • Article 4 of Regulation S-X, which requires financial statements for domestic registrants to comply with U.S. GAAP, which in turn contain disclosure requirements that apply specifically to the financial industry;3
  • Item 303 of Regulation S-K: management's discussion and analysis of financial conditions and results of operations ("MD&A");
  • Item 305 of Regulation S-K: quantitative and qualitative disclosures about market risk, including interest rate risk; and
  • Item 2.02 of Form 8-K, which requires the filing of earnings releases and investor presentations, among other items.

BHCs and certain other banking entities publicly disclose certain statistical, financial and regulatory capital-related information pursuant to the following requirements:

  • Federal Financial Institutions Examinations Council Consolidated Reports of Condition and Income ("Call Reports") and Board of Governors of the Federal Reserve System ("FRB") bank holding company reports, which are prepared based on bank regulatory reporting requirements, and thus may include disclosure that differs from that included in a BHC's Commission filings;
  • U.S. GAAP, which requires annual filings describing the Basel III regulatory capital requirements and compliance therewith;
  • Large, internationally active banking organizations and certain other financial entities are subject to a liquidity capital ratio ("LCR") requirement and must publicly disclose LCR calculations;4
  • Banking organizations with $50 billion or more in total assets are required, under Basel III, to disclose sufficient information to allow market participants to assess the organization's capital adequacy ("Pillar 3"); and
  • Large BHCs are subject to the FRB's annual comprehensive capital analysis and review ("CCAR") as well as Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") stress testing ("DFAST"). The FRB generally publishes the CCAR results, and the banking organization's primary bank regulatory agency generally publishes the DFAST results.

In addition to the requests relating to specific parts of Guide 3, the RFC asks commenters to respond to some general questions, including:

  • How valuable to investors are the current Guide 3 disclosures?
  • Do the Guide 3 disclosures assist investors with comparing financial condition and results of operations across BHC registrants?
  • Should any of the Guide 3 disclosures be codified as Commission rules?
  • On which disclosures, other than Commission filings, do investors rely when making investment decisions?
  • Should non-Commission disclosures be incorporated into the Commission's disclosure requirements?
  • Should the Guide 3 disclosures be extended to other registrants, such as those engaged in the financial services industry?

In Appendix A to this Client Alert, we summarize, for each section of Guide 3, the discussion of potentially overlapping disclosure raised by the Commission and the various requests for comment relating to that section.

Potential New Disclosures to be Included in Guide 3

Recognizing the changes in BHC activities since adoption of Guide 3, the RFC asks commenters to consider whether and to what extent the refinement of Guide 3 to account for today's financial industry would assist investors in investment and voting decisions with respect to BHC registrants.

The requests for comment relating to Guide 3 modernization include:

  • Are there activities in which BHC registrants engage that are not covered by Guide 3 and about which the Commission should require disclosure, such as commodities, asset management or broker-dealer activities?
  • Are there additional disclosures — either potentially new or disclosures required by other regimes — not already discussed in the RFC that the Commission should consider for BHC registrants that would be important for investors?
  • Should the Commission require disclosures about non-interest income and/or non-interest expense for BHC registrants?
  • Should the Commission require disclosure of information related to the resolution plans required by Dodd-Frank for BHCs with total consolidated assets of $50 billion or more?
  • Should the Commission require disclosure that summarizes the inputs and results of the various stress testing scenarios that BHCs perform, such as disclosures related to DFAST and its results?
  • Should the Commission expand the scope of its XBRL requirements to apply to the Guide 3 statistical tabular disclosures to facilitate investor comparison of data across BHC registrants?
  • Should the Commission require disclosure of any of the information provided in Call Reports or other regulatory filings? How should the information be presented or included in a Commission filing? Should the Commission require hyperlinks directly to the Call Reports or other regulatory filings that are available on third-party government websites? Should any of this information be incorporated by reference?

Expanding the Coverage of Guide 3 to Registrants Other than BHCs

The Commission is considering whether to expand the scope of Guide 3 disclosures to registrants other than BHCs. Marketplace lenders that generally have material amounts of lending activity may be subject to many of the same risks as BHCs. The RFC asks for comment on whether the Guide 3 disclosures should be expanded to cover registrants in the financial services industry other than BHCs, and whether it should take an activity-based, rather than an industry-based, approach.

Applicability of Guide 3 to Foreign Registrants

Foreign registrants that meet the foreign private issuer requirements5 and file their annual reports on Form 20-F or 40-F may present their financial statements in accordance with the International Financial Reporting Standard ("IFRS") rather than U.S. GAAP, without a reconciliation footnote. Although the Commission has observed that foreign registrants that are banking organizations typically provide the Guide 3 disclosures, there are some Guide 3 disclosure requirements that are not recognized concepts under IFRS. Guide 3, due to its 1970s vintage, does not address the differences between U.S. GAAP and IFRS.

The RFC asks commenters to respond to the following, including:

  • Should foreign registrants that are banking organizations provide the disclosures discussed in the RFC?
  • Does IFRS require the same or similar information as that called for by Guide 3? If so, how is the information similar or dissimilar? What concepts or disclosures called for by Guide 3 are not recognized by, or contradict, IFRS?
  • Would investors in foreign registrants that are banking organizations and that prepare their financial statements in accordance with IFRS lose any important information if the Commission were to eliminate all Guide 3 disclosures that are duplicative of or overlap with current U.S. GAAP?

Scaled Disclosure – Continued Applicability

General Instruction 3 to Guide 3 allows BHC registrants with less than $200 million in total assets or less than $10 million of equity to provide disclosures for each of the past two fiscal years, instead of the past three to five fiscal years. Scaled disclosures are also available under Commission rules relating to registrants that meet the definition of smaller reporting company and emerging growth company. Because the latter group is larger than the number of BHC registrants eligible for scaled Guide 3 disclosures, the RFC asks whether the Guide 3 reporting periods should be modified.

The requests for comment relating to scaled disclosure requirements are summarized here:

  • Should the reporting periods called for by Guide 3 be modified, and if so, how? Should the Guide 3 reporting periods be reduced to match the Regulation S-X requirements and the scaled disclosure requirements for smaller reporting companies and emerging growth companies?
  • Should the reporting period size threshold in Guide 3 be eliminated?
  • What is the minimum number of periods an investor needs in order to analyze and comprehend changes in trends?
  • If the reporting periods are reduced, should BHC registrants without reporting histories or publicly available financial information provide additional years of disclosures?

Comment Period

The RFC will be subject to a 60-day comment period. We anticipate that a wide range of U.S. and non-U.S. financial institutions and their accounting and legal advisers, as well as industry organizations and investors, will express views as to a variety of issues raised by the RFC. To the extent that Guide 3 or the relevant SEC rules are revised, the issues raised by the RFC have the potential to result in significant changes that will affect a large number of SEC registrants. Those changes could substantially increase or decrease the costs that those registrants face as reporting companies, and alter the mix of information that investors use to evaluate their performance and prospects. Accordingly, we expect a significant amount of careful deliberation will occur before material changes are made.

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1 The RFC can be found at: https://www.sec.gov/rules/other/2017/33-10321.pdf.

2 Although the Guide 3 disclosures are not Commission rules, bank holding companies include Guide 3 disclosures in their filings under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"), and banks also typically include Guide 3 disclosures in their offering documents for exempt offerings.

3 Unless otherwise noted, references to U.S. GAAP are to the standards in effect as of the date of this alert.

4 In December 2016, the FRB adopted quarterly disclosure requirements related to the LCR requirement, including the disclosure of inputs into the LCR calculation. Covered organizations with $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody must comply in 2017.

5 The term "foreign private issuer" is defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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