Update of Statistical Disclosures for Bank and Savings and Loan Registrants

Federal RegisterOct 3, 2019

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, and 249

[Release No. 33-10688; 34-86984; File No. S7-02-17]

RIN 3235-AL79

Update of Statistical Disclosures for Bank and Savings and Loan Registrants

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing rules to update our statistical disclosures for banking registrants. These registrants currently provide many disclosures in response to the items set forth in Industry Guide 3 (“Guide 3”),

Statistical Disclosure by Bank Holding Companies,

which are not Commission rules. The proposed rules would update the disclosures that investors receive, codify certain Guide 3 disclosures and eliminate other Guide 3 disclosures that overlap with Commission rules, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), or International Financial Reporting Standards (“IFRS”). In addition, we propose to relocate the codified disclosures to a new subpart of Regulation S-K and to rescind Guide 3.

DATES:

Comments should be received on or before December 2, 2019.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-02-17 on the subject line.

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-02-17. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's website (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.

Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notification by email.

FOR FURTHER INFORMATION CONTACT:

Stephanie Sullivan, Associate Chief Accountant, or Dana Hartz, Accountant, Division of Corporation Finance, at (202) 551-3400, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing to amend 17 CFR 229.404 (“Item 404 of Regulation S-K”) under the Securities Act of 1933 (“Securities Act”)

and the Securities Exchange Act of 1934 (“Exchange Act”);

17 CFR 210.9-03 (“Rule 9-03 of Regulation S-X”) under the Securities Act and the Exchange Act; and 17 CFR 249.220f (“Form 20-F”) under the Exchange Act. In addition, the Commission is proposing to add a new subpart, 17 CFR 229.1400 (“Item 1400 of Regulation S-K”), which would include 17 CFR 229.1401 through 17 CFR 229.1406, and is proposing to rescind 17 CFR 229.801(c) and 229.802(c) Guide 3 Securities Act Industry Guide and Guide 3 Exchange Act Industry Guide (“Guide 3”) under the Securities Act and Exchange Act.

15 U.S.C. 77a

et seq.

15 U.S.C. 78a

et seq.

Table of Contents

I. Introduction and Backgrounds

A. Background

B. Issuance of the Request for Comment

II. Proposed New Subpart 1400 of Regulation S-K

A. Codification

B. Proposed Scope

C. Proposed Applicability to Domestic Registrants and Foreign Registrants

D. Reporting Periods

E. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis)

F. Investment Portfolio

G. Loan Portfolio

H. Allowance for Credit Losses

I. Deposits

III. Certain Existing Guide 3 Disclosures That Would Not Be Codified in Proposed Subpart 1400 of Regulation S-K

A. Return on Equity and Assets

B. Short-Term Borrowings

IV. Proposed Changes to Article 9 of Regulation S-X

V. General Request for Comments

VI. Economic Analysis

A. Introduction

B. Baseline

C. Economic Effects

D. Effects on Efficiency, Competition, and Capital Formation

E. Request for Comment

VII. Paperwork Reduction Act

A. Background

B. Burden and Cost Estimates Related to the Proposed Rules

C. Request for Comment

VIII. Small Business Regulatory Enforcement Fairness Act

IX. Regulatory Flexibility Act Certification

X. Statutory Authority and Text of Proposed Rules

I. Introduction and Backgrounds

A. Background

Guide 3 was first published in 1976 as “a convenient reference to the statistical disclosures sought by the staff of the Division of Corporation Finance in registration statements and other disclosure documents filed by bank holding companies (“BHCs”).”

Guide 3 calls for disclosure in seven areas: (1) “distribution of assets, liabilities and stockholders' equity; interest rates and interest differential”, (2) investment portfolios, (3) loan portfolios, (4) summary of loan loss experience, (5) deposits, (6) return on equity and assets, and (7) short-term borrowings. Guide 3 applies to BHCs,

although other registrants, including savings and loan holding companies, provide Guide 3 disclosures to the extent applicable. The Guide 3 Release noted that “as the

operations of bank holding companies have diversified, it has become increasingly difficult for investors to identify the sources of income of such companies.”

The Division believed that disclosure of the same statistical information about BHCs on a regular, periodic basis would assist in assessing their future earning potential and enable investors to compare BHCs more easily.

Guide 3 has been amended over time to provide more consistency with Article 9 of Regulation S-X (“Article 9”)

and to elicit additional information about various risk elements involved in lending and deposit activities.

Guides for Statistical Disclosure by Bank Holding Companies,

Release No. 33-5735 (Aug. 31, 1976) [41 FR 39007] (“Guide 3 Release”). When it published the Guide 3 Release, the Commission stated that “[t]he Guides are not Commission rules nor do they bear the Commission's official approval; they represent policies and practices followed by the Commission's Division of Corporation Finance in administering the disclosure requirements of the federal securities laws.” Guide 3 was originally published as Securities Act Guide 61 and Exchange Act Guide 3. In 1982, Securities Act Guide 61 and Exchange Act Guide 3 were redesignated as Securities Act Industry Guide 3 and Exchange Act Industry Guide 3.

See Rescission of Guides and Redesignation of Industry Guides,

Release No. 33-6384 (Mar. 16, 1982) [47 FR 11476].

Rule 1-02(e) of Regulation S-X [17 CFR 210.1-02(e)] defines a BHC as “a person who is engaged, either directly or indirectly, primarily in the business of owning securities of one or more banks for the purpose, and with the effect, of exercising control.”

See supra

note 3.

Id.

17 CFR 210.9-01 through 9-07. Article 9 sets forth the form and content of the consolidated financial statements filed for bank holding companies and for any financial statements of banks that are included in filings with the Commission.

Amendments to Guides for Statistical Disclosure by Bank Holding Companies,

Release No. 33-6221 (July 8, 1980) [45 FR 47138] (“1980 Guide 3 Release”);

Revision of Financial Statement Requirements and Industry Guide Disclosure for Bank Holding Companies,

Release No. 33-6458 (Mar. 7, 1983) [48 FR 11104];

Revision of Industry Guide Disclosures for Bank Holding Companies,

Release No. 33-6478 (Aug. 11, 1983) 48 FR 37609 (together with Release 33-6458 the “1983 Guide 3 Releases”);

Notification of Technical Amendments to Securities Act Industry Guides,

Release No. 33-9337 (Jul. 13, 2012) [77 FR 42175] (“2012 Guide 3 Release”).

Since the last substantive revision to Guide 3 in 1986,

the Commission has adopted disclosure requirements

and the Financial Accounting Standards Board (“FASB”)

and International Accounting Standards Board (“IASB”)

have issued accounting standards that have changed the financial reporting obligations for registrants engaged in financial services. Consequently, some of the disclosures called for by Guide 3 overlap with subsequently adopted Commission rules, U.S. GAAP, or IFRS.

This revision added disclosures regarding loans and extensions of credit to borrowers in countries experiencing liquidity problems.

See Amendments to Industry Guide Disclosures by Bank Holding Companies,

Release No. 33-6677 (Nov. 25, 1986) [51 FR 43594].

For example, the Commission adopted Item 305 of Regulation S-K [17 CFR 229.305] in 1997.

Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments,

Release No. 33-7386 (Jan. 31, 1997) [62 FR 6044] (“Disclosure of Market Risk Sensitive Instruments Release”).

The Commission has broad authority and responsibility under the federal securities laws to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under those laws.

See, e.g.,

Sections 7 [15 U.S.C. 77g], 19(a) [15 U.S.C. 77s(a)] and Schedule A, Items (25) and (26) [15 U.S.C. 77aa(25) and (26)] of the Securities Act and Sections 3(b) [15 U.S.C. 78c(b)], 12(b) [17 CFR 781(b)] and 13(b) [17 CFR 78m(b)] of the Exchange Act. To assist it in meeting this responsibility, the Commission historically has looked to private sector standard-setting bodies designated by the accounting profession to develop accounting principles and standards. In 2003, in accordance with criteria established by the Sarbanes-Oxley Act, the Commission designated the FASB as the private sector accounting standard setter for U.S. financial reporting.

See Policy Statement: Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter,

Release No. 33-8221 (Apr. 25, 2003) [68 FR 23333].

The IASB, which is subject to oversight by the IFRS Foundation, is responsible for IFRS. For further information,

see http://www.ifrs.org/About-us/Pages/IFRS-Foundation-and-IASB.aspx.

References to IFRS throughout are to IFRS as issued by the IASB.

B. Issuance of the Request for Comment

On March 1, 2017, the Commission published a request for comment on possible changes to Industry Guide 3 (the “Request for Comment”).

The Request for Comment sought feedback on a number of areas, including:

See Request for Comment on Possible Changes to Industry Guide 3 (Statistical Disclosures by Bank Holding Companies);

Release No. 33-10321 (Mar. 1, 2017) [82 FR 12757].

• Whether, and in which respects, the specific quantitative and qualitative disclosures called for by Guide 3 should be modified, including elimination due to overlapping disclosure requirements in U.S. GAAP, IFRS, or other regulatory disclosure regimes;

• The types of information about registrants in the financial services industry that investors find important and the degree to which other disclosure regimes, such as those instituted by U.S. banking agencies, may be used by investors;

• Whether Guide 3 disclosures should be applicable to registrants other than BHCs; and

• Whether the reporting periods for Guide 3 disclosures should be modified.

In response to the Request for Comment, commenters expressed a range of views. Most commenters expressed support for an update to Guide 3.

Many of these commenters stated that Guide 3 disclosures that overlap with Commission rules, U.S. GAAP, and IFRS should be eliminated.

Some commenters stated there are overlapping disclosures contained in the U.S. banking agencies public regulatory reports.

However, one commenter noted the U.S. banking agencies information may be of limited use to investors given the volume and level of detail of it.

Furthermore, several commenters noted that the primary purpose of U.S. banking agencies reporting is different from the Commission's disclosure objectives.

Several commenters called for the Guide 3 disclosures to be less prescriptive and more principles-based.

See

letters from American Bankers Association (“ABA”) (June 28, 2017); American Express Company (“AmEx”) (July 7, 2017); BDO USA LLP (“BDO”) (May 4, 2017); Berry Dunn McNeil & Parker LLC (“BerryDunn”) (July 6, 2017); Center for American Progress (“CAP”) (July 7, 2017); Center for Audit Quality (“CAQ”) (May 8, 2017); Canadian Bankers Association (“CBA”) (June 2, 2017); Clearing House Association L.L.C., Securities Industry and Financial Markets Association (“CH/SIFMA”) (June 29, 2017); Crowe Horwath LLP (“Crowe”) (July 6, 2017); Deloitte & Touche (“Deloitte”) (June 1, 2017); Ernst & Young LLP (“EY”) (May 24, 2017); International Bancshares Corporation (“IBC”) (July 7, 2017); Independent Community Bankers of America (“ICBA”) (May 8, 2017); KPMG LLP (“KPMG”) (July 7, 2017); PNC Financial Services Group Inc. (“PNC”) (July 6, 2017); Public Citizen (July 7, 2017); RSM US LLP (“RSM”) (April 25, 2017); PricewaterhouseCoopers LLP (“PwC”) (June 28, 2017); Sumitomo Mitsui Financial Group, Inc. (submitted by Davis Polk & Wardwell LLP) (“SMFG”) (June 30, 2017); and XBRL US (“XBRL US”) (July 7, 2017).

See

letters from ABA; AmEx; BDO; BerryDunn; CAQ; CBA; CH/SIFMA; Crowe; Deloitte; EY; IBC; ICBA; KPMG; Mizuho Financial Group Inc. (“MFG”) (submitted by Simpson Thacher & Bartlett) (July 7, 2017); Mitsubishi UFJ Financial Group (“MUFG”) (submitted by Paul Weiss) (July 7, 2017); PNC; PwC; and RSM.

See

letters from ABA; Amex; CH/SIFMA; Deloitte; IBC; KPMG; and PNC.

See

letter from CH/SIFMA.

See

letters from ABA; Amex; CAQ; CH/SIFMA; Crowe; Deloitte; EY; PwC; and RSM.

See

letters from ABA; AmEx; BDO; CAQ; Crowe; Deloitte; EY; KPMG; and PNC.

A few commenters recommended that we consider addressing items such as (1) market risk and derivatives disclosures, (2) regulatory capital and other information currently required to be reported to U.S. banking agencies, (3) implementation and compliance with the Volcker Rule,

and (4) merchant banking and commercial assets information.

Some of these items affect a broader population of registrants than those addressed in this release and are activities for which Commission rules, U.S. GAAP, or IFRS already require detailed disclosures, such as derivatives. In addition, some of the recommended disclosures would likely give rise to confidentiality concerns related to confidential supervisory information

under the federal banking regulations.

See Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds;

Release No. BHCA-1 (Dec. 10, 2013) [79 FR 5535], which is commonly referred to as the Volcker Rule. The Volcker Rule is intended to prohibit banks from engaging in proprietary trading, which involves the bank using its funds to make short term trades in securities, derivatives, or commodity futures.

See

letters from CAP; Public Citizen; Ethics Metrics, LLC (“EM”) (May 8, 2017); and RSM.

See

12 CFR 261.20.

The U.S. banking agencies have rules that address the disclosure of confidential supervisory

information. Except in very limited circumstances, financial institutions are prohibited by law from disclosing nonpublic supervisory information to nonrelated third parties without written permission from the appropriate U.S. banking agency.

In developing our proposal, we considered the above recommendations, as well as the other comments received in response to the Request for Comment. Although the Request for Comment asked for feedback on a number of areas, in this release we focus on commenter feedback relevant to our proposals. We welcome additional feedback and encourage interested parties to submit comments on any or all aspects of the proposed amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

II. Proposed New Subpart 1400 of Regulation S-K

A. Codification

In the Request for Comment, the Commission sought input on whether any of the Guide 3 disclosures should be codified as Commission rules.

Some commenters recommended codifying these disclosures,

while others recommended that they not be codified.

Most of the latter commenters cited the ease of updating as the reason for not codifying the disclosures.

One commenter further stated that codification would not enhance adherence by registrants and that retaining Guide 3 as guidance would continue to allow registrants flexibility in their approach to disclosure.

In 1996, the Commission's

Task Force on Disclosure Simplification

recommended relocating the industry guides, including Guide 3, into Regulation S-K.

See Report of the Task Force on Disclosure Simplification

(Mar. 5, 1996), available at

http://www.sec.gov/news/studies/smpl.htm.

Currently, Instruction 13 to Regulation S-K Item 303(a) [17 CFR 229.303(a)] directs the attention of bank holding companies to the information called for by Guide 3. Additionally, an Instruction to Item 4 of Form 20-F indicates that the information specified in any industry guide that applies to the registrant should be furnished, and Item 7(c) of Form 1-A states that the disclosure guidelines in all Securities Act Industry Guides must be followed, and to the extent the industry guides are codified into Regulation S-K, the Regulation S-K industry disclosure items must be followed. We propose to amend Item 4 of Form 20-F to refer to proposed Items 1400 through 1406 of Regulation S-K.

See

letters from Crowe; Deloitte; and EY.

See

letters from ABA; AmEx; CBA; and CH/SIFMA.

See

letters from ABA; AmEx; and CH/SIFMA.

See

letter from CH/SIFMA.

We propose updating and codifying certain Guide 3 disclosures in a new Subpart 1400 of Regulation S-K.

This is consistent with the approach taken by the Commission when it has modernized other Industry Guides.

This proposed approach would mitigate uncertainty about when these disclosures must be included in Commission filings and enhance comparability across banking registrants, both foreign and domestic. Furthermore, the process to update an Industry Guide is the same as amendments to disclosure requirements. While there may be a decrease in flexibility driven by codification of the proposed rules into Regulation S-K, we believe this reduced flexibility is outweighed by the benefits of certainty about whether the disclosures are required. We also believe codification would streamline compliance by including these disclosures in Regulation S-K along with other non-financial statement disclosure requirements.

The Industry Guides, or Guide 3 specifically, are referenced in instructions to Forms 20-F and 1-A, as well as in instructions to Items 303 and 404 of Regulation S-K. We have proposed to replace these references, as applicable, with a reference to the proposed Subpart 1400 of Regulation S-K. We also propose to delete the reference to potential problem loans in Item III.C.1 and 2 of Guide 3 and Instruction 4(c) of Item 404 of Regulation S-K because we are not proposing to codify these disclosures. See Section II.G for further discussion.

For example, Industry Guide 2 was revised and codified in Subpart 1200 of Regulation S-K (17 CFR 229.1201 through 1208),

Modernization of Oil and Gas Reporting,

Release No. 33-8995 [74 FR 2157]. The Commission also recently consolidated the property disclosure requirements for mining registrants in a new Subpart 1300 of Regulation S-K,

Modernization of Property Disclosures for Mining Registrants,

Release No. 33-10570 (October 31, 2018) [83 FR 66344].

Request for Comment:

1. Should we codify the Guide 3 disclosures in new subpart 1400 of Regulation S-K, generally as proposed? Should some disclosures remain in Guide 3? If so, which ones?

B. Proposed Scope

i. Background

By its terms, Guide 3 applies to BHCs. However, the disclosures called for by Guide 3 are also provided by other registrants with material lending

and

deposit activities, including savings and loan holding companies.

In the Request for Comment, the Commission acknowledged that BHCs today conduct a wider array of activities than at the time of Guide's publication.

Moreover, a wider range of companies, such as insurance companies, online marketplace lenders,

and other financial technology companies

engage in some of the activities addressed by the Guide 3 disclosure areas. However, these companies normally do not engage in deposit-taking activities and therefore do not provide Guide 3 disclosures. Based on these observations, the Commission asked whether Guide 3 should employ an activity-based scope, rather than a scope based on the type of registrant. For example, the Commission asked whether the Guide 3 investment disclosures should be extended to other registrants, such as those engaged in the financial services industry, regardless of whether the registrant is a BHC or has material lending and deposit-taking activities. The Commission also asked whether Guide 3 should employ a principles-based approach, instead of using bright-line percentages or dollar amount thresholds to trigger disclosure.

Many registrants refer to Staff Accounting Bulletin Topic 11:K—Application of Article 9 and Guide 3 (“SAB 11:K”), which states that “[t]he SEC staff believes [Guide 3 information] would be material to a description of business of [non-BHC] registrants with material lending and deposit activities . . .” The Industry Guides and SAB 11:K are not rules, regulations or statements of the Commission. If the proposed rule is adopted, the staff intends to rescind SAB 11:K.

For example, some BHCs engage in activities involving asset management, investment management, physical commodities, insurance, and broker-dealer activities.

Online marketplace lending is a method of debt financing, generally through loans, that does not use a traditional financial institution as an intermediary.

Financial technology companies develop or provide technological innovation in financial services. For example, a financial technology company may use computer programs and other technology to support or enable banking and financial services activities.

ii. Comments on Scope

Several commenters stated that the applicability of Guide 3 disclosures to non-BHC registrants should be clarified.

For example, a registrant with material lending

deposit-taking activities, but not both, may be uncertain about whether, and if so which, Guide 3 disclosures it should provide. Furthermore, uncertainty may exist about when investment, short-term borrowings, or return on equity and asset disclosures should be provided because those disclosures do not necessarily correspond to a “material lending

and

deposit activity” threshold. One commenter noted that this uncertainty could impede capital formation, because a registrant may incur costs to prepare Guide 3 disclosures that are not required.

One commenter stated that Guide 3 should continue to apply to BHCs and other registrants with material lending and deposit activities as this provides useful information to investors.

Another commenter stated that Guide 3

disclosures should apply to non-BHC registrants that have significant operations in which credit is provided.

Several commenters recommended an activity-based approach for Guide 3 disclosures,

and some of them recommended that it be specific to the material operations of the registrant.

Another commenter stated that an activity-based approach could be based on numerical thresholds, such as the percentage of a registrant's revenues derived from interest or dividends.

See

letters from CAQ; Crowe; Deloitte; EY; KPMG; and PwC.

See

letter from Crowe.

See

letter from CH/SIFMA.

See

letter from ABA.

See

letters from BDO; CAQ; CH/SIFMA; Deloitte; EY; KPMG; and RSM.

See

letters from CAQ; EY; and KPMG.

See

letter from RSM.

iii. Proposed Scope

We are proposing that the proposed disclosure requirements continue to apply to BHCs, as well as include most of the registrants that under existing practice provide the disclosures called for by Guide 3.

Proposed Item 1401 of Regulation S-K would apply to banks, BHCs, savings and loan associations, and savings and loan holding companies (together, “bank and savings and loan registrants”). Most commenters focused on the need to clarify the existing practice of providing Guide 3 disclosures when there are material lending

and

deposit-taking activities. We believe identifying and codifying the types of registrants within the scope of the proposed rules would provide this clarification. We also believe this scope would capture the majority of registrants that predominantly engage in the activities covered by existing Guide 3 and for which these activities are material.

We do not believe there is a large population of non-banking registrants that are providing Guide 3 disclosure today that only engage in one or a few of the activities addressed by its disclosure areas,

e.g.,

lending and deposit-taking. Furthermore, we believe registrants should be able to easily ascertain whether they are a bank or savings and loan registrant, reducing confusion regarding the applicability of the disclosures to non-BHCs.

See supra

note 32.

There are only four registrants that have loans and bank deposits on their balance sheet, but are not within the proposed scope.

See

Table 1: Registrants Currently Applying Guide 3 in the Economic Analysis.

We are not proposing to expand the scope to include other registrants, such as insurance companies, online marketplace lenders or other financial technology companies. While the proposed disclosures may be relevant to other registrants in the financial services industry, commenters provided limited feedback on the types of registrants, other than BHCs, that the Guide 3 disclosures would be applicable to and whether it would be material under an activities-based approach. We believe additional feedback on how investors of registrants outside of the proposed scope would use the proposed disclosures would be valuable. Further, we would like to understand whether these other registrants are providing similar information in a different format. We encourage interested parties, including those outside of the banking industry, to provide feedback on the proposed disclosures as they relate to registrants outside of the proposed scope.

Request for Comment:

2. Is the proposed scope of the proposed rules sufficiently clear? If not, how should we revise the scope to make it clearer? Should the proposed rules specifically include banks, savings and loan associations, and savings and loan holding companies, as proposed? If not, why not?

3. Are there other types of registrants that should be included? For example, should we expand the scope of the proposed rules to include credit unions or all financial services registrants with material operations in any of the activities covered by the proposed rules? What are the other types of registrants that have material operations in any of the activities covered by the proposed rules? Would expanding the scope in this way elicit information material to an investment decision or are these registrants providing similar information in a different format? Would it enhance comparability? Are there particular burdens that financial services registrants, including domestic and foreign registrants, other than those within the proposed scope, would face in providing the disclosures? If so, what are the burdens and would these burdens outweigh the benefits of the disclosures? Are there ways to modify the proposal to help alleviate the burdens of providing the disclosures for these registrants?

4. If we expand the scope to include all financial services registrants, how should we define a financial services registrant for this purpose? For example, should we define a financial services registrant to include entities that fall within the scope of ASC 942 Financial Services—Depository and Lending under U.S. GAAP?

Or should we define a financial services registrant as one that directly, or indirectly through its subsidiaries, engages primarily in providing financial services, including banking, investment, asset management, or other financial services? If so, would any of the following types of financial registrants be included in the definition: banks and bank holding companies, savings associations and savings and loan association holding companies, insurance companies, broker dealers, finance companies, foreign financial institutions, mortgage companies, online marketplace lenders, real estate investment trusts (“REITs”), asset managers, investment advisers, or government-sponsored enterprises? If the scope was expanded to include all financial services registrants, are there types of registrants, such as business development companies, that should be excluded?

ASC 942 provides incremental industry-specific guidance to the entities within its scope. The guidance in the Financial Services—Depositary and Lending topic applies to the following entities: (a) Finance companies, including finance company subsidiaries, (b) depositary institutions insured by either (1) the FDIC's Deposit Insurance Fund, or (2) the National Credit Union Administration's National Credit Union Share Insurance Fund, (c) bank holding companies, (d) savings and loan association holding companies, (e) branches and agencies of foreign banks regulated by U.S. federal banking regulatory agencies, (f) state-chartered banks, credit unions, and savings institutions that are not federally insured, (g) foreign financial institutions whose financial statements are purported to be prepared in conformity with accounting principles generally accepted in the United States, (h) mortgage companies, and (i) corporate credit unions.

5. If the scope included all financial services registrants, should we require disclosure only for the activities that are material to the business or financial statements of a registrant, or should disclosure be required for each of the areas covered by the proposed rules? Would a bright-line threshold work better for determining when these disclosures should be provided? If so, what bright-line threshold would be appropriate?

6. Should we consider an activity-based standard, such as one that captures material lending

and

deposit-taking activity, irrespective of registrant type? Should we consider a broader standard that would capture material lending

deposit-taking activity? What other activities could serve as the basis for such a standard? What additional types of registrants would be captured by an activity-based standard?

7. Are there registrants currently providing the Guide 3 disclosures that would not provide disclosures based on the proposed scope? If so, what types of registrants and which of the disclosures would they no longer provide? Would this change result in the loss of information material to an investment decision related to those registrants?

C. Proposed Applicability to Domestic Registrants and Foreign Registrants

i. Background

General Instruction 1 to Guide 3 states that the disclosures apply to the description of business portions of those registration statements and other specified filings for which financial statements are required. General Instruction 6 to Guide 3 indicates that the disclosures also apply to foreign registrants to the extent the information is available or can be compiled without unwarranted or undue burden and expense. Instructions to Item 4 of Form 20-F also indicate that the information specified in any industry guide that applies to the registrant should be furnished.

The staff has observed that bank and savings and loan registrants that are foreign registrants, including foreign private issuers, typically provide the Guide 3 disclosures.

Form 40-F [17 CFR 249.240f] does not have a similar requirement, but the staff has observed that Canadian foreign private issuers that are financial institutions typically provide Guide 3 disclosures in their Form 40-F filings.

Foreign private issuers are a subset of foreign registrants, and include any foreign issuer other than a foreign government, except for an issuer that has more than 50% of its outstanding voting securities held of record by U.S. residents and any of the following: A majority of its officers or directors are citizens or residents of the United States; more than 50% of its assets are located in the United States; or its business is principally administered in the United States.

See

Rule 405 of Regulation C [17 CFR 230.405] and Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)].

In the Request for Comment, the Commission asked whether these foreign registrants should provide the Guide 3 disclosures, whether IFRS disclosures provide the same or similar information as those called for by Guide 3, whether there are concepts or disclosures in Guide 3 that are not recognized under or contradict IFRS, and whether the unwarranted or undue burden or expense accommodation for foreign registrants was still necessary.

ii. Comments on Applicability to Domestic Registrants and Foreign Registrants

One commenter stated that Guide 3 should not apply to foreign banking registrants.

This commenter, along with several other commenters,

stated that foreign registrants face challenges in providing certain Guide 3 disclosures because they are based on U.S. GAAP or U.S. banking concepts that do not exist under IFRS.

Some commenters stated that the disclosures called for by Guide 3 should be aligned with the measurement and disclosure principles in IFRS, or provide more flexibility in accommodating accounting differences between U.S. GAAP and IFRS.

These commenters recommended, at a minimum, that foreign private issuers that apply IFRS be permitted to provide disclosures that address the objectives of the Guide 3 disclosure in a manner consistent with IFRS principles.

See

letter from CH/SIFMA.

See

letters from CAQ; CBA; Deloitte; EY; KPMG; SMFG; and PwC.

In 2008 the Commission began accepting financial statements of foreign private issuers prepared in accordance with IFRS as issued by the IASB without reconciliation to U.S. GAAP.

See

Item 17(c) of Form 20-F and

Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP,

Release No. 33-8879 (Dec. 21, 2007) [73 FR 985].

See

letters from CAQ; CBA; EY; and KPMG.

The commenters that opposed applying Guide 3 to foreign registrants also recommended this approach if foreign private issuers continue to be scoped into the disclosures.

See

letter from CH/SIFMA.

Two commenters addressed circumstances where information called for by Guide 3 is unavailable and cannot be compiled without unwarranted or undue burden or expense

and recommended the staff continue to evaluate requests for disclosure accommodations.

For example, one of these commenters stated that, in some situations, the staff has not objected to a foreign private issuer providing information that is different from what a domestic registrant would provide under Guide 3 as long as it achieves the same objective as the information called for by Guide 3.

Another commenter stated that corresponding home country standards provide adequate protection to investors, and noted that the act of converting existing financial reporting systems into systems that would generate the information to provide the exact disclosures called for by Guide 3 would result in significant costs.

General Instruction 6 to Guide 3 states that it should be brought to the staff's attention if Guide 3 information is unavailable to foreign registrants and cannot be compiled without undue burden or expense. The instruction further states that in evaluating the reasonableness of assertions by registrants that the compilation of requested information, such as historical data or daily averages, would involve an unwarranted or undue burden or expense, the staff takes into consideration, among other factors, the size of the registrant, the estimated costs of compiling the data, the electronic data processing capacity of the registrant, and efforts in process to obtain the information in future periods.

See

letters from SMFG and PwC.

See

letter from PwC.

See

letter from SMFG.

iii. Proposed Rule—Applicability to Domestic Registrants and Foreign Registrants

Our proposed rules would apply to both domestic registrants and foreign registrants. We recognize that there are significant differences between U.S. GAAP and IFRS in some of the items called for by Guide 3, such as the measurement of credit losses and disclosures of financial instruments, among other areas.

As a result, the proposed rules would provide flexibility in identifying specific categories and classes of instruments that should be disclosed. In several instances, the proposed rules specifically link the disclosure requirements to the categories or classes of financial instruments disclosed in the registrant's U.S. GAAP or IFRS financial statements. Furthermore, the proposed rules explicitly exempt foreign private issuers applying IFRS (“IFRS registrants”) from certain of the disclosure requirements that are not applicable under IFRS.

We believe these elements of the proposed rules substantially address the challenges foreign registrants may face in providing the required disclosures. We do not believe this flexibility for IFRS registrants will significantly change the level of information disclosed by these registrants because Guide 3 currently provides latitude in the categories used for certain of its disclosures and IFRS registrants generally do not provide Guide 3 disclosures that are not applicable under IFRS.

For example, currently under U.S. GAAP (ASC 310-10-35-4), impairment on a loan is recognized when it is probable that a loss has been incurred, while IFRS 9, effective January 1, 2018 for calendar year companies, requires a 12-month expected credit loss measurement unless there has been a significant increase in credit risk, in which case it is a lifetime expected credit loss measurement. Differences will continue to exist for credit loss measurement between U.S. GAAP and IFRS subsequent to the adoption of Accounting Standards Update (“ASU”) 2016-13-

Financial Instruments—Credit Losses (Topic 326)

(“New Credit Loss Standard”). When effective, the New Credit Loss Standard will replace the current U.S. GAAP incurred loss methodology with a methodology that reflects expected credit losses over the entire contractual terms of the financial instruments. This differs from the 12-month expected credit loss measurement methodology that may be applicable in IFRS 9. Additionally, U.S. GAAP has recognition and disclosure requirements related to troubled debt restructurings (TDRs) (ASC 310-40) and nonaccrual loans (ASC 310-10-50-6), but neither of these concepts exists in IFRS.

For example, there is not a concept of nonaccrual loans in IFRS.

All registrants, not just foreign registrants, can avail themselves of relief from providing information that is “unknown and not reasonably available to the registrant” under 17 CFR 230.409 (“Securities Act Rule 409”) and 17 CFR 240.12b-21 (“Exchange Act Rule 12b-21”).

These rules also consider

whether obtaining the information would involve “unreasonable effort or expense,” which we believe is similar to the “unwarranted or undue burden or expense” threshold described in General Instruction 6 to Guide 3. Given that the proposed rules do not change the availability of Securities Act Rule 409 and Exchange Act Rule 12b-21 to foreign registrants, and because we believe the purpose of the thresholds overlap, we propose not to codify the Guide 3 accommodation for undue burden or expense.

Securities Act Rule 409 and Exchange Act Rule 12b-21 state that information required need be given only insofar as it is known or reasonably available to the registrant. If any required information is unknown and not reasonably

available to the registrant, either because the obtaining thereof would involve unreasonable effort or expense, or because it rests peculiarly within the knowledge of another person not affiliated with the registrant, the information may be omitted. The rule provides two additional conditions. The first is that the registrant must give such information on the subject that it possesses or can acquire without unreasonable effort or expense, together with the sources of that information. The second is that the registrant must include a statement either showing that unreasonable effort or expense would be involved or indicating the absence of any affiliation with the person within whose knowledge the information rests and stating the result of a request made to such person for the information.

See supra

note 52.

Request for Comment:

8. Should foreign registrants be subject to the proposed rules?

9. Should we, as proposed, not codify the Guide 3 accommodation for undue burden or expense? For which aspects of the proposed rules would foreign registrants need to rely on this accommodation that would not be covered by Securities Act Rule 409 and Exchange Act Rule 12b-21? Would foreign registrants still seek to discuss an accommodation or alternative presentation with the staff if this provision is not codified?

10. Are there particular challenges or costs that foreign registrants would face in complying with the proposed rules as compared to domestic registrants? If so, what are those challenges or costs and are there ways the proposed rules could be modified to help alleviate those challenges and costs?

11. Would IFRS registrants face any different or additional challenges in complying with the proposed rules relative to other foreign private issuers applying a different comprehensive basis of accounting along with an U.S. GAAP reconciliation? If so, what challenges would they face and why? Are there other proposed disclosure requirements that we should explicitly state do not apply to IFRS registrants? If so, which ones?

12. Would there be a reduction in material information being disclosed due to the proposed flexibility for IFRS registrants, that is, reference to IFRS categories and exemption from disclosures that are not applicable under IFRS? Would the proposed flexibility for IFRS registrants impact the material information needed to make investment decisions and comparability of that information?

D. Reporting Periods

i. Background

Guide 3 currently calls for five years of Loan Portfolio and Summary of Loan Loss Experience data and three years of all other information. However, Guide 3 states that registrants with less than $200 million of assets or $10 million of net worth

may present only two years of the information. In addition, Guide 3 calls for interim period disclosures when there is a material change in the information presented or when a new trend has become evident.

At the time Guide 3 was issued, only two years of financial statements were required as the current three year requirement was adopted in 1980.

Commenters of the Guide 3 Release stated that five years of historical information would be “extremely difficult to obtain in some cases, especially where detailed breakdowns of certain assets or reserves are requested.”

Therefore, the Guide 3 Release also stated that historical information need not be provided if it's not presently available and cannot be compiled without unwarranted or undue burden or expense.

Net worth is the amount by which assets exceeds liabilities and thus represents the total stockholders' equity of a registrant.

In practice, registrants that provide Guide 3 disclosures generally provide interim disclosures.

Amendments to Annual Report Form, Related Forms, Rules, Regulations, and Guides; Integration of Securities Act Disclosure Systems,

Release No. 33-6231 (Sept. 25, 1980) [45 FR 63630].

See supra

note 3.

In the Request for Comment, the Commission asked whether the reporting periods called for by Guide 3 should be modified, and if so, how; whether the reporting periods should match Regulation S-X requirements for financial statements and scaled disclosure requirements for smaller reporting companies (“SRCs”)

and emerging growth companies (“EGCs”);

and whether the reporting periods should explicitly include interim periods.

An SRC is a registrant that had a public float of less than $250 million as of the last business day of its most recently completed second fiscal quarter, or had annual revenues of less than $100 million during its most recently completed fiscal year and no public float or a public float of less than $700 million.

See

Rule 405 of Regulation C, Rule 12b-2 of the Exchange Act [17 CFR 240.12b-2], and Item 10(f) of Regulation S-K [17 CFR 229.10(f)].

An EGC is a registrant with less than $1.07 billion in total annual gross revenues during its most recently completed fiscal year. If a registrant qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of: (1) The last day of the fiscal year of the registrant during which it has total annual gross revenues of $1.07 billion or more; (2) the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; (3) the date on which the registrant has, during the previous 3-year period, issued more than $1.07 billion in non-convertible debt; or (4) the date on which the registrant is deemed to be a “large accelerated filer” (as defined in Exchange Act Rule 12b-2).

See

Rule 405 of Regulation C under the Securities Act and Rule 12b-2 of the Exchange Act.

ii. Comments on Reporting Periods

Many commenters recommended reducing the Guide 3 reporting periods.

Most of these commenters recommended using the reporting periods for which financial statements are required.

A number of these commenters recommended reducing the reporting periods for certain types of registrants,

including those that provide scaled disclosures under Commission rules.

Several other commenters recommended the Commission evaluate the relevance of reporting periods that go beyond the financial statement periods.

See

letters from ABA; AmEx; CBA; CH/SIFMA; Crowe; EY; ICBA; KPMG; and RSM.

See

letters from ABA; AmEx; CBA; CH/SIFMA; Crowe; EY; and KPMG.

Commenters recommended reduced reporting periods for SRCs, EGCs, foreign private issuers and non-issuer targets in Form S-4 [17 CFR 239.25] registration statements.

See

letters from ABA; AmEx; Crowe; EY; and RSM.

See

letters from BDO; CAQ; Deloitte; and PwC.

One commenter suggested that interim period disclosures should only be called for when such disclosures are necessary to reflect material changes since the issuance of the annual financial statements,

while several others

called for no interim period disclosures.

See

letter from CH/SIFMA.

See

letters from ABA; AmEx; CAQ; and CBA.

iii. Proposed Rule—Reporting Periods

We propose defining the term “reported period” for purposes of new Subpart 1400 of Regulation S-K to mean each annual period required by Commission rules for a registrant's financial statements. Our rules generally require two years of balance sheets and three years of income statements,

except that SRCs may present only two years of income statements

and EGCs may present only two years of financial statements in initial public offerings of common equity securities.

However,

with respect to the disclosure of credit ratios, the disclosure would be required for each of the last five fiscal years in initial registration statements by new bank and savings and loan registrants and in offering statements by new bank and savings and loan issuers under Regulation A (“Regulation A offering statements”). But, as discussed further in Section II.H.iv, pursuant to Securities Act Rule 409 and Exchange Act Rule 12b-21 the information would only be required insofar as it is known or reasonably available to the registrant.

17 CFR 210.3 (“Article 3 of Regulation S-X”).

17 CFR 210.8 (“Article 8 of Regulation S-X”).

Securities Act § 7(a)(2)(A), 15 U.S.C. 77g(a)(2)(A).

See

discussion of proposed credit ratios disclosure in Section II.H.iv.

We are proposing to reduce the required reporting periods to align them with the relevant annual periods required by Commission rules for a registrant's financial statements because we believe the proposed disclosures are integrally related to the financial statements. We also believe this change is consistent with other Commission rulemakings over the years.

There have been changes in technology since Guide 3 was issued, in particular the availability of past financial statements and other disclosure made in filings on the Commission's Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”). As such, the historical information that would be omitted from the proposed disclosures will generally be accessible through registrant's prior filings on EDGAR. Furthermore, the reduction of repetitive disclosures, reduction in costs and burdens to registrants and leveraging the use of technology is in line with the 2015 Fixing America's Surface Transportation Act (the “FAST Act”) mandate

and the related rulemaking.

For example, the Commission in 1980 eliminated the five-year Summary of Operations disclosure and adopted the Management's Discussion and Analysis (“MD&A”) disclosure requirement for the periods covered by the financial statements.

See supra

note 62.

Public Law 114-94, Sec. 72003, 129 Stat. 1312 (2015).

FAST Act Modernization and Simplification of Regulation S-K.

Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674].

In addition, we propose to slightly modify the current interim period instruction to clarify that the threshold to include an additional interim period is based on whether there is a material change in the information or the trend evidenced thereby, which is consistent with the existing wording in General Instruction 3 and with the discussion of the interim period disclosure threshold added to Guide 3 in the 1980 Guide 3 Release.

The proposed rules would not codify the existing language in General Instruction 3(d) which states that any additional interim period should be included if necessary to keep the information from being misleading because we believe this standard is encompassed within the general disclosure requirement in 17 CFR 230.408 (“Securities Act Rule 408”) and 17 CFR 240.12b-20 (“Exchange Act Rule 12b-20”).

The 1980 Guide 3 Release reduced the frequency of interim period Guide 3 disclosures by amending the reported period definition to only call for information for a subsequent interim period “if a material change in the information presented or the trend evidenced thereby has occurred.”

See

1980 Guide 3 Release,

supra

note 8.

Securities Act Rule 408 and Exchange Act Rule 12b-20 require disclosure of material information that may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

Request for Comment:

13. Would the proposed reporting periods provide the number of years of information an investor needs to analyze and comprehend changes in trends? If not, what additional information would be material for purposes of this analysis?

14. Would the proposed change in reporting periods result in a loss of information material to an investment decision? If so, please explain how.

15. Should the proposed rules require interim period disclosures even if there is not a material change in the information or a trend that has become evident? If so, why?

16. Should we, as proposed, require five years of Credit Ratio disclosures in initial registration statements or initial Regulation A offering statements of bank and savings and loan registrants or should we align the number of required years to those in other Commission rules? Would a requirement to provide five years of Credit Ratio disclosure impose undue burdens on registrants considering an initial registration statement or initial Regulation A offering statement? Should initial registration statements and initial Regulation A offering statements include additional reporting period information for any of the other proposed disclosures? If so, which ones, and for which reporting periods?

E. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis)

i. Background

For registrants with material net interest earnings, like bank and savings and loan registrants, future earnings depend significantly on present and future economic conditions, as changes in interest rates can have a significant impact on these registrants' performance. As such, investors and other users of registrant disclosures would benefit from understanding the components of net interest earnings in order to evaluate the impact of potential changes in interest rates on future income of these registrants.

Average balance sheets provide investors with an indication of the balance sheet items that have been, and have the potential to be, most affected by changes in interest rates as well as an indication of a registrant's ability to move into or out of positions with favorable or unfavorable risk/return characteristics.

For example, an average balance sheet may provide an indication of whether a registrant is asset-sensitive or liability-sensitive.

Liability-sensitive registrants that rely heavily on short-term and other rate-sensitive funding sources may experience significant increases in future funding costs in a rising interest rate environment. Such registrants may be unable to offset an increase in funding costs with a higher yield on assets, which could result in an adverse impact on net interest earnings.

See

Guide 3 Release,

supra

note 3.

A registrant is asset sensitive when the impact of the change in its assets is larger than the impact of the change in its liabilities after a change in prevailing interest rates. An asset-sensitive registrant's earnings or net income increases when prevailing rates rise and declines when prevailing rates fall. A liability-sensitive registrant has a long-term asset maturity and repricing structure, relative to a shorter-term liability structure. For example, liability-sensitive registrants may have significant exposure to longer-term mortgage-related assets that reprice slowly while relying heavily on rate-sensitive funding sources that reprice more quickly.

Item I.A of Guide 3 calls for 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.

Item I.B of Guide 3 calls for the disclosure of:

Guide 3 indicates that if the collection of data on a daily average basis would involve unwarranted or undue burden or expense, weekly or month end averages may be used, provided they are representative of the operations of the registrant. The basis used for presenting averages should be disclosed when not presented on a daily average basis.

Item I.A of Guide 3 indicates that major categories of interest-earning assets should include loans, taxable investment securities, non-taxable investment securities, interest-bearing deposits in other banks, federal funds sold and securities purchased with agreements to resell, other short-term investments and other assets. Major categories of interest-bearing liabilities should include savings deposits, other time deposits, short-term debt, long-term debt and other liabilities.

• Interest earned or paid

on the average amount of each major category

of interest-earning asset and interest-bearing liability;

The interest earned and interest paid reported on the average balance sheet is based on the

amounts reported in the audited financial statements. Under U.S. GAAP and IFRS, reported interest expense may differ from the cash paid for interest during the period.

• Average yield for each major category of interest-earning asset;

• Average rate paid for each major category of interest-bearing liability;

• Average yield on all interest-earning assets;

• Average effective rate paid on all interest-bearing liabilities; and

• Net yield on interest-earning assets.

Net yield is net interest earnings divided by total interest-earning assets, with net interest earnings equaling the difference between total interest earned and total interest paid.

Item I.C of Guide 3 calls for a rate and volume analysis of interest income and interest expense for the last two fiscal years. This analysis is segregated by each major category of interest-earning asset and interest-bearing liability into amounts attributable to:

• Changes in volume (changes in volume multiplied by the old rate);

• Changes in rates (changes in rates multiplied by the old volume); and

• Changes in rates and volume (changes in rates multiplied by changes in volume).

Lastly, Instruction 5 to Item I states that if disclosure regarding foreign activities is required pursuant to General Instruction 7 of Guide 3,

the information required by paragraphs A, B and C of Item I should be further segregated between domestic and foreign activities for each significant category of assets and liabilities disclosed pursuant to Item I.A, as well as disclosure of the percentage of total assets and total liabilities attributable to foreign activities.

Instruction 7 of Guide 3 clarifies that foreign data need not be presented if the registrant is not required to make separate disclosures concerning its foreign activities pursuant to the test set forth in Rule 9-05 of Regulation S-X [17 CFR 210.9-05]. Rule 9-05 requires disclosure when foreign activities, which include loans and other revenue producing assets, exceed 10% of (1) assets, (2) revenue, (3) income (loss) before income tax expense, or (4) net income (loss).

In the Request for Comment, the Commission asked whether the existing disclosures called for by Guide 3 provide investors with information material to an investment decision and whether the disclosures would otherwise overlap with information required by Commission rules, U.S. GAAP or IFRS.

ii. Comments on Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis)

Many commenters stated that the existing distribution of “assets, liabilities and stockholders' equity; interest rate and interest differential” disclosures called for by Item I of Guide 3 may be of value to investors and others.

Most of these commenters indicated that Item I does not overlap in its entirety with Commission rules or U.S. GAAP.

However, one commenter stated that the presentation of the change in interest income and expense called for by Item I.C is duplicative of disclosures in MD&A and that the rate/volume analysis is not representative of how financial institutions currently manage interest rate risk and, thus, should be eliminated.

Several commenters stated that the disclosures called for by Items I.A and I.B of Guide 3 are not specifically required by IFRS unless the period-end balances are not representative of activity during the period,

and indicated that the disclosures called for by Item I.C are unique to Guide 3.

See

letters from ABA; AmEx; CAQ; CH/SIFMA; Crowe; Deloitte; EY; KPMG; PNC; PwC; and RSM.

See

letters from ABA; AmEx; CAQ; Crowe; Deloitte; EY; KPMG; PNC; PwC; and RSM.

See

letter from CH/SIFMA.

IFRS 7.35, IFRS 7.BC48 and IFRS 7.IG20 require this additional disclosure if period-end information is unrepresentative of a registrant's exposure during the period.

See

letters CAQ; EY; KPMG; and PwC.

iii. Proposed Rule—Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis)

Proposed Item 1402 of Regulation S-K would codify all of the disclosures currently called for by Item I of Guide 3 and further disaggregate the categories of interest-earning assets and interest-bearing liabilities required for disclosure. The new categories of interest-earning assets represent the separation of federal funds

sold and securities purchased with agreements to resell. The new categories of interest-bearing liabilities represent the separation of federal funds purchased and securities sold under agreements to repurchase,

and the disclosure of commercial paper.

We believe these more disaggregated categories would provide investors with further detail of the drivers of the changes in net interest earnings and the sources of funding.

Furthermore, the proposed rules would also codify the instructions related to foreign activities contained in General Instruction 7 and Instruction 5 of Item I of Guide 3. We believe the distinction between foreign and domestic activities continues to provide relevant information regarding registrants' activities and can provide insight into drivers of changes in business focus as well as factors driving material changes in interest-earning assets and interest-bearing liabilities, and the related interest rates.

The federal funds rate is the interest rate that banks charge one another for borrowing funds overnight. Federal funds are excess funds that banks deposit with the Federal Reserve Bank for lending to other banks.

ASC 860-10 defines a repurchase agreement as an arrangement under which a transferor (repo party) transfers a security to a transferee (repo counterparty or reverse party) in exchange for cash and concurrently agrees to reacquire the security at a future date for an amount equal to the cash exchanged plus a stipulated interest factor.

Commercial paper consists of short-term promissory notes issued primarily by corporations. Maturities range up to 270 days but average about 30 days.

Item VII of Guide 3 currently call for disclosures related to short-term borrowings and requires disclosure for (1) Federal funds purchased and securities sold under agreements to repurchase; (2) commercial paper; and (3) other short-term borrowings, to the extent the average balance of those categories meet or exceed 30 percent of stockholders' equity at the end of the period. As discussed in Section III.B below, we are proposing not to codify all of those disclosures. However, given that the proposed Item 1402 of Regulation S-K would require disaggregated disclosure for federal funds purchased, securities sold under agreements to repurchase, and commercial paper, including the average amount outstanding and the average effective rate paid on these liabilities, the proposed rule effectively would codify the disclosure currently called for by Item VII.3. We believe the average outstanding balance and yield of these short-term borrowing categories could be material for investors.

While some bank and savings and loan registrants manage interest rate risk using more complex models or systems than a rates and volume analysis, we believe this disclosure nevertheless provides material and comparable information to investors about the drivers of the changes in net interest earnings across registrants in a simple format. Furthermore, we do not believe that all bank and savings and loan registrants would provide these disclosures, in the same format and level of detail, under the existing principles-based MD&A

requirements to discuss whether material increases in net sales

are due to increases in

prices,

100

or increases in volume,

101

or due to the introduction of new products or services. We believe the proposed level of detail for these disclosures strikes a balance between providing sufficient information to help investors understand the changes in interest earning income and expense from period to period, and excessive amount of information that could make it difficult to understand the material drivers. We are therefore proposing to codify these disclosures.

See

Item 303(a)(3)(iii) of Regulation S-K.

For registrants preparing their income statement in accordance with Rule 9-04 of Regulation S-X, the closest equivalent to net sales is net interest income. Net interest income

represents interest revenue less interest expense. Net interest income is typically the primary component of sales revenue for financial institutions.

100

For registrants preparing their income statement in accordance with Rule 9-04 of Regulation S-X, the closest equivalent to increases in prices is increases in interest rates.

101

For registrants preparing their income statement in accordance with Rule 9-04 of Regulation S-X, the closest equivalent to increases in volume is increases in net interest earning assets such as securities or loans.

Request for Comment:

17. Should we codify, as proposed, all of the disclosures currently called for by Item I of Guide 3? If not, which disclosures should not be codified?

18. Should we codify, as proposed, the rate and volume analysis called for by Item I.C?

19. Are the additional categories of interest-earning assets and interest-bearing liabilities proposed for disclosure appropriate? Are there other categories for which disclosure should be required?

20. Should we codify, as proposed, General Instruction 7 of Guide 3 and General Instruction 5 of Item I regarding disclosure of foreign activities? Is the threshold for disclosure of foreign activities appropriate? If not, how should it be revised?

F. Investment Portfolio

i. Background

The investment portfolio disclosures currently called for by Item II of Guide 3 provide investors with information about the types of investments a registrant holds, the earnings potential of those investments, and their risk characteristics. Item II.A of Guide 3 calls for disclosure of the book value

102

of investments by specified categories

103

as of the end of each reported period. Item II.B calls for a maturity analysis for each category of investment as of the end of the latest reported period, as well as the weighted average yield for each range of maturities.

104

When the aggregate book value of securities from a single issuer exceeds 10% of stockholders' equity as of the end of the latest reported period, Item II.C calls for disclosure of the name of the issuer and the aggregate book value and aggregate market value of those securities.

102

At the time Guide 3 was issued, most securities were accounted for at cost with the exception of certain marketable securities, which were carried at the lower of aggregate cost or market value. The FASB issued FASB Statement No. 115,

Accounting for Certain Investments in Debt and Equity Securities,

an accounting standard creating three types of investment securities categories and the related accounting for each, in 1993.

103

The specified categories are obligations of: (1) U.S. Treasury and other U.S. Government agencies and corporations; (2) States of the U.S and political subdivisions; and (3) other securities including bonds, notes, debentures and stock of business corporations, foreign governments and political subdivisions, intergovernmental agencies and the Federal Reserve Bank.

104

The ranges of maturities are securities due (1) in one year or less, (2) between one and five years, (3) between five and ten years, and (4) after ten years.

Subsequent to the last substantive revisions to Guide 3, the FASB and IASB have issued accounting standards that require disclosures that are similar to many of the investment portfolio disclosures called for by Guide 3. For example, U.S. GAAP requires disclosure, by major security type,

105

of the amortized cost basis, aggregate fair value and information about the contractual maturities

106

as of the date of the most recent balance sheet presented, among other disclosures, for both held-to-maturity (“HTM”) and available-for-sale (“AFS”) debt securities, which overlaps with the disclosures called for by Items II.A and II.B.

107

IFRS requires disclosure of the fair value and carrying value of each class

108

of a registrant's financial instruments, but only requires a maturity analysis of financial instruments held for managing liquidity risk if necessary for users to evaluate the nature and extent of liquidity risk.

109

Additionally, both U.S. GAAP

110

and IFRS

111

require disclosure of significant concentrations of credit risk, which we believe substantially overlaps with the disclosure called for by Item II.C related to the issuer name and aggregate book value and market value of securities exceeding 10% of stockholders equity. Neither U.S. GAAP nor IFRS requires disclosure of the weighted average yield information for each maturity category called for by Item II.B.

105

ASC 320-10-50-1B states that major security types should be based on the nature and risks of the security and that an entity should consider all of the following when considering whether disclosure for a particular security type is necessary: (a) Shared activity or business sector, (b) vintage, (c) geographic concentration, (d) credit quality, and (e) economic characteristics. Financial institutions, including banks, savings and loan associations, savings banks, credit unions, finance companies and insurance entities are required to include the nine securities categories listed in ASC 942-320-50-2, although additional types may also be necessary: (a) Equity securities, segregated by either (1) industry type or (2) registrant size, or (3) investment objective; (b) debt securities issued by U.S. Treasury and other U.S. government corporations and agencies; (c) debt securities issued by states of the United States and political subdivisions of the states; (d) debt securities issued by foreign governments; (e) corporate debt securities; (f) residential mortgage-backed securities; (g) commercial mortgage-backed securities; (h) collateralized debt obligations; and (i) other debt obligations.

106

ASC 320-10-50-3 and ASC 320-10-50-5(f) both indicate that maturity information may be combined in appropriate groupings. Those paragraphs also both state that in complying with these requirements, financial institutions (

see

paragraph ASC 942-320-50-1) shall disclose the fair value and net carrying amount (if different from fair value) of debt securities on the basis of at least the following four maturity groupings: (a) Within one year, (b) after one year through five years, (c) after five years through ten years, and (d) after ten years.

107

ASC 320-10-50-2 and ASC 320-10-50-5.

108

IFRS 7.6 requires disclosures by classes of financing instruments, which are defined as “. . . classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments.”

109

IFRS 7.25 and IFRS 7.B11E.

110

ASC 825-10-50-20 and 21 requires disclosure of significant concentrations of credit risk arising from all financial instruments, including information about the (shared) activity, region, or economic characteristic that identifies the concentration, the maximum amount of loss due to credit risk, that, based on the gross fair value of the financial instrument, the registrant would incur if the parties to the financial instruments that make up the concentration failed completely to perform according to the terms of the contracts and the collateral or other security, information related to any collateral and policies regarding master netting arrangements

111

IFRS 7.34(a) requires disclosure of risks based on information provided internally to management and IFRS 7.34(c) requires disclosure of concentrations of risk if not apparent from the other disclosure requirements. IFRS 7.B8 states that disclosure of concentration of credit risk should include: (a) A description of how management determines concentrations, (b) a description of the shared characteristic that identifies each concentration (

e.g.

counterparty, geographical area, currency or market), and, (c) the amount of the risk exposure associated with all financial instruments sharing that characteristic.

In the Request for Comment, the Commission asked whether the investment portfolio disclosures called for by Guide 3 provide information material to an investment decision and whether Commission rules, U.S. GAAP, or IFRS require the same or similar information.

ii. Comments on the Investment Portfolio

Many commenters indicated that a substantial portion of the investment portfolio disclosures called for by Guide 3 overlap with Commission rules and U.S. GAAP.

112

Most of these commenters stated that the overlap

should be eliminated,

113

while one indicated, given the substantial overlap, that Guide 3 should be eliminated in its entirety.

114

112

See

letters from ABA; AmEx; BerryDunn; CAQ; CH/SIFMA; Crowe; Deloitte; EY; KPMG; MFG; MUFG; PNC; and PwC.

113

See

letters from ABA; AmEx; BerryDunn; CAQ; CH/SIFMA; Crowe; Deloitte; EY; KPMG; MUFG; and PwC.

114

See

letter from PNC.

Many commenters noted that the book value of investments disclosures called for by Item II.A of Guide 3 overlap with U.S. GAAP.

115

Most of these commenters also stated that the maturity disclosure called for by Item II.B overlaps with U.S. GAAP.

116

By contrast, most of these commenters indicated that the weighted average yield disclosure called for by Item II.B is not redundant with U.S. GAAP requirements.

117

Two of these commenters further stated that the weighted average yield disclosure may be of value to investors and others.

118

Regarding the disclosures called for by Item III.C relating to investments exceeding 10% of stockholders' equity, several commenters characterized this disclosure as unique to Guide 3.

119

However, one commenter

120

said the disclosure is largely duplicative of the U.S. GAAP significant concentrations of credit risk arising from financial instruments disclosures.

121

Lastly, a few commenters noted that there is some overlap between the investment portfolio disclosures called for by Guide 3 and IFRS disclosure requirements, and stated that the overlap should be eliminated.

122

115

See

letters from ABA; AmEx; BerryDunn; CAQ; CH/SIFMA; EY; KPMG; MFG; MUFG; PNC; and PwC.

116

See

letters from ABA; AmEx; BerryDunn; CAQ; CH/SIFMA; EY; KPMG; MFG; PNC; and PwC.

117

See

letters from ABA; AmEx; BerryDunn; CAQ; CH/SIFMA; EY; KPMG; PNC; and PwC.

118

See

letters from ABA and AmEx.

119

See

letters from CAQ; EY; KPMG; PNC; and PwC.

120

See

letter from CH/SIFMA.

121

See supra

note 110.

122

See

letters from CAQ; EY; KPMG; and PwC.

iii. Proposed Rule—Investment Portfolio

The proposed rules would not codify the following disclosures in Item II: (a) Book value information; (b) the maturity analysis of book value information; and (c) the disclosures related to investments exceeding 10% of stockholders' equity. We are proposing not to codify these disclosures because they substantially overlap with U.S. GAAP and IFRS disclosure requirements. Therefore, the proposed rules should not result in the loss of information material to an investment decision. We also note that this proposal is generally consistent with the Commission's recent efforts to streamline its disclosure requirements when they overlap with reasonably similar U.S. GAAP or IFRS disclosure requirements.

123

See Disclosure Update and Simplification,

Release No. 33-10532 (Aug. 17, 2018) [83 FR 50148].

Proposed Item 1403 of Regulation S-K would codify the weighted average yield disclosure for each range of maturities by category of debt securities currently called for by Item II.B, with a change to the categories presented. Specifically, the categories of debt securities in the proposed rules would be the categories required to be disclosed in the registrant's U.S. GAAP

124

or IFRS

125

financial statements. The proposed rules would only apply to debt securities that are not carried at fair value through earnings. Guide 3 calls for disclosures about both debt and equity securities and does not specifically exclude debt securities that are carried at fair value through earnings.

126

We believe this change is appropriate given that maturity and yield disclosures are not applicable to equity securities. Furthermore, we believe the weighted average yield disclosure is most relevant for debt securities that are not carried at fair value through earnings because these debt securities are often held longer than debt securities carried at fair value through the income statement (such as trading securities),

127

and thus the weighted average yield and maturity information would appear to be more meaningful for these securities.

128

We believe the proposed weighted average yield disclosure does not overlap with U.S. GAAP or IFRS requirements and provides investors with information to better evaluate the performance of the portfolio. Furthermore, revising the categories of debt securities to conform to the categories presented in accordance with U.S. GAAP or IFRS would enhance the consistency of the investment disclosures in a registrant's filing and increase their usefulness to investors. This also would ease the preparation burden on registrants because they would no longer have to present separate or additional categories between the Guide 3 disclosures and the financial statements.

124

See supra

note 105.

125

See supra

note 108.

126

Guide 3 was last amended in 1986 and at that time, most investment securities were accounted for at cost, except for certain marketable securities. As such, the Guide 3 investment disclosures were applicable to most investment securities and thus it was unnecessary to limit the disclosure by type or accounting model of investment. SFAS 115 “

Accounting for Certain Investments and Debt and Equity Securities”

was issued 1993 and created three categories of investment securities: HTM, AFS, and trading securities. These same categories exist in U.S. GAAP today (ASC 320-10-25-1). Of these categories, only trading securities are carried at fair value through earnings and thus would not be subject to the proposed rule. However, debt securities classified as HTM and AFS would be subject to the proposed rule. Additionally, U.S. GAAP (ASC 825-10-15-4) allows registrants to elect to measure certain eligible items,

e.g.,

investment securities, at fair value, with changes in fair value recognized through earnings. Thus, where a registrant made this election to measure debt securities at fair value through earnings, those debt securities would also not be subject to the proposed rule. For IFRS registrants, only debt securities that are subsequently measured at amortized cost, or fair value through other comprehensive income, would be subject to the proposed rule.

127

ASC 320-10-25-1(a) states that if a security is acquired with the intent of selling it within hours or days, the security shall be classified as trading. However, at acquisition, an entity is not precluded from classifying as trading a security it plans to hold for a longer period.

128

ASC 320-10-50 only requires information about the contractual maturities of securities that are classified as either HTM or AFS, and does not require similar disclosure for securities classified as trading.

Request for Comment:

21. The proposed rules would not codify the investment portfolio book value disclosures currently called for by Item II.A. Would this result in the loss of information material to an investment decision not readily available elsewhere in Commission filings? If so, what material information would be lost and how should we codify it?

22. The proposed rules would not codify the maturity analysis of book value disclosures called for by Item II.B, but would codify the weighted average yield for each range of maturities. Would this result in the loss of information material to an investment decision not readily available elsewhere in Commission filings? Would the more principles-based IFRS maturity disclosure

129

result in the loss of material information about IFRS registrants, or would IFRS registrants within the scope of the proposed rules continue to provide the maturity analysis for debt securities absent a specific requirement? Are there additional disclosures related to a maturity analysis that we should codify to avoid the potential loss of information material to an investment decision?

129

IFRS 7.B11E requires a maturity analysis of financial instruments that registrants hold for managing liquidity risk

if necessary

for users to evaluate the nature and extent of liquidity risk; whereas U.S. GAAP requires contractual maturities disclosure for HTM and AFS debt securities without an “if necessary” concept.

23. Should we codify, as proposed, the weighted average yield disclosure for each range of maturities in Item II.B of Guide 3 for debt securities not carried at fair value through earnings? Should the proposed rules also require this disclosure for debt securities carried at

fair value through earnings, including trading securities or debt securities where the fair value option is elected? If so, how would this information be used by investors?

24. The proposed weighted average yield disclosure would only apply to debt securities. Should this proposed rule require disclosures related to equity securities? If so, what additional disclosures should be required? Would this information be available without undue cost or burden?

25. Should the categories for the weighted average yield disclosure in the proposed rules be conformed to those presented in the U.S. GAAP or IFRS financial statements as proposed? Given that U.S. GAAP and IFRS do not require the same categories to be disclosed,

130

would the lack of standardization of the categories disclosed among registrants result in confusion for investors? If so, how should we revise the proposed rules to avoid such confusion? For example, should we codify the Guide 3 investment categories?

130

U.S. GAAP and IFRS have a principles-based approach for determining the categories of investments to be disclosed.

See supra

notes 105 and 108. Thus, both U.S. GAAP and IFRS registrants will make judgments about the categories to be disclosed and there likely will not be consistency amongst all registrants.

26. The proposed rules would not codify disclosure of the name of any issuer and aggregate book value and market value of the securities of such issuer that exceeds 10% of stockholders' equity as called for in Item II.C of Guide 3. Would this result in the loss of information material to an investment decision in light of the fact that U.S. GAAP

131

and IFRS

132

require reasonably similar disclosure about significant concentrations of credit risk? Would the “significant” threshold in U.S. GAAP and IFRS likely result in the same or nearly the same population of securities being disclosed as the current 10% bright-line threshold in Item II.C. of Guide 3?

131

See supra

note 110.

132

See supra

note 111.

27. Is there additional information material to an investment decision related to investment securities that should be disclosed? If so, what information should be disclosed and how would this information be used by investors? Would there be a significant cost or burden to registrants in providing this additional information?

G. Loan Portfolio

i. Background

A registrant's loan portfolio may consist of various categories of loans, including consumer loans, such as residential real estate, credit card and auto loans, as well as commercial loans, such as commercial real estate, lease financings, and wholesale loans. Loan portfolio compositions differ considerably among registrants because lending activities are influenced by many factors, including the type of organization, management's objectives and philosophies about diversification and credit risk management, the availability of funds, credit demands, interest rate margins and regulations, among others. Different types of loans have different characteristics. For example, commercial loans tend to have shorter maturities than residential real estate loans and are more likely to have balloon payments at maturity. Further, the composition of a registrant's loan portfolio may vary substantially over time due to factors such as changes in regulation or management strategy. For example, if management expects interest rates to rise, it may seek to increase the registrant's holdings of variable-rate mortgages.

The loan portfolio disclosures in Item III of Guide 3 provide investors with information about the registrant's loan investment policies and lending practices, including: (1) The types of lending in which a registrant engages; (2) the nature of credit risk inherent in the loan portfolio, including types of loans and portfolio maturity; (3) indications of loan collectibility risks; and (4) portfolio concentrations.

Item III.A of Guide 3 calls for disclosure of the amount of loans in specified categories

133

as of the end of each period. Item III.B calls for a maturity analysis

134

for each category of loans as of the end of the latest reported period, along with a separate presentation of all loans due after one year with fixed interest rates versus those with floating or adjustable interest rates.

135

Item III.C.1 calls for disclosure of the aggregate amount of domestic and foreign

136

loans in each of the following categories:

133

The specified categories are,

for domestic loans:

(1) Commercial, financial and agricultural, (2) real estate—construction, (3) real estate—mortgage, (4) installment loans to individuals, and (5) lease financing, and

for foreign loans:

(6) governments and official institutions, (7) banks and other financial institutions, (8) commercial and industrial, and (9) other. The instructions to Item III.A indicate that registrants may present a series of loan categories other than those specified if considered a more appropriate presentation.

134

The range of maturities are loans due (1) in one year or less, (2) between one and five years, (3) between five and ten years, and (4) after ten years. This information need not be presented for mortgage real estate loans, installment loans to individuals and lease financing. Foreign loan categories may be aggregated.

135

Instruction 3 to Item III.B states that determinations should be based upon contract terms. However, such terms may vary due to the registrant's “rollover policy,” in which case the maturity should be revised as appropriate and the rollover policy should be briefly discussed.

136

See supra

note 88.

• loans accounted for on a nonaccrual basis;

137

The term “nonaccrual” is not defined in U.S. GAAP or Commission rules. U.S. banking agencies require their regulated financial institutions to file publicly available Consolidated Reports of Condition and Income (Call Reports). Call Report instructions generally require an asset to be reported as nonaccrual if: (1) It is maintained on a cash basis because of deterioration in the financial condition of the borrower, (2) payment in full of principal or interest is not expected, or (3) principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection. Certain loans, such as consumer loans and purchased credit-impaired loans, are not placed on nonaccrual status as discussed in the nonaccrual definitions section of Call Report Schedule RC-N-2. Guide 3 also currently calls for and U.S. GAAP also requires disclosure of the registrant's nonaccrual policy.

• loans accruing but contractually past due 90 days or more as to principal or interest payments; and

• loans classified as troubled debt restructurings (“TDRs”)

138

that are not otherwise disclosed as being on nonaccrual status or past due 90 days or more.

139

138

Under U.S. GAAP, a restructuring of a debt is a TDR if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider.

See

ASC 310-40-15-5.

139

Guide 3 originally called for disclosure of nonperforming loans and a discussion of the risk elements associated with those loans for which there were serious doubts as to the ability of the borrowers to comply with the present loan payment terms. The current Item III.C.1 disclosures reflect amendments made in 1980 and 1983 to promote consistency with bank regulatory disclosure requirements and comparability among registrants.

See

1980 Guide 3 Release,

supra

note 8; and 1983 Guide 3 Releases,

supra

note 8.

Item III.C.2 calls for descriptions of the nature and extent of any potential problem loans

140

at the end of the most recent reported period and the policy for placing loans on nonaccrual status. The instructions to Item III.C.2 call for disclosure of the foregone interest income and recognized interest income for nonaccrual loans and TDRs during the period.

140

Potential problem loans are loans not disclosed pursuant to Item III.C.1, except where known information about possible credit problems of borrowers (which are not related to transfer risk inherent in cross-border lending activities) causes management to have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms and which may result in disclosure of the loans pursuant to Item III.C.1.

If material amounts of the loans described above are outstanding to borrowers in any foreign country, Guide 3 states that each country should be identified and that the amounts

outstanding should be quantified.

141

Item III.C.3 calls for disclosure of the aggregate amount of cross-border outstandings

142

to borrowers in each foreign country where they exceed 1% of total assets.

143

These disclosures should be provided by category of foreign borrower specified by Item III.A. Where current conditions in a foreign country give rise to liquidity problems that are expected to have a material impact on the timely repayment of principal or interest on the country's private or public sector debt, Guide 3 calls for:

141

For purposes of determining the amount of outstandings to be reported, loans made to or deposits placed with a branch of a foreign bank located outside the foreign bank's home country should be considered as loans to or deposits with the foreign bank.

142

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other nonlocal currency. The foreign outstandings disclosure was added in 1983 to consolidate all risk-related disclosure guidelines in one section of Guide 3 and to emphasize the risks present in cross-border lending activities.

See

1983 Guide 3 Releases,

supra

note 8.

143

For countries whose outstandings are between 0.75% and 1% of total assets, the names of the countries and the aggregate amount of outstandings attributable to them should be disclosed.

• A description of the nature and impact of the developments;

• An analysis of the changes in aggregate outstandings to borrowers in each country for the most recent reported period;

• Quantitative information about interest income and interest collected during the most recent period; and

• Quantitative information about any outstandings that may be subject to a restructuring.

Item III.C.4 calls for disclosure as of the end of the most recent reported period of any concentration of loans exceeding 10% of total loans not otherwise disclosed as a category of loans pursuant to Item III.A.

144

Item III.D calls for disclosure as of the end of the most recent reported period of the nature and amounts of any other interest-bearing assets that would be disclosed under Item III.C.1 or III.C.2 if those assets were loans.

144

Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities which would cause them to be similarly affected by economic or other conditions. For example, loans may be concentrated in a specific industry, such as the energy sector, and exceed the 10% threshold.

Subsequent to the last substantive revisions to Guide 3, the FASB and IASB have issued accounting standards that have resulted in similar, and sometimes overlapping, loan disclosure. For example, U.S. GAAP requires major categories of loans to be presented separately either on the balance sheet or in the financial statement footnotes,

145

similar to the disclosure called for by Item III.A of Guide 3. U.S. GAAP also requires disclosure, by class of financing receivable,

146

of nearly all of the same information related to loans accounted for as nonaccrual and accruing loans contractually past due 90 days or more, as specified by Item III.C.1(a) and (b) and Item III.C.3 of Guide 3.

147

There are two main differences between the disclosures called for by the Instructions to Item III.C.1 and U.S. GAAP. The first is that U.S. GAAP does not require disclosure of the amount of gross interest income that would have been recorded during the period for the loans classified as nonaccrual or TDRs if they had been current in accordance with their original terms and had been outstanding throughout the period or since origination. The second difference is that U.S. GAAP does not explicitly require disclosure separately between domestic and foreign nonaccrual loans, accruing loans contractually past due 90 days or more and TDRs. Furthermore, U.S. GAAP requires information about TDRs, although there is a difference between the U.S. GAAP disclosures and those called for by Item III.C.1(c).

148

Specifically, U.S. GAAP only requires disclosure of TDRs occurring during each period that an income statement is presented and does not provide a cumulative level of TDRs existing on the balance sheet, similar to the disclosure called for by Item III.C.1(c). However, U.S. GAAP requires additional TDR disclosures beyond those called for by Guide 3.

149

145

ASC 310-10-45-2 and ASC 310-10-50-3.

146

U.S. GAAP uses the term “financing receivable,” and a loan is considered a type of financing receivable. A class of financing receivable is defined as a group of financing receivables determined on the basis of all of the following: (a) Initial measurement attribute (for example, amortized cost), (b) risk characteristics of the financing receivable, and (c) a registrant's method for monitoring and assessing credit risk.

147

ASC 310-10-50-6 requires disclosure of the policy for placing financing receivables on nonaccrual, as well as the policy for resuming accrual of interest. ASC 310-10-50-7 requires disclosure of nonaccrual loans and loans 90 days or more past due and still accruing by class of financing receivable. ASC 310-10-50-7A requires disclosure of an analysis of the age of the recorded investment in financing receivables at the end of the reporting period that are past due, as determined by the entity's policy. ASC 310-10-50-15 requires disclosure of impaired loans and of the related amount of interest income that was recognized during the time the loans were impaired.

148

ASC 310-10-50-33 requires disclosure, by class of financing receivable, of quantitative and qualitative information about TDRs occurring during the period.

149

ASC 310-10-50-33 requires disclosure, by class of financing receivable, of qualitative and quantitative information about how the financing receivables were modified, the financial effects of the modifications, and by portfolio segment, qualitative information about how such modifications were factored into the determination of the allowance for credit losses. ASC 310-10-50-34 requires, by class of financing receivable, qualitative and quantitative information about TDRs that were modified within the previous 12 months and for which there was a payment default occurring during the period, including the types of financing receivables that defaulted, the amount of financing receivables that defaulted, and by portfolio segment, qualitative information about how such defaults are factored into the determination of the allowance for credit losses.

In addition, while certain of the disclosures currently called for by Guide 3 are not completely duplicative of U.S. GAAP requirements, we believe that in certain cases U.S. GAAP requires reasonably similar disclosures. For example, while there is not a specific disclosure requirement in U.S. GAAP analogous to the potential problem loans disclosure called for by Item III.C.2, U.S. GAAP requires disclosure of credit quality indicators

150

by class of financing receivable.

151

Additionally, Item 303 of Regulation S- K

152

requires a discussion of known trends and uncertainties in MD&A that may help supplement the U.S. GAAP disclosures.

When considered together, we believe these U.S. GAAP and MD&A disclosures allow an investor to evaluate loans where management has doubts about the borrowers' ability to comply with loan repayment terms. Additionally, while U.S. GAAP does not require the exact disclosures called for by Item III.C.3 regarding cross-border outstanding loans to countries where conditions give rise to liquidity problems expected to have a material impact on repayment of principal or interest, or by Item III.C.4 regarding other concentrations of loans, we believe the combination of certain U.S. GAAP

153

and Regulation S-X

154

disclosure requirements call for reasonably similar information.

150

A credit quality indicator is defined as a statistic about the credit quality of financing receivables. ASC 310-10-55-19 provides the following examples of credit quality indicators: Consumer credit risk scores, credit-rating-agency ratings, a registrant's internal credit risk grades, loan-to-value ratios, collateral, collection experience, or other internal metrics.

151

ASC 310-10-50-29 and 30 requires a description of the credit quality indicator, the recorded investment in financing receivables by credit quality indicator, the date or range of dates in which the information was updated for each credit quality indicator, and qualitative information on how internal risk ratings, if disclosed, relate to the likelihood of loss.

152

Item 303(a) of Regulation S-K requires a registrant to discuss its financial condition, changes in financial condition, and results of operations. Instruction 3 to paragraph 303(a) states that the discussion should focus on the material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. The instruction further states that it would include descriptions and amounts of (A) matters that would have an impact on future operations and have not had an impact in the past, and (B) matters that have had an impact on reported operations and are not expected to have an impact upon future operations.

Similarly, for foreign private issuers, Item 5.D. of Form 20-F requires a foreign private issuer to discuss, for at least the current financial year, any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the company's net sales or revenues income from continuing operations, profitability, liquidity, or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

153

See supra

note 110.

154

Rule 9-05 requires disclosure when foreign activities, which include loans and other revenue producing assets, exceed 10% of (1) assets, (2) revenue, (3) income (loss) before income tax expense, or (4) net income (loss).

Lastly, while U.S. GAAP does not require specific disclosure related to other interest bearing assets that would be required to be disclosed by Item III.C.1 or Item C.2 if they were loans, it does require disclosure of nonaccrual and past due financing receivables, including items such as credit cards, notes receivables and trade receivables with maturities of more than one year, consistent with the disclosures currently called for by Item III.D of Guide 3.

155

When it takes effect, the New Credit Loss Standard

156

will increase the credit quality-related disclosures for loans. For example, it will require registrants to present credit quality indicator disclosures by year of origination and require additional disclosures about loans on nonaccrual status.

157

155

ASC 310-10-50-5B.

156

The FASB has an ongoing project to reconsider the effective dates for major standards, including the New Credit Loss Standard. As currently issued, the New Credit Loss Standard is effective for public business entities that meet the definition of an SEC filer for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities that are not public business entities are provided a delayed effective date of two years. Thus, an EGC that chooses to elect the private company timeline for adopting new or revised accounting standards may defer adopting the New Credit Loss Standard until their fiscal year beginning after December 15, 2021. As part of its ongoing project, available at:

https://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdateExpandPage&cid=1176173010144,

the FASB has proposed to amend the New Credit Loss Standard effective dates so that SEC filers that are eligible to be a SRC, as defined by the SEC, and entities that are not SEC filers would be provided a delayed effective date of three years. Thus, SRCs, EGCs and non-SEC filers would be able to elect to defer adopting the New Credit Loss Standard until their fiscal year beginning after December 15, 2022.

157

ASC 326-20-50-6 and ASC 326-20-50-16 and 17.

IFRS often requires similar loan disclosure to that called for by Item III of Guide 3, as follows:

• IFRS requires the disclosure of the carrying value (and fair value) of each class of financial instruments, similar to the disclosure called for by Item III.A.

158

See supra

note 108.

• IFRS requires disclosure of the credit risk management process, credit exposure, and how changes in the gross carrying amount of financial instruments contributed to the changes in the loss allowance, which is similar to the types of information called for by Items III.C.1 and 2.

159

Additionally, Item 5.D of Form 20-F

160

requires a discussion of known trends and uncertainties that may supplement the IFRS disclosures. When considered together, we believe these disclosures allow an investor to evaluate loans where management has doubts about the borrowers' ability to comply with repayment terms. The nonaccrual and TDR disclosures called for by Items III.C.1 and 2 are not applicable under IFRS because, unlike in U.S. GAAP, there is no concept of TDRs or nonaccrual loans in IFRS. However, IFRS does require disclosure related to the nature and effect of modifications of contractual cash flows on financial instruments that have not resulted in derecognition from the balance sheet.

161

159

IFRS 7.35I, IFRS 7.IG20B, and IFRS 7.35M.

160

See supra

note 152.

161

IFRS 7.35J.

• IFRS requires disclosure about significant concentrations of credit risk, which is similar to the types of disclosures called for by Item III.C.3 related to cross-border outstanding loans or to countries where conditions give rise to liquidity problems expected to have a material impact on repayment of principal or interest, the Item III.C.4 disclosure regarding other concentrations of loans, and the Item III.D disclosure related to other interest bearing assets.

162

See supra

note 111.

In the Request for Comment, the Commission asked whether Commission rules, U.S. GAAP or IFRS require the same or similar information as called for by Guide 3 and whether the disclosures provide investors with information material to an investment decision.

ii. Comments on the Loan Portfolio

Many commenters indicated that substantial portions of the Item III disclosures overlap with U.S. GAAP or Commission rules.

163

For example, a number of commenters stated that the disclosures called for by Item III.A—Types of Loans—overlap with U.S. GAAP

164

and that the disclosures called for by Item III.C.1 related to nonaccrual, past due and restructured loans overlap with U.S. GAAP.

165

One commenter noted that, while U.S. GAAP requires similar, but not identical, information, its requirements are more extensive than the Guide 3 disclosures.

166

163

See

letters from ABA; AmEx; BerryDunn; CAQ; CBA; CH/SIFMA; Crowe; Deloitte; EY; KPMG; ICBA; MFG; MUFG; PNC; PwC; and RSM.

164

See

letters from BerryDunn; CAQ; CH/SIFMA; EY; KPMG; MFG; MUFG; PNC; and PwC.

165

See

letters from BerryDunn; CAQ; CH/SIFMA; Deloitte; EY; KPMG; MFG; MUFG; PNC; and PwC.

166

See

letter from Deloitte.

Several commenters indicated that U.S. GAAP addresses the objective of the potential problem loans disclosure called for by Item III.C.2.

167

Additionally, a few commenters indicated that while U.S. GAAP may not require the same information about potential problem loans, this disclosure would appear to be more appropriate for MD&A.

168

These commenters also noted that the relevance of problem loans could change significantly upon the effectiveness of the New Credit Loss Standard. Several commenters stated that the disclosure related to foreign outstandings called for by Item III.C.3 Risk Elements and the loan concentrations disclosure called for by Item III.C.4 are similar to disclosures required by U.S. GAAP.

169

167

See

letters from CAQ; CH/SIFMA; EY; KPMG; MFG; PNC; and PwC.

168

See

letters from ABA and AMEX.

169

See

letters from CAQ; CH/SIFMA; Deloitte; EY; KPMG; MFG; PNC; and PwC.

A few commenters stated that the disclosures called for by Item III.D relating to other (

i.e.,

non-loan) interest bearing assets, while not explicitly required by U.S. GAAP, likely overlap with areas of U.S. GAAP that address credit risk disclosures for financial instruments.

170

However, two other commenters thought that this disclosure is only called for by Item III.D of Guide 3 and is not required by U.S. GAAP and “may be useful” to some investors.

171

While commenter feedback on this point was mixed, no commenter pointed to specific material information that would be lost if Item III.D disclosures were not codified.

170

See

letters from CAQ; EY; KPMG; PNC; and PwC.

171

See

letters from ABA and AmEx.

Several commenters did not view the maturity and sensitivities to changes in interest rate disclosures called for by Item III.B as redundant with Commission rules or U.S. GAAP,

172

and a few of these commenters said the information “may be useful” to some

investors.

173

However, a number of these commenters noted that Item 305 of Regulation S-K—Quantitative and Qualitative Disclosures about Market Risk, requires similar disclosure to that called for by Guide 3.

174

172

See

letters from ABA; AmEx; BerryDunn; CAQ; CH/SIFMA; KPMG; PNC; and PwC.

173

See

letters from ABA; AmEx; and CH/SIFMA.

174

See

letters from CAQ; EY; KPMG; PNC; and PwC.

Several commenters indicated that there is some overlap between the disclosures called for by Item III of Guide 3 and IFRS.

175

For example, several commenters noted that IFRS

176

calls for disclosure of financial instruments by class, but acknowledged that the classes disclosed would require judgment by management versus the prescriptive categories in Guide 3.

177

Commenters also highlighted certain areas where there are potential differences. For example, several commenters said that IFRS does not align with the maturities and sensitivities to changes in interest rate disclosures called for by Item III.B because IFRS includes a threshold that must be met before disclosure is required.

178

Specifically, IFRS requires disclosure of a maturity analysis of financial instruments a registrant holds for managing liquidity risk if that information is necessary to enable users of the financial statements to evaluate the nature and extent of liquidity risk.

179

Additionally, many commenters stated that IFRS and Guide 3 differ in the treatment and presentation of past due and nonaccrual/impaired loans, given that there is no concept of nonaccrual or TDRs under IFRS.

180

Lastly, several commenters stated that there is no specific disclosure requirement under IFRS similar to that called for by Items III.C.2-C.4 and III.D.

181

However, these commenters also indicated that the disclosure framework under IFRS is consistent with the Guide 3 instructions and that any significant concentration risk (by class of financial instrument) should be disclosed under IFRS.

175

See

letters from CAQ; EY; KPMG; and PwC.

176

See supra

note 108.

177

See

letters from CAQ; EY; KPMG; and PwC.

178

Id.

179

See supra

note 129.

180

See

letters from CAQ; CBA; CH/SIFMA; Deloitte; EY; KPMG; and PwC.

181

See

letters from CAQ; EY; KPMG; and PwC.

iii. Proposed Rule—Loan Portfolio

The proposed rules would not include the loan category disclosure currently called for by Item III.A of Guide 3, the loan portfolio risk elements disclosure called for by Item III.C and the other interest bearing assets disclosure called for by Item III.D,

182

as we believe reasonably similar disclosures are required by Commission rules, U.S. GAAP, or IFRS as discussed in more detail above. Proposed Item 1404 of Regulation S-K would codify the maturity by loan category disclosure currently called for by Item III.B, but the loan categories may increase as it would be the categories required to be disclosed in the registrant's U.S. GAAP

183

or IFRS

184

financial statements. Existing Guide 3 provided latitude to registrants to use loan categories outside of those identified in Guide 3 “if considered a more appropriate presentation.” Therefore, we believe some registrants may already be using the U.S. GAAP or IFRS loan categories for the Guide 3 disclosures. Additionally, the proposed rules would codify the existing Guide 3 instruction stating that the determination of maturities should be based on contractual terms. We also propose to clarify the “rollover policy” for these disclosures by stating that, to the extent non-contractual rollovers or extensions are included for purposes of measuring the allowance for credit losses under U.S. GAAP or IFRS, such non-contractual rollovers or extensions should be considered for purposes of the maturities classification and that the policy should be briefly disclosed. This clarification may represent a change from existing Guide 3 application, which provides that the determination of maturities should be revised as appropriate to comply with the registrant's “rollover policy” and makes no reference to U.S. GAAP or IFRS.

185

The proposed rules also would codify the disclosure currently called for by Item III.B of the total amount of loans due after one year that have (a) predetermined interest rates and (b) floating or adjustable interest rates and would specify that this disclosure should also be segregated by the loan categories disclosed in the registrant's U.S. GAAP or IFRS financial statements. Item III.B currently permits the exclusion of certain loan categories (real estate-mortgage, installment loans to individuals and lease financing) and the aggregation of other loan categories (foreign loans to governments and official institutions, banks and other financial institutions, commercial and industrial and other loans) from the maturity and sensitivity to changes in interest rates disclosure. The proposed rule would not provide any exclusion of loan categories, or permit the aggregation of any loan categories, for purposes of this disclosure. We are not aware of any reason why the proposed disclosure would be less relevant or useful for these specific loan categories, nor do we think the information would be any more burdensome for registrants to produce, or for investors to evaluate, for these categories.

182

The proposed rule also deletes the loan presentation disclosure required under Rule 9-03(7)(a)-(c) of Regulation S-X. See Section IV below.

183

See supra

notes 145 and 146.

184

See supra

note 108.

185

See supra

note 135.

The proposed rules would codify the Guide 3 loan disclosures that we believe elicit information material to an investment decision and do not overlap with other existing disclosure requirements or principles. Furthermore, we believe revising the current loan categories to conform to the loan categories required by U.S. GAAP or IFRS would promote consistency of loan portfolio disclosures throughout a registrant's filing. Lastly, we believe that specifically linking the maturities guidance to whether the rollovers or extensions are included for purposes of measuring the allowance for credit losses under U.S. GAAP or IFRS promotes comparability and consistency amongst U.S. GAAP or IFRS registrants and provides a more objective basis to make the maturities determination. The proposed changes would thereby assist investors in evaluating the disclosures while also reducing the burdens on registrants to prepare such disclosures because registrants should be able to derive this information from their existing books and records.

Request for Comment:

28. The proposed rules would not codify the loan portfolio disclosures currently called for by Item III.A of Guide 3. Would this result in the loss of information material to an investment decision not readily available from other publicly available disclosures? If so, what material information would be lost and how should we modify the proposed rules to preserve this information?

29. Should we codify, as proposed, the disclosures currently called for by Item III.B related to maturities and sensitivities to changes in interest rates? Are the maturity categories in the proposed rules appropriate? If not, what maturity categories should be required?

30. Should we, as proposed, require that maturity category determinations take into account non-contractual rollovers or extensions that are included for purposes of measuring the allowance for credit losses under U.S. GAAP or IFRS? If not, what approach should be required?

31. Should the loan categories for the maturities and sensitivities to changes in interest rate disclosures in the proposed rules be conformed to those presented in the registrant's U.S. GAAP or IFRS financial statements as proposed? Given that U.S. GAAP and IFRS do not require the same categories to be disclosed,

186

would the lack of standardization of the categories disclosed between registrants applying U.S. GAAP (“U.S. GAAP registrants”) and IFRS registrants result in confusion for investors? If so, how should we revise the proposed rules to avoid such confusion? For example, should we codify the Guide 3 loan categories?

186

U.S. GAAP and IFRS have a principles-based approach for determining the categories of loans to be disclosed.

See supra

notes 108 and 145. Thus, both U.S. GAAP and IFRS registrants will make judgments about the loan categories to be disclosed and there likely will not be consistency amongst all registrants.

32. Unlike current Guide 3, the proposed rules would require disclosure for loans due after one year with predetermined interest rates and floating or adjustable interest rate for all loan categories, and not exclude or aggregate certain loan categories.

187

Would this information be material to an investment decision? Should we permit certain categories of loans to be excluded or aggregated? If so, which categories?

187

Item III.B currently permits the exclusion of certain loan categories (real estate-mortgage, installment loans to individuals and lease financing) and the aggregation of other loan categories (foreign loans to governments and official institutions, banks and other financial institutions, commercial and industrial and other loans) from the maturity and sensitivity to changes in interest rates disclosure.

33. The proposed rules would not codify disclosure of the period end amount of TDRs as called for by Item III.C.1 even though the U.S. GAAP disclosure requirement is not substantially the same.

188

Is the disclosure of the TDR balance at period-end material to an investment decision and should it be codified?

188

U.S. GAAP only requires disclosure of TDRs occurring during each period that an income statement is presented, and does not provide a cumulative level of TDRs existing on the balance sheet, similar to the disclosure called for by Item III.C.1(c).

34. Under the proposed rules, IFRS registrants would not be required to provide disclosure of nonaccrual loans or TDRs because IFRS does not recognize the concept of nonaccrual or TDRs. Should the proposed rules require IFRS registrants to disclose these amounts, calculated on a U.S. GAAP basis, in order to aid in comparability with U.S. GAAP registrants?

35. The proposed rules would not codify the potential problem loans disclosure called for by Item III.C.2 even though the U.S. GAAP and IFRS disclosure requirements are not substantially the same. Is the disclosure of potential problem loans material to an investment decision and should it be codified? How would investors use this disclosure? Can the information provided by the potential problem loan disclosure be obtained from other disclosures required by U.S. GAAP

189

or IFRS,

190

or from the trends and uncertainties disclosures called for by Item 303 of Regulation S-K?

191

189

See supra

note 151.

190

IFRS 7.35M.

191

See supra

note 152.

36. The proposed rules would not codify the disclosures in Item III.C.3 of Guide 3 related to foreign outstandings, which currently calls for disclosure of the name of the country and aggregate amount of cross-border outstandings to borrowers in each foreign country where such outstandings exceed one percent of total assets. Would this result in the loss of information material to an investment decision in light of the fact that U.S. GAAP

192

and IFRS

193

require disclosure about significant concentrations of credit risk? Would the “significant” threshold in U.S. GAAP and IFRS likely result in substantially the same population of countries being disclosed as the one percent bright-line threshold currently called for by Guide 3? Should we instead codify the one-percent bright-line threshold? If so, why? Are there additional disclosures related to foreign outstandings that we should codify to avoid potential loss of information material to an investment decision? If so, what are those disclosures?

192

See supra

note 110.

193

See supra

note 111.

37. The proposed rules would not codify the Item III.C.4 of Guide 3 disclosure of loan concentrations that exceed 10% of total loans. Would this result in the loss of information material to an investment decision in light of the fact that U.S. GAAP

194

and IFRS

195

require disclosure about significant concentrations of credit risk? Would the “significant” threshold in U.S. GAAP and IFRS likely result in substantially the same categories of loans being disclosed as the 10% bright-line threshold currently called for by Guide 3? Should we instead codify the 10% bright-line threshold? If so, why? Are there additional disclosures related to loan concentrations that we should codify or propose to avoid potential loss of information material to an investment decision? If so, what are those disclosures?

194

See supra

note 110.

195

See supra

note 111.

38. The proposed rules would not codify the disclosure in Item III.D of Guide 3 disclosure related to other interest bearing assets. Would this result in the loss of information material to an investment decision in light of the fact that U.S. GAAP

196

and IFRS

197

require disclosure of reasonably similar information for assets likely to have been disclosed under this item? Should we instead codify the current interest-bearing assets disclosure?

196

See supra

note 155.

197

IFRS 7.35B and M.

39. Is there additional information related to loans that should be disclosed? If so, what information and how would this information be used by investors? Would there be a significant cost or burden to bank and savings and loan registrants in providing this additional information?

H. Allowance for Credit Losses

i. Background

Item IV.A of Guide 3 calls for a five-year analysis of loan loss experience,

198

including the beginning and ending balances of the allowance for loan losses, charge-offs and recoveries by loan category

199

and additions charged to operations. Item IV.A also calls for disclosure of the ratio of net charge-offs to average loans outstanding during the period, as well as a brief discussion of the factors that influenced management's judgment in determining the amount of the additions to the allowance charged to operating expense.

198

This analysis of activity in the allowance for loan losses is known as a “rollforward” of the allowance for loan losses.

199

The loan categories presented in Item IV.A are the same as in Item III of Guide 3.

Item IV.B calls for a breakdown of the allowance for loan losses by category

200

along with the percentage of loans in each category. Registrants may, however, furnish a narrative discussion of the loan portfolio's risk elements and the factors considered in determining the amount of the allowance in lieu of providing a breakdown. The staff has observed that BHC registrants generally elect to use a tabular format to present the allocation of allowance for loan losses instead of a narrative discussion.

200

The specified categories

for domestic loans

are: (1) Commercial, financial and agricultural, (2) real estate construction, (3) real estate-mortgage, (4) installment loans to individual, and (5) lease financing. The other categories for the breakdown are foreign and unallocated.

Since Guide 3 was last amended, a number of new disclosures related to credit losses of financial instruments have been added to U.S. GAAP and

IFRS. For example, U.S. GAAP

201

requires a rollforward of the activity in the allowance for loan losses for each period by portfolio segment,

202

as well as a description of the factors that influenced management's judgment, which overlaps with the disclosure called for by Item IV.A of Guide 3.

203

Similarly, IFRS requires reconciliation, by class of financial instrument, of the opening balance to the closing balance of the allowance, as well a discussion of the inputs, assumptions, and estimation techniques used to determine the allowance.

204

The staff has observed that, since the IFRS reconciliation of the allowance is by class

205

of financial instrument, the disclosure of this information is typically more disaggregated than the reconciliation by portfolio segment under U.S. GAAP. Furthermore, this more detailed allowance reconciliation provides information consistent with the breakdown of the allowance for loan losses by loan category called for by Item IV.B.

201

ASC 310-10-50-11B (and ASC 326-20-50-11 and ASC 326-20-50-13 upon the adoption of the New Credit Loss Standard).

202

ASC 310-20 defines a portfolio segment as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses.

203

The staff has observed that some BHC registrants present their Guide 3 rollforward using their U.S. GAAP portfolio segments instead of the loan categories specified in Guide 3 or Article 9 because Guide 3 provides latitude in determining loan categories.

204

IFRS 7.35G and H.

205

See supra

note 108.

There are differences in the credit loss impairment standards under U.S. GAAP

206

and IFRS.

207

Such differences will continue to exist subsequent to the adoption of the New Credit Loss Standard. Currently under U.S. GAAP, an impairment is recognized for certain financial instruments when it is probable that a loss has been incurred.

208

When effective, the New Credit Loss Standard will replace the current incurred loss methodology with a methodology that reflects expected credit losses over the entire contractual term of the financial instruments.

209

By contrast, IFRS

210

requires a 12-month expected credit loss measurement for certain financial instruments unless there has been a significant increase in credit risk, in which case a lifetime expected credit loss measurement is required.

206

ASC 310-10 (and ASC 326 upon the adoption of the New Credit Loss Standard).

207

IFRS 9.

208

ASC 310-10-35-4.

209

As discussed in paragraph BC46 of the New Credit Loss Standard, the FASB decided not to characterize expected credit losses as “lifetime” expected credit losses, even though a registrant must estimate credit losses over the entire contractual term of the financial instruments (recognizing that expected prepayments affect the estimated life). The FASB observed that the use of the term “lifetime” could be interpreted in many ways and could lead some to believe the standard was defining the model a registrant must use to estimate.

210

See supra

note 207.

The New Credit Loss Standard will require consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new methodology will require registrants to use forecasted information, in addition to past events and current conditions, when developing their estimates. Similar to current U.S. GAAP, it will not specify a method for measuring expected credit losses and will allow registrants to apply methods that reasonably reflect their expectations of the credit loss estimate. The New Credit Loss Standard and IFRS both require disclosure about how the registrant measures expected credit losses, as well as how it incorporates forward-looking information into the measurement.

In the Request for Comment, the Commission asked whether Commission rules, U.S. GAAP, or IFRS require the same or similar loan loss information as that called for by Guide 3 as well as whether additional disclosures would be material to an investment decision upon the change from an accrual method to an expected loss method for credit losses.

ii. Comments on Allowance for Credit Losses

Many commenters stated that all or a portion of the disclosures called for by Item IV relating to loan losses overlap with Commission rules or U.S. GAAP.

211

Several of these commenters stated that the disclosures called for by Item IV overlap in their entirety with U.S GAAP requirements and should be eliminated.

212

However, one commenter stated that the disclosure of the ratio of net charge-offs to average loans outstanding during the period is not a U.S. GAAP requirement.

213

Several commenters stated that the disclosures called for by Item IV.B relating to the allocation of the allowance for loan losses overlap with U.S. GAAP.

214

However, a few of those commenters observed that the disclosure breakdowns called for by Item IV.B are more prescriptive than the U.S. GAAP requirements.

215

Several commenters also stated that IFRS addresses the objective of the disclosures called for by Item IV.

216

211

See

letters from ABA; AmEx; BerryDunn; CAQ; CH/SIFMA; Crowe; Deloitte; EY; KPMG; MFG; MUFG; PNC; PwC; and RSM.

212

See

letters from ABA; AmEx; Crowe; Deloitte; MFG; and MUFG.

213

See

letter from BerryDunn.

214

See

letters from CAQ; CH/SIFMA; EY; KPMG; MFG; MUFG; PNC; PwC; and RSM.

215

See

letters from CAQ; EY; KPMG; PNC; and PwC.

216

See

letters from CAQ; EY; KPMG; and PwC.

One commenter called for additional disclosure under U.S. GAAP regarding the allowance for credit losses under the New Credit Loss Standard.

217

In contrast, two commenters stated that it would be premature for the Commission to add disclosure that relates to future accounting standards.

218

These commenters generally noted that at a later time, after implementation has been reviewed, the Commission, FASB, registrants and investors can assess and determine whether additional disclosures may be necessary or useful.

219

Lastly, one commenter observed that the financial asset disclosures under IFRS are qualitative in nature and a registrant has more discretion to disaggregate and provide information on investments and loan portfolios compared to the current disclosures called for by Guide 3.

220

217

See

letter from Capital Group. In this letter, the Capital Group requested that the FASB require more detailed disclosure about the assumptions being made in the accounting and how those judgments and actual experience occur and change over time. More specifically, the Capital Group viewed the following disclosures as crucial elements in making the new standard operational: (1) Transparency around loan loss reserves at origination, (2) change in estimate of the loan loss reserve disaggregated by year of loan origination and type of loan, (3) gross and net chargeoffs and recoveries each period by vintage, and (4) disaggregation of credit quality indicators by vintage, including loan-to-value, internal risk rating, and geography.

218

See

letters from CAQ and CH/SIFMA.

219

Since the Request for Comment, IFRS 9 has become effective.

220

See

letter from Deloitte.

iii. Proposed Rule—Allowance for Credit Losses

The proposed rules would not require the analysis of loss experience disclosure currently called for by Item IV.A of Guide 3, but would codify in Item 1405 of Regulation S-K the ratio of net charge-offs during the period to average loans outstanding as this disclosure does not overlap with existing Commission, U.S. GAAP, or IFRS requirements. The proposed rules would require the disclosure of the net charge-off ratio on a more disaggregated basis than the current Guide 3 disclosure, based on the loan categories required to be disclosed in the registrant's U.S. GAAP

221

or IFRS

222

financial statements. We believe this ratio, as well as the disaggregation of information that will be based on the loan categories disclosed in the financial statements would provide further insight into the performance of specific loan categories. The proposed rules would also codify the breakdown of the allowance disclosures called for by Item IV.B with some revisions, as we concur with commenter feedback that this disclosure provides more detailed information than that required by U.S. GAAP. Specifically, a tabular breakdown of the allowance would be required for registrants applying or reconciling to U.S. GAAP, rather than permitting an alternative option to provide a narrative discussion. We believe the tabular breakdown would provide for easier analysis by investors when reviewing these disclosures and note that the alternative narrative discussion is not widely used by registrants. The breakdown would be based on the loan categories presented in the U.S. GAAP financial statements, instead of the specified loan categories currently listed by Item IV.B.

223

We are not proposing to apply this requirement to IFRS registrants because IFRS already requires this information at a similar level of disaggregation in the financial statements.

224

221

See supra

note 145.

222

See supra

note 108.

223

See supra

note 145.

224

IFRS 7.35H.

The proposed rules would not codify the existing overlap between the Item IV disclosures in Guide 3, U.S. GAAP and IFRS. At the same time, our proposal to link the proposed disclosures to the specific loan categories required by U.S. GAAP or IFRS would provide investors with consistent categories of disclosures throughout the filing without imposing undue cost or burden on registrants to prepare the disclosure, because registrants should be able to derive this information from their existing books and records.

We are not proposing any disclosures related to the New Credit Loss Standard at this time. Consistent with the recommendation of several commenters, the staff will wait until after the effective date of the new standards before we assess the disclosures provided under the new standards and whether additional material information is necessary. Additionally, the FASB has a codification improvement project

225

related to disclosures to be provided as part of the New Credit Loss Standard. In light of these ongoing efforts, we are requesting comment on whether there are allowance disclosures under an expected credit loss model that would be material to an to an investment decision that are not already required by Commission rules, the proposed rules, U.S. GAAP, or IFRS. This request for comment will help inform future Commission consideration of the information available regarding the New Credit Loss Standard and any changes that may arise from the FASB activities described above.

225

See Financial Instruments—Credit Losses (Vintage Disclosures: Gross Writeoffs and Gross Recoveries)

available at:

https://www.fasb.org/jsp/FASB/Page/TechnicalAgendaPage&cid=1175805470156.

Request for Comment:

40. Would the proposed rules result in the loss of information material to an investment decision? If so, what additional disclosures should be codified to avoid such loss?

41. Should we, as proposed, require a U.S. GAAP registrant to provide the tabular breakdown of the allowance for credit losses, and not codify the existing option of providing an alternative narrative discussion?

42. Should we, as proposed, revise the allowance breakdown to be based on the U.S. GAAP loan categories? If not, what alternative breakdown would be more appropriate? Should the proposed rules also require a breakdown of the liability for credit losses on unfunded commitments?

226

Unfunded commitments, such as revolving lines of credit or other unfunded loan commitments, represent off-balance sheet credit exposures. Because they are often legally binding agreements to extend credit under certain terms and conditions, loan commitments can expose an entity to credit losses.

43. The proposed rules would not require IFRS registrants to provide the tabular breakdown of the allowance because IFRS already requires similar information. Would any information material to an investment decision be lost by not requiring this disclosure for IFRS registrants? If so, how should we revise the proposed rules to avoid such loss?

44. The proposed rules would require the net charge off ratio to be disclosed on a more disaggregated basis than the level of charge off disclosure that currently exists in U.S. GAAP. Specifically, the proposed rules would require the ratio for each of the U.S. GAAP loan categories or IFRS loan classes disclosed in the registrant's financial statements. Is this level of disaggregation appropriate for this ratio?

45. Should the proposed rules also require additional expected credit loss information by U.S. GAAP loan category, such as the provision for credit losses for each loan category? Would information at the U.S. GAAP loan category level be available to preparers without significant undue cost or burden?

46. Are there additional disclosures that registrants with material portfolios of financial instruments with an allowance based on an expected credit loss model (

e.g.,

the New Credit Loss Standard) should provide? If so, what additional disclosures should be required and why? Should these disclosures allow for scalability among registrants, and if so, how?

47. Would disclosure of the key inputs and assumptions used in an expected credit loss model (

e.g.,

the New Credit Loss Standard) provide information material to an investment decision? If so, what key inputs and assumptions would be material?

48. Are there other disclosures about allowance for credit losses we should consider requiring? For example, should we require registrants to disclose the material qualitative adjustments used in the estimation of the allowance for credit losses and how those adjustments were determined? Should we require registrants to provide a description of any material changes in the key inputs/assumptions disclosed from period-to-period, including quantitative and/or directional information as to how the inputs and assumptions changed, and the factors driving the changes? If so, how would these disclosures be used? At what disaggregation level, for example, at a loan category level or portfolio segment level, should they be presented?

iv. Proposed New Disclosure—Credit Ratios

a. Background

Guide 3 currently calls for the disclosure of one credit ratio, net charge-offs during the period to average loans outstanding, as outlined in Item IV.A. As discussed in Section 2.H.iii

above, we propose to codify this disclosure. Guide 3 currently calls for this disclosure on a consolidated basis. However, we are proposing to require it by the loan categories disclosed in the U.S. GAAP or IFRS financial statements. There is no requirement in Commission rules, U.S. GAAP, or IFRS to disclose other commonly used credit ratios by bank and savings and loan registrants, such as the allowance for credit losses to total loans, nonaccrual loans to total loans, or the allowance for credit losses to nonaccrual loans. Nevertheless, bank and savings and loan registrants commonly disclose other credit ratios and such information is generally readily available to them without undue cost or burden as the components are provided in Call Reports filed with the U.S. banking agencies. Furthermore, U.S. GAAP requires disclosure of many of the components of these ratios, such as nonaccrual loans, and the rollforward of the allowance for credit losses by portfolio segment, including separate line items showing writeoffs charged against the allowance and recoveries of amounts previously charged off (which together can be used to calculate net charge-offs).

227

IFRS includes a similar requirement to provide disclosure of the rollforward of the allowance for credit losses

228

at a more disaggregated class level compared to U.S. GAAP, but there is no requirement to disclose nonaccrual loans because nonaccrual loans are not a concept recognized in IFRS.

227

ASC 310-10-50-7 (and ASC 326-20-50-16 after the adoption of the New Credit Loss Standard) requires disclosure of nonaccrual loans by class of financing receivable. ASC 310-10-50-11B (and ASC 326-20-50-13 upon the adoption of the New Credit Loss Standard) requires disclosure of a rollforward of the allowance for credit losses, by portfolio segment, showing the beginning and ending balance, the current period provision, writeoffs charged against the allowance and recoveries of amounts previously charged off.

228

See supra

note 224.

In the Request for Comment, the Commission asked whether it should require disclosure of financial services industry-specific ratios, such as nonaccrual loans to total loans. We did not, however, receive commenter feedback on this point.

b. Proposed Rule—Credit Ratios

Proposed Item 1405 of RegulationS-K would require disclosure of the following credit ratios, along with each of the components used in their calculation: (1) Allowance for Credit Losses to Total Loans; (2) Nonaccrual Loans to Total Loans; (3) Allowance for Credit Losses to Nonaccrual Loans; and (4) Net Charge-offs

229

to Average Loans,

230

by loan category disclosed in the financial statements. The first three ratios would be disclosed on a consolidated basis, while the fourth ratio of Net Charge-Offs to Average Loans would be at the more disaggregated loan category level. The disaggregated loan category level is more detailed than the components to the ratios, net charge-offs and average loans outstanding, are required to be disclosed under U.S. GAAP. The proposed rules would also require a discussion of the factors that drove material changes in the ratios, or related components, during the periods presented. In our experience, these credit ratios are commonly disclosed by bank and savings and loan registrants with material lending portfolios. Consequently, investors may already be evaluating these ratios in making investment decisions. We believe disclosure of the components used in the calculation of these ratios, along with the proposed narrative disclosure would further aid investors' understanding of the drivers of the changes in the ratios, particularly if both the numerator and denominator of the ratio have changed significantly during a period. If the related components are separately disclosed with the ratios, investors would be able to get a better sense of the magnitude of changes in each component. As discussed in Section II.D.ii, these ratios would be required for each of the last five years in initial registration statements under the Securities or Exchange Act and in initial Regulation A offering statements. For all other filings, the ratios and related disclosure of the components used in the calculation would be included for the same periods that financial statements are required by Commission rules.

231

229

Net charge-offs should be based on current period net charge-offs.

230

See discussion in Section II.H.iii above.

231

Article 3 of Regulation S-X generally requires two years of balance sheets and three years of income statements, except that SRCs may present only two years of income statements under Article 8 of Regulation S-X. EGCs may also present only two years of financial statements in initial public offerings of common equity securities. Issuers in Regulation A offerings will not be required to update the ratio disclosures in reports filed subsequent to the qualification of the initial registration statement since the ongoing reporting requirements under Regulation A do not require this information.

We believe it is appropriate to require five years of this credit ratio information in initial registration and initial Regulation A offering statements given that investors would be seeing the loan portfolio and related credit history for the first time, and absent this requirement, investors would not have insight into the registrant's loan portfolio credit history beyond, at most, the last two years based on our proposed changes to the reporting period discussed in Section II.D.

232

We believe the proposed disclosure could elicit information material to an investment decision regarding registrant-specific credit trends as credit trends often take several years to develop in the disclosed components. Additionally, if after reasonable effort, the registrant is unable to obtain the five years of credit ratio information, it would be able to rely on Securities Act Rule 409 and Exchange Act Rule 12b-21 to omit the information that is unknown and not reasonably available.

232

Id.

The proposed rules seek to balance the need for additional credit trend information when investors make an initial investment decision absent prior reporting about the registrant, with the added cost to the registrant of producing such information by requiring only information that is not available from prior period filings. The proposed rules would also include an instruction stating that IFRS registrants do not have to provide either of the nonaccrual ratios as there is no concept of nonaccrual in IFRS.

Request for Comment:

49. Are the proposed new disclosures appropriate? Would the proposed ratio disclosures help investors better understand how the credit trends in the loan portfolio change over time? Should different or additional credit ratios be included?

50. Would there be a significant cost or burden to registrants in providing the proposed ratio disclosures, including for 5 years in initial registration and initial Regulation A offering statements? Would registrants have the information readily available from the information they report to the U.S. banking agencies?

51. The proposed rules would require the ratio of Net Charge-offs to Average Loans to be provided on a disaggregated basis, with the other ratios provided on a consolidated basis. Should we require further disaggregation for the other credit ratios? If so, at what disaggregation level? Is there a significant cost or burden to registrants in providing this information?

52. Should we require, as proposed, the disclosure of each of the components used in the calculation of the ratios for each period, along with a discussion of the drivers of the material changes in the ratios? If not, why not?

53. Is the proposed five years of disclosure in initial registration and initial Regulation A offering statements

a sufficient time period for evaluation of the loan portfolio credit trends? Would a shorter time period capture the same credit trends? Are there other registration statements, Regulation A filings, or periodic filings that should include the five years of credit ratios?

54. Should we require, as proposed, five years of credit ratios for initial registration or initial Regulation A offering statements filed by EGCs and SRCs or should we limit the requirement to the periods presented in the financial statements provided by those types of registrants?

55. The proposed rules would not require disclosure of the ratio of Nonaccrual Loans to Total Loans or the Allowance for Credit Losses to Nonaccrual Loans for IFRS registrants since there is no concept of nonaccrual loans in IFRS. Should the proposed rules require disclosure of these ratios, calculated on a U.S. GAAP basis, to aid in comparability? Are there different ratios that should be required for IFRS registrants that would provide similar information?

56. Would the ratio of the allowance for credit losses to total nonaccrual loans continue to be necessary upon the adoption of the New Credit Loss Standard by U.S. GAAP registrants?

I. Deposits

i. Background

Deposit disclosures, together with the level of other disclosed funding sources,

233

may provide transparency with respect to a registrant's sources of funding and liquidity risk profile. Insured retail deposits can be a reliable funding source and may play an integral role in mitigating liquidity risk. Disclosures about significant amounts of deposits from a small number of depositors or certain types of deposits, such as uninsured deposits, could provide investors with insight as to the registrant's reliance on particular sources of funding and risks related to those sources of funding.

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ASC 942-470-50-3 requires disclosures related to debt agreements. ASC 942 and Rule 9-03 of Regulation S-X call for disclosures about short-term borrowings as described below in Section III.B.

Items V.A and V.B of Guide 3 call for the presentation of the average amounts of and the average rates paid for specified deposit categories that exceed 10% of average total deposits.

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Most registrants that currently provide Guide 3 disclosures present this disclosure by disaggregating the deposit categories in the average balance sheet called for by Item I of Guide 3. Item V.C calls for disclosure of the aggregate amount of deposits by foreign depositors in U.S. offices, if material. Items V.D and V.E of Guide 3 focus on the disclosure of time certificates of deposits and other time deposits in amounts of $100,000 or more.

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Item V.D calls for a maturity analysis of time deposits,

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and Item V.E calls for disclosure of time deposits in excess of $100,000 issued by foreign offices.

237

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The specified deposit categories are: (1) Noninterest-bearing demand deposits, (2) interest-bearing demand deposits, (3) savings deposits, (4) time deposits, (5) deposits of banks located in foreign countries including foreign branches of other U.S. banks, (6) deposits of foreign governments and official institutions, (7) other foreign demand deposits, and (8) other foreign time and savings deposits. Categories (1) to (4) are deposits in U.S. bank offices and categories (5) to (8) are deposits in foreign bank offices. Other categories may be used for U.S. bank offices if they more appropriately describe the nature of the deposits.

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The $100,000 thresholds were established in 1976 when the FDIC insurance limit was $40,000 and has never changed.

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The ranges of maturities are by time remaining until maturity: (1) 3 months or less, (2) over 3 through 6 months, (3) over 6 through 12 months, and (4) over 12 months.

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If the aggregate of certificates of deposit and time deposits over $100,000 issued by foreign offices represents a majority of total foreign deposit liabilities, this disclosure need not be provided if a statement to that effect is provided.

U.S. GAAP and Commission rules require similar, but not the same, deposit disclosures as those called for by Guide 3. For example, U.S. GAAP

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requires disclosure of the aggregate amount of time deposits (including certificates of deposit) in denominations that meet or exceed the FDIC insurance limit at the balance sheet date.

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This disclosure is similar to that called for by Item V.D, but differs in that it is not broken out by different maturity categories. Moreover, Item V.D calls for disclosure based on a $100,000 threshold rather than linking to the FDIC insurance limit. In addition, Article 9 requires separate presentation on the balance sheet of noninterest-bearing deposits and interest-bearing deposits.

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IFRS does not specifically require deposit disclosures that overlap with those called for by Guide 3.

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ASC 942-405-50-1.

239

See supra

note 45.

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17 CFR 201.9-03. If the disclosures about foreign activities in Rule 9-05 apply, the amount of noninterest-bearing deposits and interest-bearing deposits in foreign banking offices also must be presented separately.

In the Request for Comment, the Commission asked whether Commission rules, U.S. GAAP or IFRS require the same or similar information as called for by Guide 3, whether the disclosures provide investors with information material to an investment decision, and requested recommendations for how the disclosures could be improved.

ii. Comments on Deposits

Many commenters stated that a portion of the disclosures called for by Item V of Guide 3 overlap with Commission rules or U.S. GAAP.

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For example, one of these commenters stated that the disclosures called for by Item V.A relating to the average amount and average rate paid on interest-bearing deposits are duplicative of the disclosures called for by Item I.A.

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Many commenters stated that the disclosures called for by Item V.D relating to the amount of outstanding domestic time certificates of deposit and other time deposits equal to or in excess of $100,000 by maturity overlap with U.S. GAAP.

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However, these commenters generally noted the difference in disclosure thresholds.

244

A few of these commenters stated that the disclosures called for by Item V.E relating to the amount of outstanding foreign office time certificates of deposit and other time deposits equal to or in excess of $100,000 overlap with U.S. GAAP.

245

241

See

letters from ABA; AmEx; BDO; BerryDunn; CAQ; Crowe; Deloitte; EY; KPMG; ICBA; MFG; MUFG; PNC; PwC; and RSM.

242

See

letter from MFG.

243

See

letters from ABA; AmEx; BDO; BerryDunn; CAQ; Crowe; Deloitte; EY; KPMG; ICBA; MFG; MUFG; PNC; PwC; and RSM.

244

ASC 942-405-50-1 requires disclosure of the amount of time deposits equal to or in excess of the FDIC insurance limit, which is currently $250,000, whereas Guide 3 has a $100,000 threshold.

245

See

letters from BerryDunn; MFG; and MUFG.

Several commenters stated that a portion of the disclosures called for by Item V of Guide 3 elicit information that may be of value to investors.

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A few of these commenters

247

indicated that the disclosure of the average rate paid on deposits is only called for by Item V.A of Guide 3, and some of these commenters

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asserted that the disclosure of other categories of deposits is only called for by Item V.B of Guide 3. All of these commenters expressed the view that the disclosure of the aggregate amount of deposits by foreign depositors in domestic offices is only called for by Item V.C of Guide 3 and is not required by other disclosure requirements.

249

One commenter stated that the disclosures called for by Item V.D relating to the amount of domestic time deposits equal to or in excess of $100,000 by maturity elicit “meaningful

additional information” for investors.

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Several commenters stated that the disclosure of the amount of foreign office time deposits equal to or in excess of $100,000 is only called for by Item V.E of Guide 3 and is not required by other rules.

251

One commenter also recommended that Guide 3 should be updated to align with the U.S. GAAP requirement to disclose information regarding time deposits in excess of the FDIC insurance limit.

252

246

See

letters from ABA; AmEx; CAQ; CH/SIFMA; EY; KPMG; PNC; and PwC.

247

See

letters from ABA; AmEx; and CH/SIFMA.

248

See

letters from CAQ; EY; KPMG; PNC; and PwC.

249

See

letters from ABA; AmEx; CAQ; CH/SIFMA; EY; KPMG; PNC; and PwC.

250

See

letter from CH/SIFMA.

251

See

letters from ABA; AmEx; CAQ; CH/SIFMA; EY; KPMG; PNC; and PwC.

252

See

letter from CH/SIFMA.

Several commenters stated that the disclosures called for by Items V.A, V.B, V.C and V.E of Guide 3 are not specifically required by IFRS.

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However, these commenters also noted that IFRS requires disclosure of more information about financial inst

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