82 FR 12757 - Request for Comment on Possible Changes to Industry Guide 3 (Statistical Disclosure by Bank Holding Companies)
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 43 (March 7, 2017)
Federal Register Volume 82, Issue 43 (March 7, 2017)
| Page Range | 12757-12781 | |
| FR Document | 2017-04329 |
[Federal Register Volume 82, Number 43 (Tuesday, March 7, 2017)] [Proposed Rules] [Pages 12757-12781] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-04329] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 210, 211, 229, 231 and 241 [Release No. 33-10321; 34-80131; File No. S7-02-17] RIN 3235-AL79 Request for Comment on Possible Changes to Industry Guide 3 (Statistical Disclosure by Bank Holding Companies) AGENCY: Securities and Exchange Commission. ACTION: Request for comment. ----------------------------------------------------------------------- SUMMARY: The Commission is publishing this request for comment to seek public input as to the disclosures called for by Industry Guide 3, Statistical Disclosure by Bank Holding Companies. The financial services industry has changed dramatically since Guide 3 was first published. Consequently, our disclosure guidance may not in all cases reflect recent industry developments or changes in accounting standards related to financial and other reporting requirements. DATES: Comments should be received on or before May 8, 2017. ADDRESSES: Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); Send an email to [email protected]. Please include File Number S7-02-17 on the subject line; or Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments Send paper comments to 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 Web site (http://www.sec.gov/rules/other.shtml). Comments also are available for Web site 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; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Lindsay McCord, Associate Chief Accountant in the Office of Chief Accountant, Division of Corporation Finance, at (202) 551-3400, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. SUPPLEMENTARY INFORMATION: Table of Contents I. Introduction II. Applicable Disclosures A. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis) B. Investment Portfolio C. Loan Portfolio D. Summary of Loan Loss Experience E. Deposits F. Return on Equity and Assets G. Short-Term Borrowings H. Potential New Disclosures III. Applicability of Disclosure Requirements A. Applicability to Registrants Other Than Bank Holding Companies B. Applicability to Foreign Registrants C. Size Thresholds and Reporting Periods IV. Closing I. Introduction The Commission is considering possible revisions to its disclosure regime for bank holding companies. When we discuss current disclosure guidance in this request for comment, we focus on the disclosures currently called for by Industry Guide 3, Statistical Disclosure by Bank Holding Companies (Guide 3).\1\ By its terms, Guide 3 applies exclusively to bank holding companies, although the staff has previously indicated that the disclosures called for by Guide 3 ``should also be provided by other registrants with material lending and deposit activities.'' \2\ In this request for comment, when we use the term ``BHC registrants,'' we are referring to public companies that apply Guide 3 disclosures. In light of developments in [[Page 12758]] the financial services industry since publication of Guide 3, we are considering modernization of the nature, timing, scope and applicability of Guide 3. We also encourage commenters to consider registrants other than BHC registrants with material amounts of activities in the areas addressed in Guide 3 \3\ when responding to this request for comment. --------------------------------------------------------------------------- \1\ 57 FR 36442. \2\ Staff Accounting Bulletin Topic 11:K--Application of Article 9 and Guide 3 (SAB 11:K). The Industry Guides and SAB 11:K are not rules, regulations or statements of the Commission. Further, as with any staff guidance, the views of the staff referenced in this request for comment are not rules or interpretations of the Commission. The Commission has neither approved nor disapproved the views of the staff expressed herein. \3\ Guide 3 is divided into seven sections, each covering a distinct area of statistical disclosure: (I) Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential, (II) Investment Portfolio, (III) Loan Portfolio, (IV) Summary of Loan Loss Experience, (V) Deposits, (VI) Return on Equity and Assets, and (VII) Short-Term Borrowings. --------------------------------------------------------------------------- The goal of the Commission's disclosure system is to ensure that investors receive the information they need to make informed investment and voting decisions.\4\ Many of the Commission's disclosure requirements are found in Regulation S-K,\5\ which is the central repository of non-financial statement disclosure requirements, and Regulation S-X,\6\ which prescribes the form and content of and requirements for financial statements. These requirements generally apply to all registrants, regardless of industry. In some instances, the Commission has determined that registrants in specific industries, such as bank holding companies, should provide additional disclosures. For example, Subpart 1200 of Regulation S-K \7\ contains additional disclosure requirements for oil and gas producing companies. The Commission also recently proposed to consolidate the property disclosure requirements for mining registrants in a new Subpart 1300 of Regulation S-K.\8\ Similarly, the Commission has adopted disclosure requirements and published guidance specific to bank holding companies, such as Article 9 of Regulation S-X (Article 9),\9\ which sets forth the Commission's rules for the form and content of consolidated bank holding company financial statements and bank financial statements included in filings with the Commission. --------------------------------------------------------------------------- \4\ Adoption of Integrated Disclosure System, Release No. 33- 6383 (Mar. 3, 1982) [47 FR 11380]. \5\ 17 CFR 229.10 et seq. \6\ 17 CFR 210.1-01 et seq. \7\ 17 CFR 229.1201 through 1208. \8\ Modernization of Property Disclosures for Mining Registrants, Release No. 33-10098 (June 16, 2016) [81 FR 41651] (Mining Disclosures Release). \9\ 17 CFR 210.9-01 through 9-07. --------------------------------------------------------------------------- Industry Guide 3 was first published in 1976 \10\ 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.'' \11\ 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.'' \12\ The Division believed that disclosure of the same statistical information on a regular, periodic basis would assist in assessing their future earning potential and enable investors to compare bank holding companies.\13\ In drafting Guide 3, the staff was ``mindful of the investor's need to assess uncertainties, the need for disclosure with respect to changes in risk characteristics, and specifically the need for substantial and specific disclosure of changes in risk characteristics of loan portfolios.'' \14\ Consequently, Guide 3 called for ``more meaningful disclosure about loan portfolios and related items in filings by bank holding companies'' \15\ than had been generally available prior to implementation of Guide 3. Guide 3 also requests information with respect to a BHC registrant's foreign operations on the basis that it believes is representative of its foreign activities and the risks associated with such business. The staff's view was that such ``information [would] assist investors to evaluate the potential impact of future economic events upon a registrant's business and earnings and to assess the ability of a bank holding company to move into or out of situations with favorable or unfavorable risk/return characteristics.'' \16\ In adopting Guide 3, the staff consulted extensively with representatives of the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (collectively, U.S. banking agencies), which regulate banking organizations.\17\ Unless the context dictates otherwise, in this request for comment, when we use the term ``banking organizations,'' we are referring to national banks, state member banks, Federal savings associations, and top-tier bank holding companies domiciled in the United States not subject to the FRB's Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C), as well as top-tier savings and loan holding companies domiciled in the United States, except certain savings and loan holding companies that are substantially engaged in insurance underwriting or commercial activities.\18\ Guide 3 has been amended over time to provide more uniformity and consistency between the Guide and Article 9 and to elicit additional information about various risk elements involved in deposit and lending activities,\19\ although the last substantive revision of Guide 3 took place in 1986.\20\ --------------------------------------------------------------------------- \10\ Guides for Statistical Disclosure by Bank Holding Companies, Release No. 33-5735 (Aug. 31, 1976) [41 FR 39007] (Guide 3 Release). 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]. 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.'' \11\ Guide 3 Release at 39008. \12\ Id. \13\ Id. \14\ Id. \15\ Id. \16\ Id. \17\ Id. \18\ See Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule. (Oct. 11, 2013) [78 FR 62017] (Regulatory Capital Rules). \19\ Amendments to Guides for Statistical Disclosure by Bank Holding Companies, Release No. 33-6221 (July 8, 1980) [45 FR 47138] (1980 Guide 3 Amendments 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 (1983 Guide 3 Revisions Release); Notification of Technical Amendments to Securities Act Industry Guides, Release No. 33-9337 (Jul. 13, 2012) [77 FR 42175]. \20\ Guide 3's last substantive revision, which added disclosures regarding loans and extensions of credit to borrowers in countries experiencing liquidity problems, occurred in 1986. See Amendments to Industry Guide Disclosures by Bank Holding Companies, Release No. 33-6677 (Nov. 25, 1986) [51 FR 43594]. --------------------------------------------------------------------------- Purpose of This Request for Comment Since the last substantive revisions to Guide 3, the Commission has issued disclosure requirements and guidelines \21\ and the Financial Accounting Standards Board (FASB) \22\ [[Page 12759]] has issued accounting standards that have changed the reporting obligations for all registrants generally. In addition, various international, federal and state regulatory, supervisory and standard- setting bodies \23\ require entities within their respective remits to publish a wide range of quantitative and qualitative disclosures. Consequently, some of the disclosures called for by Guide 3, which are focused on the needs of an investor, may be duplicative of or overlap with subsequently adopted Commission rules, accounting principles generally accepted in the United States (U.S. GAAP) or disclosures mandated by other regulatory, supervisory or standard-setting regimes. --------------------------------------------------------------------------- \21\ For example, the Commission adopted Item 305 of Regulation S-K 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). \22\ 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 and 19(a) and Schedule A, Items (25) and (26) of the Securities Act of 1933 [15 U.S.C. 77a et seq.] (Securities Act) and Sections 3(b), 12(b) and 13(b) of the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (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 2002, 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 Commission Statement of Policy 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 and establishes its own standard-setting agenda. For further information, see http://www.ifrs.org/About-us/Pages/IFRS-Foundation-and-IASB.aspx. \23\ In the United States, for example, the U.S. banking agencies regulate and supervise banking organizations. The Basel Committee on Banking Supervision (BCBS) is an example of an international standard-setter for the prudential regulation of banks. The BCBS develops international regulatory capital standards through a number of capital accords and related publications. The United States is a participating member of the BCBS, and the U.S. banking agencies generally implement BCBS standards through a notice and comment process. For more information, see http://www.bis.org/bcbs/history.pdf. --------------------------------------------------------------------------- Furthermore, the financial services industry has evolved significantly since Guide 3 was first published. Bank holding companies and financial holding companies today conduct a wider array of activities than was the case at the time of Guide 3's publication.\24\ Moreover, the use of financial instruments has also evolved. For example, 1,438 insured U.S. commercial banks and savings associations reported derivatives activities at the end of the third quarter of 2016.\25\ A small group of large financial institutions continues to dominate derivatives activity in the U.S. commercial banking system. During the third quarter of 2016, four large commercial banks represented 89.7 percent of the total banking industry notional amounts and 84.4 percent of industry net credit exposure.\26\ --------------------------------------------------------------------------- \24\ For example, some banking organizations engage in activities involving physical commodities, insurance, investment management, asset management and broker-dealer activities. See also Henry T. C. Hu, Disclosure Universes and Modes of Information: Banks, Innovation, and Divergent Regulatory Quests, 31 Yale Journal on Regulation 565 (2014) at pages 590-592. \25\ See Quarterly Report on Bank Derivatives Activities, Third Quarter 2016, Office of the Comptroller of the Currency, available at https://www.occ.gov/topics/capital-markets/financial-markets/derivatives/derivatives-quarterly-report.html. \26\ Id. --------------------------------------------------------------------------- In this request for comment, we describe each disclosure section in Guide 3 in turn, as well as related disclosures required by Commission rules, U.S. GAAP and the U.S. banking agencies,\27\ and we ask for public input about how and to what extent the Guide 3 disclosure regime could be improved. We seek input on new or revised disclosure or the elimination of what may be duplicative or overlapping disclosures in Guide 3. We also seek input on whether any of the Guide 3 disclosures, which are not Commission rules or requirements, should be codified as Commission rules.\28\ Because we are considering modernization of the scope and applicability of Guide 3, we also encourage commenters to consider registrants other than bank holding companies when recommending improvements to the disclosure regime. --------------------------------------------------------------------------- \27\ The descriptions in this request for comment are provided for the convenience of commenters and to facilitate the comment process. These descriptions, particularly the descriptions of applicable bank regulatory requirements and U.S. GAAP, should not be taken as Commission or staff guidance about the relevant rules or standards. \28\ In 1996, the Commission's Task Force on Disclosure Simplification recommended relocating the industry guides, including Guide 3, into Regulation S-K. 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) directs the attention of bank holding companies to the information called for by Guide 3. In 2008, the Commission modernized the reporting requirements applicable to oil and gas reserves and codified the disclosures formerly in Industry Guide 2 into Regulation S-K. Modernization of Oil and Gas Reporting, Release No. 33-8995 (Dec. 31, 2008) [74 FR 2158]. --------------------------------------------------------------------------- Sources of Disclosures In addition to Article 9 and Guide 3, various Commission rules and accounting standards applicable to registrants in all industries govern the disclosures that bank holding companies provide in Commission filings. For example: \29\ --------------------------------------------------------------------------- \29\ The rules and accounting standards in these examples apply to domestic registrants. Foreign private issuers are subject to similar Commission disclosure requirements. For example, Form 20-F requires a discussion of the foreign private issuer's financial condition, changes in financial condition and results of operations and quantitative and qualitative disclosures about market risk. --------------------------------------------------------------------------- Article 4 of Regulation S-X \30\ requires financial statements for domestic registrants to comply with U.S. GAAP, which in turn contains disclosure requirements that apply specifically to the financial services industry.\31\ --------------------------------------------------------------------------- \30\ 17 CFR 210.4-01 through 4-10. \31\ U.S. GAAP includes industry-specific accounting and reporting guidance for the financial services industry in Accounting Standards Codification (ASC) 940 to 950. U.S. GAAP categorizes the financial services industry disclosures by the following: Broker Dealers, Depository and Lending, Insurance, Investment Companies, Mortgage Banking, and Title Plant. --------------------------------------------------------------------------- Item 303 of Regulation S-K,\32\ Management's discussion and analysis of financial condition and results of operations (MD&A), requires a discussion and analysis of the underlying causes of material changes in financial statement line items, as well as the material trends and uncertainties that may have a material impact on a registrant's results of operations, liquidity or capital resources.\33\ --------------------------------------------------------------------------- \32\ 17 CFR 229.303. \33\ See Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056] (Interpretive Guidance on MD&A). --------------------------------------------------------------------------- Item 305 of Regulation S-K,\34\ Quantitative and qualitative disclosures about market risk, requires disclosures about market risks, including interest rate risk. Interest rate risk is a significant risk for registrants whose balance sheets are concentrated in interest-earning assets and interest-bearing liabilities. --------------------------------------------------------------------------- \34\ 17 CFR 229.305. --------------------------------------------------------------------------- Item 2.02 of Form 8-K requires registrants that make any public announcement or release material non-public information about their results of operations or financial condition for a completed quarter or annual period to furnish the information as an exhibit to Form 8-K. Among other things, this requirement applies to earnings releases and investor presentations.\35\ --------------------------------------------------------------------------- \35\ Registrants sometimes provide investor presentations that contain extensive information that is not required to be disclosed by Commission rules or accounting standards. For example, some registrants disclose calculations for capital ratios to which they are not yet subject. In addition, some registrants disclose their deposit spreads for each category of deposits, while disclosing in MD&A their deposit spread on an aggregated basis only. --------------------------------------------------------------------------- A wide range of information is publicly available beyond what is called for by the Commission's disclosure requirements and guidance. For example: The U.S. banking agencies require their regulated banking organizations to file publicly available Consolidated Reports of Condition and Income (Call [[Page 12760]] Reports), on a quarterly basis.\36\ The FRB also requires bank holding companies to file publicly available data separately on a consolidated basis.\37\ Because these reports are prepared based on bank regulatory reporting requirements, the information they contain is not necessarily identical to the information in Commission filings. --------------------------------------------------------------------------- \36\ Every national bank, state member bank, insured state nonmember bank, and savings association is required to file periodic consolidated Call Reports. These banking organizations may not be the entities that file reports with the Commission, which typically are the bank holding companies. For Call Report instructions and forms, see http://www.ffiec.gov/ffiec_report_forms.htm. Call Reports must be filed 30 to 35 calendar days after the report date, depending on whether the filer has a foreign office. The discussion of Call Reports in this request for comment is based on the reporting requirements applicable to banking organizations as of December 31, 2016. \37\ The FRB collects basic financial data on a consolidated basis from domestic bank holding companies, savings and loan holding companies and securities holding companies on Form FR Y-9C. --------------------------------------------------------------------------- Banking organizations are subject to the regulatory capital framework and the associated disclosures adopted by the U.S. banking agencies. The current regulatory capital framework, known as ``Basel III,'' was first phased in beginning on January 1, 2014 and became effective for all U.S. banking organizations on January 1, 2015.\38\ U.S. GAAP requires disclosure describing the capital requirements and compliance with those requirements on an annual basis.\39\ --------------------------------------------------------------------------- \38\ The BCBS developed international regulatory capital standards through a number of capital accords and related publications, which have collectively been in effect since 1998. Basel III is a comprehensive set of reform measures, developed by the BCBS, to strengthen the regulation, supervision, and risk management of the banking sector. The measures include both liquidity and capital reforms. See http://www.federalreserve.gov/bankinforeg/basel/. The Basel III framework is based on the following three pillars: (1) Minimum capital requirements, (2) supervisory review process, and (3) market discipline disclosures. See Regulatory Capital Rules. \39\ ASC 942-505-50. The ratios and amounts required to be disclosed, if applicable, include: (1) Tier 1 leverage, (2) Tier 1 risk-based and total risk-based capital, (3) tangible capital, and (4) Tier 3 capital for market risk. Registrants should disclose any other regulatory limitations that could materially affect their economic resources and claims to those resources. Entities within the scope of ASC 942 include the following: (a) Finance companies; (b) depository institutions; (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 that present U.S. GAAP financial statements; (h) mortgage companies; and (i) corporate credit unions. --------------------------------------------------------------------------- Large, internationally active banking organizations, certain designated nonbank financial companies and certain consolidated subsidiary depositary institutions thereof are subject to a liquidity coverage ratio (LCR) requirement. The LCR requirement is designed to promote the short-term resilience of the liquidity risk profile of covered organizations, thereby improving the financial services industry's ability to absorb shocks arising from financial and economic stress, and to further improve the measurement and management of liquidity risk. It requires covered organizations to maintain adequate levels of ``high-quality liquid assets.'' \40\ Basel III also introduced, and the U.S. banking agencies have proposed, a net stable funding ratio (NSFR) requirement, a liquidity measure that would require large, internationally active banking organizations to maintain sufficient levels of ``stable funding'' to reduce liquidity risk in the banking system.\41\ --------------------------------------------------------------------------- \40\ The U.S. banking agencies adopted the LCR rule effective January 1, 2015 for large and internationally active banking organizations, generally, bank holding companies, certain savings and loan holding companies, and depository institutions with $250 billion or more in total assets or $10 billion or more in on balance sheet foreign exposure and their consolidated subsidiaries that are depository institutions with $10 billion or more in total consolidated assets. In addition, a modified minimum LCR requirement applies to bank holding companies and savings and loan holding companies without significant insurance or commercial operations that are not internationally active and, in each case, have $50 billion or more in total consolidated assets. See Liquidity Coverage Ratio: Liquidity Risk Measurement Standards (Oct. 10, 2014) [79 FR 61440] (LCR Adopting Release). In December 2016, the FRB adopted quarterly public disclosure requirements related to the LCR requirement, including disclosure of the inputs to the LCR calculation. The effective date is scaled based on organization size, and only those covered organizations with $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody must comply in 2017. See Liquidity Coverage Ratio: Public Disclosure Requirements; Extension of Compliance Period for Certain Companies to Meet the Liquidity Coverage Ratio Requirements (Dec. 27, 2016) [81 FR 94922]. \41\ In May 2016, the U.S. banking agencies proposed a rule that would establish a minimum NSFR threshold applicable to covered organizations and would require public disclosure of the NSFR, its components and a discussion of certain qualitative features of it. If adopted, the rule would become effective on January 1, 2018 and is tailored to the size of the organization. See Net Stable Funding Ratio: Liquidity Risk Measurement Standards and Disclosure Requirements (May 3, 2016) [81 FR 35123]. --------------------------------------------------------------------------- Under Basel III, certain banking organizations are subject to public disclosure requirements intended to allow market participants to assess an organization's capital adequacy (Pillar 3).\42\ --------------------------------------------------------------------------- \42\ Pillar 3 disclosure requirements apply to banking organizations with $50 billion or more in total assets. See Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule (Oct. 11, 2013) [78 FR 62018] (Regulatory Capital Rules Release). --------------------------------------------------------------------------- Large bank holding companies are subject to the FRB's annual comprehensive capital analysis and review (CCAR) and Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) \43\ stress testing (DFAST).\44\ Some bank holding companies subject to these stress testing requirements issue press releases announcing their CCAR and DFAST results and furnish the press releases as Form 8-K exhibits. The FRB generally publishes the CCAR results, and banking organizations' primary bank regulatory agencies generally publish the DFAST results. These results are published both in summary form and on an organization-by-organization basis. --------------------------------------------------------------------------- \43\ Public Law 111-203, 124 Stat. 1376 (2010). \44\ Banking organizations with $50 billion or more in total consolidated assets are subject to the full scope of these tests. DFAST testing and disclosure requirements are significantly reduced for banking organizations with $10 billion to $50 billion in total consolidated assets. See https://www.federalreserve.gov/newsevents/press/bcreg/20150602a.htm. The FRB uses CCAR to assess whether a banking organization has sufficient capital to continue operations in times of economic and financial stress and to ensure that the organization maintains a robust, forward-looking capital planning process that accounts for the unique risks it faces. See http://www.federalreserve.gov/bankinforeg/ccar.htm. The U.S. banking agencies use DFAST to assess whether a banking organization has sufficient capital to absorb losses and support operations during adverse economic conditions. See http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20150602a1.pdf. --------------------------------------------------------------------------- Public Comments on Guide 3 Over the years, the Commission has continuously evaluated its disclosure system and engaged periodically in rulemakings designed to enhance its disclosure and registration requirements. This request for comment is part of the staff's broad-based review of the Commission's disclosure regime. As part of this effort, the staff requested public input generally on how the Commission's disclosure system could be improved for the benefit of both companies and investors,\45\ and a concept release on the business and financial disclosure requirements in Regulation S-K \46\ requests comment on the Commission industry guides.\47\ Over [[Page 12761]] 30 of the comment letters submitted in response to these requests addressed Guide 3 specifically or Commission industry guides generally.\48\ Several commenters indicated that the industry guides are helpful and relevant,\49\ and several commenters recommended that the industry guides be updated.\50\ Several commenters recommended that the industry guides be revised to eliminate overlap with U.S. GAAP requirements.\51\ One commenter recommended that the Commission conduct a comprehensive review of the regulatory disclosures applicable to the financial services industry.\52\ Some commenters suggested that to reduce complexity and redundancy, the staff should consider how U.S. GAAP disclosure requirements interplay with Commission disclosure requirements.\53\ Some commenters recommended that the industry guides be codified into Regulation S-K or Regulation S-X,\54\ while other commenters recommended that the guides not be codified.\55\ Three commenters made specific recommendations on the disclosures called for by Guide 3.\56\ --------------------------------------------------------------------------- \45\ Comment letters related to this request are available at http://www.sec.gov/spotlight/disclosure-effectiveness.shtml. \46\ Business and Financial Disclosure Required by Regulation S- K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915] (Regulation S- K Concept Release). \47\ Comment letters related to the Regulation S-K Concept release are available at https://www.sec.gov/comments/s7-06-16/s70616.htm. \48\ See letters from The PNC Financial Services Group (July 14, 2014) (PNC Letter); Tom C.W. Lin (July 30, 2014) (Lin Letter); Global Financial Institutions Accounting Committee of the Securities Industry and Financial Markets Association (Oct. 13, 2014) (SIFMA Letter); Sustainability Accounting Standards Board (Nov. 12, 2014) (SASB Letter); CFA Institute (Nov. 12, 2014) (CFA Institute Letter); Shearman & Sterling LLP (Nov. 26, 2014) (Shearman & Sterling Letter); Disclosure Effectiveness Working Group of the Federal Regulation of Securities Committee and the Law & Accounting Committee of the Business Law Section of the American Bar Association (Mar. 6, 2015) (ABA Letter); Henry T. C. Hu (Oct. 7, 2015) (Hu Letter); Data Transparency Coalition (Oct. 29, 2015) (Data Transparency Coalition Letter); Ernst & Young LLP (Nov. 20, 2015) (EY Letter); Terra Alpha Investments LLC (June 6, 2016) (Terra Alpha Letter); Sustainability Accounting Standards Board (July 1, 2016) (SASB Letter II); US SIF and US SIF Foundation (July 14, 2016) (US SIF Letter); American Bankers Association (July 15, 2016) (American Bankers Association Letter); Deloitte & Touche LLP (July 15, 2016) (Deloitte Letter); U.S. Chamber of Commerce (July 20, 2016) (Chamber Letter); Corporate Governance Coalition for Investor Value (July 20, 2016) (CGCIV Letter); Center for Audit Quality (July 21, 2016) (CAQ Letter); Ernst & Young LLP (July 21, 2016) (EY Letter II); The PNC Financial Services Group (July 21, 2016) (PNC Letter II); KPMG LLP (July 21, 2016); Investment Program Association (July 21, 2016) (Investment Program Association Letter); Committee on Securities Law, Business Law Section, Maryland State Bar Association (July 21, 2016) (Maryland State Bar Letter); PricewaterhouseCoopers LLP (July 21, 2016) (PwC Letter); Crowe Horwath LLP (July 21, 2016) (Crowe Horwath Letter); Allstate Insurance Company (July 21, 2016) (Allstate Letter); Financial Services Roundtable (July 21, 2016) (Financial Services Roundtable Letter); Davis Polk & Wardwell LLP (July 22, 2016) (Davis Polk Letter); Lark Research, Inc. (July 25, 2016 (Lark Research Letter); Shearman & Sterling (August 31, 2016) (Shearman & Sterling Letter II); CFA Institute (Oct. 6, 2016) (CFA Institute Letter II). \49\ See, e.g., CFA Institute Letter; CFA Institute Letter II; Maryland State Bar Letter; Shearman & Sterling Letter II. \50\ See, e.g., Allstate Letter; American Bankers Association Letter; CAQ Letter; CFA Institute Letter; CFA Institute Letter II; Crowe Horwath Letter; Davis Polk Letter; EY Letter; Financial Services Roundtable Letter; Investment Program Association Letter; PNC Letter II; PwC Letter; Shearman & Sterling Letter; SIFMA Letter. \51\ See, e.g., CAQ Letter; Crowe Horwath Letter; EY Letter; KPMG Letter; SIFMA Letter. \52\ SIFMA Letter. \53\ See, e.g. CFA Institute Letter; Shearman & Sterling Letter. \54\ See, e.g., Crowe Horwath Letter; Davis Polk Letter; EY Letter; \55\ See, e.g., Allstate Letter; Investment Program Association Letter; PNC Letter II. \56\ Deloitte Letter (recommending that the Commission consider whether certain investment portfolio, return on equity and assets and short-term borrowings disclosures continue to be informative or useful for investors, and that the Commission consider increasing the threshold that triggers deposits disclosure); Maryland State Bar Letter (recommending that the threshold that triggers deposit disclosure be increased, and that the scaled disclosure requirements in Guide 3 be made available to all smaller reporting companies and emerging growth companies); SIFMA Letter (providing specific recommendations on whether to retain, eliminate or revise each Guide 3 disclosure). --------------------------------------------------------------------------- In this request for comment, we are seeking public input as to whether and in which respects the specific quantitative and qualitative disclosures called for by Guide 3 should be modified. Such disclosures include statistical disclosures that enable investors to compare results of operations among BHC registrants and evaluate exposures to risk. Portions of Guide 3 may call for the same or similar information as called for by U.S. GAAP or other regulatory reporting requirements that are not subject to the Commission's review. We are considering whether our current disclosure regime for BHC registrants continues to elicit the most relevant and important information for investors. To this end, we are seeking to understand better the types of information investors find important and how our current disclosure regime comports with investor expectations as well as industry practice and trends. In addition, we seek to understand to what degree other disclosure regimes, such as those instituted by U.S. banking agencies, may be used by investors. We also are considering how Guide 3's disclosures can be most effectively presented from the perspective of both investor protection and promoting efficiency, competition and capital formation.\57\ We also are interested in learning about any challenges that BHC registrants have faced in preparing and providing the categories of information currently covered by Guide 3. --------------------------------------------------------------------------- \57\ Section 3(f) of the Exchange Act requires that, whenever the Commission is engaged in rulemaking under the Exchange Act and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall consider, in addition to the protection of investors, promotion of efficiency, competition and capital formation. Section 2(b) of the Securities Act also sets forth this same requirement. See also Section 23(a)(2) of the Exchange Act. --------------------------------------------------------------------------- Further, we are considering whether disclosures called for by Guide 3 should be applicable to certain other registrants in the financial services industry. Request for Comment 1. Does Guide 3 provide important information for investors about BHC registrants? What is the value to investors of the disclosures currently called for by Guide 3? 2. Do the disclosures called for by Guide 3 assist investors with comparing financial condition and results of operations across BHC registrants? Do the disclosures help investors evaluate exposures to risk across BHC registrants? 3. How should the Commission consider the importance of comparability for BHC registrants relative to other industries that do not have defined analytical data or specified disclosures? 4. Which Guide 3 disclosures, if any, should be codified as Commission rules, and why? 5. Excluding Commission filings, on what disclosures (e.g., U.S. banking agency regulatory disclosures) do investors most frequently rely in making investment decisions? How do investors use those disclosures in making investment decisions? How do investors use such disclosures to compare results of operations and evaluate exposures to risks? 6. Should the information from disclosures outside of Commission filings be incorporated into the Commission's disclosure requirements? Why or why not? If incorporated, how should the information be presented to facilitate investors' access to such information? 7. Should the disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? II. Applicable Disclosures In this section, we describe the disclosures currently called for by Guide 3 and other regulatory regimes. Our discussion of U.S. accounting standards and bank regulatory requirements is neither comprehensive nor interpretive, and it emphasizes only current \58\ disclosure requirements, some [[Page 12762]] of which will or may change in the future.\59\ To focus the discussion, this request for comment describes the disclosures applicable to domestic registrants that are not smaller reporting companies \60\ or emerging growth companies \61\ and that do not provide scaled Guide 3 disclosures.\62\ We discuss the applicability of these disclosures to foreign registrants, smaller reporting companies, emerging growth companies and smaller bank holding companies in Section III. We also consider whether disclosures beyond or in lieu of those currently applicable would be important for investors. --------------------------------------------------------------------------- \58\ We refer to U.S. GAAP standards that are effective as of the date of this request for comment as ``current'' and highlight separately throughout this request for comment standards that have been issued but are not yet effective. \59\ For example, in 2016 the FASB issued two new accounting standards that modify the accounting for and disclosure of financial assets and liabilities. See the discussion of these new standards in Sections 2.B, 2.C and 2.D of this request for comment. \60\ Exchange Act Rule 12b-2 [17 CFR 240.12b-2] defines a smaller reporting company as an issuer that is not an investment company, an asset-backed issuer or a majority-owned subsidiary of a parent that is not a smaller reporting company and that has a public float of less than $75 million. If an issuer has zero public float, it is considered a smaller reporting company if its annual revenues are less than $50 million. \61\ Section 2(a)(19) of the Securities Act defines an emerging growth company as an issuer that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year. It retains that status for five years after its initial public offering unless its revenues are $1 billion or more, it issues more than $1 billion of non-convertible debt during the previous three- year period, or it qualifies as a large accelerated filer as defined in Exchange Act Rule 12b-2. \62\ For bank holding companies with less than $200 million in total assets or less than $10 million of equity, Guide 3 calls for only two years of data, as opposed to three or five years of data, depending on the item, for all other registrants. --------------------------------------------------------------------------- A. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rate and Interest Differential (Average Balance, Interest and Yield/Rate Analysis and Rate/Volume Analysis) 1. Background Net interest income represented more than 64% of total net operating revenue for all FDIC-insured institutions for the first three quarters of 2016.\63\ Given the significance of net interest income to the results of operations, it is important for investors to understand the reasons for its fluctuations. A BHC registrant's future earnings depend significantly on present and future economic conditions. Changes in interest rates can have a significant impact on a BHC registrant's performance, and that impact may not be evident from analyzing historical results alone. --------------------------------------------------------------------------- \63\ Unless otherwise indicated, industry-wide percentages used in this request for comment were calculated using information from FDIC Quarterly, which includes data for all FDIC-insured institutions and is available at https://www.fdic.gov/bank/analytical/quarterly/2016_vol10_4/fdic_v10n4_3q16_quarterly.pdf. --------------------------------------------------------------------------- As called for by Guide 3, average balance sheets \64\ provide investors with an indication of the balance sheet items that have been most affected by changes in interest rates and an indication of a registrant's ability to move into or out of situations 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.\65\ Liability-sensitive BHC registrants that rely heavily on short-term and other rate-sensitive funding sources may experience significant increases in funding costs in a rising interest rate environment. Such BHC registrants may be unable to offset higher funding costs with higher yielding assets, which could result in an adverse impact on net interest margins. --------------------------------------------------------------------------- \64\ Section I.A of Guide 3 calls for balance sheets that show the average daily balances of significant categories of assets and liabilities. If the collection of data on a daily average basis, however, 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 BHC registrant. The basis used for presenting averages should be disclosed when not presented on a daily average basis. \65\ A liability-sensitive banking organization has a long-term asset maturity and repricing structure, relative to a shorter-term liability structure. For example, a liability-sensitive BHC 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. --------------------------------------------------------------------------- 2. Current Guide 3 Disclosures Section 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.\66\ Section I.B of Guide 3 calls for disclosure of the: --------------------------------------------------------------------------- \66\ Section 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, 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 \67\ on the average amount of each major category of interest-earning asset and interest-bearing liability; --------------------------------------------------------------------------- \67\ 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, 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.\68\ --------------------------------------------------------------------------- \68\ 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. --------------------------------------------------------------------------- Section 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 should be 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 rate/volume (changes in rates multiplied by changes in volume). 3. Other Sources of Information i. Information Available in SEC Filings as Required by Commission Rules and Accounting Standards Article 9 prescribes the form and content of consolidated financial statements for bank holding companies and requires presentation of interest income and interest expense separately by type and subtotals of total interest income, interest expense and net interest income on the income statement or in the footnotes to the financial statements.\69\ In addition, all registrants must discuss their financial condition, changes in financial condition and results of operations in MD&A, including a narrative discussion of the extent to which any material increases are attributable to increases in price or increases in volume. MD&A requires registrants to describe significant components of revenues or expenses that, in the registrant's judgment, should be described in order to understand the results of operations.\70\ In response to this requirement, some bank holding companies provide an analysis of fluctuations in their interest income and interest expense in MD&A. Another source of income for bank holding companies that may be discussed in MD&A is non-interest income. Because Guide 3 currently does not call for specific disclosures regarding this type of income, we discuss non-interest [[Page 12763]] income in Section H. Potential New Disclosures. --------------------------------------------------------------------------- \69\ 17 CFR 210.9-04. The types of interest income or interest expense include loans, investment securities, trading accounts, deposits, short-term borrowings and long-term debt. \70\ 17 CFR 229.303(a)(3). --------------------------------------------------------------------------- Other rule provisions require registrants to provide quantitative and qualitative disclosures about market risk sensitive instruments, both trading and other than trading instruments, that affect their financial condition.\71\ Interest rate risk generally is a significant market risk exposure for BHC registrants. These disclosures, made in response to Item 305 of Regulation S-K, are intended to provide investors with forward-looking information about a registrant's potential interest rate risk exposure, while the disclosures called for by Item I of Guide 3 focus on the historical effect. Item 305 requires a description of the quantitative impact of market risk and provides flexibility by allowing one or more of the following three disclosure alternatives to be used: --------------------------------------------------------------------------- \71\ Items 305(a) and 305(b) of Regulation S-K [17 CFR 229.305(a) and 305 (b)]. For purposes of Items 305(a) and 305(b), market risk sensitive instruments include derivative financial instruments, other financial instruments and derivative commodity instruments. Each of these terms is defined in General Instruction 3 to Items 305(a) and 305(b). --------------------------------------------------------------------------- A tabular presentation of fair value information and contract terms relevant to determining future cash flows, categorized by expected maturity dates. A sensitivity analysis expressing potential loss in future earnings, fair values or cash flows from selected hypothetical changes in market rates and prices. Value at risk (VaR) disclosures expressing potential loss in future earnings, fair values or cash flows from market movements over a selected period of time with a selected likelihood of occurrence. Item 305 of Regulation S-K addresses risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments and was designed to strike a balance between comparability and flexibility of market risk disclosures by prescribing these alternatives without stipulating standardized methods or procedures specifying how to comply with each alternative.\72\ Registrants may choose which methods, model characteristics, assumptions and parameters they use in complying with the item, and registrants may use more than one disclosure alternative across each market risk exposure category.\73\ Consequently, investors may be unable to compare one registrant to another. The staff has observed that large bank holding companies generally elect to use a combination of disclosure alternatives to present different market risk sensitive instruments. An example of how a bank holding company may use multiple disclosure alternatives for its Item 305 disclosures is to use VaR to quantify market risks for its entire trading portfolio while using a sensitivity analysis to quantify interest rate risk for the other than trading portfolio. Registrants must describe the disclosure alternative or alternatives they select to assist investors with evaluating the potential effect of variations in a model's characteristics and assumptions. One consequence of the disclosure alternative approach used in Item 305 is that registrants may provide disclosure using alternatives that differ from the methods they actually use to manage, evaluate and monitor market risk. Commenters have suggested that management's views about market risk and risk management activities, rather than one of the three prescribed methods, represent the most relevant information for investors.\74\ However, when Item 305 was adopted, the Commission believed that a presentation of market risk using a management approach outside of the framework articulated in Item 305 could make it difficult for investors to assess market risk across registrants.\75\ --------------------------------------------------------------------------- \72\ See Disclosure of Market Risk Sensitive Instruments Release. \73\ Market risk exposure categories include interest rate risk, foreign currency exchange rate risk, commodity price risk and other relevant market risks. \74\ See, e.g., CAQ Letter and KPMG Letter. \75\ The Commission noted that, in adopting Item 305, it sought to strike a balance between the views of commenters seeking a ``management approach'' and those supporting a more consistent reporting framework for the sake of comparability. See Disclosure of Market Risk Sensitive Instruments Release. --------------------------------------------------------------------------- During the last five years, other regulatory agencies and the private sector have given increased attention to market risk disclosures. For example, in 2012 the Financial Stability Board's Enhanced Disclosure Task Force (EDTF), a private sector group composed of members representing users and preparers of financial reports, recommended that banking organizations provide information that facilitates users' understanding of the linkages between line items in the balance sheet and income statement with positions included in the market risk disclosures. The EDTF report included 32 recommendations for improving bank risk disclosures in the areas of report usability, risk governance and risk management, capital adequacy, liquidity and funding, market risk, credit risk and other risks. In addition, the BCBS has focused on whether banking organizations have sufficient capital to cover possible losses due to interest rate changes.\76\ According to the BCBS, adverse movements in interest rates can pose a significant threat to a bank's current capital base and/or future earnings. However, U.S. GAAP does not require a presentation or disclosure of net interest earnings or average balance sheets. Nearly five years ago, the FASB proposed the following standardized quantitative interest rate risk disclosures: --------------------------------------------------------------------------- \76\ See Interest rate risk in the banking book (April 2016), available at https://www.bis.org/bcbs/publ/d368.pdf. --------------------------------------------------------------------------- The carrying amount of classes of financial assets and liabilities segregated according to time intervals based on the contractual repricing of the financial instruments; the weighted-average contractual yield by class of financial instrument and time interval as well as the duration for each class of financial instrument; an interest rate sensitivity table showing the effects on net income and shareholders' equity of specified hypothetical, instantaneous shifts of interest rate curves as of the measurement date; a discussion of the significant changes and reasons for those changes related to the timing and amounts of financial assets and liabilities in the tabular disclosures from the last reporting period to the current reporting period along with any action taken to manage the exposure related to the changes; and additional qualitative or narrative disclosure, as necessary, for understanding of exposure to interest rate risk.\77\ --------------------------------------------------------------------------- \77\ The proposed disclosures would have applied only to entities or reportable segments for which the primary business activity is to (i) earn, as a primary source of income, the difference between interest income generated by earning assets and interest paid on borrowed funds or (ii) provide insurance. See Proposed Accounting Standards Update--Financial Instruments (Topic 825): Disclosure About Liquidity Risk and Interest Rate Risk (Jun. 27, 2012) (FASB Interest Rate Risk Exposure Draft), available at www.fasb.org. --------------------------------------------------------------------------- During the FASB Exposure Draft's development, the FASB received feedback from users \78\ that it was imperative that liquidity and interest rate disclosures be comparable and that standardized quantitative disclosures provide more decision-useful information than non-standardized disclosures. Although initiated, in part, as a response to these comments, the [[Page 12764]] majority of respondents to the FASB Exposure Draft, 84% of whom were preparers, did not support the proposed disclosures. Most respondents stated that standardizing information about interest rate risk would not be achieved by the proposals. Some commenters questioned whether standardization was an appropriate objective and whether it could ever be achieved.\79\ The liquidity risk and interest rate risk project was last updated in November 2012 and is not on the FASB's active standard- setting agenda. --------------------------------------------------------------------------- \78\ See Accounting for Financial Instruments Disclosures About Liquidity Risk and Interest Rate Risk Comment Letter Summary, available at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176160500931. \79\ For example, respondents noted that expected maturity requires estimates from each entity's asset and loan portfolios, such as prepayment rates relating to the expected behavior of the counterparty, and that the underlying assumptions made for each of those estimates will not be consistent among entities. --------------------------------------------------------------------------- ii. Information Available Outside of SEC Filings Banking organizations must report segregated information about interest income and interest expense and quarterly averages of certain balance sheet items in their Call Reports.\80\ While banking organizations are not required to report all balance sheet line items or subtotals of interest-earning assets and interest-bearing liabilities, the Call Report categories for reporting interest income, interest expense and quarterly averages are more disaggregated than what is called for by Guide 3. --------------------------------------------------------------------------- \80\ Interest income, interest expense and quarterly averages are segregated by the following: Type of loan, type of security, trading assets/liabilities, federal funds sold/purchased and securities purchased/sold under agreements to resell/repurchase, deposits by location and category, subordinated notes and debentures and other. See Call Report Schedules RC-1, Income Statement and RC- K, Quarterly Averages. --------------------------------------------------------------------------- Request for Comment 8. Do the distribution of (i) assets, liabilities and stockholders' equity; (ii) interest rates and (iii) interest differential disclosures called for by Guide 3 provide investors with information upon which they base investment and voting decisions? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? Are there any particular issues that BHC registrants face in providing these disclosures or that investors or analysts face in utilizing these disclosures? 9. Do Commission rules or U.S. GAAP require the same or similar information on the distribution of (i) assets, liabilities and stockholders' equity; (ii) interest rates and (iii) interest differential disclosures as called for by Guide 3? If so, how is the information similar or dissimilar? Please provide a detailed comparison. 10. What improvements could we make to the disclosures called for by Section I of Guide 3? For example, should we require disclosure about how BHC registrants present the effects of hedging of interest rate risk? Should we consider enhancing quantitative interest-rate risk disclosures? If so, what guidance, if any, should we provide to BHC registrants about the presentation? 11. Are there additional interest income and interest expense disclosures that would be important for investors that we should consider? In suggesting additional disclosures, please indicate whether BHC registrants would face any challenges in preparing and providing them. Please describe specifically the evidentiary basis for your knowledge of the challenges faced by BHC registrants in providing such disclosures. In your response, please assess the benefits of such disclosures to investors against the regulatory burdens to BHC registrants. 12. Recognizing the differences between more prescriptive and standardized disclosure requirements, which allow for more comparability, and more principles-based disclosure requirements, which allow registrants to provide disclosures more closely aligned with how their business is managed, would more prescriptive and standardized disclosures about market risks for BHC registrants beyond those called for by Item 305 of Regulation S-K be important for investors? If so, how should we revise our current disclosures? For example, should we limit the disclosure alternatives or assumptions these BHC registrants can use by market risk and/or trading versus other than trading portfolios in Item 305? 13. Alternatively, should we eliminate the prescribed market risk disclosure alternatives in Item 305 for BHC registrants and instead require them to provide market risk disclosures based on the methods they actually use to manage risk? Does the benefit of providing disclosure about the way management assesses market risk outweigh any lack of comparability of these disclosures across BHC registrants for an investor? 14. Should we require any of the interest rate risk disclosures proposed in the FASB's 2012 Exposure Draft in our filings? If so, which ones, and why? 15. Should we revise our market risk disclosures for BHC registrants to better align the disclosures to the financial statements, capital adequacy or other metrics? If so, what revisions should we consider and why? 16. Should we consider requiring that the distribution of (i) assets, liabilities and stockholders' equity; (ii) interest rates and (iii) interest differential disclosures called for by Guide 3 be presented in a structured data format, such as XBRL, to facilitate investor comparison of data across BHC registrants and usability of the disclosures? Why or why not? If so, what elements of these disclosures should be tagged so that they can be extracted in a structured data format? 17. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 18. Should the categories used for disaggregation of these Guide 3 disclosures be closely aligned with those called for in Call Reports and other U.S. banking agency regulatory filings? If so, which ones and why? 19. Should we require disclosure of the interest income and expense information provided in Call Reports or other regulatory filings? If so, what information and why? 20. Should the distribution of (i) assets, liabilities and stockholders' equity; (ii) interest rates and (iii) interest differential disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? B. Investment Portfolio 1. Background The investment portfolio typically is an important component of BHC registrants' total assets. Due to a recent trend of deposits outpacing lending,\81\ investment portfolios have expanded in recent years and now represent a much greater percentage of the total assets of FDIC- insured institutions.\82\ In addition, compliance with the LCR requirements may require some large, internationally active banking organizations to alter the mix of assets in their investment portfolios or revise their investment strategies so as to maintain sufficient amounts of investments that meet the definition of ``high-quality liquid assets.'' \83\ At September 30, 2016, [[Page 12765]] investment securities constituted nearly 21% of the total assets of all FDIC-insured institutions.\84\ --------------------------------------------------------------------------- \81\ See, e.g., Shrinking Loan-to-Deposit Ratios Remain Cause for Concern Among Banks, Forbes (Mar. 10, 2015). \82\ According to the Aggregate Condition and Income Data for all FDIC-Insured Institutions, Table II-A., in the FDIC Quarterly, investment securities accounted for 15% of total assets as of December 31, 2007. This report is available at https://www5.fdic.gov/qbp/2007dec/qbp.pdf. \83\ See LCR Adopting Release and the discussion of concerns raised with respect to assets that would qualify as high-quality liquid assets. \84\ See FDIC Quarterly. --------------------------------------------------------------------------- Banking organizations typically use their investment portfolios to provide balance sheet liquidity, to generate income and to engage in risk management and market-making. U.S. GAAP currently classifies investment securities into three categories: Trading securities, held- to-maturity (HTM) securities and available-for-sale (AFS) securities.\85\ Trading securities include securities acquired for the purpose of selling them within hours or days and securities for which this category has been elected. HTM securities are limited to securities that a registrant has the positive intent and ability to hold to maturity. Securities not classified as trading or HTM are classified as AFS securities. Both trading and AFS securities are measured at fair value on the balance sheet, whereas HTM securities are measured at amortized cost. --------------------------------------------------------------------------- \85\ ASC 320-10-25-1. --------------------------------------------------------------------------- In 2016, the FASB issued two new accounting standards for financial instruments.\86\ ASU 2016-01 will change the accounting guidance for equity investments, but does not affect the recognition and initial measurement of investments in debt securities.\87\ This guidance is effective for registrants in fiscal years beginning after December 15, 2017. ASU 2016-13 will change the impairment model for most financial assets accounted for at amortized cost, including HTM debt securities, and also makes certain changes to the recognition of impairment for AFS securities.\88\ This guidance is effective for registrants in fiscal years beginning after December 15, 2019 or fiscal years beginning after December 15, 2018 if early adoption is elected. Both ASU 2016-01 and ASU 2016-13 also will change U.S. GAAP disclosure requirements for investment securities.\89\ --------------------------------------------------------------------------- \86\ Accounting Standards Update 2016-01, Financial Instruments--Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities (ASU 2016-01). Accounting Standards Update 2016-13, Financial Instruments-- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). \87\ Equity investments that have readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) will be measured at fair value with changes in fair value recognized in net income. This eliminates the ability to classify equity securities as AFS and the reporting of unrealized holding gains and losses in other comprehensive income. Equity investments that do not have readily determinable fair values will no longer be accounted for using the cost method. Instead, an entity can elect to either measure these equity investments at fair value with unrealized holding gains and losses in earnings or choose a measurement alternative. There will also no longer be an assessment of whether an impairment loss is ``other than temporary'' for these investments. \88\ U.S. GAAP currently requires a two-step process to measure other-than-temporary impairment (OTTI) for HTM and AFS investment securities. When OTTI is recognized, it is reflected as a direct reduction of the amortized cost basis of the investment. The new standard will require an allowance for credit losses for these debt securities instead of a direct reduction. The allowance for credit losses for HTM securities will be based on the same expected credit loss model applied to loans. There will also be an allowance for credit losses for AFS debt securities, but it will be measured in a manner similar to OTTI under current U.S. GAAP. \89\ The U.S. GAAP standards differ significantly from the International Financial Reporting Standard (IFRS) as issued by the International Accounting Standard Board (IASB) model, IFRS 9, Financial Instruments, as described in Section III.B. --------------------------------------------------------------------------- Guide 3 investment portfolio disclosures provide investors with insight into the types of investments a BHC registrant holds, the earnings potential of those investments and their risk characteristics. For example, the weighted average yield for a category of securities allows investors to calculate estimated future earnings potential for that category of securities. Disclosures about significant amounts of investments in one or a small number of issuers also alert investors to concentration risks. 2. Current Guide 3 Disclosures Section II.A of Guide 3 calls for disclosure of the book value of investments by specified category as of the end of each reported period. Section II.B calls for a maturity analysis for each category of investments as of the end of the latest reported period, as well as the weighted average yield for each range of maturities.\90\ 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, Section II.C calls for disclosure of the name of the issuer and the aggregate book value and aggregate market value of those securities. --------------------------------------------------------------------------- \90\ 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. --------------------------------------------------------------------------- 3. Other Sources of Information i. Information Available in SEC Filings as Required by Commission Rules and Accounting Standards Article 9 requires disclosure of investment securities either on the balance sheet or in the footnotes to the financial statements. Article 9 also currently requires footnote disclosure of the carrying value and market value of securities by specified category, while Guide 3 calls for disclosure of book value.\91\ --------------------------------------------------------------------------- \91\ 17 CFR 210.9-03. The investment categories specified by Article 9 are the same as those specified by Guide 3. In July 2016, the Commission proposed to amend certain of its disclosure requirements, including Article 9, that may have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, IFRS, or changes in the information environment. Specifically, the investment securities disclosure in Article 9 was proposed for elimination. See Disclosure Update and Simplification, Release No. 33-10110 (July 13, 2016) [81 FR 51607] (Disclosure Update and Simplification Release). --------------------------------------------------------------------------- Accounting standards have similar disclosure requirements, although the disclosures required by U.S. GAAP are more extensive than those required by Guide 3.\92\ For example, U.S. GAAP currently requires the following disclosures for AFS securities by major security type: \93\ --------------------------------------------------------------------------- \92\ See ASC 320-10-50. \93\ ASC 320-10-50-1B notes 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. ASC 942-320-50-2 defines nine security types that entities within its scope must present in their investment disclosures and the list is more granular than the Guide 3 categories. --------------------------------------------------------------------------- Amortized cost basis; aggregate fair value; total other-than-temporary impairment (OTTI) recognized in accumulated other comprehensive income (AOCI); total gains for securities with net gains in AOCI; total losses for securities with net losses in AOCI; and information about the contractual maturities as of the date of the most recent balance sheet presented.\94\ --------------------------------------------------------------------------- \94\ ASC 320-10-50-2. These disclosures will no longer be required for equity securities upon the effectiveness of ASU 2016-01 as equity securities that have readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) will be measured at fair value with changes in fair value recognized in net income. --------------------------------------------------------------------------- U.S. GAAP requires similar disclosures for HTM securities, except that gross unrecognized holding gains and losses also must be disclosed.\95\ U.S. GAAP also requires a maturity analysis of both AFS and HTM securities, but it does not require disclosure of weighted average yields.\96\ ASU 2016-13, when effective for registrants in fiscal years after December 15, 2019, will not significantly change the disclosure requirements described above, except that it will require disclosure of the [[Page 12766]] allowance for credit losses rather than OTTI. --------------------------------------------------------------------------- \95\ ASC 320-10-50. \96\ Id. --------------------------------------------------------------------------- U.S. GAAP also requires disclosures related to asset quality and impairment of investment securities.\97\ For example, registrants must disclose the aggregate fair value of investments with unrealized losses and the amount of those losses, segregated by those that have been in a continuous unrealized loss position for 12 months or longer and those that have not, as well as qualitative and quantitative information about impairments. When registrants conclude that it is not necessary to record OTTI for these investment securities, U.S. GAAP requires that they describe the factors considered in reaching that conclusion.\98\ When OTTI is recorded in earnings, registrants must disclose the methodology and significant inputs they used to measure the credit loss and include a roll-forward \99\ of the amount of credit losses recognized in earnings. When ASU 2016-13 becomes effective, the credit quality and impairment disclosures described above will continue to apply to AFS securities, but not HTM securities. Instead, the credit quality and allowance for credit losses disclosures discussed below in Sections C.3 and D.3 will apply to HTM securities.\100\ --------------------------------------------------------------------------- \97\ Id. \98\ OTTI is considered to have occurred if (a) an entity intends to sell an impaired security, (b) it is more likely than not that an entity will be required to sell an impaired security before the recovery of its amortized cost basis, or (c) a credit loss is determined to have occurred based on an analysis of the present value of expected cash flows. ASC 320-10-35. \99\ A ``roll-forward'' is a reconciliation of beginning of period and end of period line item balances. \100\ See ASU 2016-13. The new standard still requires a roll- forward of credit losses for HTM securities and a discussion of how the allowance for credit losses was determined. The new standard also includes prescriptive disclosure requirements for loans that do not apply to HTM securities. For example, a registrant is not required to present credit quality indicators for HTM securities by year of origination. --------------------------------------------------------------------------- U.S. GAAP also requires disclosures about fair value measurements for securities measured at or written-down to fair value.\101\ These disclosures include the valuation techniques and inputs used to develop the fair value measurements, the observability of the inputs used, quantitative information about significant unobservable inputs and the effect of those fair value measurements using significant unobservable inputs on earnings or other comprehensive income for the period. --------------------------------------------------------------------------- \101\ ASC 820-10-50. --------------------------------------------------------------------------- The Division staff has observed that some BHC registrants discuss the composition of and fluctuations in their investment portfolio in MD&A.\102\ These BHC registrants also discuss critical accounting estimates \103\ related to their investment portfolios in MD&A, which may include fair value measurements and the determination of OTTI.\104\ --------------------------------------------------------------------------- \102\ Item 303 of Reg. S-K requires registrants to discuss their financial condition and material changes in financial condition. It also requires a description of internal and external sources of liquidity, and any material unused sources of liquid assets. \103\ In the Interpretive Guidance on MD&A, the Commission reminded registrants that they should address the material implications of uncertainties associated with the methods, assumptions and estimates underlying their critical accounting measurements. \104\ See Staff Accounting Bulletin Topic 5:M--Other Than Temporary Impairment of Certain Investments in Equity Securities. The OTTI guidance for equity securities will no longer apply when ASU 2016-01 is adopted. --------------------------------------------------------------------------- Some BHC registrants, especially the largest ones, often publish and furnish in a current report on Form 8-K supplements to their earnings releases that provide detailed information about the investment portfolio not required by U.S. GAAP, including information about the duration of the portfolio, management's investment strategy or how new regulations may affect the portfolio. Some BHC registrants also provide detailed information about credit ratings or the valuation of specific investments that may be at risk of impairment or were impaired during the period. ii. Information Available Outside of SEC Filings Banking organizations are required to report the amortized cost and fair value of both HTM and AFS securities by security type in Call Reports.\105\ Banking organizations also report maturity and repricing data for debt securities and the amounts of income and loss recognized during the period.\106\ Banking organizations must also report regulatory capital components and ratios, including the categorization of investment securities by risk weights in Call Reports.\107\ --------------------------------------------------------------------------- \105\ Call Report Schedule RC-B, Securities, identifies more security types than Guide 3. \106\ Banking organizations may omit the maturity and repricing data for certain branches or subsidiaries located in foreign countries in Call Report Schedule RC-B. A banking organization may exclude its foreign branches or subsidiaries if the assets of the excluded locations combined do not exceed 50% of its total assets in foreign countries and 10% of its total consolidated assets. \107\ Banking organization's assets and off-balance sheet exposures are risk-weighted based on the assigned categories of risk. Call Report Schedule RC-R, Regulatory Capital. --------------------------------------------------------------------------- In addition, Pillar 3 disclosures require information about how banking organizations measure credit and market risks in their investment portfolios, along with the associated risk weights of investment portfolio assets.\108\ For example, they must quantify the credit risk exposure of their investment portfolio. --------------------------------------------------------------------------- \108\ See Regulatory Capital Rules Release, Section XI, Market Discipline and Disclosure Requirements. --------------------------------------------------------------------------- Request for Comment 21. Do the investment portfolio disclosures called for by Guide 3 provide investors with information upon which they base investment and voting decisions? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? Are there any particular issues that BHC registrants face in providing these disclosures or that investors or analysts face in utilizing these disclosures? 22. Do Commission rules or U.S. GAAP require the same or similar investment portfolio information as called for by Guide 3? If so, how is the information similar or dissimilar? Please provide a detailed comparison. 23. What improvements to the existing investment portfolio disclosures should we consider that would assist investors in making investment and voting decisions? For example, should investment securities that are measured at fair value with changes in fair value recorded in earnings, such as trading securities, fall within the scope of our investment portfolio disclosures? In suggesting improvements, please indicate whether BHC registrants would face any challenges in preparing and providing the disclosures. 24. To promote comparability and consistency of investment portfolio disclosures, should we specify the investment categories that BHC registrants must present when providing their investment portfolio disclosures? \109\ Why or why not? If so, which investment categories should we specify? --------------------------------------------------------------------------- \109\ While most accounting standards include guidance about disaggregation, the requirements are principles-based instead of prescriptive. --------------------------------------------------------------------------- 25. While investors do not have experience with the disclosures that will be required by ASU 2016-13, is there information about HTM securities and impairment that would be important for investors under an expected credit loss model? If so, please indicate which information and indicate whether BHC registrants would face any challenges in preparing and providing the information. 26. In addition, is there information about AFS securities that would be important for investors when [[Page 12767]] impairment is reflected through an allowance for credit losses instead of OTTI? If so, please indicate which information and whether BHC registrants would face any challenges in preparing and providing the information. For example, upon adoption of ASU 2016-13, should we require disaggregation of the AFS securities allowance for credit losses roll-forward by security type? 27. Should we consider requiring that the investment portfolio disclosures called for by Guide 3 be presented in a structured data format, such as XBRL, to facilitate investor comparison of data across BHC registrants and usability of the disclosures? Why or why not? If so, what elements of these disclosures should be tagged so that they can be extracted in a structured data format? 28. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 29. Should the categories used for disaggregation of these Guide 3 disclosures be closely aligned with those called for in Call Reports and other U.S. banking agency regulatory filings? If so, which ones and why? 30. Should we require disclosure of the investment information provided in Call Reports or other regulatory filings? If so, what information and why? 31. Should the investment portfolio disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? C. Loan Portfolio 1. Background Loans \110\ often constitute a banking organization's most significant assets and generate a significant portion of revenues. At September 30, 2016, total loans and leases constituted 55% of total assets of all FDIC-insured institutions.\111\ Loan portfolio compositions differ considerably because lending activities are influenced by many factors, including the type of banking organization, management's objectives and philosophies about diversification and credit risk management, the availability of funds, credit demand, interest-rate margins and regulations. A banking organization's loan portfolio may consist of consumer loans, such as residential real estate, credit card and auto loans, as well as commercial loans, such as commercial real estate loans, lease financings and wholesale loans.\112\ Different types of loans have different risk 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 particular banking organization's loan portfolio may vary substantially over time due to factors such as changes in regulations or management philosophies. For example, if management expects interest rates to rise, it may seek to increase the banking organization's offerings of variable-rate mortgages. --------------------------------------------------------------------------- \110\ In this request for comment we use the terms ``loans'' or ``loan portfolio'' when we refer to Commission rules or U.S. banking reporting requirements. The loan portfolio for a registrant may also include receivables and leases. Receivables and leases, however, generally do not represent a significant portion of the total loan portfolio. \111\ See FDIC Quarterly. \112\ Wholesale banking is often used as a term to refer to the wide range of services that banking organizations provide to various corporations and businesses, as well as to government entities. --------------------------------------------------------------------------- To address risks related to the loan portfolio and the allowance for loan losses,\113\ the Commission issued Accounting Series Release No. 166 \114\ in 1975, which was the precursor to Guide 3's loan portfolio and loan loss experience disclosures. Among other things, ASR No. 166 provided for the disclosure of information necessary to enable investors to understand the nature and the status of loan portfolios, including a breakdown sufficient to provide investors with insight into investment policies, lending practices and portfolio concentrations. The release also called for consideration of expanded disclosures when loans considered doubtful as to collectability have materially increased, or there have been large increases in delinquent loans, or in loans extended or renegotiated under adverse conditions. --------------------------------------------------------------------------- \113\ We discuss allowance for loan losses disclosures in Section II.D of this request for comment. \114\ Accounting Series Release No. 166--Disclosure of Unusual Risks and Uncertainties, Release No. 33-5551 (Jan. 15, 1975) [40 FR 2678]. --------------------------------------------------------------------------- In 2010, the FASB issued updated disclosure guidance that greatly expanded the loan credit quality disclosures required by U.S. GAAP.\115\ Loan portfolio disclosures provide investors with information about the types of lending in which a registrant engages, and one objective of the FASB's amendments was to increase the transparency of the nature of credit risk inherent in the loan portfolio.\116\ Further, disclosures of trends in early stage delinquencies can be an early-warning indicator of deteriorating credit quality. --------------------------------------------------------------------------- \115\ Accounting Standards Update 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. (ASU 2010-20). \116\ Id. --------------------------------------------------------------------------- 2. Current Guide 3 Disclosures Section III.A of Guide 3 calls for disclosure of the amount of loans in each specified category \117\ as of the end of each period. --------------------------------------------------------------------------- \117\ 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 loan categories specified in Guide 3 originally conformed to those required in Call Reports but were changed when Guide 3 was amended in 1980 to conform to the loan categories set forth in Article 9. 1980 Guide 3 Amendments Release. --------------------------------------------------------------------------- Section III.B calls for a maturity analysis \118\ for each category of loans as of the end of the latest reported period and a separate presentation of all loans due after one year with fixed interest rates versus those with floating or adjustable interest rates. --------------------------------------------------------------------------- \118\ 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. --------------------------------------------------------------------------- Section III.C.1 calls for disclosure of the aggregate amount of domestic and foreign \119\ loans in each of the following categories: --------------------------------------------------------------------------- \119\ 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. --------------------------------------------------------------------------- Loans accounted for on a nonaccrual basis; \120\ --------------------------------------------------------------------------- \120\ The term ``nonaccrual'' is not defined in U.S. GAAP or Commission rules. Call Report instructions, however, 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 calls for and U.S. GAAP also requires disclosure of the 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) \121\ that are not [[Page 12768]] otherwise disclosed as being on nonaccrual status or past due 90 days or more.\122\ --------------------------------------------------------------------------- \121\ 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. \122\ 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 Section III.C.1 disclosures reflect amendments made in 1980 and 1983 to promote consistency with bank regulatory disclosure requirements and comparability among registrants. 1980 Guide 3 Amendments Release; 1983 Guide 3 Revisions Release. --------------------------------------------------------------------------- Section III.C.2 calls for descriptions of the nature and extent of any potential problem loans \123\ at the end of the most recent reported period and the policy for placing loans on nonaccrual status. The instructions to Section III.C.2 call for disclosure of the foregone interest income and recognized interest income for nonaccrual loans and TDRs during the period. --------------------------------------------------------------------------- \123\ Potential problem loans are loans not disclosed pursuant to Item III.C.1, but 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 in these sections 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.\124\ --------------------------------------------------------------------------- \124\ 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. --------------------------------------------------------------------------- Section III.C.3 calls for disclosure of the aggregate amount of cross-border outstandings \125\ to borrowers in each foreign country where they exceed 1% of total assets.\126\ These disclosures should be provided by category of foreign borrower specified in Section 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: --------------------------------------------------------------------------- \125\ 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 Revisions Release. \126\ 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. Section 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 Section III.A.\127\ --------------------------------------------------------------------------- \127\ 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, that exceed the 10% threshold. --------------------------------------------------------------------------- Section 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 Section III.C.1 or III.C.2 if those assets were loans. 3. Other Sources of Information i. Information Available in SEC Filings as Required by Commission Rules and Accounting Standards Article 9 requires separate disclosure of total loans and unearned income on the balance sheet or in the footnotes for the same loan categories specified in Guide 3.\128\ Similar to Guide 3, Article 9 allows bank holding companies latitude in determining loan categories.\129\ Article 9 also requires disclosures about loans made to certain related parties and the aggregate amount of those loans that are disclosed as nonaccrual, past due, restructured or potential problem loans.\130\ --------------------------------------------------------------------------- \128\ 17 CFR 210.9-03. \129\ The instructions to Section III.A of Guide 3 and Item 7(b) of Rule 9-03 state that ``[a] series of categories other than those specified above may be used to present details of loans if considered a more appropriate presentation.'' The staff has observed that bank holding companies commonly provide the Guide 3 and Article 9 loan disclosures by ``class of financing receivables'' as defined by U.S. GAAP instead of the specified Guide 3 and Article 9 loan categories. \130\ Item 7(e) of Rule 9-03. Related parties include directors, executive officers, principal equity holders and associates of those persons. --------------------------------------------------------------------------- U.S. GAAP and Guide 3 have some similar loan presentation and disclosure standards. U.S. GAAP requires major categories of loans to be presented separately either on the balance sheet or in the financial statement footnotes.\131\ Although U.S. GAAP does not specify loan categories, it does require that qualitative and quantitative credit quality information be provided for each class of financing receivable,\132\ except loans measured at fair value, under the fair value option, and loans held for sale measured at lower of cost or fair value. These disclosures include: --------------------------------------------------------------------------- \131\ ASC 310-10-45-2. \132\ 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) an entity's method for monitoring and assessing credit risk. --------------------------------------------------------------------------- A description of each credit quality indicator; \133\ --------------------------------------------------------------------------- \133\ A credit quality indicator is defined as a statistic about the credit quality of financing receivables. --------------------------------------------------------------------------- the recorded investment in financing receivables by credit quality indicator; and the date or range of dates in which information was updated for each credit quality indicator.\134\ --------------------------------------------------------------------------- \134\ ASC 310-10-50. --------------------------------------------------------------------------- Currently and after implementation of ASU 2016-13, U.S. GAAP requires disclosure, by class of financing receivable, of the same information as specified in Sections III.C.1(a) and (b) of Guide 3 and an aging analysis of past due financing receivables. ASU 2016-13 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. The disclosures about loans on nonaccrual status will include the amortized cost basis at both the beginning and end of the reporting period and the amortized cost basis for those nonaccrual loans without a related allowance for credit losses. In addition, disclosures will be required by class of financing receivable about collateral-dependent loans and the collateral that secures them.\135\ --------------------------------------------------------------------------- \135\ The disclosures required for collateral-dependent financial assets include descriptions of (1) the type of collateral, (2) the extent to which collateral secures the asset, and (3) significant changes in the extent to which collateral secures the asset, whether because of general deterioration or some other reason. --------------------------------------------------------------------------- In addition, both Guide 3 and U.S. GAAP, now and after the adoption of ASU 2016-13, call for disclosure of the following accounting policies: Placing financing receivables on nonaccrual status; recording payments received on nonaccrual financing receivables; resuming accrual of interest; and [[Page 12769]] determining past due or delinquency status for each class of financing receivable.\136\ --------------------------------------------------------------------------- \136\ ASC 310-10-50. --------------------------------------------------------------------------- Currently, U.S. GAAP also requires the following disclosures, by class of financing receivable, for impaired loans: \137\ --------------------------------------------------------------------------- \137\ See ASC 310-10-35-13 for the scope of loans evaluated individually for impairment. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. TDRs are also considered impaired loans in accordance with ASC 310-40-35-10 but are not required to be included in the impaired loan disclosures in years after the restructuring as long as the criteria in ASC 310-40-50-2 are met. --------------------------------------------------------------------------- The accounting policy for recognizing interest income, including how cash receipts are recorded; the accounting policy for determining which loans are individually assessed for impairment and the factors considered in determining that a loan is impaired; as of each balance sheet date, the recorded investment segregated by the amount for which there is a related allowance versus the amount for which there is no related allowance, and the total unpaid principal balance of impaired loans; and for each period, the average recorded investment in impaired loans, the amount of interest income recognized while the loans were impaired and, if practicable, the amount of interest income recognized using a cash-basis method of accounting.\138\ --------------------------------------------------------------------------- \138\ ASC 310-10-50. For the cash-basis method of accounting, income is recognized only when the interest payment is received. ASU 2016-13 will eliminate the impaired loan concept and the above related disclosures.\139\ --------------------------------------------------------------------------- \139\ We discuss the ASU 2016-13 changes to the allowance and related disclosures in Section II.D below. U.S. GAAP also requires qualitative and quantitative information, by class of financing receivable, about TDRs for each period for which an income statement is presented. For example, for TDRs occurring during the period, registrants must disclose how the financing receivables were modified and the financial effects of the modifications. In addition, for TDRs that were completed within the previous 12 months and subsequently have payment defaults during the reporting periods, registrants must disclose the types and amounts of financing receivables that defaulted.\140\ Registrants also must disclose the amount of commitments, if any, to lend additional funds related to a TDR.\141\ In contrast, Guide 3 does not call for disclosures specific to TDR activity during the period, but calls for disclosure of the total balance of TDRs as of the end of the period. U.S. GAAP also requires specific disclosures about loans acquired with deteriorated credit quality \142\ for each balance sheet presented.\143\ --------------------------------------------------------------------------- \140\ ASC 310-10-50. \141\ ASC 310-40-50. \142\ ASC 310-30-20. These are loans that were acquired with evidence of deteriorated credit quality since their origination and for which it was probable, at acquisition, that the acquirer would be unable to collect all contractually required payments. Because these loans are identified as having credit risk at the time of acquisition, the accounting treatment is different than for newly originated loans. Any cash flows in excess of those expected at acquisition are recognized as interest income on a level-yield basis over the life of the loan. \143\ ASC 310-30-50 requires the following disclosures: Outstanding balance and related carrying amount of the loans at the beginning and end of the period; the amount of accretable yield at the beginning and end of the period, reconciled for additions, accretion, disposals of loans and reclassifications to/from nonaccretable difference during the period; for loans acquired during the period, the contractually required payments receivable, cash flows expected to be collected and fair value at the acquisition date; and the carrying amount as of acquisition date and at end of period of loans acquired with deteriorated credit quality for which income is not being recognized because the timing and amount of cash flows expected to be collected cannot be reasonably estimated. ASU 2016-13 revises these disclosures to require a reconciliation of the difference between the purchase price of these loans and the par value of the assets and removes the requirements described above. --------------------------------------------------------------------------- The Division staff has observed that bank holding companies often discuss their loan portfolios and focus on changes in portfolio composition, delinquencies and nonperforming or restructured loans in the results of operations section of MD&A. The Division staff also has observed that BHC registrants with material amounts of nonaccrual loans sometimes provide a reconciliation of the beginning and ending balances of those loans, although they are not required by Commission rules to do so. As described previously, ASU 2016-13 will require disclosure of the beginning and ending nonaccrual loan balances, but will not require disclosure of activity during the period. Information about activity during the period may help investors understand remediation efforts related to the portfolio and changes in credit quality. Therefore, we are considering whether we should require disclosure of activity during the period in addition to beginning and ending balances. BHC registrants also may discuss higher-risk loans and declines in collateral value when they are reasonably expected to have a material impact on results of operations, liquidity or capital resources.\144\ For example, disclosures about interest-only and adjustable-rate mortgage loans, by year of reset, provide investors with information about a BHC registrant's exposure to higher-risk loans, including the potential effect that changes in repayment terms may have on future cash flows and liquidity. In addition, BHC registrants may disclose in their Commission filings quantitative and qualitative information about their loan portfolios and other significant balance sheet items with material country-specific risk.\145\ --------------------------------------------------------------------------- \144\ The Division has provided guidance in the form of a sample comment letter regarding provisions and allowance for loans losses. See Sample Letter Sent to Public Companies on MD&A Disclosure Regarding Provisions and Allowances for Loan Losses (Aug. 2009) (Sample MD&A Letter), available at https://www.sec.gov/divisions/corpfin/guidance/loanlossesltr0809.htm. Types of loans identified as ``higher-risk'' included option adjustable-rate mortgage products, junior lien mortgages, high loan-to-value ratio mortgages, interest- only loans, subprime loans and loans with initial teaser rates. \145\ In January 2012, the Division issued disclosure guidance providing the Division's views regarding disclosure related to registrants' exposures to certain European countries experiencing financial stress. See CF Disclosure Guidance: Topic No. 4, European Sovereign Debt Exposures. --------------------------------------------------------------------------- BHC registrants often publish and furnish, on current reports, Forms 8-K, supplements to their earnings releases that include credit quality statistics that are adjusted or more disaggregated than those provided under Guide 3 or U.S. GAAP. These statistics may exclude certain types of loans that are not typically classified as nonaccrual.\146\ --------------------------------------------------------------------------- \146\ For example, the allowance to loan ratios may exclude credit cards and loans acquired with deteriorated credit quality. Registrants also may adjust credit quality statistics for significant sales, litigation settlements or regulatory changes. --------------------------------------------------------------------------- ii. Information Available Outside of SEC Filings Banking organizations must report loan amounts categorized by type of security, borrower or purpose in Call Reports.\147\ Loans past due and on nonaccrual status must be reported along with TDRs, both performing and on nonaccrual status.\148\ Certain banking organizations also must report specific information about mortgage banking activities, including carrying amount, originations, purchases and sales for both first lien and junior lien loans.\149\ [[Page 12770]] Banking organizations also must report regulatory capital components and ratios, including the categorization of loans by risk weights.\150\ --------------------------------------------------------------------------- \147\ Call Report Schedule RC-C, Loans and Lease Financing Receivables, specifies more loan categories than Guide 3. \148\ Call Report Schedule RC-N, Past Due and Nonaccrual Loans, Leases, and Other Assets and Call Report Schedule RC-C. \149\ Call Report Schedule RC-P, Family Residential Mortgage Banking Activities, must be completed by (1) all banks with $1 billion or more in total assets, and (2) banks with less than $1 billion in total assets with greater than $10 million in mortgage banking activities (determined based on originations, sales or period-end balances) for two consecutive quarters. \150\ Call Report Schedule RC-R, Regulatory Capital. --------------------------------------------------------------------------- Pillar 3 disclosures include a description of how banking organizations subject to the disclosure requirements \151\ measure credit risk in their loan portfolios, how they mitigate those risks and the associated regulatory risk weights of the assets. For example, these organizations must provide quantitative credit risk disclosures \152\ based on geography, industry and/or counterparty type. If a banking organization uses its own internal credit risk estimates, such as the probability of default, exposure at default and loss given default, those measures must be disclosed.\153\ --------------------------------------------------------------------------- \151\ Pillar 3 disclosure requirements apply to banking organizations with $50 billion or more in total assets. See Regulatory Capital Rules Release. \152\ The required quantitative credit risk disclosures include total credit risk exposures and average credit risk disclosures, after accounting for offsets in accordance with U.S. GAAP over the period, without taking into account the effect of credit risk mitigation techniques, categorized by major types of credit exposure. Information about impaired and past-due loans also is required. \153\ Regulatory Capital Rules Release, Section XI, Market Discipline and Disclosure Requirements. --------------------------------------------------------------------------- Request for Comment 32. Do the loan portfolio disclosures called for by Guide 3 provide investors with information upon which they base investment and voting decisions? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? Are there any particular issues that BHC registrants face in providing these disclosures or that investors or analysts face in utilizing these disclosures? 33. Do Commission rules or U.S. GAAP require the same or similar loan information as called for by Guide 3? If so, how is the information similar or dissimilar? Please provide a detailed comparison. 34. What improvements to the existing loan disclosures should we consider that would be important for investors? For example, should loans held-for-sale or loans carried at fair value under the fair value option fall within the scope of our loan portfolio disclosures? In suggesting improvements, please indicate whether BHC registrants would face any challenges in preparing and providing the disclosures. 35. How do investors use the TDR disclosures called for by Guide 3 for investment decisions? Is the basis for a modification (i.e., credit risk management purposes versus commercial or other reasons) important in assessing the risk elements in a BHC registrant's loan portfolio? 36. Should we require disclosures of all loan modifications by type of modification and/or credit quality of borrower? Would BHC registrants face any challenges in preparing and providing these disclosures? 37. To promote comparability and consistency, should we prescribe the level of disaggregation that BHC registrants should employ for their loan portfolio disclosures? \154\ If so, what threshold should be used and why? --------------------------------------------------------------------------- \154\ While U.S. GAAP and IFRS standards include guidance about disaggregation, the requirements generally allow management to exercise judgment. For example ASC 310-10-50 includes disclosures by class of financing receivables and portfolio segment, but management determines the classes and segments. IFRS 7 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.'' --------------------------------------------------------------------------- 38. Should the categories used for disaggregation of these Guide 3 disclosures be closely aligned with those called for in Call Reports and other U.S. banking agency regulatory filings? If so, which ones and why? 39. While investors do not have experience with the disclosures that will be required by ASU 2016-13, is there information about loans that would be important for investors under an expected credit loss model? If so, please indicate which information and whether BHC registrants would face any challenges in preparing and providing the information? For example, upon effectiveness of ASU 2016-13, should we require disclosure of the current period activity for nonaccrual loans since the new standard will require disclosure of the beginning and ending nonaccrual balances only? 40. Should we consider requiring that the loan portfolio disclosures called for by Guide 3 be presented in a structured data format, such as XBRL, to facilitate investor comparison of data across BHC registrants and usability of the disclosures? Why or why not? If so, what elements of these disclosures should be tagged so that they can be extracted in a structured data format? 41. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 42. Should we require disclosure of the loan information provided in Call Reports or other regulatory filings? If so, what information and why? 43. Should the loan portfolio disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? D. Summary of Loan Loss Experience 1. Background BHC registrants generally accept and manage significant amounts of credit risk, and most of their credit losses traditionally have come from loans and declines in the value of collateral underlying loans. The allowance for loan losses is a critical accounting estimate and is a primary focus of management, investors and the U.S. banking agencies. This discussion focuses on the allowance for loan loss methodology currently required by U.S. GAAP and highlights only the significant changes that will occur once the new standard, ASU 2016-13, becomes effective.\155\ --------------------------------------------------------------------------- \155\ The currently effective guidance for recognizing credit losses includes ASC 310-10-35-4, which states that an impairment is recognized when it is probable that a loss has been incurred. The new standard replaces the current incurred loss methodology with a methodology that reflects expected credit losses. ASU 2016-13 is not effective for registrants until fiscal years beginning after December 15, 2019, unless early adoption is elected. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. --------------------------------------------------------------------------- A BHC registrant's methodology for estimating loan losses is influenced by many factors, including the its size, organizational structure, business environment and strategy, loan portfolio characteristics, loan administration procedures and management information systems.\156\ Most methodologies for estimating loan losses include a risk classification process that involves categorizing loans into risk categories or ratings.\157\ U.S. GAAP also requires management to consider all available information reflecting past events and current conditions when developing its estimate of loan losses.\158\ Because estimating loan losses involves [[Page 12771]] a high degree of management judgment, the Commission issued a financial reporting release and the staff issued an accounting bulletin that provides its views on the development, documentation and application of a systematic methodology for determining an allowance for loan losses.\159\ --------------------------------------------------------------------------- \156\ See Interpretive Response to Question 2.A in Staff Accounting Bulletin Topic 6:L--Financial Reporting Release 28-- Accounting for Loan Losses By Registrants Engaged in Lending Activities (SAB Topic 6:L). The guidance was issued in 2001 based on the U.S. GAAP impairment model effective today and has not been updated for ASU 2016-13. \157\ The categorization normally is based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current trends. \158\ ASC 310-10-35. Examples of available information include existing industry, geographical, economic and political factors that are relevant to the collectibility of a loan. \159\ See Financial Reporting Release 28, Accounting for Loan Losses by Registrants Engaged in Lending Activities and SAB Topic 6:L. --------------------------------------------------------------------------- ASU 2016-13, once effective, will replace the current incurred loss methodology with a methodology that reflects expected credit losses and will require consideration of a broader range of reasonable and supportable information to inform credit loss estimates.\160\ The new methodology will require registrants to use forecasted information, in addition to past events and current conditions, when developing their estimates. In addition, 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. As a result of the broader range of items to consider and the required use of forward-looking information, the FASB expanded the disclosure requirements related to financial instruments and impairments. --------------------------------------------------------------------------- \160\ See ASU 2016-13. --------------------------------------------------------------------------- Loan loss disclosures, like those required by U.S. GAAP, provide investors with information about how a registrant analyzes and assesses credit risk when determining the allowance for loan losses and the reasons for any changes in how it determines the allowance.\161\ --------------------------------------------------------------------------- \161\ See ``What Are the Main Provisions?'' section of ASU 2010- 20. --------------------------------------------------------------------------- 2. Current Guide 3 Disclosures Section IV.A of Guide 3 calls for a five-year analysis of loan loss experience,\162\ including the beginning and ending balances of the allowance for loan losses, charge-offs and recoveries by loan category \163\ and additions charged to operations. Section IV.A also calls for disclosure of the ratio of net charge-offs to average loans outstanding during the period. --------------------------------------------------------------------------- \162\ This analysis of activity in the allowance for loan losses is known as a ``roll-forward'' of the allowance for loan losses. \163\ The loan categories presented in Section IV.A are the same as in Section III. --------------------------------------------------------------------------- Section IV.B calls for a breakdown of the allowance for loan losses by category along with the percentage of loans in each category. BHC 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 the tabular format and loan categories in Section IV.B to present the allocation of allowance for loan losses instead of the narrative discussion. 3. Other Sources of Information i. Information Available in SEC Filings as Required by Commission Rules and Accounting Standards Article 9 currently requires disclosure of the total allowance for loan losses on the balance sheet or in the footnotes to the financial statements and the changes in the allowance for loan losses for each period in which an income statement is presented in the footnotes.\164\ This requirement is identical to the Guide 3 disclosure. --------------------------------------------------------------------------- \164\ 17 CFR 210.9-03. The Commission has proposed to eliminate the changes in the allowance for loan losses disclosure in the Disclosure Update and Simplification Release. --------------------------------------------------------------------------- U.S. GAAP requires disclosure of loan loss information, including the related accounting policies, for each portfolio segment except loans measured at fair value.\165\ For example, the accounting policy disclosures shall include: --------------------------------------------------------------------------- \165\ ASC 310-10-20 defines a portfolio segment as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. --------------------------------------------------------------------------- A description of the methodology used to estimate the allowance for loan losses, including a description of the factors that influenced management's judgment; \166\ --------------------------------------------------------------------------- \166\ ASC 310-10-50 states that both historical losses and existing economic conditions must be included in the description of factors. --------------------------------------------------------------------------- a discussion of risk characteristics relevant to each portfolio segment; the identification of any change in accounting policies or methodology from the prior period, the rationale for the change and the quantitative effect of the change; and a description of the policy for charging off uncollectible financing receivables.\167\ --------------------------------------------------------------------------- \167\ ASC 310-10-50-11B. --------------------------------------------------------------------------- ASU 2016-13, once effective, will add new policy disclosures regarding the changes in the factors that influenced management's current estimate of expected credit losses and reasons for significant changes in the amount of write-offs. In addition, ASU 2016-13 will require disclosures related to the forecasted information management used in developing its allowance for credit losses.\168\ U.S. GAAP currently requires disclosure of the allowance for loan losses and the related investment in financing receivables to which the allowance pertains, disaggregated on the basis of a registrant's impairment methodology.\169\ Both before and after adoption of ASU 2016-13, U.S. GAAP requires a roll-forward of the activity in the allowance for loan losses for each period by portfolio segment.\170\ --------------------------------------------------------------------------- \168\ ASC 326-20-50 requires a description of the factors that influenced management's expected loss estimate, including a discussion of the reasonable and supportable forecasts used and a discussion of the reversion method applied for periods beyond the reasonable and supportable forecast period. \169\ To disaggregate the required information on the basis of the impairment methodology, U.S. GAAP provides that a registrant shall disclose the following amounts: (a) Amounts collectively evaluated for impairment, (b) amounts individually evaluated for impairment, and (c) amounts related to loans acquired with deteriorated credit quality. See ASC 310-10-50-11C. Since ASU 2016-13 requires the allowance methodology for all loans to reflect the current estimate of expected credit losses, it eliminates this disaggregation requirement. \170\ The staff has observed that some bank holding companies present their Guide 3 roll-forward 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. --------------------------------------------------------------------------- Both before and after adoption of ASU 2016-13, U.S. GAAP requires qualitative information, by portfolio segment, about the impact of TDRs on the allowance for loan losses. For TDRs occurring during each period for which an income statement is presented, U.S. GAAP requires disclosure of how the modifications were factored into the determination of the allowance for loan losses. Similarly, for TDRs that were completed within the previous 12 months and subsequently have payment defaults during the reporting periods, U.S. GAAP requires disclosure of how the defaults were factored into the determination of the allowance for loan losses.\171\ --------------------------------------------------------------------------- \171\ ASC 310-10-50. --------------------------------------------------------------------------- U.S. GAAP currently also requires specific disclosures about the impact that loans acquired with deteriorated credit quality have on the allowance for loan losses in periods subsequent to acquisition.\172\ For example, U.S. GAAP currently requires disclosure of the amount of any additions or reductions to the allowance for loan losses resulting from changes in estimated cash flows expected to be collected over the life of those loans, as well as the amount of the allowance pertaining to those loans at the beginning and end of the period.\173\ ASU 2016-13 will change [[Page 12772]] the required disclosures because, under the new methodology, these loans will be recorded with an allowance for credit losses at the acquisition date. Therefore, there no longer will be separate disclosures related to changes in expected cash flows for these loans, but the roll-forward of the allowance by portfolio segment will include a separate line for the allowance recorded at acquisition. --------------------------------------------------------------------------- \172\ Currently under U.S. GAAP, an allowance for loan losses is not recorded upon the acquisition of loans acquired with deteriorated credit quality. These loans are initially recorded at fair value, which factors in an estimate of expected credit losses. An allowance may subsequently be required to the extent that there is an adverse change in the estimated cash flows expected to be collected over the life of the loan. \173\ ASC 310-30-50. --------------------------------------------------------------------------- The staff has observed that bank holding companies consider their methodology for determining the allowance for loan losses, when it could have a material impact on the financial condition or operation performance, to be a critical accounting estimate and provide a discussion of the material implications of uncertainties associated with their allowance methodology and assumptions in MD&A.\174\ These bank holding companies also discuss material fluctuations in their provision and allowance for loan losses in MD&A. The Division has provided its views on the appropriate disclosure in MD&A related to the current allowance for loan loss methodology, which includes the following information: --------------------------------------------------------------------------- \174\ In the Interpretive Guidance on MD&A, the Commission reminded registrants that they should address the material implications of uncertainties associated with the methods, assumptions and estimates underlying their critical accounting measurements. --------------------------------------------------------------------------- The historical loss data used as the starting point for estimating current losses; how economic factors affecting loan quality are incorporated into the allowance estimate; the level of specificity used to group loans for purposes of estimating losses; the application of loss factors to risk-rated loans; and any other estimation methods and assumptions used.\175\ --------------------------------------------------------------------------- \175\ Sample MD&A Letter. The Division is considering the impact that ASU 2016-13 will have on these disclosures and will take into consideration comments received in response to this request for comment as part of its analysis. --------------------------------------------------------------------------- ii. Information Available Outside of SEC Filings Banking organizations must report the amount of loans charged off against the allowance for loan losses during the period, as well as the amount of recoveries of loans previously charged off by specified loan category in Call Reports.\176\ Banking organizations also must provide a reconciliation of the allowance for loan losses on an aggregate basis. This requirement is similar to the disclosures called for in Section IV.A of Guide 3, except that write-downs arising from transfers of loans to held for sale and any other adjustments must also be reported in the Call Reports.\177\ Banking organizations must disclose in their Call Reports the amount of allowance for loan losses established due to decreases in cash flows expected to be collected on loans acquired with deteriorated credit quality.\178\ Banking organizations with $1 billion or more in total assets also must report disaggregated data on the allowance for loan losses and the related recorded investment in loans.\179\ This requirement is similar to the U.S. GAAP requirement. --------------------------------------------------------------------------- \176\ The loan categories specified by Call Report Schedule RI- B, Charge-offs and Recoveries on Loans and Leases and Changes in Allowance for Loan and Lease Losses, are consistent with those specified by Schedule RC-C. \177\ Loans held for sale are measured at lower of cost or fair value. Therefore, when a loan measured at amortized cost is transferred to the held for sale category, it may result in a write- down. \178\ Memoranda Item 4 in Schedule RI-B. \179\ The loan categories specified by Call Report Schedule RI- C, Disaggregated Data on the Allowance for Loan and Lease Losses, represent general categories that best correspond to the characteristics of the related loans and leases, rather than the standardized loan categories defined in Schedule RC-C. --------------------------------------------------------------------------- Pillar 3 disclosures provide qualitative and quantitative information about the allowance for loan losses that are more detailed than the disclosures called for by Guide 3 and U.S. GAAP. For example, qualitative disclosures include a description of the approaches used to determine the allowance for loan losses, including statistical methods used and an explanation of the internal rating system and its relationship with external ratings by loan type. Quantitative disclosures include actual losses for the preceding period for each loan category, including how the amounts differ from past experience or the banking organization's estimates of losses compared to actual losses over a longer period.\180\ --------------------------------------------------------------------------- \180\ Pillar 3 instructions do not prescribe the period used for this assessment, but define the period as ``a period sufficient to allow for meaningful assessment of the performance of the internal ratings processes.'' --------------------------------------------------------------------------- Request for Comment 44. Do the summary of loan loss experience disclosures called for by Guide 3 provide investors with information upon which they base investment and voting decisions? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? Are there any particular issues that BHC registrants face in providing these disclosures or that investors or analysts face in utilizing these disclosures? 45. Do Commission rules or U.S. GAAP require the same or similar loan loss experience information as called for by Guide 3? If so, how is the information similar or dissimilar? Please provide a detailed comparison. 46. What improvements to the existing summary of loan loss experience disclosures should we consider that would be important for investors? For example, should BHC registrants disclose the qualitative portion of their allowance or details about their allowance methodology, such as adjustments made due to existing economic conditions? In suggesting improvements, please indicate whether BHC registrants would face any challenges in preparing and providing the disclosures. 47. To promote comparability and consistency, should we prescribe the level of disaggregation that BHC registrants should employ for their summary of loan loss disclosures? If so, what threshold should be used and why? 48. Should the categories used for disaggregation of these Guide 3 disclosures be closely aligned with those called for in Call Reports and other U.S. banking agency regulatory filings? If so, which ones and why? 49. While investors do not have experience with the disclosures that will be required by ASU 2016-13, is there information about loan impairment that would be important for investors under an expected credit loss model? If so, please indicate which information and whether BHC registrants would face any challenges in preparing and providing the information? For example, upon effectiveness of ASU 2016-13, should we require separate disclosure of the amount of provision that relates to loans originated during the period in the allowance for credit losses roll-forward? Why or why not? 50. Should we require any of the suggested disclosures from the 2009 Sample MD&A Letter? Why or why not? If so, which disclosures should we require and what challenges, if any, would BHC registrants face in preparing and providing them? For example, should we require the disclosure suggestions related to changes in practices such as the historical loss data used as the starting point for estimating current losses? 51. Should we consider requiring that the summary of loan loss experience disclosures called for by Guide 3 be presented in a structured data format, such as XBRL, to facilitate investor comparison of data across BHC registrants and usability of the disclosures? Why or why not? If so, what elements of these disclosures [[Page 12773]] should be tagged so that they can be extracted in a structured data format? 52. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 53. Should we require disclosure of any loan information provided in Call Reports or other regulatory filings? If so, what information and why? 54. Should the summary of loan loss experience disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? E. Deposits 1. Background Deposits are generally the most significant liability on an FDIC- insured institution's balance sheet, and interest paid on deposits generally represents a large portion of expenses. As of September 30, 2016, deposits represented 76% of the total liabilities and capital of all FDIC-insured institutions.\181\ During times of economic stress, insured retail deposits have proven to be the most reliable funding source and, therefore, play an integral role in mitigating liquidity risk during crisis scenarios.\182\ FDIC-insured institutions also can generate funds by acquiring brokered deposits,\183\ which typically are obtained through arrangements with securities brokerage firms. The use of brokered deposits allows FDIC-insured institutions to raise large amounts of funds quickly with a predetermined maturity structure. Brokered deposits, however, are highly rate-sensitive and when they mature institutions need to match prevailing market rates to roll-over or renew them. FDIC rules limit access to brokered deposits for insured institutions that are not ``well capitalized'' for purposes of the applicable regulatory capital requirements.\184\ --------------------------------------------------------------------------- \181\ See FDIC Quarterly. \182\ See page 15 of OCC, Comptroller's Handbook--Liquidity (June 2012). Retail deposits include demand, savings and time deposits. In addition, retail deposits are assigned a low outflow rate of 3-10% for purposes of the LCR calculations whereas the rates for other types of liabilities (e.g., unsecured wholesale funding provided by a financial sector entity) may be as high as 100%. See LCR Adopting Release. \183\ As defined by the FDIC, brokered deposits are deposits accepted through a ``deposit broker'' or ``any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions for the purpose of selling interests in those deposits to third parties.'' See Frequently Asked Questions Regarding Identifying, Accepting, and Reporting Brokered Deposits on the FDIC's Web site for additional information, available at https://www.fdic.gov/news/news/financial/2015/fil15051b.pdf. \184\ 12 CFR 337.6. --------------------------------------------------------------------------- Deposit disclosures, together with the level of other disclosed funding sources,\185\ may provide transparency with respect to a registrant's sources of funding and liquidity risk profile. Disclosures about significant amounts of deposits from a small number of depositors also could indicate concentration risk. For example, disclosures about a BHC registrant's reliance on brokered deposits as a source of funding may inform investors that the BHC registrant's cost of funding could increase quickly when the brokered deposits mature. --------------------------------------------------------------------------- \185\ ASC 942-470-50-3 requires disclosures related to debt agreements and Section VII of Guide 3 calls for disclosures about short-term borrowings as described below in Section II.G. --------------------------------------------------------------------------- 2. Current Guide 3 Disclosures Section V.A of Guide 3 calls for presentation of the average amounts of and the average rates paid for specified deposit categories that exceed 10% of average total deposits.\186\ Most BHC registrants provide this disclosure by disaggregating the deposit categories in the average balance sheet required by Section I of Guide 3. Section V.A also calls for disclosure of the aggregate amount of deposits by foreign depositors in U.S. offices, if material. Sections V.D and V.E of Guide 3 focus on the disclosures of time certificates of deposits and other time deposits in amounts of $100,000 or more.\187\ Section V.D calls for a maturity analysis of time deposits,\188\ and Section V.E calls for disclosure of time deposits in excess of $100,000 issued by foreign offices.\189\ --------------------------------------------------------------------------- \186\ 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. \187\ The $100,000 thresholds were established in 1976 when the FDIC insurance limit was $40,000. \188\ 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. \189\ 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. --------------------------------------------------------------------------- 3. Other Sources of Information i. Information Available in SEC Filings as Required by Commission Rules and Accounting Standards Article 9 requires separate presentation on the balance sheet of noninterest-bearing deposits and interest-bearing deposits.\190\ U.S. GAAP requires limited disclosures about deposits. For example, U.S. GAAP requires disclosures about deposits received on terms other than those available in the normal course of business and the aggregate amount of time deposits equal to or exceeding the FDIC insurance limit,\191\ which is currently $250,000.\192\ The time deposit disclosure requirement previously contained a $100,000 threshold, similar to Guide 3. In March 2014, the FASB replaced the $100,000 threshold with the term ``FDIC insurance amounts.'' \193\ As a result, BHC registrants generally provide separate time deposit disclosures at both the $100,000 and the $250,000 thresholds to comply with both Guide 3 and U.S. GAAP. --------------------------------------------------------------------------- \190\ 17 CFR 210.9-03. If the disclosures on 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. \191\ ASC 942-405-50-1. \192\ https://www.fdic.gov/deposit/deposits. \193\ FASB Editorial and Maintenance Update 2014-07 (Mar. 17, 2014), available at https://asc.fasb.org/imageRoot/89/51570489.pdf. In the update, the FASB states that the revision maintained the original intent of the disclosure and was made to accommodate any future changes to the FDIC insurance limit. --------------------------------------------------------------------------- As part of the standard-setting process for ASU 2016-01, in 2013 the FASB proposed a definition of ``core deposit liabilities'' and related disclosures.\194\ The proposal would have required registrants with core deposit liabilities to disclose the following by significant type of core deposit account: --------------------------------------------------------------------------- \194\ ``Core deposit liabilities'' was defined as ``deposits without a contractual maturity that management considers to be a stable source of funds, which excludes surge balances due to seasonal factors or economic uncertainty and other balances that management believes are transient (such as highly interest rate sensitive accounts.)'' --------------------------------------------------------------------------- The core deposit liability balance; the implied weighted-average maturity period; and the estimated all-in-cost-to-service rate.\195\ \195\ Proposed Accounting Standards Update (Apr. 12, 2013), available at http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176162349236&acceptedDisclaimer=true. The all-in- cost-to-service rate was defined as ``a rate that includes the net direct costs to service core deposit liabilities, including interest paid on those deposits and the expense of maintaining a branch network minus fee income earned on those deposit accounts.'' --------------------------------------------------------------------------- The FASB did not include these disclosures in the final standard due to [[Page 12774]] input from financial statement preparers indicating that the cost of providing the information would be significant and that they could result in the disclosure of proprietary information. In addition, respondents expressed concern that the disclosures would not be comparable because the definition of core deposit liabilities would be based on management's determination.\196\ Because the respondents to the FASB proposal consisted mostly of preparers and included only one user,\197\ we are seeking feedback about whether there are additional disclosures about deposits, such as those considered by the FASB, that would be important for investors. --------------------------------------------------------------------------- \196\ See ASU 2016-01, paragraph BC138. \197\ See http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176162921974. --------------------------------------------------------------------------- The staff has observed that BHC registrants generally discuss in MD&A material changes to or key metrics for deposits when deposits are a material source of liquidity.\198\ For example, many BHC registrants discuss loan-to-deposit ratios and some present this information by reportable segment. They also generally include a discussion of deposits as a source of funding, including a description of deposit inflows and outflows during the period, in the liquidity section of MD&A. Some include total deposits or time deposits in the maturity of contractual obligations table.\199\ --------------------------------------------------------------------------- \198\ Item 303 of Reg. S-K requires registrants to discuss their financial condition, material changes in financial condition, and a description of internal and external sources of liquidity. \199\ Deposits, including time deposits, normally do not meet the definition of long-term obligations in Item 303(a)(5)(ii) of Regulation S-K. --------------------------------------------------------------------------- ii. Information Available Outside of SEC Filings Banking organizations must separately report deposits held at U.S. bank offices and deposits held at foreign bank offices \200\ in their Call Reports.\201\ Maturity data for brokered deposits, time deposits less than $100,000, time deposits between $100,000 and $250,000, and time deposits of $250,000 or more must also be provided.\202\ Banking organizations must also provide quarterly average balances of interest- bearing deposit transaction accounts and non-transaction accounts in Call Reports. Call Reports contain more information about deposits and categorize deposits by more and sometimes different factors than Guide 3. For example, banking organizations must provide information about whether deposits are insured or uninsured and the intended uses of the deposit products in Call Reports. --------------------------------------------------------------------------- \200\ For definitions of U.S. bank offices and foreign bank offices, see the Glossary in Instructions for Preparation of Consolidated Reports of Condition and Income (FFIEC 031 and 041). \201\ Call Report Schedule RC-E, Deposit Liabilities. \202\ The maturity periods specified by Schedule RC-E, are one year or less for brokered deposits and, for time deposits, (a) three months or less, (b) over three months through 12 months, (c) over one year and through three years, and (d) over three years. --------------------------------------------------------------------------- Request for Comment 55. Do the deposit disclosures called for by Guide 3 provide investors with information upon which they base investment and voting decisions? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? Are there any particular issues that BHC registrants face in providing these disclosures or that investors or analysts face in utilizing these disclosures? 56. Do Commission rules or U.S. GAAP require the same or similar deposits information as called for by Guide 3? If so, how is the information similar or dissimilar? Please provide a detailed comparison. 57. What improvements to the existing deposits disclosures should we consider that would be important for investors? For example, should BHC registrants disclose the amount and maturity of brokered deposits? Should we require disclosures about core deposits and, if so, what disclosures? In suggesting improvements, please indicate whether BHC registrants would face any challenges in preparing and providing the disclosures. 58. How do investors use the time deposit disclosures? Should we retain the $100,000 threshold for these disclosures or should we change it to another threshold, such as the FDIC insurance limit? Why or why not? 59. Should we require disclosure of an estimate of the quantitative and qualitative benefits of using government guaranteed deposits? 60. Should we consider requiring that the deposit disclosures called for by Guide 3 be presented in a structured data format, such as XBRL, to facilitate investor comparison of data across BHC registrants and usability of the disclosures? Why or why not? If so, what elements of these disclosures should be tagged so that they can be extracted in a structured data format? 61. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 62. Should the categories used for disaggregation of these Guide 3 disclosures be closely aligned with those called for in Call Reports and other U.S. banking agency regulatory filings? If so, which ones and why? 63. Should we require disclosure of any deposit information provided in Call Reports or other regulatory filings? If so, what information and why? 64. Should the deposit disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? F. Return on Equity and Assets 1. Background Financial ratios allow investors to compare registrants in the same industry. Section VI of Guide 3 calls for disclosure of four specific ratios. Two are profitability ratios, one is an indicator of how much capital a BHC registrant returns to investors, and the other is an indicator of solvency. While useful to investors for comparing BHC registrants and making investment decisions, the ratios called for by Guide 3 are not specific to the financial services industry. Moreover, Guide 3 does not call for other industry-specific ratios, other than the ratio of net charge-offs to average loans outstanding in Section IV.A. Examples of industry- specific ratios that investors may use to evaluate BHC registrants and make investment decisions include the efficiency ratio,\203\ allowance for loan losses to total loans, allowance for loan losses to total nonaccrual loans and nonaccrual loans to total loans. Although not specifically referenced in Guide 3, BHC registrants generally disclose these ratios. We are considering whether specific ratio disclosures for BHC registrants would be important for investors or whether these BHC registrants already disclose the ratios that are important for investors in response to Regulation S-K requirements. --------------------------------------------------------------------------- \203\ The efficiency ratio measures the proportion of net operating revenues that are absorbed by overhead expenses, so that a lower value indicates greater efficiency. FDIC Quarterly. --------------------------------------------------------------------------- 2. Current Guide 3 Disclosure Requirements Section VI of Guide 3 calls for the following ratios for each reported period: Return on assets (ROA); return on equity (ROE); dividend payout ratio; and equity to assets ratio.\204\ \204\ Instruction 1 to Section VI calls for a dual presentation of the return on equity and equity to assets ratios if mandatorily redeemable preferred stock is outstanding. The dual presentation provides the ratios calculated both with and without preferred stock. --------------------------------------------------------------------------- [[Page 12775]] Instruction 2 of Section VI indicates that BHC registrants should provide any other ratios they deem necessary to explain their operations. 3. Other Sources of Information No other Commission rules, U.S. accounting standards or bank regulatory requirements specifically require disclosure of the four ratios included in Guide 3. These ratios, however, can be calculated using financial information disclosed in Commission filings. ROA, ROE and equity to assets can be derived from amounts reported on the income statement and the average balance sheet called for by Section I.A of Guide 3.\205\ BHC registrants also generally disclose their ROA and ROE ratios in their earnings releases. The dividend payout ratio can be calculated based on the disclosures required by Article 3 of Regulation S-X.\206\ Also, although Commission rules do not specifically require these ratios, the Interpretive Guidance on MD&A highlights the potential need for disclosure of industry-specific or key performance measures when they are used to manage the business and would be material to investors. --------------------------------------------------------------------------- \205\ In the case of average amounts, current and prior year amounts presented on the balance sheet can be used to calculate the average. \206\ 17 CFR 210.3-01 through 3-20. Rule 3-04 of Regulation S-X requires disclosure of dividends per common share in the changes in stockholders' equity and noncontrolling interests statement or footnote. --------------------------------------------------------------------------- Bank holding companies also disclose non-GAAP measures in Commission filings. For example, they commonly present non-GAAP versions of ROE, return on average equity, and book value per common share using tangible equity \207\ instead of shareholders' equity. Another common non-GAAP measure used by bank holding companies is taxable equivalent interest income and the related net interest margin.\208\ In addition, banking organizations are subject to a minimum ``leverage ratio'' requirement as part of their regulatory capital requirements. The leverage ratio and its inputs are reported on the Call Report.\209\ --------------------------------------------------------------------------- \207\ Tangible equity is not defined in Commission rules or U.S. GAAP. Generally, tangible common equity is U.S. GAAP shareholders' equity minus any intangible asset (such as deferred costs or goodwill), net of deferred tax liabilities. \208\ Net interest income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in income tax expense. See Staff Accounting Bulletin Topic 11:G--Tax Equivalent Adjustment in Financial Statements of Bank Holding Companies (SAB Topic 11:G) for additional discussions related to tax equivalent adjustments. \209\ Tier 1 leverage ratio is calculated by dividing Tier 1 capital, as defined by the U.S. banking agencies, by average total consolidated assets. Call Report Schedule RC-R, Regulatory Capital. --------------------------------------------------------------------------- Request for Comment 65. Do the return on equity and assets disclosures called for by Guide 3 provide investors with information upon which they base investment and voting decisions? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? Are there any particular issues that BHC registrants face in providing these disclosures or that investors or analysts face in utilizing these disclosures? 66. Do Commission rules or U.S. GAAP require the same or similar ratios as called for by Guide 3? If so, how are the ratios similar or dissimilar? 67. What improvements to the existing return on equity and assets disclosures should we consider that would be important for investors? For example, should we require other industry-specific ratios, such as nonaccrual loans to total loans, and if so, which ones? In suggesting improvements, please indicate whether BHC registrants would face any challenges in preparing and providing the disclosures. 68. What non-GAAP financial measures do BHC registrants disclose? Which of these measures help make investment decisions and why? Should we require disclosure of any of these measures to enhance the comparability of information for investors? 69. Are there any bank regulatory capital metrics, such as risk- weighted assets or liquidity ratios, that BHC registrants are not already required to disclose under accounting standards or Commission rules that would be important for investors? If so, which ones and how do investors use them? 70. Banking organizations typically are afforded a transition period to comply with new bank regulatory capital metric requirements. For recently issued accounting standards that have not yet been adopted, registrants generally discuss the potential effects of adoption in registration statements and reports filed with the Commission.\210\ However, there is no related disclosure guidance for bank capital metrics that have been issued but not yet implemented. Would disclosure of the calculation of a new metric provide important information for investors even before the organization is required to comply with the requirement? What challenges, if any, would BHC registrants face in preparing and providing it? --------------------------------------------------------------------------- \210\ See Staff Accounting Bulletin Topic 11:M--Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period. (SAB Topic 11:M) --------------------------------------------------------------------------- 71. Should we consider requiring that the return on equity and assets disclosures called for by Guide 3 be presented in a structured data format, such as XBRL, to facilitate investor comparison of data across BHC registrants and usability of the disclosures? Why or why not? If so, what elements of these disclosures should be tagged so that they can be extracted in a structured data format? 72. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 73. Should the return on equity and assets disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? G. Short-Term Borrowings 1. Background BHC registrants often use short-term borrowings to supplement their deposits and diversify their funding sources. Short-term borrowings may include federal funds transactions,\211\ repurchase agreements,\212\ commercial paper,\213\ traditional loans from other banks, and any other short-term borrowings reflected on the BHC registrant's balance sheet.\214\ Federal funds transactions can be an important tool for managing liquidity, while repurchase agreements can provide a cost- effective source of funds and may allow a BHC registrant to leverage its securities portfolio for liquidity and funding needs. Short-term borrowings and the reliance on them for financing are especially important to the liquidity of many of the largest BHC registrants [[Page 12776]] and, industry-wide, may have a global impact on the financial markets and systemic stability. Illiquidity in the markets as a whole can affect short-term borrowings, sometimes severely and rapidly, which can present increased risks for registrants that rely heavily on short-term borrowings as a funding source. Because of these potential risks, banking regulators across the globe have focused on liquidity and funding sources and have adopted new liquidity measures, such as the LCR and NSFR requirements. These new liquidity measures are designed to create incentives for certain large banking organizations to fund their activities with more stable sources of funding, which may cause banking organizations to replace some of their short-term borrowings, like federal funds purchased, with long-term debt. For example, the NSFR generally is calibrated assuming that long-term liabilities are more stable than short-term liabilities.\215\ --------------------------------------------------------------------------- \211\ The federal fund rate is the interest rate that banks charge one another for borrowing funds overnight. Federal funds are excess funds that banks deposit with the FRB for lending to other banks. \212\ 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. \213\ Commercial paper consists of short-term promissory notes issued primarily by corporations. Maturities range up to 270 days but average about 30 days. \214\ 17 CFR 210.9-03.13(3). \215\ Basel III: the net stable funding ratio (October 2014), available at http://www.bis.org/bcbs/publ/d295.pdf. --------------------------------------------------------------------------- A BHC registrant's use of short-term borrowings can fluctuate significantly during a reporting period. As a result, the presentation of period-end amounts alone may not accurately reflect a BHC registrant's funding needs or use of short-term borrowings during the period. The Guide 3 short-term borrowings disclosures provide investors with information beyond the period-end borrowings balance. These disclosures focus on the activity in short-term borrowings and related interest expense throughout the period and may help investors better understand the role of this form of financing and its related risks to BHC registrants. 2. Current Guide 3 Disclosures Section VII of Guide 3 calls for the following short-term borrowings disclosures by category: The period-end amount outstanding; the average amount outstanding during the period; and the maximum month-end amount outstanding.\216\ \216\ Section VII refers to Rule 9-04.11 for categories of short-term borrowings. The correct reference, however, is Rule 9- 03.13. Registrants often provide the average short-term borrowings disclosures as part of their average balance sheet disclosures. Section VII also calls for disclosure, by category of borrowing, of the weighted average interest rates at period-end and during the period, and the general terms of the borrowing. The disclosures in Section VII need not be provided for categories of short-term borrowings for which the average balance outstanding during the period was less than 30% of stockholders' equity at the end of the period. 3. Other Sources of Information i. Information Available in SEC Filings as Required by Commission Rules and Accounting Standards Article 9 requires separate disclosure of the period-end balances of federal funds purchased and securities sold under agreements to repurchase, commercial paper and other short-term borrowings on the face of the financial statements or in the footnotes.\217\ U.S. GAAP requires disclosure of period-end balances of significant categories of borrowings.\218\ U.S. GAAP also requires disclosures about repurchase agreements and securities lending transactions. For example, BHC registrants must reconcile the amount of the gross liability for repurchase agreements and securities lending transactions accounted for as secured borrowings to the net liability amount presented on the balance sheet.\219\ --------------------------------------------------------------------------- \217\ 17 CFR 210.9-03. \218\ ASC 942-470-45. \219\ ASC 860-30-50 and ASC 210-20-50 permit offsetting of derivatives, repurchase agreements and securities lending transactions in the financial statements. ASC 860-30-50 requires disclosure of gross and net liabilities related to these transactions. --------------------------------------------------------------------------- The staff has observed that BHC registrants typically discuss their sources of funding and outstanding borrowings in their liquidity section of MD&A. In 2010, the Commission issued interpretive guidance on liquidity and capital resources disclosures that highlighted important trends and uncertainties related to liquidity for registrants to consider in their MD&A disclosures.\220\ The guidance noted as examples of trends and uncertainties the reliance on commercial paper or other short-term financing arrangements for liquidity and intra- period variations in borrowings in circumstances where borrowings during the period are materially different than the period-end amounts. The guidance also specifically indicated that bank holding companies should consider additional MD&A disclosures, including their policies and practices for meeting applicable bank regulatory guidance on funding and liquidity risk management, or any policies and practices that differ from applicable bank regulatory guidance. --------------------------------------------------------------------------- \220\ Commission Guidance on Presentation of Liquidity and Capital Resources Disclosures in Management's Discussion and Analysis, Release No. 33-9144 (Sept. 17, 2010) [75 FR 59894]. --------------------------------------------------------------------------- Regulation S-K also requires a discussion of off-balance sheet arrangements when the arrangements have or are reasonably likely to have a current or future effect on the registrant's financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.\221\ When these disclosures were adopted in 2003, the definition of ``off-balance sheet arrangement'' focused on the means through which registrants typically structure off-balance sheet transactions or otherwise incur risks of loss that are not fully transparent to investors. For example, a registrant sometimes provides financial support as part of its involvement in activities of an unconsolidated entity.\222\ Commenters on the Regulation S-K Concept Release expressed differing views about whether the Commission should retain, expand or eliminate this disclosure item. One commenter recommended expanding it to include detailed information about the underlying assets of asset-backed securities.\223\ Commenters often cited redundancy with disclosures required by U.S. GAAP as the reason for eliminating the disclosure requirement.\224\ We are considering whether there are disclosures about off-balance sheet arrangements specific to BHC registrants that investors find important. Further, we are considering whether disclosures about off-balance sheet arrangements should be considered for other registrants in the financial services industry. --------------------------------------------------------------------------- \221\ 17 CFR 229.303(a)(4). \222\ Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Release No. 33-8182 (Jan. 28, 2003) [68 FR 5982] (Off- Balance Sheet and Contractual Obligations Adopting Release). \223\ CFA Institute Letter. \224\ See, e.g., Chamber Letter; SIFMA Letter; KPMG LLP; Davis Polk Letter; and Financial Services Roundtable Letter. --------------------------------------------------------------------------- Short-term borrowing levels and deposit levels also factor into the LCR calculation, because it is based on projected cash outflows during a 30-day stress period.\225\ Banking organizations subject to the LCR requirement typically disclose whether or not they comply with the rule in their Commission filings. We are considering whether to require additional quantitative and qualitative disclosures about funding and liquidity risks. --------------------------------------------------------------------------- \225\ See LCR Adopting Release. --------------------------------------------------------------------------- [[Page 12777]] ii. Information Available Outside of SEC Filings Banking organizations must report the year-end balance, quarterly average balances and interest expense on federal funds purchased and securities sold under agreements to repurchase, and other borrowings in their Call Reports.\226\ Global systemically important bank holding companies (GSIBs) are subject to a risk-based capital surcharge in excess of their minimum capital requirements.\227\ One of the methods for calculating the risk-based surcharge focuses on a GSIB's reliance on short-term wholesale funding because reliance on this type of funding may cause vulnerability to runs and fire sales. Pillar 3 disclosures discuss risks related to borrowings and liquidity and include borrowings as an input to certain disclosure requirements, including the LCR and GSIB risk-based capital surcharge. --------------------------------------------------------------------------- \226\ Year-end balances are required to be reported on Call Report Schedule RC, Balance Sheet. Quarterly average balances are required to be reported on Call Report Schedule RC-K, Averages. Interest expense is required to be reported on Call Report Schedule RI, Income Statement. \227\ Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies (Aug. 14, 2015) [80 FR 157]. The surcharge became effective on January 1, 2016. --------------------------------------------------------------------------- Request for Comment 74. Do the short-term borrowings disclosures called for by Guide 3 provide investors with information upon which they base investment and voting decisions? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? Are there any particular issues that BHC registrants face in providing these disclosures or that investors or analysts face in utilizing these disclosures? 75. Do Commission rules or U.S. GAAP require the same or similar short-term borrowing information as called for by Guide 3? If so, how is the information similar or dissimilar? Please provide a detailed comparison. 76. What improvements to the existing short-term borrowings disclosures should we consider? For example, should BHC registrants discuss the degree of reliance on wholesale or short-term funding sources? Should they describe the nature, timing, and extent of volatile short-term funding? In suggesting improvements, please indicate whether BHC registrants would face any challenges in preparing and providing the disclosures. 77. Are there disclosures about off-balance sheet arrangements in the financial services industry that investors find important? If so, which disclosures? Would such information otherwise be provided under Commission rules (e.g., Regulation S-K) or U.S. GAAP? If not, in what manner should these disclosures be provided? 78. Are there quantitative and qualitative disclosures that would add transparency about ongoing liquidity risk exposure for BHC registrants? For example, should BHC registrants describe the liquidity risks arising from their assets, derivatives and off-balance-sheet activities? If so, what disclosures would be important for investors and in what manner should they be provided? For example, should we require these BHC registrants to disclose their compliance with and the calculation of their bank regulatory LCR? 79. What non-GAAP financial measures do BHC registrants provide concerning short-term funding? Should we require BHC registrants to disclose any of these measures to enhance the comparability of information for investors? 80. Do the short-term borrowings disclosures properly balance the benefits to investors and the costs to BHC registrants? If no, why? 81. Should we consider requiring disclosure of a liquidity mismatch index (MMI) \228\ or other measure of maturity mismatch for BHC registrants? If so, what measure would be useful for investors in making investment decisions? --------------------------------------------------------------------------- \228\ MMI is a liquidity measure proposed by researchers from the National Bureau of Economic Research in 2011 to measure the mismatch between the market liquidity of assets and the funding liquidity of liabilities. See Brunnermeier, M.K., G. Gorton, and A. Krishnamurthy, 2011, Risk Topography, NBER Macroeconomics Annual., available at http://www.nber.org/chapters/c12412. --------------------------------------------------------------------------- 82. Should we consider requiring that the short-term borrowings disclosures called for by Guide 3 be presented in a structured data format, such as XBRL, to facilitate investor comparison of data across BHC registrants and usability of the disclosures? Why or why not? If so, what elements of these disclosures should be tagged so that they can be extracted in a structured data format? 83. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 84. Should the categories used for disaggregation of these Guide 3 disclosures be closely aligned with those called for in Call Reports and other U.S. banking agency regulatory filings? If so, which ones and why? 85. Should the short-term borrowings disclosures called for by Guide 3 be extended to other registrants, such as those engaged in the financial services industry? If so, which registrants and which disclosures? H. Potential New Disclosures As originally published, Guide 3 focused on eliciting what the Division of Corporation Finance believed at the time to be the most significant statistical disclosures relating to the operations of bank holding companies. Over the intervening four decades, and particularly following the passage of the Gramm-Leach-Bliley Act,\229\ which repealed certain provisions of the Glass-Steagall Act,\230\ the scope of activities permitted to bank holding companies has expanded significantly. For example, today, some bank holding companies and financial holding companies may engage in operations involving physical commodities, insurance, investment management, asset management and broker-dealer activities that were limited or impermissible at the time of Guide 3's initial publication. --------------------------------------------------------------------------- \229\ Public Law 106-102, 113 Stat. 1338 (1999). \230\ Public Law 73-66, 48 Stat. 162 (1933). The Glass-Steagall Act contained provisions limiting commercial bank securities activities and affiliations with investment banks. The Gramm-Leach- Blilely Act repealed those anti-affiliation provisions and permitted banks to affiliate with companies engaged in a broad range of financial activities. --------------------------------------------------------------------------- We are considering whether and to what extent refinement of Guide 3 to account for the shifting landscape of the financial industry would yield important information for investors in their evaluation of BHC registrants. Part of this shifting landscape is supervisory or regulatory in nature. For example, in recent years CCAR, DFAST and resolution planning were implemented for certain large banking organizations.\231\ Consequently, we are seeking input about the effects of regulation on BHC registrants, including with regard to their operations, capital structures, dividend policies and treatment in bankruptcy. --------------------------------------------------------------------------- \231\ Banking organizations with $50 billion or more in total consolidated assets are subject to the full scope of CCAR and DFAST. DFAST testing and disclosure requirements are significantly reduced for banking organizations with $10 billion to $50 billion in total consolidated assets. --------------------------------------------------------------------------- We also are mindful of how our disclosure regime interacts with the various disclosure requirements of the U.S. banking agencies. In some cases, our disclosure regime and the regimes of the U.S. banking agencies require different types of information or present information in inconsistent ways; in [[Page 12778]] other cases, the various regimes may overlap with or duplicate one another. Guide 3 was originally intended to conform to the information required in reports to the U.S. banking agencies to the ``fullest extent possible, consistent with the public interest and the protection of investors,'' \232\ although gaps between the two regimes have formed over the decades. We are interested in understanding the interrelationships between the securities and banking disclosure regimes, how they differ and whether and how the existing banking disclosures can be leveraged to improve our own disclosure regime. We are cognizant of the fact that securities and banking disclosures serve different purposes in light of the different missions of their respective regulatory regimes. Where our disclosure regime serves our core missions of investor protection, fair, orderly, and efficient markets, and capital formation, the U.S. banking agency regulatory regime is premised largely on ensuring safety and soundness of banking organizations. --------------------------------------------------------------------------- \232\ Guide 3 Release. --------------------------------------------------------------------------- Guide 3 disclosures currently focus on interest-earning and interest-bearing activities and do not address other revenues that a BHC registrant may earn. Non-interest income represented more than 35% of total net operating revenue for all FDIC-insured institutions for the first three quarters of 2016.\233\ Examples of non-interest income include trading revenue, fee income from deposits and servicing income. Given the significance of non-interest income, it is important for investors to understand the reasons for its fluctuations. Non-interest income, generally, is a material component of net operating revenue for large FDIC-insured institutions. Trading revenues accounted for more than 24% of net operating revenues for FDIC-insured institutions, with more than $250 billion in assets for the first three quarters of 2016, but accounted for approximately 1% of net operating revenues for FDIC- insured institutions with less than $1 billion in total assets.\234\ Banking organizations must report disaggregated information about their noninterest income activity in Call Reports.\235\ We are considering whether to expand Guide 3 to include disclosures on non-interest income activities. --------------------------------------------------------------------------- \233\ See FDIC Quarterly. \234\ Id. \235\ Schedule RI-E, RC-P, and RC-T --------------------------------------------------------------------------- We also are considering whether or not more prescriptive disclosures not related specifically to the financial statements would be important for investors. An example is risk management disclosure. In May 2012, the Financial Stability Board established the EDTF with the goal of improving risk disclosures in the financial services industry. In October 2012, the EDTF published a report containing a number of recommendations for enhancing risk disclosures.\236\ Since 2012, the EDTF has published additional recommendations for enhancing disclosures and status reports on the implementation of the 2012 recommendations.\237\ Several of the EDTF's recommended disclosures are already addressed by Commission rules, accounting standards or U.S. banking agency disclosure requirements.\238\ Some of the EDTF's recommendations are intended to help investors better compare banking organizations but would require more standardized or detailed disclosures than currently required by either Commission rules or U.S. GAAP.\239\ Comparability was a fundamental principle identified by the EDTF for risk disclosures, with a focus on global comparability. We are considering whether industry-specific rules or guidance for these non- financial statement disclosures are needed to elicit more comparability. --------------------------------------------------------------------------- \236\ Report of the Enhanced Disclosure Task Force to the Financial Stability Board, Enhancing the Risk Disclosures of Banks (Oct. 29, 2012), available at http://www.financialstabilityboard.org/publications/r_121029.pdf. \237\ See, e.g., the EDTF's position on the disclosure of emergency liquidity assistance (Dec. 7, 2015), available at http://www.fsb.org/2015/12/edtfs-position-on-the-disclosure-of-emergency-liquidity-assistance/. \238\ See, e.g., Items 305 and 503(c) of Regulation S-K and ASC 815 for disclosures about derivatives and Pillar 3 for disclosures about risk-weighted assets. \239\ For example, the EDTF recommends a quantitative analysis of the components of the liquidity reserve held to meet liquidity needs, ideally by providing averages as well as period-end balances. The description would be complemented by an explanation of possible limitations on the use of the liquidity reserve maintained in any material subsidiary or currency. --------------------------------------------------------------------------- Finally, we are considering whether our disclosure regime should better utilize technological advances that have occurred over the years that allow information to be provided in a more accessible manner. For example, interactive data allows users to search disclosure documents and extract specific information and compare it to information from other companies, performance in past years and industry averages. Commission rules require registrants to provide their financial statements, including notes and financial statement schedules, in interactive data format using eXtensible Business Language Reporting (XBRL) by filing them with the Commission and posting them on their corporate Web sites.\240\ Commission rules do not require Guide 3 disclosures to be submitted in XBRL format. --------------------------------------------------------------------------- \240\ Regulation S-K Item 601(b)(101) and Regulation S-T Item 405. 17 CFR 229.601(b)(101) and 17 CFR 232.405. --------------------------------------------------------------------------- Request for Comment 86. Are there activities in which BHC registrants engage that are not covered by Guide 3 about which we should require disclosure? For example, should we require disclosure, in addition to that already required by accounting standards, about commodities, asset management or broker-dealer activities? If so, what information is important for investors and what challenges, if any, would BHC registrants face in preparing and providing it? What thresholds should trigger any disclosure requirements we consider? 87. Are there additional disclosures, either potential new disclosures or disclosures required by other regimes, not already discussed in this request for comment that we should consider for BHC registrants that would be important for investors? If so, what disclosures and how are they similar or dissimilar to the disclosures called for by Guide 3? What challenges, if any, would BHC registrants face in preparing and providing them? 88. Are there other Commission rules or disclosure guidance we should consider as part of this project that are not already discussed in this request for comment? 89. Should we require disclosures about non-interest income and/or non-interest expense for BHC registrants? If so, what disclosures should we require and how should these disclosures be presented? For example, should we require statistical disclosures about trading revenue? 90. Do the current distinctions between Guide 3 disclosures and the Call Reports and other bank regulatory filings enhance investor understanding or contribute to investor confusion? Please indicate which distinctions enhance investor understanding versus contribute to investor confusion and why. 91. The Dodd-Frank Act requires bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the FRB to periodically submit resolution plans to the FRB and the FDIC.\241\ The plans describe the companies' strategies [[Page 12779]] for rapid and orderly resolution in the event of material financial distress or failure.\242\ The plans contain a confidential section and a section that the FRB and FDIC make available to the public. Should we require the disclosure in Commission filings of information related to the resolution plans? If so, what types of information should be included and to what extent should BHC registrants describe their plans? What challenges, if any, would BHC registrants face in preparing and providing this information? --------------------------------------------------------------------------- \241\ Dodd-Frank Act Sec. 165(d). \242\ See http://www.federalreserve.gov/bankinforeg/resolution-plans.htm and https://www.fdic.gov/regulations/reform/resplans/. --------------------------------------------------------------------------- 92. In recent years, BHC registrants have become subject to many new bank regulatory and capital requirements, including pursuant to the Dodd-Frank Act. Should we specifically require BHC registrants to discuss the effects, when material, of such regulations on their business, financial condition and results of operations? For example, should we require disclosure of the effects of these regulations on their dividend policy or disclosure of an estimate of the costs of such regulations? Why or why not? 93. Should we require disclosure that summarizes the inputs and results of the various stress testing scenarios that bank holding companies perform? For example, should we require disclosures related to DFAST and its results. Why or why not? 94. Should we require any of the disclosures recommended in the EDTF report that are not addressed specifically by Commission rules or U.S. GAAP? If so, which ones? For example, should a reconciliation of risk-weighted assets at the beginning and ending of the period be disclosed? 95. For disclosure areas already addressed by Commission rules or U.S. GAAP, should we consider any EDTF recommendations that could potentially elicit additional or better information? If so, which ones? 96. Should we expand the scope of our XBRL requirements to apply to the Guide 3 statistical tabular disclosures to facilitate investor comparison of data across BHC registrants? Why or why not? 97. If we require the Guide 3 tabular disclosures to be submitted in XBRL, are the current requirements for the format and elements of the tables suitable for tagging? If not, how should they be revised? 98. Should we require disclosure of any of the information provided in Call Reports or other regulatory filings? If so, what information and why? How should the information be presented or included in a Commission filing? Should we require hyperlinks directly to the Call Reports or other regulatory filings that are available on third-party government Web sites? Should it be incorporated by reference? III. Applicability of Disclosure Requirements A. Applicability to Registrants Other Than Bank Holding Companies Some Commission disclosure requirements and guidance, including Guide 3, apply only to bank holding companies.\243\ The staff, however, has indicated that such disclosures should also be provided by other registrants with material lending and deposit activities.\244\ We are considering whether to expand the applicability of those disclosures and others discussed in this request for comment to other registrants. For example, marketplace lenders generally have material amounts of lending activities and may be exposed to some of the same risks as bank holding companies.\245\ Insurance companies and real estate investment trusts are examples of registrants that also may have material activities in the disclosure areas discussed in this request for comment. Typically registrants in those industries have material investment portfolios and in some cases have material amounts of lending activities. Therefore, we are considering whether the disclosures discussed in this request for comment should employ an activity-based scope rather than a narrow industry-based scope. For example, using an activity-based approach, the disclosures called for by Section II and certain aspects of Section I of Guide 3 could be required to the extent that investments are material to a registrant's operations, whether or not the registrant is a bank holding company. --------------------------------------------------------------------------- \243\ General Instruction 1 to Guide 3 states that the guide applies to bank holding company Securities Act registration statements for which financial statements are required and to bank holding company registration statements on Form 10, proxy and information statements relating to mergers, consolidations, acquisitions and similar matters and reports filed on Form 10-K. Rule 9-01 of Regulation S-X indicates that Article 9 applies to consolidated financial statements filed for bank holding companies and to any financial statements of banks that are included in filings with the Commission. \244\ See SAB 11:K. \245\ Areya Aranoff, ``BankThink Line Between Banks and Marketplace Lenders Thinner than You Think.'' American Banker, March 11, 2016, available at http://www.americanbanker.com/bankthink/line-between-banks-and-marketplace-lenders-thinner-than-you-think-1079840-1.html. --------------------------------------------------------------------------- Request for Comment 99. Should the disclosures called for by Guide 3 apply to registrants other than BHC registrants in the financial services industry? Why or why not? If so, which categories of non-BHC registrants should we consider? 100. Should Guide 3 employ an activity-based approach? If so, how should the disclosures be triggered? 101. Some Guide 3 disclosures, such as short-term borrowings, employ bright-line percentages or dollar amount thresholds to trigger disclosures. While the use of thresholds provides BHC registrants with certainty and promotes consistency, it does not allow BHC registrants to apply judgment to all facts and circumstances. Would employing a principles-based approach instead of using specific quantitative thresholds improve the effectiveness of the disclosures? Why or why not? What practical issues might arise if registrants apply judgment? B. Applicability to Foreign Registrants Foreign registrants that qualify as foreign private issuers \246\ may present their financial statements in accordance with any of the following: --------------------------------------------------------------------------- \246\ ``Foreign private issuers'' are foreign issuers (other than foreign governments) except issuers meeting the following conditions: (1) More than 50% of their outstanding voting securities are directly or indirectly owned of record by residents of the United States, and (2) any of the following: (a) The majority of their executive officers or directors are U.S. citizens or residents, (b) more than 50% of their assets are located in the United States, or (c) their businesses are administered principally in the United States. Securities Act Rule 405 and Exchange Act Rule 3b-4(c). 17 CFR 230.405 and 17 CFR 240.3b-4(c). --------------------------------------------------------------------------- U.S. GAAP; another comprehensive body of accounting with reconciliation to U.S. GAAP; or IFRS as issued by the IASB without reconciliation to U.S. GAAP.\247\ --------------------------------------------------------------------------- \247\ See Item 17(c) of Form 20-F. --------------------------------------------------------------------------- Foreign registrants that do not qualify as foreign private issuers must present their financial statements in accordance with U.S. GAAP and must use the same registration and reporting forms as domestic registrants. The staff has observed that most foreign registrants that are banking organizations meet the foreign private issuer definition and file their annual reports on Form 20-F or Form 40-F. As a result, most of the Commission disclosure requirements described in Section II of this request for comment apply to them.\248\ Instruction [[Page 12780]] 6 to Guide 3 indicates that the disclosures apply to these registrants to the extent the information is available or can be compiled without unwarranted or undue burden or expense. The staff has observed that foreign registrants that are banking organizations typically provide the Guide 3 disclosures. --------------------------------------------------------------------------- \248\ Instructions to Item 4 of Form 20-F indicate that the information specified in any industry guide that applies to the registrant must be furnished. Form 20-F Items 4, 5 and 11 require disclosures similar to Regulation S-K Items 101 (Description of business), 303 (MD&A) and 305 (Quantitative and qualitative disclosures about market risk). Form 40-F does not have a similar requirement, but the staff has observed that Canadian foreign private issuers typically provide Guide 3 disclosures in their Form 40-F filings. --------------------------------------------------------------------------- Because the categories and classifications specified by Guide 3 are influenced heavily by U.S. banking regulation and U.S. GAAP, some categories and classifications may not be relevant for understanding their operations. In addition, the Commission accepted IFRS without reconciliation to U.S. GAAP, for foreign private issuers, only in the last ten years, and Guide 3 was last substantively updated more than 30 years ago. Therefore, Guide 3 does not address the fact that some of its disclosures are not recognized concepts under IFRS. As a result, the staff has observed diversity in the manner in which foreign registrants that are banking organizations and file IFRS financial statements provide this information. For example, because nonaccrual is not a recognized concept under IFRS, the staff has observed disclosure of total impaired loans or disclosure of all past due loans in lieu of providing the nonaccrual loan disclosures called for by Item III.C.1 of Guide 3. Similarly, because the concept of TDRs is not recognized under IFRS, the staff has observed disclosure of all loan modifications, regardless of whether they were undertaken for credit risk management purposes or for commercial or other reasons. Further, Guide 3 does not address the differences between U.S. GAAP and IFRS, which are significant. For example, the IASB issued a new accounting standard in July 2014, IFRS 9, that will have a significant impact on the accounting and disclosures for financial instruments. This standard differs from the FASB's two new financial instruments standards, ASU 2016-01 and ASU 2016-13.\249\ One main difference is that IFRS 9 will require a 12-month expected credit loss measurement unless there has been a significant increase in credit risk, in which case it is lifetime, whereas U.S. GAAP will require only the lifetime expected credit loss measurement. Another difference is that IFRS 9 will allow a registrant to make an election at initial recognition to present subsequent changes in fair value in other comprehensive income for particular investments in equity instruments that otherwise are measured at fair value through profit or loss. At the same time the IASB issued IFRS 9, it also amended IFRS 7 to increase the financial instruments disclosure requirements when IFRS 9 is effective. For example, after adoption of IFRS 9, the standard will require more disclosures about how registrants measure expected credit losses and assess changes in credit risk. There is still no concept of TDRs, but IFRS 7 will require disclosure about financial assets where contractual cash flows have been modified during the period.\250\ --------------------------------------------------------------------------- \249\ IFRS 9, Financial Instruments, is effective for annual periods beginning on or after January 1, 2018 and permits early application. Both IFRS 9 and ASU 2016-13 eliminate the current incurred loss model, but each standard approaches the expected credit loss model differently. \250\ Id. --------------------------------------------------------------------------- We are considering generally the applicability of the Guide 3 disclosures to foreign registrants that are banking organizations, as well as the accommodation provided to them if the information is not available or cannot be compiled without unwarranted or undue burden or expense. We also are considering whether IFRS accounting and disclosure requirements elicit disclosures that are duplicative of or substantially similar to those called for by Guide 3, or whether the disclosures called for by Guide 3 should be different for foreign registrants that are banking organizations. Since there are significant differences between U.S. GAAP and IFRS, we are considering whether investors in foreign registrants that are banking organizations and that prepare their financial statements in accordance with IFRS would lose any important information if we eliminated all duplicative or overlapping Guide 3 disclosures in favor of those in U.S. GAAP. Request for Comment 102. Should foreign registrants that are banking organizations provide the disclosures discussed in this request for comment? Why or why not? 103. Is the information called for by Guide 3 generally available to foreign registrants that are banking organizations without unwarranted or undue burden or expense such that an accommodation should no longer be provided to these registrants? Why or why not? 104. Does IFRS require the same or similar information as called for by Guide 3? If so, how is the information similar or dissimilar? Please provide a detailed comparison. 105. What concepts or disclosures called for by Guide 3 are not recognized or contradict with IFRS? Please provide a detailed list. 106. Would investors in foreign registrants that are banking organizations and that prepare their financial statements in accordance with IFRS lose any important information if we were to eliminate all Guide 3 disclosures that are duplicative of or overlap with current U.S. GAAP? If so, which information would be lost? 107. While investors do not have experience with the disclosures that will be required by IFRS 9, is there information about financial instruments under an expected credit loss model that would be useful for investors in making investment and voting decisions? If so, please indicate which and whether registrants would face any challenges in preparing and providing the information? C. Size Thresholds and Reporting Periods Guide 3 applies to all bank holding company registrants, regardless of size. However, Guide 3 calls for those registrants with less than $200 million in total assets or less than $10 million of equity to provide scaled disclosures in terms of the number of periods presented.\251\ Commission rules also make certain scaled disclosures available to registrants that meet the definition of smaller reporting company and emerging growth company. Because the number of registrants eligible for scaled disclosures under those definitions is larger than the number that are eligible for Guide 3 scaled disclosures, we are considering whether the disclosures called for by Guide 3 should be scaled further. --------------------------------------------------------------------------- \251\ General Instruction 3 to Guide 3 provides that registrants below the prescribed thresholds may provide disclosures for each of the past two fiscal years instead of each of the past three or five years. --------------------------------------------------------------------------- Guide 3 currently calls for five years of loan portfolio and summary of loan loss experience data and three years of data for all other information.\252\ In addition, Guide 3 reporting periods include interim periods only when necessary.\253\ Regulation S-X generally requires two years of balance sheets and three years of income statements,\254\ except that smaller reporting companies may present only two years of income statements \255\ and emerging growth companies may present only two years of financial statements for initial public [[Page 12781]] offerings of common equity securities.\256\ In some instances, U.S. GAAP and/or Regulation S-X require similar disclosures to those specified in Guide 3, but for different periods. For example, Guide 3, Article 9 and U.S. GAAP all contain categorized investment portfolio disclosures, but Article 9 and U.S. GAAP \257\ require disclosures for the balance sheet periods presented, generally two years, while Section II.A of Guide 3 calls for three years. --------------------------------------------------------------------------- \252\ Guide 3 originally called for five years of disclosures for all items, but the reporting periods were generally reduced in 1980. 1980 Guide 3 Amendments Release. \253\ Instruction 3(d) of Guide 3. \254\ 17 CFR 210.3-01 and 3-02. \255\ 17 CFR 210.8-02. \256\ Securities Act Sec. 7(a)(2)(A). \257\ ASC 320-10-45. --------------------------------------------------------------------------- Guide 3's five-year presentation of loan portfolio and allowance for loan losses data provides a basis for statistical trend analysis and identifies unusual or non-recurring events which may have affected the loan portfolio and its related provision for loan losses.\258\ Similarly, the selected financial data requirement in Item 301 of Regulation S-K \259\ that generally requires five years of information \260\ was designed to highlight historical trends in significant data relating to financial condition and results of operations over a five- year period.\261\ We are considering whether the Guide 3 reporting periods, which generally are greater than most Commission disclosure requirements except for interim periods, facilitates trend analysis that investors rely upon or if the periods should be modified to be consistent with the requirements of Regulation S-X for both annual and interim reporting. --------------------------------------------------------------------------- \258\ Information about nonperforming loans was originally proposed to cover a three-year period but was increased to five years because the staff believed the data would show trends indicative of management policies concerning non-performing loans. Guide 3 Release. \259\ 17 CFR 229.301. \260\ Smaller reporting companies are not required to present selected financial data. See Item 301(c) of Regulation S-K. Emerging growth companies are not required to present selected financial data for any period earlier than the earliest audited period presented in connection with their initial public offerings. See Securities Act Sec. 7(a)(2)(A) and Exchange Act Sec. 13(a). \261\ See Staff Report on Review of Disclosure Requirements in Regulation S-K (Dec. 2013) available at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf. See also Amendments to Annual Report Form, Related Forms, Rules, Regulations and Guides; Integration of Securities Acts Disclosure Systems, Release No. 33-6231 (Sept. 2, 1980) [45 FR 63630] (stating that ``the Commission believes that five-year information is relevant primarily where it can be related to trends in the registrant's continuing operations''). --------------------------------------------------------------------------- Request for Comment 108. Should the reporting periods called for by Guide 3 be modified, and if so, how? For example, should the Guide 3 reporting periods be reduced to match the Regulation S-X requirements and the scaled disclosure requirements for smaller reporting companies and emerging growth companies? 109. Should the Guide 3 reporting periods explicitly include interim periods so investors receive the information more frequently than once a year? 110. Should we eliminate the reporting period size threshold in Guide 3? Why or why not? 111. What is the minimum number of periods an investor needs to analyze and comprehend changes in trends? Do investors need five years of information to analyze and comprehend fully changes in trends in asset quality and loan losses? 112. If the reporting periods are reduced, should BHC registrants without reporting histories or publicly available financial information provide additional years of disclosures? IV. Closing This request for comment is not intended to limit the scope of comments, views, issues or approaches to be considered. In addition to investors and registrants, the Commission welcomes comment from other market participants and particularly welcomes statistical, empirical and other data from commenters that may support their views and/or support or refute the views or issues raised. By the Commission. Dated: March 1, 2017. Brent J. Fields, Secretary. [FR Doc. 2017-04329 Filed 3-6-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 43 / Tuesday, March 7, 2017 / Proposed Rules 12757
(h) Definitions SECURITIES AND EXCHANGE business days between the hours of
(1) For the purposes of this AD, shop visit COMMISSION 10:00 a.m. and 3:00 p.m. All comments
is defined as the removal of the tie-shaft nut received will be posted without change;
from the engine. 17 CFR Parts 210, 211, 229, 231 and the Commission does not edit personal
(2) For the purposes of this AD, access is 241 identifying information from
defined as the removal of the fan rotor [Release No. 33–10321; 34–80131; File No. submissions. You should submit only
assembly from the engine. S7–02–17] information that you wish to make
(3) For the purposes of this AD, parts available publicly.
eligible for installation are those fan disks RIN 3235–AL79
FOR FURTHER INFORMATION CONTACT:
that pass the inspections and are marked Lindsay McCord, Associate Chief
Request for Comment on Possible
with ‘‘T43374’’ adjacent to the P/N or S/N. Accountant in the Office of Chief
Changes to Industry Guide 3
(i) Alternative Methods of Compliance (Statistical Disclosure by Bank Holding Accountant, Division of Corporation
(AMOCs) Companies) Finance, at (202) 551–3400, U.S.
Securities and Exchange Commission,
(1) The Manager, Los Angeles Aircraft AGENCY: Securities and Exchange 100 F Street NE., Washington, DC
Certification Office, FAA, may approve Commission. 20549.
AMOCs for this AD. Use the procedures
ACTION: Request for comment. SUPPLEMENTARY INFORMATION:
found in 14 CFR 39.19 to make your request.
(2) Before using any approved AMOC, SUMMARY: The Commission is Table of Contents
notify your appropriate principal inspector, publishing this request for comment to
or lacking a principal inspector, the manager I. Introduction
seek public input as to the disclosures II. Applicable Disclosures
of the local flight standards district office/ called for by Industry Guide 3, A. Distribution of Assets, Liabilities and
certificate holding district office. Statistical Disclosure by Bank Holding Stockholders’ Equity; Interest Rate and
(j) Related Information Companies. The financial services Interest Differential (Average Balance,
industry has changed dramatically since Interest and Yield/Rate Analysis and
(1) For more information about this AD, Rate/Volume Analysis)
contact Joseph Costa, Aerospace Engineer,
Guide 3 was first published.
B. Investment Portfolio
Los Angeles Aircraft Certification Office, Consequently, our disclosure guidance
C. Loan Portfolio
FAA, Transport Airplane Directorate, 3960 may not in all cases reflect recent D. Summary of Loan Loss Experience
Paramount Blvd., Lakewood, CA 90712– industry developments or changes in E. Deposits
4137; phone: 562–627–5246; fax: 562–627– accounting standards related to F. Return on Equity and Assets
5210; email: joseph.costa@faa.gov. financial and other reporting G. Short-Term Borrowings
(2) For service information identified in requirements. H. Potential New Disclosures
III. Applicability of Disclosure Requirements
this AD, contact Honeywell International DATES: Comments should be received on A. Applicability to Registrants Other Than
Inc., 111 S. 34th Street, Phoenix, AZ 85034– or before May 8, 2017. Bank Holding Companies
2802; phone: 800–601–3099; Internet: https:// ADDRESSES: Comments may be B. Applicability to Foreign Registrants
myaerospace.honeywell.com/wps/portal/!ut/. submitted by any of the following C. Size Thresholds and Reporting Periods
(3) For service information on returning the methods: IV. Closing
fan disk for inspection identified in SB
TFE731–72–5256 of this AD, contact Electronic Comments I. Introduction
Honeywell International Inc., 111 S. 34th • Use the Commission’s Internet The Commission is considering
Street, Phoenix, AZ 85034–2802; phone: comment form (http://www.sec.gov/ possible revisions to its disclosure
800–601–3099; Internet: https:// rules/other.shtml); regime for bank holding companies.
myaerospace.honeywell.com/wps/portal/!ut/. • Send an email to rule-comments@ When we discuss current disclosure
(4) You may view this service information sec.gov. Please include File Number S7– guidance in this request for comment,
at the FAA, Engine & Propeller Directorate, 02–17 on the subject line; or we focus on the disclosures currently
1200 District Avenue, Burlington, MA. For • Use the Federal eRulemaking Portal called for by Industry Guide 3,
information on the availability of this (http://www.regulations.gov). Follow the Statistical Disclosure by Bank Holding
material at the FAA, call 781–238–7125. instructions for submitting comments. Companies (Guide 3).1 By its terms,
Issued in Burlington, Massachusetts on Guide 3 applies exclusively to bank
Paper Comments holding companies, although the staff
February 8, 2017.
Carlos A. Pestana, • Send paper comments to Secretary, has previously indicated that the
Securities and Exchange Commission, disclosures called for by Guide 3
Acting Manager, Engine & Propeller ‘‘should also be provided by other
100 F Street NE., Washington, DC
Directorate, Aircraft Certification Service.
20549–1090. registrants with material lending and
[FR Doc. 2017–04370 Filed 3–6–17; 8:45 am] deposit activities.’’ 2 In this request for
All submissions should refer to File
BILLING CODE 4910–13–P
Number S7–02–17. This file number comment, when we use the term ‘‘BHC
should be included on the subject line registrants,’’ we are referring to public
if email is used. To help us process and companies that apply Guide 3
review your comments more efficiently, disclosures. In light of developments in
please use only one method of
jstallworth on DSK7TPTVN1PROD with PROPOSALS
1 57 FR 36442.
submission. The Commission will post 2 Staff Accounting Bulletin Topic 11:K—
all comments on the Commission’s Web Application of Article 9 and Guide 3 (SAB 11:K).
site (http://www.sec.gov/rules/ The Industry Guides and SAB 11:K are not rules,
other.shtml). Comments also are regulations or statements of the Commission.
available for Web site viewing and Further, as with any staff guidance, the views of the
staff referenced in this request for comment are not
printing in the Commission’s Public rules or interpretations of the Commission. The
Reference Room, 100 F Street NE., Commission has neither approved nor disapproved
Washington, DC 20549, on official the views of the staff expressed herein.
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![12758 Federal Register / Vol. 82, No. 43 / Tuesday, March 7, 2017 / Proposed Rules
the financial services industry since the statistical disclosures sought by the context dictates otherwise, in this
publication of Guide 3, we are staff of the Division of Corporation request for comment, when we use the
considering modernization of the Finance in registration statements and term ‘‘banking organizations,’’ we are
nature, timing, scope and applicability other disclosure documents filed by referring to national banks, state
of Guide 3. We also encourage bank holding companies.’’ 11 The Guide member banks, Federal savings
commenters to consider registrants 3 release noted that ‘‘as the operations associations, and top-tier bank holding
other than BHC registrants with material of bank holding companies have companies domiciled in the United
amounts of activities in the areas diversified, it has become increasingly States not subject to the FRB’s Small
addressed in Guide 3 3 when responding difficult for investors to identify the Bank Holding Company Policy
to this request for comment. sources of income of such Statement (12 CFR part 225, appendix
The goal of the Commission’s companies.’’ 12 The Division believed C), as well as top-tier savings and loan
disclosure system is to ensure that that disclosure of the same statistical holding companies domiciled in the
investors receive the information they information on a regular, periodic basis United States, except certain savings
need to make informed investment and would assist in assessing their future and loan holding companies that are
voting decisions.4 Many of the earning potential and enable investors substantially engaged in insurance
Commission’s disclosure requirements to compare bank holding companies.13 underwriting or commercial activities.18
are found in Regulation S–K,5 which is In drafting Guide 3, the staff was Guide 3 has been amended over time to
the central repository of non-financial ‘‘mindful of the investor’s need to assess provide more uniformity and
statement disclosure requirements, and uncertainties, the need for disclosure consistency between the Guide and
Regulation S–X,6 which prescribes the with respect to changes in risk Article 9 and to elicit additional
form and content of and requirements characteristics, and specifically the need information about various risk elements
for financial statements. These for substantial and specific disclosure of involved in deposit and lending
requirements generally apply to all changes in risk characteristics of loan activities,19 although the last
registrants, regardless of industry. In portfolios.’’ 14 Consequently, Guide 3 substantive revision of Guide 3 took
some instances, the Commission has called for ‘‘more meaningful disclosure place in 1986.20
determined that registrants in specific about loan portfolios and related items
Purpose of This Request for Comment
industries, such as bank holding in filings by bank holding companies’’ 15
companies, should provide additional than had been generally available prior Since the last substantive revisions to
disclosures. For example, Subpart 1200 to implementation of Guide 3. Guide 3 Guide 3, the Commission has issued
also requests information with respect disclosure requirements and
of Regulation S–K 7 contains additional
to a BHC registrant’s foreign operations guidelines 21 and the Financial
disclosure requirements for oil and gas
on the basis that it believes is Accounting Standards Board (FASB) 22
producing companies. The Commission
also recently proposed to consolidate representative of its foreign activities
18 See Regulatory Capital Rules: Regulatory
the property disclosure requirements for and the risks associated with such
Capital, Implementation of Basel III, Capital
mining registrants in a new Subpart business. The staff’s view was that such Adequacy, Transition Provisions, Prompt Corrective
1300 of Regulation S–K.8 Similarly, the ‘‘information [would] assist investors to Action, Standardized Approach for Risk-weighted
Commission has adopted disclosure evaluate the potential impact of future Assets, Market Discipline and Disclosure
economic events upon a registrant’s Requirements, Advanced Approaches Risk-Based
requirements and published guidance Capital Rule, and Market Risk Capital Rule. (Oct.
specific to bank holding companies, business and earnings and to assess the 11, 2013) [78 FR 62017] (Regulatory Capital Rules).
such as Article 9 of Regulation S–X ability of a bank holding company to 19 Amendments to Guides for Statistical
(Article 9),9 which sets forth the move into or out of situations with Disclosure by Bank Holding Companies, Release
Commission’s rules for the form and favorable or unfavorable risk/return No. 33–6221 (July 8, 1980) [45 FR 47138] (1980
characteristics.’’ 16 In adopting Guide 3, Guide 3 Amendments Release); Revision of
content of consolidated bank holding Financial Statement Requirements and Industry
company financial statements and bank the staff consulted extensively with Guide Disclosure for Bank Holding Companies,
financial statements included in filings representatives of the Board of Release No. 33–6458 (Mar. 7, 1983) [48 FR 11104];
with the Commission. Governors of the Federal Reserve Revision of Industry Guide Disclosures for Bank
System (FRB), the Office of the Holding Companies, Release No. 33–6478 (Aug. 11,
Industry Guide 3 was first published 1983) 48 FR 37609 (1983 Guide 3 Revisions
Comptroller of the Currency (OCC) and
in 1976 10 as ‘‘a convenient reference to Release); Notification of Technical Amendments to
the Federal Deposit Insurance Securities Act Industry Guides, Release No. 33–
3 Guide 3 is divided into seven sections, each Corporation (FDIC) (collectively, U.S. 9337 (Jul. 13, 2012) [77 FR 42175].
covering a distinct area of statistical disclosure: (I) banking agencies), which regulate 20 Guide 3’s last substantive revision, which
Distribution of Assets, Liabilities and Stockholders’ banking organizations.17 Unless the added disclosures regarding loans and extensions of
Equity; Interest Rates and Interest Differential, (II) credit to borrowers in countries experiencing
Investment Portfolio, (III) Loan Portfolio, (IV) liquidity problems, occurred in 1986. See
redesignated as Securities Act Industry Guide 3 and Amendments to Industry Guide Disclosures by
Summary of Loan Loss Experience, (V) Deposits, Exchange Act Industry Guide 3. See Rescission of
(VI) Return on Equity and Assets, and (VII) Short- Bank Holding Companies, Release No. 33–6677
Guides and Redesignation of Industry Guides, (Nov. 25, 1986) [51 FR 43594].
Term Borrowings. Release No. 33–6384 (Mar. 16, 1982) [47 FR 11476]. 21 For example, the Commission adopted Item 305
4 Adoption of Integrated Disclosure System,
When it published the Guide 3 Release, the of Regulation S–K in 1997. Disclosure of
Release No. 33–6383 (Mar. 3, 1982) [47 FR 11380]. Commission stated that ‘‘[t]he Guides are not
5 17 CFR 229.10 et seq. Accounting Policies for Derivative Financial
Commission rules nor do they bear the
Instruments and Derivative Commodity Instruments
6 17 CFR 210.1–01 et seq. Commission’s official approval; they represent
and Disclosure of Quantitative and Qualitative
7 17 CFR 229.1201 through 1208. policies and practices followed by the
Information about Market Risk Inherent in
jstallworth on DSK7TPTVN1PROD with PROPOSALS
8 Modernization of Property Disclosures for Commission’s Division of Corporation Finance in
administering the disclosure requirements of the Derivative Financial Instruments, Other Financial
Mining Registrants, Release No. 33–10098 (June 16, Instruments and Derivative Commodity
federal securities laws.’’
2016) [81 FR 41651] (Mining Disclosures Release). 11 Guide 3 Release at 39008. Instruments, Release No. 33–7386 (Jan. 31, 1997)
9 17 CFR 210.9–01 through 9–07. [62 FR 6044] (Disclosure of Market Risk Sensitive
12 Id.
10 Guides for Statistical Disclosure by Bank Instruments Release).
13 Id.
Holding Companies, Release No. 33–5735 (Aug. 31, 22 The Commission has broad authority and
14 Id.
1976) [41 FR 39007] (Guide 3 Release). Guide 3 was responsibility under the federal securities laws to
15 Id.
originally published as Securities Act Guide 61 and prescribe the methods to be followed in the
16 Id.
Exchange Act Guide 3. In 1982, Securities Act preparation of accounts and the form and content
Guide 61 and Exchange Act Guide 3 were 17 Id. of financial statements to be filed under those laws.
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![Federal Register / Vol. 82, No. 43 / Tuesday, March 7, 2017 / Proposed Rules 12759
has issued accounting standards that financial institutions continues to • Article 4 of Regulation S–X 30
have changed the reporting obligations dominate derivatives activity in the U.S. requires financial statements for
for all registrants generally. In addition, commercial banking system. During the domestic registrants to comply with
various international, federal and state third quarter of 2016, four large U.S. GAAP, which in turn contains
regulatory, supervisory and standard- commercial banks represented 89.7 disclosure requirements that apply
setting bodies 23 require entities within percent of the total banking industry specifically to the financial services
their respective remits to publish a wide notional amounts and 84.4 percent of industry.31
range of quantitative and qualitative industry net credit exposure.26 • Item 303 of Regulation S–K,32
disclosures. Consequently, some of the In this request for comment, we Management’s discussion and analysis
disclosures called for by Guide 3, which describe each disclosure section in of financial condition and results of
are focused on the needs of an investor, Guide 3 in turn, as well as related operations (MD&A), requires a
may be duplicative of or overlap with disclosures required by Commission
discussion and analysis of the
subsequently adopted Commission rules, U.S. GAAP and the U.S. banking
underlying causes of material changes
rules, accounting principles generally agencies,27 and we ask for public input
in financial statement line items, as well
accepted in the United States (U.S. about how and to what extent the Guide
as the material trends and uncertainties
GAAP) or disclosures mandated by 3 disclosure regime could be improved.
that may have a material impact on a
other regulatory, supervisory or We seek input on new or revised
registrant’s results of operations,
standard-setting regimes. disclosure or the elimination of what
liquidity or capital resources.33
Furthermore, the financial services may be duplicative or overlapping
industry has evolved significantly since disclosures in Guide 3. We also seek • Item 305 of Regulation S–K,34
Guide 3 was first published. Bank input on whether any of the Guide 3 Quantitative and qualitative disclosures
holding companies and financial disclosures, which are not Commission about market risk, requires disclosures
holding companies today conduct a rules or requirements, should be about market risks, including interest
wider array of activities than was the codified as Commission rules.28 rate risk. Interest rate risk is a significant
case at the time of Guide 3’s Because we are considering risk for registrants whose balance sheets
publication.24 Moreover, the use of modernization of the scope and are concentrated in interest-earning
financial instruments has also evolved. applicability of Guide 3, we also assets and interest-bearing liabilities.
For example, 1,438 insured U.S. encourage commenters to consider • Item 2.02 of Form 8–K requires
commercial banks and savings registrants other than bank holding registrants that make any public
associations reported derivatives companies when recommending announcement or release material non-
activities at the end of the third quarter improvements to the disclosure regime. public information about their results of
of 2016.25 A small group of large operations or financial condition for a
Sources of Disclosures
completed quarter or annual period to
See, e.g., Sections 7 and 19(a) and Schedule A, In addition to Article 9 and Guide 3, furnish the information as an exhibit to
Items (25) and (26) of the Securities Act of 1933 [15 various Commission rules and Form 8–K. Among other things, this
U.S.C. 77a et seq.] (Securities Act) and Sections accounting standards applicable to
3(b), 12(b) and 13(b) of the Securities Exchange Act requirement applies to earnings releases
of 1934 [15 U.S.C. 78a et seq.] (Exchange Act). To registrants in all industries govern the and investor presentations.35
assist it in meeting this responsibility, the disclosures that bank holding
Commission historically has looked to private companies provide in Commission A wide range of information is
sector standard-setting bodies designated by the
filings. For example: 29 publicly available beyond what is called
accounting profession to develop accounting for by the Commission’s disclosure
principles and standards. In 2002, in accordance
with criteria established by the Sarbanes-Oxley Act, Comptroller of the Currency, available at https:// requirements and guidance. For
the Commission designated the FASB as the private www.occ.gov/topics/capital-markets/financial- example:
sector accounting standard setter for U.S. financial markets/derivatives/derivatives-quarterly-
reporting. See Commission Statement of Policy report.html. • The U.S. banking agencies require
Reaffirming the Status of the FASB as a Designated 26 Id. their regulated banking organizations to
Private-Sector Standard Setter, Release No. 33–8221 27 The descriptions in this request for comment file publicly available Consolidated
(Apr. 25, 2003) [68 FR 23333]. The IASB, which is are provided for the convenience of commenters
subject to oversight by the IFRS Foundation, is
Reports of Condition and Income (Call
and to facilitate the comment process. These
responsible for IFRS and establishes its own descriptions, particularly the descriptions of
standard-setting agenda. For further information, applicable bank regulatory requirements and U.S. 30 17 CFR 210.4–01 through 4–10.
see http://www.ifrs.org/About-us/Pages/IFRS- GAAP, should not be taken as Commission or staff 31 U.S. GAAP includes industry-specific
Foundation-and-IASB.aspx. guidance about the relevant rules or standards. accounting and reporting guidance for the financial
23 In the United States, for example, the U.S. 28 In 1996, the Commission’s Task Force on
services industry in Accounting Standards
banking agencies regulate and supervise banking Disclosure Simplification recommended relocating Codification (ASC) 940 to 950. U.S. GAAP
organizations. The Basel Committee on Banking the industry guides, including Guide 3, into categorizes the financial services industry
Supervision (BCBS) is an example of an Regulation S–K. Report of the Task Force on disclosures by the following: Broker Dealers,
international standard-setter for the prudential Disclosure Simplification (Mar. 5, 1996), available Depository and Lending, Insurance, Investment
regulation of banks. The BCBS develops at http://www.sec.gov/news/studies/smpl.htm. Companies, Mortgage Banking, and Title Plant.
international regulatory capital standards through a Currently, Instruction 13 to Regulation S–K Item 32 17 CFR 229.303.
number of capital accords and related publications. 303(a) directs the attention of bank holding 33 See Commission Guidance Regarding
The United States is a participating member of the companies to the information called for by Guide
BCBS, and the U.S. banking agencies generally Management’s Discussion and Analysis of Financial
3. In 2008, the Commission modernized the
implement BCBS standards through a notice and reporting requirements applicable to oil and gas Condition and Results of Operations, Release No.
comment process. For more information, see http:// reserves and codified the disclosures formerly in 33–8350 (Dec. 19, 2003) [68 FR 75056] (Interpretive
www.bis.org/bcbs/history.pdf. Guidance on MD&A).
jstallworth on DSK7TPTVN1PROD with PROPOSALS
Industry Guide 2 into Regulation S–K.
24 For example, some banking organizations 34 17 CFR 229.305.
Modernization of Oil and Gas Reporting, Release
35 Registrants sometimes provide investor
engage in activities involving physical No. 33–8995 (Dec. 31, 2008) [74 FR 2158].
commodities, insurance, investment management, 29 The rules and accounting standards in these presentations that contain extensive information
asset management and broker-dealer activities. See examples apply to domestic registrants. Foreign that is not required to be disclosed by Commission
also Henry T. C. Hu, Disclosure Universes and private issuers are subject to similar Commission rules or accounting standards. For example, some
Modes of Information: Banks, Innovation, and disclosure requirements. For example, Form 20–F registrants disclose calculations for capital ratios to
Divergent Regulatory Quests, 31 Yale Journal on requires a discussion of the foreign private issuer’s which they are not yet subject. In addition, some
Regulation 565 (2014) at pages 590–592. financial condition, changes in financial condition registrants disclose their deposit spreads for each
25 See Quarterly Report on Bank Derivatives and results of operations and quantitative and category of deposits, while disclosing in MD&A
Activities, Third Quarter 2016, Office of the qualitative disclosures about market risk. their deposit spread on an aggregated basis only.
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![12760 Federal Register / Vol. 82, No. 43 / Tuesday, March 7, 2017 / Proposed Rules
Reports), on a quarterly basis.36 The companies and certain consolidated • Large bank holding companies are
FRB also requires bank holding subsidiary depositary institutions subject to the FRB’s annual
companies to file publicly available data thereof are subject to a liquidity comprehensive capital analysis and
separately on a consolidated basis.37 coverage ratio (LCR) requirement. The review (CCAR) and Dodd-Frank Wall
Because these reports are prepared LCR requirement is designed to promote Street Reform and Consumer Protection
based on bank regulatory reporting the short-term resilience of the liquidity Act (Dodd-Frank Act) 43 stress testing
requirements, the information they risk profile of covered organizations, (DFAST).44 Some bank holding
contain is not necessarily identical to thereby improving the financial services companies subject to these stress testing
the information in Commission filings. industry’s ability to absorb shocks requirements issue press releases
• Banking organizations are subject to arising from financial and economic announcing their CCAR and DFAST
the regulatory capital framework and stress, and to further improve the results and furnish the press releases as
the associated disclosures adopted by measurement and management of Form 8–K exhibits. The FRB generally
the U.S. banking agencies. The current liquidity risk. It requires covered publishes the CCAR results, and
regulatory capital framework, known as organizations to maintain adequate banking organizations’ primary bank
‘‘Basel III,’’ was first phased in levels of ‘‘high-quality liquid assets.’’ 40 regulatory agencies generally publish
beginning on January 1, 2014 and Basel III also introduced, and the U.S. the DFAST results. These results are
became effective for all U.S. banking banking agencies have proposed, a net published both in summary form and on
organizations on January 1, 2015.38 U.S. stable funding ratio (NSFR) an organization-by-organization basis.
GAAP requires disclosure describing the requirement, a liquidity measure that
capital requirements and compliance Public Comments on Guide 3
would require large, internationally
with those requirements on an annual active banking organizations to maintain Over the years, the Commission has
basis.39 sufficient levels of ‘‘stable funding’’ to continuously evaluated its disclosure
• Large, internationally active reduce liquidity risk in the banking system and engaged periodically in
banking organizations, certain system.41 rulemakings designed to enhance its
designated nonbank financial • Under Basel III, certain banking disclosure and registration
organizations are subject to public requirements. This request for comment
36 Every national bank, state member bank,
disclosure requirements intended to is part of the staff’s broad-based review
insured state nonmember bank, and savings of the Commission’s disclosure regime.
association is required to file periodic consolidated allow market participants to assess an
As part of this effort, the staff
Call Reports. These banking organizations may not organization’s capital adequacy (Pillar
be the entities that file reports with the requested public input generally on how
3).42
Commission, which typically are the bank holding the Commission’s disclosure system
companies. For Call Report instructions and forms,
40 The U.S. banking agencies adopted the LCR
could be improved for the benefit of
see http://www.ffiec.gov/ffiec_report_forms.htm. both companies and investors,45 and a
Call Reports must be filed 30 to 35 calendar days rule effective January 1, 2015 for large and
after the report date, depending on whether the filer internationally active banking organizations, concept release on the business and
has a foreign office. The discussion of Call Reports generally, bank holding companies, certain savings financial disclosure requirements in
in this request for comment is based on the and loan holding companies, and depository Regulation S–K 46 requests comment on
reporting requirements applicable to banking institutions with $250 billion or more in total assets
organizations as of December 31, 2016. or $10 billion or more in on balance sheet foreign the Commission industry guides.47 Over
37 The FRB collects basic financial data on a exposure and their consolidated subsidiaries that
consolidated basis from domestic bank holding are depository institutions with $10 billion or more Corrective Action, Standardized Approach for Risk-
companies, savings and loan holding companies in total consolidated assets. In addition, a modified weighted Assets, Market Discipline and Disclosure
and securities holding companies on Form FR Y– minimum LCR requirement applies to bank holding Requirements, Advanced Approaches Risk-Based
9C. companies and savings and loan holding companies Capital Rule, and Market Risk Capital Rule (Oct. 11,
38 The BCBS developed international regulatory without significant insurance or commercial 2013) [78 FR 62018] (Regulatory Capital Rules
capital standards through a number of capital operations that are not internationally active and, Release).
accords and related publications, which have in each case, have $50 billion or more in total 43 Public Law 111–203, 124 Stat. 1376 (2010).
collectively been in effect since 1998. Basel III is a consolidated assets. See Liquidity Coverage Ratio: 44 Banking organizations with $50 billion or more
comprehensive set of reform measures, developed Liquidity Risk Measurement Standards (Oct. 10, in total consolidated assets are subject to the full
by the BCBS, to strengthen the regulation, 2014) [79 FR 61440] (LCR Adopting Release). scope of these tests. DFAST testing and disclosure
supervision, and risk management of the banking In December 2016, the FRB adopted quarterly requirements are significantly reduced for banking
sector. The measures include both liquidity and public disclosure requirements related to the LCR organizations with $10 billion to $50 billion in total
capital reforms. See http://www.federalreserve.gov/ requirement, including disclosure of the inputs to consolidated assets. See https://www.federal
bankinforeg/basel/. the LCR calculation. The effective date is scaled reserve.gov/newsevents/press/bcreg/2015
The Basel III framework is based on the following based on organization size, and only those covered 0602a.htm.
three pillars: (1) Minimum capital requirements, (2) organizations with $700 billion or more in total The FRB uses CCAR to assess whether a banking
supervisory review process, and (3) market consolidated assets or $10 trillion or more in assets organization has sufficient capital to continue
discipline disclosures. See Regulatory Capital under custody must comply in 2017. See Liquidity operations in times of economic and financial stress
Rules. Coverage Ratio: Public Disclosure Requirements; and to ensure that the organization maintains a
39 ASC 942–505–50. The ratios and amounts Extension of Compliance Period for Certain robust, forward-looking capital planning process
required to be disclosed, if applicable, include: (1) Companies to Meet the Liquidity Coverage Ratio that accounts for the unique risks it faces. See
Tier 1 leverage, (2) Tier 1 risk-based and total risk- Requirements (Dec. 27, 2016) [81 FR 94922]. http://www.federalreserve.gov/bankinforeg/
based capital, (3) tangible capital, and (4) Tier 3 41 In May 2016, the U.S. banking agencies ccar.htm. The U.S. banking agencies use DFAST to
capital for market risk. Registrants should disclose proposed a rule that would establish a minimum assess whether a banking organization has sufficient
any other regulatory limitations that could NSFR threshold applicable to covered organizations capital to absorb losses and support operations
materially affect their economic resources and and would require public disclosure of the NSFR, during adverse economic conditions. See http://
claims to those resources. its components and a discussion of certain www.federalreserve.gov/newsevents/press/bcreg/
Entities within the scope of ASC 942 include the qualitative features of it. If adopted, the rule would bcreg20150602a1.pdf.
jstallworth on DSK7TPTVN1PROD with PROPOSALS
become effective on January 1, 2018 and is tailored 45 Comment letters related to this request are
following: (a) Finance companies; (b) depository
institutions; (c) bank holding companies; (d) to the size of the organization. See Net Stable available at http://www.sec.gov/spotlight/
savings and loan association holding companies; (e) Funding Ratio: Liquidity Risk Measurement disclosure-effectiveness.shtml.
branches and agencies of foreign banks regulated by Standards and Disclosure Requirements (May 3, 46 Business and Financial Disclosure Required by
U.S. federal banking regulatory agencies; (f) state- 2016) [81 FR 35123]. Regulation S–K, Release No. 33–10064 (Apr. 13,
chartered banks, credit unions and savings 42 Pillar 3 disclosure requirements apply to 2016) [81 FR 23915] (Regulation S–K Concept
institutions that are not federally insured; (g) banking organizations with $50 billion or more in Release).
foreign financial institutions that present U.S. total assets. See Regulatory Capital Rules: 47 Comment letters related to the Regulation S–K
GAAP financial statements; (h) mortgage Regulatory Capital, Implementation of Basel III, Concept release are available at https://
companies; and (i) corporate credit unions. Capital Adequacy, Transition Provisions, Prompt www.sec.gov/comments/s7-06-16/s70616.htm.
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![12762 Federal Register / Vol. 82, No. 43 / Tuesday, March 7, 2017 / Proposed Rules
of which will or may change in the significant impact on a BHC registrant’s • average rate paid for each major
future.59 To focus the discussion, this performance, and that impact may not category of interest-bearing liability;
request for comment describes the be evident from analyzing historical • average yield on all interest-earning
disclosures applicable to domestic results alone. assets;
registrants that are not smaller reporting As called for by Guide 3, average • average effective rate paid on all
companies 60 or emerging growth balance sheets 64 provide investors with interest-bearing liabilities; and
companies 61 and that do not provide an indication of the balance sheet items • net yield on interest-earning
scaled Guide 3 disclosures.62 We that have been most affected by changes assets.68
discuss the applicability of these in interest rates and an indication of a Section I.C of Guide 3 calls for a rate
disclosures to foreign registrants, registrant’s ability to move into or out of and volume analysis of interest income
smaller reporting companies, emerging situations with favorable or unfavorable and interest expense for the last two
growth companies and smaller bank risk/return characteristics. For example, fiscal years. This analysis should be
holding companies in Section III. We an average balance sheet may provide segregated by each major category of
also consider whether disclosures an indication of whether a registrant is interest-earning asset and interest-
beyond or in lieu of those currently asset-sensitive or liability-sensitive.65 bearing liability into amounts
applicable would be important for Liability-sensitive BHC registrants that attributable to:
investors. rely heavily on short-term and other • changes in volume (changes in
rate-sensitive funding sources may volume multiplied by the old rate);
A. Distribution of Assets, Liabilities and experience significant increases in
Stockholders’ Equity; Interest Rate and • changes in rates (changes in rates
funding costs in a rising interest rate multiplied by the old volume); and
Interest Differential (Average Balance, environment. Such BHC registrants may
Interest and Yield/Rate Analysis and • changes in rate/volume (changes in
be unable to offset higher funding costs
Rate/Volume Analysis) rates multiplied by changes in volume).
with higher yielding assets, which could
1. Background result in an adverse impact on net 3. Other Sources of Information
interest margins. i. Information Available in SEC Filings
Net interest income represented more
than 64% of total net operating revenue 2. Current Guide 3 Disclosures as Required by Commission Rules and
for all FDIC-insured institutions for the Section I.A of Guide 3 calls for Accounting Standards
first three quarters of 2016.63 Given the balance sheets that show the average Article 9 prescribes the form and
significance of net interest income to the daily balances of significant categories content of consolidated financial
results of operations, it is important for of assets and liabilities, including all statements for bank holding companies
investors to understand the reasons for major categories of interest-earning and requires presentation of interest
its fluctuations. A BHC registrant’s assets and interest-bearing liabilities.66 income and interest expense separately
future earnings depend significantly on Section I.B of Guide 3 calls for by type and subtotals of total interest
present and future economic conditions. disclosure of the: income, interest expense and net
Changes in interest rates can have a • Interest earned or paid 67 on the interest income on the income statement
average amount of each major category or in the footnotes to the financial
as ‘‘current’’ and highlight separately throughout of interest-earning asset and interest- statements.69 In addition, all registrants
this request for comment standards that have been bearing liability; must discuss their financial condition,
issued but are not yet effective.
59 For example, in 2016 the FASB issued two new
• average yield for each major changes in financial condition and
accounting standards that modify the accounting for
category of interest-earning asset; results of operations in MD&A,
and disclosure of financial assets and liabilities. See including a narrative discussion of the
the discussion of these new standards in Sections 64 Section I.A of Guide 3 calls for balance sheets
that show the average daily balances of significant
extent to which any material increases
2.B, 2.C and 2.D of this request for comment.
60 Exchange Act Rule 12b–2 [17 CFR 240.12b–2] categories of assets and liabilities. If the collection are attributable to increases in price or
defines a smaller reporting company as an issuer of data on a daily average basis, however, would increases in volume. MD&A requires
that is not an investment company, an asset-backed involve unwarranted or undue burden or expense, registrants to describe significant
issuer or a majority-owned subsidiary of a parent weekly or month end averages may be used,
provided they are representative of the operations components of revenues or expenses
that is not a smaller reporting company and that has
a public float of less than $75 million. If an issuer of the BHC registrant. The basis used for presenting that, in the registrant’s judgment, should
has zero public float, it is considered a smaller averages should be disclosed when not presented be described in order to understand the
reporting company if its annual revenues are less on a daily average basis. results of operations.70 In response to
65 A liability-sensitive banking organization has a
than $50 million. this requirement, some bank holding
61 Section 2(a)(19) of the Securities Act defines an long-term asset maturity and repricing structure,
relative to a shorter-term liability structure. For companies provide an analysis of
emerging growth company as an issuer that had
total annual gross revenues of less than $1 billion
example, a liability-sensitive BHC registrants may fluctuations in their interest income and
have significant exposure to longer-term mortgage- interest expense in MD&A. Another
during its most recently completed fiscal year. It
related assets that reprice slowly while relying
retains that status for five years after its initial heavily on rate-sensitive funding sources that source of income for bank holding
public offering unless its revenues are $1 billion or reprice more quickly. companies that may be discussed in
more, it issues more than $1 billion of non-
convertible debt during the previous three-year
66 Section I.A of Guide 3 indicates that major
MD&A is non-interest income. Because
categories of interest-earning assets should include Guide 3 currently does not call for
period, or it qualifies as a large accelerated filer as
loans, taxable investment securities, non-taxable
defined in Exchange Act Rule 12b–2. investment securities, interest-bearing deposits in specific disclosures regarding this type
62 For bank holding companies with less than
other banks, federal funds sold, securities of income, we discuss non-interest
$200 million in total assets or less than $10 million
jstallworth on DSK7TPTVN1PROD with PROPOSALS
purchased with agreements to resell, other short-
of equity, Guide 3 calls for only two years of data, term investments and other assets. Major categories 68 Net yield is net interest earnings divided by
as opposed to three or five years of data, depending of interest-bearing liabilities should include savings
on the item, for all other registrants. deposits, other time deposits, short-term debt, long- total interest-earning assets, with net interest
63 Unless otherwise indicated, industry-wide term debt and other liabilities. earnings equaling the difference between total
percentages used in this request for comment were 67 The interest earned and interest paid reported interest earned and total interest paid.
69 17 CFR 210.9–04. The types of interest income
calculated using information from FDIC Quarterly, on the average balance sheet is based on the
which includes data for all FDIC-insured amounts reported in the audited financial or interest expense include loans, investment
institutions and is available at https:// statements. Under U.S. GAAP, reported interest securities, trading accounts, deposits, short-term
www.fdic.gov/bank/analytical/quarterly/2016_ expense may differ from the cash paid for interest borrowings and long-term debt.
vol10_4/fdic_v10n4_3q16_quarterly.pdf. during the period. 70 17 CFR 229.303(a)(3).
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income in Section H. Potential New registrant to another. The staff has sufficient capital to cover possible
Disclosures. observed that large bank holding losses due to interest rate changes.76
Other rule provisions require companies generally elect to use a According to the BCBS, adverse
registrants to provide quantitative and combination of disclosure alternatives movements in interest rates can pose a
qualitative disclosures about market risk to present different market risk sensitive significant threat to a bank’s current
sensitive instruments, both trading and instruments. An example of how a bank capital base and/or future earnings.
other than trading instruments, that holding company may use multiple However, U.S. GAAP does not require a
affect their financial condition.71 disclosure alternatives for its Item 305 presentation or disclosure of net interest
Interest rate risk generally is a disclosures is to use VaR to quantify earnings or average balance sheets.
significant market risk exposure for BHC market risks for its entire trading Nearly five years ago, the FASB
registrants. These disclosures, made in portfolio while using a sensitivity proposed the following standardized
response to Item 305 of Regulation S–K, analysis to quantify interest rate risk for quantitative interest rate risk
are intended to provide investors with the other than trading portfolio. disclosures:
forward-looking information about a Registrants must describe the disclosure • The carrying amount of classes of
registrant’s potential interest rate risk alternative or alternatives they select to financial assets and liabilities segregated
exposure, while the disclosures called assist investors with evaluating the according to time intervals based on the
for by Item I of Guide 3 focus on the potential effect of variations in a contractual repricing of the financial
historical effect. Item 305 requires a model’s characteristics and instruments;
description of the quantitative impact of assumptions. One consequence of the • the weighted-average contractual
market risk and provides flexibility by disclosure alternative approach used in yield by class of financial instrument
allowing one or more of the following Item 305 is that registrants may provide and time interval as well as the duration
three disclosure alternatives to be used: disclosure using alternatives that differ for each class of financial instrument;
• A tabular presentation of fair value from the methods they actually use to • an interest rate sensitivity table
information and contract terms relevant manage, evaluate and monitor market showing the effects on net income and
to determining future cash flows, risk. Commenters have suggested that shareholders’ equity of specified
categorized by expected maturity dates. management’s views about market risk hypothetical, instantaneous shifts of
• A sensitivity analysis expressing and risk management activities, rather interest rate curves as of the
potential loss in future earnings, fair than one of the three prescribed measurement date;
values or cash flows from selected methods, represent the most relevant • a discussion of the significant
hypothetical changes in market rates information for investors.74 However, changes and reasons for those changes
and prices. when Item 305 was adopted, the related to the timing and amounts of
• Value at risk (VaR) disclosures Commission believed that a financial assets and liabilities in the
expressing potential loss in future presentation of market risk using a tabular disclosures from the last
earnings, fair values or cash flows from management approach outside of the reporting period to the current reporting
market movements over a selected framework articulated in Item 305 could period along with any action taken to
period of time with a selected likelihood make it difficult for investors to assess manage the exposure related to the
of occurrence. market risk across registrants.75 changes; and
Item 305 of Regulation S–K addresses During the last five years, other • additional qualitative or narrative
risks arising from changes in interest regulatory agencies and the private disclosure, as necessary, for
rates, foreign currency exchange rates, sector have given increased attention to understanding of exposure to interest
commodity prices, equity prices and market risk disclosures. For example, in rate risk.77
other market changes that affect market 2012 the Financial Stability Board’s During the FASB Exposure Draft’s
risk sensitive instruments and was Enhanced Disclosure Task Force development, the FASB received
designed to strike a balance between (EDTF), a private sector group feedback from users 78 that it was
comparability and flexibility of market composed of members representing imperative that liquidity and interest
risk disclosures by prescribing these users and preparers of financial reports, rate disclosures be comparable and that
alternatives without stipulating recommended that banking standardized quantitative disclosures
standardized methods or procedures organizations provide information that provide more decision-useful
specifying how to comply with each facilitates users’ understanding of the information than non-standardized
alternative.72 Registrants may choose linkages between line items in the disclosures. Although initiated, in part,
which methods, model characteristics, balance sheet and income statement as a response to these comments, the
assumptions and parameters they use in with positions included in the market
complying with the item, and registrants risk disclosures. The EDTF report 76 See Interest rate risk in the banking book (April
may use more than one disclosure included 32 recommendations for 2016), available at https://www.bis.org/bcbs/publ/
alternative across each market risk improving bank risk disclosures in the d368.pdf.
77 The proposed disclosures would have applied
exposure category.73 Consequently, areas of report usability, risk governance
only to entities or reportable segments for which the
investors may be unable to compare one and risk management, capital adequacy, primary business activity is to (i) earn, as a primary
liquidity and funding, market risk, source of income, the difference between interest
71 Items 305(a) and 305(b) of Regulation S–K [17
credit risk and other risks. income generated by earning assets and interest
CFR 229.305(a) and 305 (b)]. For purposes of Items paid on borrowed funds or (ii) provide insurance.
305(a) and 305(b), market risk sensitive instruments
In addition, the BCBS has focused on
See Proposed Accounting Standards Update—
jstallworth on DSK7TPTVN1PROD with PROPOSALS
include derivative financial instruments, other whether banking organizations have Financial Instruments (Topic 825): Disclosure
financial instruments and derivative commodity About Liquidity Risk and Interest Rate Risk (Jun. 27,
instruments. Each of these terms is defined in 74 See, e.g., CAQ Letter and KPMG Letter. 2012) (FASB Interest Rate Risk Exposure Draft),
General Instruction 3 to Items 305(a) and 305(b). 75 The Commission noted that, in adopting Item available at www.fasb.org.
72 See Disclosure of Market Risk Sensitive
305, it sought to strike a balance between the views 78 See Accounting for Financial Instruments
Instruments Release. of commenters seeking a ‘‘management approach’’ Disclosures About Liquidity Risk and Interest Rate
73 Market risk exposure categories include and those supporting a more consistent reporting Risk Comment Letter Summary, available at http://
interest rate risk, foreign currency exchange rate framework for the sake of comparability. See www.fasb.org/cs/ContentServer?c=Document_
risk, commodity price risk and other relevant Disclosure of Market Risk Sensitive Instruments C&pagename=FASB%2FDocument_
market risks. Release. C%2FDocumentPage&cid=1176160500931.
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investment securities constituted nearly guidance is effective for registrants in Guide 3 calls for disclosure of book
21% of the total assets of all FDIC- fiscal years beginning after December value.91
insured institutions.84 15, 2019 or fiscal years beginning after Accounting standards have similar
Banking organizations typically use December 15, 2018 if early adoption is disclosure requirements, although the
their investment portfolios to provide elected. Both ASU 2016–01 and ASU disclosures required by U.S. GAAP are
balance sheet liquidity, to generate 2016–13 also will change U.S. GAAP more extensive than those required by
income and to engage in risk disclosure requirements for investment Guide 3.92 For example, U.S. GAAP
management and market-making. U.S. securities.89 currently requires the following
GAAP currently classifies investment Guide 3 investment portfolio disclosures for AFS securities by major
securities into three categories: Trading disclosures provide investors with security type: 93
securities, held-to-maturity (HTM) insight into the types of investments a • Amortized cost basis;
securities and available-for-sale (AFS) BHC registrant holds, the earnings
• aggregate fair value;
securities.85 Trading securities include potential of those investments and their
risk characteristics. For example, the • total other-than-temporary
securities acquired for the purpose of impairment (OTTI) recognized in
selling them within hours or days and weighted average yield for a category of
securities allows investors to calculate accumulated other comprehensive
securities for which this category has income (AOCI);
been elected. HTM securities are limited estimated future earnings potential for
that category of securities. Disclosures • total gains for securities with net
to securities that a registrant has the
about significant amounts of gains in AOCI;
positive intent and ability to hold to
maturity. Securities not classified as investments in one or a small number of • total losses for securities with net
trading or HTM are classified as AFS issuers also alert investors to losses in AOCI; and
securities. Both trading and AFS concentration risks. • information about the contractual
securities are measured at fair value on maturities as of the date of the most
2. Current Guide 3 Disclosures
the balance sheet, whereas HTM recent balance sheet presented.94
Section II.A of Guide 3 calls for U.S. GAAP requires similar
securities are measured at amortized
disclosure of the book value of disclosures for HTM securities, except
cost.
investments by specified category as of that gross unrecognized holding gains
In 2016, the FASB issued two new
the end of each reported period. Section and losses also must be disclosed.95 U.S.
accounting standards for financial
II.B calls for a maturity analysis for each GAAP also requires a maturity analysis
instruments.86 ASU 2016–01 will
category of investments as of the end of of both AFS and HTM securities, but it
change the accounting guidance for
the latest reported period, as well as the does not require disclosure of weighted
equity investments, but does not affect
weighted average yield for each range of average yields.96 ASU 2016–13, when
the recognition and initial measurement
maturities.90 When the aggregate book effective for registrants in fiscal years
of investments in debt securities.87 This
value of securities from a single issuer after December 15, 2019, will not
guidance is effective for registrants in
exceeds 10% of stockholders’ equity as significantly change the disclosure
fiscal years beginning after December
of the end of the latest reported period, requirements described above, except
15, 2017. ASU 2016–13 will change the
Section II.C calls for disclosure of the that it will require disclosure of the
impairment model for most financial
name of the issuer and the aggregate
assets accounted for at amortized cost,
book value and aggregate market value
including HTM debt securities, and also 91 17 CFR 210.9–03. The investment categories
of those securities. specified by Article 9 are the same as those
makes certain changes to the recognition
specified by Guide 3. In July 2016, the Commission
of impairment for AFS securities.88 This 3. Other Sources of Information proposed to amend certain of its disclosure
i. Information Available in SEC Filings requirements, including Article 9, that may have
84 See FDIC Quarterly. become redundant, duplicative, overlapping,
85 ASC
as Required by Commission Rules and outdated, or superseded, in light of other
320–10–25–1.
86 Accounting Standards Update 2016–01, Accounting Standards Commission disclosure requirements, U.S. GAAP,
Financial Instruments—Overall (Subtopic 825–10): IFRS, or changes in the information environment.
Article 9 requires disclosure of Specifically, the investment securities disclosure in
Recognition and Measurement of Financial Assets
and Liabilities (ASU 2016–01).
investment securities either on the Article 9 was proposed for elimination. See
Accounting Standards Update 2016–13, Financial balance sheet or in the footnotes to the Disclosure Update and Simplification, Release No.
Instruments—Credit Losses (Topic 326): financial statements. Article 9 also 33–10110 (July 13, 2016) [81 FR 51607] (Disclosure
Update and Simplification Release).
Measurement of Credit Losses on Financial currently requires footnote disclosure of 92 See ASC 320–10–50.
Instruments (ASU 2016–13). the carrying value and market value of
87 Equity investments that have readily 93 ASC 320–10–50–1B notes that major security
determinable fair values (except those accounted for
securities by specified category, while types should be based on the nature and risks of
under the equity method of accounting or those that the security and that an entity should consider all
result in consolidation of the investee) will be as a direct reduction of the amortized cost basis of of the following when considering whether
measured at fair value with changes in fair value the investment. The new standard will require an disclosure for a particular security type is
recognized in net income. This eliminates the allowance for credit losses for these debt securities necessary: (a) Shared activity or business sector, (b)
ability to classify equity securities as AFS and the instead of a direct reduction. The allowance for vintage, (c) geographic concentration, (d) credit
reporting of unrealized holding gains and losses in credit losses for HTM securities will be based on quality, and (e) economic characteristics. ASC 942–
other comprehensive income. Equity investments the same expected credit loss model applied to 320–50–2 defines nine security types that entities
that do not have readily determinable fair values loans. There will also be an allowance for credit within its scope must present in their investment
will no longer be accounted for using the cost losses for AFS debt securities, but it will be disclosures and the list is more granular than the
method. Instead, an entity can elect to either measured in a manner similar to OTTI under Guide 3 categories.
jstallworth on DSK7TPTVN1PROD with PROPOSALS
measure these equity investments at fair value with current U.S. GAAP. 94 ASC 320–10–50–2. These disclosures will no
unrealized holding gains and losses in earnings or 89 The U.S. GAAP standards differ significantly longer be required for equity securities upon the
choose a measurement alternative. There will also from the International Financial Reporting Standard effectiveness of ASU 2016–01 as equity securities
no longer be an assessment of whether an (IFRS) as issued by the International Accounting that have readily determinable fair values (except
impairment loss is ‘‘other than temporary’’ for these Standard Board (IASB) model, IFRS 9, Financial those accounted for under the equity method of
investments. Instruments, as described in Section III.B. accounting or those that result in consolidation of
88 U.S. GAAP currently requires a two-step 90 The ranges of maturities are securities due (1) the investee) will be measured at fair value with
process to measure other-than-temporary in one year or less, (2) between one and five years, changes in fair value recognized in net income.
95 ASC 320–10–50.
impairment (OTTI) for HTM and AFS investment (3) between five and ten years, and (4) after ten
securities. When OTTI is recognized, it is reflected years. 96 Id.
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impairment is reflected through an of funds, credit demand, interest-rate inherent in the loan portfolio.116
allowance for credit losses instead of margins and regulations. A banking Further, disclosures of trends in early
OTTI? If so, please indicate which organization’s loan portfolio may stage delinquencies can be an early-
information and whether BHC consist of consumer loans, such as warning indicator of deteriorating credit
registrants would face any challenges in residential real estate, credit card and quality.
preparing and providing the auto loans, as well as commercial loans,
information. For example, upon 2. Current Guide 3 Disclosures
such as commercial real estate loans,
adoption of ASU 2016–13, should we lease financings and wholesale loans.112 Section III.A of Guide 3 calls for
require disaggregation of the AFS Different types of loans have different disclosure of the amount of loans in
securities allowance for credit losses risk characteristics. For example, each specified category 117 as of the end
roll-forward by security type? commercial loans tend to have shorter of each period.
27. Should we consider requiring that maturities than residential real estate Section III.B calls for a maturity
the investment portfolio disclosures loans and are more likely to have analysis 118 for each category of loans as
called for by Guide 3 be presented in a balloon payments at maturity. Further, of the end of the latest reported period
structured data format, such as XBRL, to the composition of a particular banking and a separate presentation of all loans
facilitate investor comparison of data organization’s loan portfolio may vary due after one year with fixed interest
across BHC registrants and usability of substantially over time due to factors rates versus those with floating or
the disclosures? Why or why not? If so, such as changes in regulations or adjustable interest rates.
what elements of these disclosures management philosophies. For example, Section III.C.1 calls for disclosure of
should be tagged so that they can be if management expects interest rates to the aggregate amount of domestic and
extracted in a structured data format? rise, it may seek to increase the banking foreign 119 loans in each of the following
28. If we require the Guide 3 tabular organization’s offerings of variable-rate categories:
disclosures to be submitted in XBRL, are mortgages. • Loans accounted for on a
the current requirements for the format nonaccrual basis; 120
To address risks related to the loan
and elements of the tables suitable for
portfolio and the allowance for loan • loans accruing but contractually
tagging? If not, how should they be past due 90 days or more as to principal
losses,113 the Commission issued
revised? or interest payments; and
29. Should the categories used for Accounting Series Release No. 166 114 in
1975, which was the precursor to Guide • loans classified as troubled debt
disaggregation of these Guide 3 restructurings (TDRs) 121 that are not
disclosures be closely aligned with 3’s loan portfolio and loan loss
those called for in Call Reports and experience disclosures. Among other
116 Id.
other U.S. banking agency regulatory things, ASR No. 166 provided for the 117 The specified categories are, for domestic
filings? If so, which ones and why? disclosure of information necessary to loans: (1) Commercial, financial and agricultural,
30. Should we require disclosure of enable investors to understand the (2) real estate—construction, (3) real estate—
the investment information provided in nature and the status of loan portfolios, mortgage, (4) installment loans to individuals, and
including a breakdown sufficient to (5) lease financing, and for foreign loans: (6)
Call Reports or other regulatory filings? Governments and official institutions, (7) banks and
If so, what information and why? provide investors with insight into other financial institutions, (8) commercial and
31. Should the investment portfolio investment policies, lending practices industrial, and (9) other. The loan categories
disclosures called for by Guide 3 be and portfolio concentrations. The specified in Guide 3 originally conformed to those
release also called for consideration of required in Call Reports but were changed when
extended to other registrants, such as Guide 3 was amended in 1980 to conform to the
those engaged in the financial services expanded disclosures when loans loan categories set forth in Article 9. 1980 Guide 3
industry? If so, which registrants and considered doubtful as to collectability Amendments Release.
which disclosures? have materially increased, or there have 118 The range of maturities are loans due (1) in
been large increases in delinquent loans, one year or less, (2) between one and five years, (3)
C. Loan Portfolio or in loans extended or renegotiated between five and ten years, and (4) after ten years.
This information need not be presented for
1. Background under adverse conditions. mortgage real estate loans, installment loans to
Loans 110 often constitute a banking In 2010, the FASB issued updated individuals and lease financing. Foreign loan
disclosure guidance that greatly categories may be aggregated.
organization’s most significant assets 119 Instruction 7 of Guide 3 clarifies that foreign
and generate a significant portion of expanded the loan credit quality data need not be presented if the registrant is not
revenues. At September 30, 2016, total disclosures required by U.S. GAAP.115 required to make separate disclosures concerning
loans and leases constituted 55% of Loan portfolio disclosures provide its foreign activities pursuant to the test set forth in
investors with information about the Rule 9–05 of Regulation S–X.
total assets of all FDIC-insured 120 The term ‘‘nonaccrual’’ is not defined in U.S.
institutions.111 Loan portfolio types of lending in which a registrant
GAAP or Commission rules. Call Report
compositions differ considerably engages, and one objective of the instructions, however, generally require an asset to
because lending activities are FASB’s amendments was to increase the be reported as nonaccrual if: (1) It is maintained on
influenced by many factors, including transparency of the nature of credit risk a cash basis because of deterioration in the financial
condition of the borrower, (2) payment in full of
the type of banking organization, principal or interest is not expected, or (3) principal
112 Wholesale banking is often used as a term to
management’s objectives and or interest has been in default for a period of 90
refer to the wide range of services that banking days or more unless the asset is both well secured
philosophies about diversification and organizations provide to various corporations and and in the process of collection. Certain loans, such
credit risk management, the availability businesses, as well as to government entities. as consumer loans and purchased credit-impaired
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113 We discuss allowance for loan losses
loans, are not placed on nonaccrual status as
110 In this request for comment we use the terms disclosures in Section II.D of this request for discussed in the nonaccrual definitions section of
‘‘loans’’ or ‘‘loan portfolio’’ when we refer to comment. Call Report Schedule RC–N–2. Guide 3 also calls for
Commission rules or U.S. banking reporting 114 Accounting Series Release No. 166— and U.S. GAAP also requires disclosure of the
requirements. The loan portfolio for a registrant Disclosure of Unusual Risks and Uncertainties, nonaccrual policy.
may also include receivables and leases. Release No. 33–5551 (Jan. 15, 1975) [40 FR 2678]. 121 Under U.S. GAAP, a restructuring of a debt is
Receivables and leases, however, generally do not 115 Accounting Standards Update 2010–20, a TDR if the creditor, for economic or legal reasons
represent a significant portion of the total loan Disclosures about the Credit Quality of Financing related to the debtor’s financial difficulties, grants
portfolio. Receivables and the Allowance for Credit Losses. a concession to the debtor that it would not
111 See FDIC Quarterly. (ASU 2010–20). otherwise consider.
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otherwise disclosed as being on country’s private or public sector debt, Although U.S. GAAP does not specify
nonaccrual status or past due 90 days or Guide 3 calls for: loan categories, it does require that
more.122 • A description of the nature and qualitative and quantitative credit
impact of the developments; quality information be provided for each
Section III.C.2 calls for descriptions of • an analysis of the changes in
the nature and extent of any potential class of financing receivable,132 except
aggregate outstandings to borrowers in loans measured at fair value, under the
problem loans 123 at the end of the most each country for the most recent fair value option, and loans held for sale
recent reported period and the policy reported period; measured at lower of cost or fair value.
for placing loans on nonaccrual status. • quantitative information about These disclosures include:
The instructions to Section III.C.2 call interest income and interest collected • A description of each credit quality
for disclosure of the foregone interest during the most recent period; and indicator; 133
income and recognized interest income • quantitative information about any
outstandings that may be subject to a • the recorded investment in
for nonaccrual loans and TDRs during
restructuring. financing receivables by credit quality
the period.
Section III.C.4 calls for disclosure as indicator; and
If material amounts of the loans • the date or range of dates in which
of the end of the most recent reported
described in these sections are information was updated for each credit
period of any concentration of loans
outstanding to borrowers in any foreign quality indicator.134
exceeding 10% of total loans not
country, Guide 3 states that each otherwise disclosed as a category of Currently and after implementation of
country should be identified and that loans pursuant to Section III.A.127 ASU 2016–13, U.S. GAAP requires
the amounts outstanding should be Section III.D calls for disclosure as of disclosure, by class of financing
quantified.124 the end of the most recent reported receivable, of the same information as
Section III.C.3 calls for disclosure of period of the nature and amounts of any specified in Sections III.C.1(a) and (b) of
the aggregate amount of cross-border other interest-bearing assets that would Guide 3 and an aging analysis of past
outstandings 125 to borrowers in each be disclosed under Section III.C.1 or due financing receivables. ASU 2016–13
foreign country where they exceed 1% III.C.2 if those assets were loans. will increase the credit quality-related
of total assets.126 These disclosures disclosures for loans. For example, it
3. Other Sources of Information
should be provided by category of will require registrants to present credit
foreign borrower specified in Section i. Information Available in SEC Filings quality indicator disclosures by year of
III.A. Where current conditions in a as Required by Commission Rules and origination and require additional
Accounting Standards disclosures about loans on nonaccrual
foreign country give rise to liquidity
problems that are expected to have a Article 9 requires separate disclosure status. The disclosures about loans on
material impact on the timely of total loans and unearned income on nonaccrual status will include the
repayment of principal or interest on the the balance sheet or in the footnotes for amortized cost basis at both the
the same loan categories specified in beginning and end of the reporting
122 Guide 3 originally called for disclosure of Guide 3.128 Similar to Guide 3, Article period and the amortized cost basis for
nonperforming loans and a discussion of the risk 9 allows bank holding companies those nonaccrual loans without a related
elements associated with those loans for which latitude in determining loan allowance for credit losses. In addition,
there were serious doubts as to the ability of the categories.129 Article 9 also requires disclosures will be required by class of
borrowers to comply with the present loan payment financing receivable about collateral-
terms. The current Section III.C.1 disclosures reflect
disclosures about loans made to certain
amendments made in 1980 and 1983 to promote related parties and the aggregate amount dependent loans and the collateral that
consistency with bank regulatory disclosure of those loans that are disclosed as secures them.135
requirements and comparability among registrants. nonaccrual, past due, restructured or In addition, both Guide 3 and U.S.
1980 Guide 3 Amendments Release; 1983 Guide 3
Revisions Release.
potential problem loans.130 GAAP, now and after the adoption of
123 Potential problem loans are loans not U.S. GAAP and Guide 3 have some ASU 2016–13, call for disclosure of the
disclosed pursuant to Item III.C.1, but where known similar loan presentation and disclosure following accounting policies:
information about possible credit problems of standards. U.S. GAAP requires major • Placing financing receivables on
borrowers (which are not related to transfer risk categories of loans to be presented
inherent in cross-border lending activities) causes
nonaccrual status;
management to have serious doubts as to the ability
separately either on the balance sheet or • recording payments received on
of the borrowers to comply with the present loan in the financial statement footnotes.131 nonaccrual financing receivables;
repayment terms and which may result in • resuming accrual of interest; and
disclosure of the loans pursuant to Item III.C.1. 127 Loan concentrations are considered to exist
124 For purposes of determining the amount of when there are amounts loaned to multiple
132 U.S. GAAP uses the term ‘‘financing
outstandings to be reported, loans made to or borrowers engaged in similar activities which
deposits placed with a branch of a foreign bank would cause them to be similarly affected by receivable,’’ and a loan is considered a type of
located outside the foreign bank’s home country economic or other conditions. For example, loans financing receivable. A class of financing receivable
should be considered as loans to or deposits with may be concentrated in a specific industry, such as is defined as a group of financing receivables
the foreign bank. the energy sector, that exceed the 10% threshold. determined on the basis of all of the following: (a)
125 Cross-border outstandings are defined as loans 128 17 CFR 210.9–03. Initial measurement attribute (for example,
(including accrued interest), acceptances, interest- 129 The instructions to Section III.A of Guide 3 amortized cost), (b) risk characteristics of the
bearing deposits with other banks, other interest- and Item 7(b) of Rule 9–03 state that ‘‘[a] series of financing receivable, and (c) an entity’s method for
bearing investments and any other monetary assets categories other than those specified above may be monitoring and assessing credit risk.
133 A credit quality indicator is defined as a
which are denominated in dollars or other nonlocal used to present details of loans if considered a more
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currency. The foreign outstandings disclosure was appropriate presentation.’’ The staff has observed statistic about the credit quality of financing
added in 1983 to consolidate all risk-related that bank holding companies commonly provide receivables.
disclosure guidelines in one section of Guide 3 and the Guide 3 and Article 9 loan disclosures by ‘‘class 134 ASC 310–10–50.
to emphasize the risks present in cross-border of financing receivables’’ as defined by U.S. GAAP 135 The disclosures required for collateral-
lending activities. See 1983 Guide 3 Revisions instead of the specified Guide 3 and Article 9 loan dependent financial assets include descriptions of
Release. categories. (1) the type of collateral, (2) the extent to which
126 For countries whose outstandings are between 130 Item 7(e) of Rule 9–03. Related parties include
collateral secures the asset, and (3) significant
0.75% and 1% of total assets, the names of the directors, executive officers, principal equity changes in the extent to which collateral secures the
countries and the aggregate amount of outstandings holders and associates of those persons. asset, whether because of general deterioration or
attributable to them should be disclosed. 131 ASC 310–10–45–2. some other reason.
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and, industry-wide, may have a global Section VII need not be provided for policies and practices that differ from
impact on the financial markets and categories of short-term borrowings for applicable bank regulatory guidance.
systemic stability. Illiquidity in the which the average balance outstanding Regulation S–K also requires a
markets as a whole can affect short-term during the period was less than 30% of discussion of off-balance sheet
borrowings, sometimes severely and stockholders’ equity at the end of the arrangements when the arrangements
rapidly, which can present increased period. have or are reasonably likely to have a
risks for registrants that rely heavily on
3. Other Sources of Information current or future effect on the
short-term borrowings as a funding
source. Because of these potential risks, registrant’s financial condition, results
i. Information Available in SEC Filings of operations, liquidity, capital
banking regulators across the globe have as Required by Commission Rules and
focused on liquidity and funding expenditures or capital resources that is
Accounting Standards
sources and have adopted new liquidity material to investors.221 When these
measures, such as the LCR and NSFR Article 9 requires separate disclosure disclosures were adopted in 2003, the
requirements. These new liquidity of the period-end balances of federal definition of ‘‘off-balance sheet
measures are designed to create funds purchased and securities sold arrangement’’ focused on the means
incentives for certain large banking under agreements to repurchase, through which registrants typically
organizations to fund their activities commercial paper and other short-term structure off-balance sheet transactions
with more stable sources of funding, borrowings on the face of the financial or otherwise incur risks of loss that are
which may cause banking organizations statements or in the footnotes.217 U.S. not fully transparent to investors. For
to replace some of their short-term GAAP requires disclosure of period-end example, a registrant sometimes
borrowings, like federal funds balances of significant categories of provides financial support as part of its
purchased, with long-term debt. For borrowings.218 U.S. GAAP also requires involvement in activities of an
example, the NSFR generally is disclosures about repurchase unconsolidated entity.222 Commenters
calibrated assuming that long-term agreements and securities lending on the Regulation S–K Concept Release
liabilities are more stable than short- transactions. For example, BHC expressed differing views about whether
term liabilities.215 registrants must reconcile the amount of the Commission should retain, expand
A BHC registrant’s use of short-term the gross liability for repurchase or eliminate this disclosure item. One
borrowings can fluctuate significantly agreements and securities lending commenter recommended expanding it
during a reporting period. As a result, transactions accounted for as secured to include detailed information about
the presentation of period-end amounts borrowings to the net liability amount the underlying assets of asset-backed
alone may not accurately reflect a BHC presented on the balance sheet.219 securities.223 Commenters often cited
registrant’s funding needs or use of
short-term borrowings during the The staff has observed that BHC redundancy with disclosures required
period. registrants typically discuss their by U.S. GAAP as the reason for
The Guide 3 short-term borrowings sources of funding and outstanding eliminating the disclosure
disclosures provide investors with borrowings in their liquidity section of requirement.224 We are considering
information beyond the period-end MD&A. In 2010, the Commission issued whether there are disclosures about off-
borrowings balance. These disclosures interpretive guidance on liquidity and balance sheet arrangements specific to
focus on the activity in short-term capital resources disclosures that BHC registrants that investors find
borrowings and related interest expense highlighted important trends and important. Further, we are considering
throughout the period and may help uncertainties related to liquidity for whether disclosures about off-balance
investors better understand the role of registrants to consider in their MD&A sheet arrangements should be
this form of financing and its related disclosures.220 The guidance noted as considered for other registrants in the
risks to BHC registrants. examples of trends and uncertainties the financial services industry.
reliance on commercial paper or other Short-term borrowing levels and
2. Current Guide 3 Disclosures
short-term financing arrangements for deposit levels also factor into the LCR
Section VII of Guide 3 calls for the liquidity and intra-period variations in
following short-term borrowings calculation, because it is based on
borrowings in circumstances where
disclosures by category: projected cash outflows during a 30-day
borrowings during the period are
• The period-end amount materially different than the period-end
stress period.225 Banking organizations
outstanding; subject to the LCR requirement typically
amounts. The guidance also specifically
• the average amount outstanding indicated that bank holding companies
disclose whether or not they comply
during the period; and with the rule in their Commission
should consider additional MD&A
• the maximum month-end amount filings. We are considering whether to
disclosures, including their policies and
outstanding.216 require additional quantitative and
practices for meeting applicable bank
Section VII also calls for disclosure, by regulatory guidance on funding and qualitative disclosures about funding
category of borrowing, of the weighted liquidity risk management, or any and liquidity risks.
average interest rates at period-end and
during the period, and the general terms 217 17
221 17 CFR 229.303(a)(4).
CFR 210.9–03.
of the borrowing. The disclosures in 218 ASC 942–470–45.
222 Disclosure in Management’s Discussion and
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219 ASC 860–30–50 and ASC 210–20–50 permit Analysis about Off-Balance Sheet Arrangements
215 Basel III: the net stable funding ratio (October and Aggregate Contractual Obligations, Release No.
offsetting of derivatives, repurchase agreements and
2014), available at http://www.bis.org/bcbs/publ/ securities lending transactions in the financial 33–8182 (Jan. 28, 2003) [68 FR 5982] (Off-Balance
d295.pdf. statements. ASC 860–30–50 requires disclosure of Sheet and Contractual Obligations Adopting
216 Section VII refers to Rule 9–04.11 for gross and net liabilities related to these Release).
223 CFA Institute Letter.
categories of short-term borrowings. The correct transactions.
224 See, e.g., Chamber Letter; SIFMA Letter;
reference, however, is Rule 9–03.13. Registrants 220 Commission Guidance on Presentation of
often provide the average short-term borrowings Liquidity and Capital Resources Disclosures in KPMG LLP; Davis Polk Letter; and Financial
disclosures as part of their average balance sheet Management’s Discussion and Analysis, Release Services Roundtable Letter.
disclosures. No. 33–9144 (Sept. 17, 2010) [75 FR 59894]. 225 See LCR Adopting Release.
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![Federal Register / Vol. 82, No. 43 / Tuesday, March 7, 2017 / Proposed Rules 12777
ii. Information Available Outside of SEC financial services industry that investors 85. Should the short-term borrowings
Filings find important? If so, which disclosures called for by Guide 3 be
Banking organizations must report the disclosures? Would such information extended to other registrants, such as
year-end balance, quarterly average otherwise be provided under those engaged in the financial services
balances and interest expense on federal Commission rules (e.g., Regulation S–K) industry? If so, which registrants and
funds purchased and securities sold or U.S. GAAP? If not, in what manner which disclosures?
under agreements to repurchase, and should these disclosures be provided?
H. Potential New Disclosures
other borrowings in their Call 78. Are there quantitative and
Reports.226 Global systemically qualitative disclosures that would add As originally published, Guide 3
important bank holding companies transparency about ongoing liquidity focused on eliciting what the Division of
(GSIBs) are subject to a risk-based risk exposure for BHC registrants? For Corporation Finance believed at the
capital surcharge in excess of their example, should BHC registrants time to be the most significant statistical
minimum capital requirements.227 One describe the liquidity risks arising from disclosures relating to the operations of
of the methods for calculating the risk- their assets, derivatives and off-balance- bank holding companies. Over the
based surcharge focuses on a GSIB’s sheet activities? If so, what disclosures intervening four decades, and
reliance on short-term wholesale would be important for investors and in particularly following the passage of the
funding because reliance on this type of what manner should they be provided? Gramm-Leach-Bliley Act,229 which
funding may cause vulnerability to runs For example, should we require these repealed certain provisions of the Glass-
and fire sales. Pillar 3 disclosures BHC registrants to disclose their Steagall Act,230 the scope of activities
discuss risks related to borrowings and compliance with and the calculation of permitted to bank holding companies
liquidity and include borrowings as an their bank regulatory LCR? has expanded significantly. For
input to certain disclosure 79. What non-GAAP financial example, today, some bank holding
requirements, including the LCR and measures do BHC registrants provide companies and financial holding
GSIB risk-based capital surcharge. concerning short-term funding? Should companies may engage in operations
we require BHC registrants to disclose involving physical commodities,
Request for Comment any of these measures to enhance the insurance, investment management,
74. Do the short-term borrowings comparability of information for asset management and broker-dealer
disclosures called for by Guide 3 investors? activities that were limited or
provide investors with information 80. Do the short-term borrowings impermissible at the time of Guide 3’s
upon which they base investment and disclosures properly balance the initial publication.
voting decisions? Would such benefits to investors and the costs to We are considering whether and to
information otherwise be provided BHC registrants? If no, why? what extent refinement of Guide 3 to
under Commission rules (e.g., 81. Should we consider requiring account for the shifting landscape of the
Regulation S–K) or U.S. GAAP? Are disclosure of a liquidity mismatch index financial industry would yield
there any particular issues that BHC (MMI) 228 or other measure of maturity important information for investors in
registrants face in providing these mismatch for BHC registrants? If so, their evaluation of BHC registrants. Part
disclosures or that investors or analysts what measure would be useful for of this shifting landscape is supervisory
face in utilizing these disclosures? investors in making investment or regulatory in nature. For example, in
75. Do Commission rules or U.S. decisions? recent years CCAR, DFAST and
GAAP require the same or similar short- 82. Should we consider requiring that resolution planning were implemented
term borrowing information as called for the short-term borrowings disclosures for certain large banking
by Guide 3? If so, how is the called for by Guide 3 be presented in a organizations.231 Consequently, we are
information similar or dissimilar? Please structured data format, such as XBRL, to seeking input about the effects of
provide a detailed comparison. facilitate investor comparison of data regulation on BHC registrants, including
76. What improvements to the across BHC registrants and usability of with regard to their operations, capital
existing short-term borrowings the disclosures? Why or why not? If so, structures, dividend policies and
disclosures should we consider? For what elements of these disclosures treatment in bankruptcy.
example, should BHC registrants should be tagged so that they can be We also are mindful of how our
discuss the degree of reliance on extracted in a structured data format? disclosure regime interacts with the
wholesale or short-term funding 83. If we require the Guide 3 tabular various disclosure requirements of the
sources? Should they describe the disclosures to be submitted in XBRL, are U.S. banking agencies. In some cases,
nature, timing, and extent of volatile the current requirements for the format our disclosure regime and the regimes of
short-term funding? In suggesting and elements of the tables suitable for the U.S. banking agencies require
improvements, please indicate whether tagging? If not, how should they be different types of information or present
BHC registrants would face any revised? information in inconsistent ways; in
challenges in preparing and providing 84. Should the categories used for
the disclosures. disaggregation of these Guide 3 229 Public Law 106–102, 113 Stat. 1338 (1999).
77. Are there disclosures about off- disclosures be closely aligned with 230 Public Law 73–66, 48 Stat. 162 (1933). The
balance sheet arrangements in the those called for in Call Reports and Glass-Steagall Act contained provisions limiting
commercial bank securities activities and
other U.S. banking agency regulatory affiliations with investment banks. The Gramm-
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226 Year-end balances are required to be reported
on Call Report Schedule RC, Balance Sheet.
filings? If so, which ones and why? Leach-Blilely Act repealed those anti-affiliation
Quarterly average balances are required to be provisions and permitted banks to affiliate with
reported on Call Report Schedule RC–K, Averages. 228 MMI is a liquidity measure proposed by companies engaged in a broad range of financial
Interest expense is required to be reported on Call researchers from the National Bureau of Economic activities.
Report Schedule RI, Income Statement. Research in 2011 to measure the mismatch between 231 Banking organizations with $50 billion or
227 Regulatory Capital Rules: Implementation of the market liquidity of assets and the funding more in total consolidated assets are subject to the
Risk-Based Capital Surcharges for Global liquidity of liabilities. See Brunnermeier, M.K., G. full scope of CCAR and DFAST. DFAST testing and
Systemically Important Bank Holding Companies Gorton, and A. Krishnamurthy, 2011, Risk disclosure requirements are significantly reduced
(Aug. 14, 2015) [80 FR 157]. The surcharge became Topography, NBER Macroeconomics Annual., for banking organizations with $10 billion to $50
effective on January 1, 2016. available at http://www.nber.org/chapters/c12412. billion in total consolidated assets.
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![Federal Register / Vol. 82, No. 43 / Tuesday, March 7, 2017 / Proposed Rules 12781
offerings of common equity highlight historical trends in significant information more frequently than once
securities.256 In some instances, U.S. data relating to financial condition and a year?
GAAP and/or Regulation S–X require results of operations over a five-year 110. Should we eliminate the
similar disclosures to those specified in period.261 We are considering whether reporting period size threshold in Guide
Guide 3, but for different periods. For the Guide 3 reporting periods, which 3? Why or why not?
example, Guide 3, Article 9 and U.S. generally are greater than most 111. What is the minimum number of
GAAP all contain categorized Commission disclosure requirements periods an investor needs to analyze
investment portfolio disclosures, but except for interim periods, facilitates and comprehend changes in trends? Do
Article 9 and U.S. GAAP 257 require trend analysis that investors rely upon investors need five years of information
disclosures for the balance sheet periods or if the periods should be modified to to analyze and comprehend fully
presented, generally two years, while be consistent with the requirements of changes in trends in asset quality and
Section II.A of Guide 3 calls for three Regulation S–X for both annual and loan losses?
years. interim reporting. 112. If the reporting periods are
Guide 3’s five-year presentation of Request for Comment reduced, should BHC registrants
loan portfolio and allowance for loan without reporting histories or publicly
108. Should the reporting periods available financial information provide
losses data provides a basis for
called for by Guide 3 be modified, and additional years of disclosures?
statistical trend analysis and identifies
if so, how? For example, should the
unusual or non-recurring events which IV. Closing
Guide 3 reporting periods be reduced to
may have affected the loan portfolio and match the Regulation S–X requirements
its related provision for loan losses.258 This request for comment is not
and the scaled disclosure requirements intended to limit the scope of
Similarly, the selected financial data for smaller reporting companies and
requirement in Item 301 of Regulation comments, views, issues or approaches
emerging growth companies? to be considered. In addition to
S–K 259 that generally requires five years 109. Should the Guide 3 reporting
of information 260 was designed to investors and registrants, the
periods explicitly include interim Commission welcomes comment from
256 Securities
periods so investors receive the other market participants and
Act § 7(a)(2)(A).
257 ASC 320–10–45. particularly welcomes statistical,
offerings. See Securities Act § 7(a)(2)(A) and
258 Information about nonperforming loans was
Exchange Act § 13(a). empirical and other data from
originally proposed to cover a three-year period but 261 See Staff Report on Review of Disclosure commenters that may support their
was increased to five years because the staff
believed the data would show trends indicative of
Requirements in Regulation S–K (Dec. 2013) views and/or support or refute the views
available at http://www.sec.gov/news/studies/2013/ or issues raised.
management policies concerning non-performing
reg-sk-disclosure-requirements-review.pdf. See also
loans. Guide 3 Release. Amendments to Annual Report Form, Related By the Commission.
259 17 CFR 229.301.
Forms, Rules, Regulations and Guides; Integration Dated: March 1, 2017.
260 Smaller reporting companies are not required
of Securities Acts Disclosure Systems, Release No.
to present selected financial data. See Item 301(c) 33–6231 (Sept. 2, 1980) [45 FR 63630] (stating that Brent J. Fields,
of Regulation S–K. Emerging growth companies are ‘‘the Commission believes that five-year Secretary.
not required to present selected financial data for information is relevant primarily where it can be
any period earlier than the earliest audited period related to trends in the registrant’s continuing [FR Doc. 2017–04329 Filed 3–6–17; 8:45 am]
presented in connection with their initial public operations’’). BILLING CODE 8011–01–P
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Document Created: 2018-02-01 14:49:18
Document Modified: 2018-02-01 14:49:18
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Request for comment. | |
| Dates | Comments should be received on or before May 8, 2017. | |
| Contact | Lindsay McCord, Associate Chief Accountant in the Office of Chief Accountant, Division of Corporation Finance, at (202) 551-3400, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. | |
| FR Citation | 82 FR 12757 | |
| RIN Number | 3235-AL79 | |
| CFR Citation | 17
CFR
210 17 CFR 211 17 CFR 229 17 CFR 231 17 CFR 241 |
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