Securities Act Release No. 6458

Exchange Act Release No. 19570

March 7, 1983

RELEASE NO. 11 Revision of Financial Statement Requirements and Industry Guide Disclosure for Bank Holding Companies

ACTION: Final Rules.

SUMMARY: The Commission announces the adoption of final rules which amend Article 9 of Regulation S-X regarding financial statements filed for bank holding companies. The amendments to Article 9 are being adopted to (1) eliminate rules which are duplicative of generally accepted accounting principles ("GAAP"), (2) integrate and simplify the rules, (3) reflect current financial reporting practices, and (4) improve financial reporting generally. In addition, certain related amendments to the Guides for Statistical Disclosure by Bank Holding Companies have been adopted in order to incorporate a number of disclosures which have been eliminated from the requirements of Article 9. The Commission is also amending the proxy rules to eliminate the interim rule that requires only substantial compliance with Article 9 in annual reports to shareholders. Consequently, bank holding companies that are required to comply with the Commission's proxy rules will be required to include in annual reports to shareholders financial statements prepared in accordance with the requirements of Regulation S-X.

EFFECTIVE DATE: The rules adopted herein are applicable to financial statements for fiscal years ending on or after December 31, 1983, although earlier application of these rules in their entirety is permitted. Upon adoption of these rules, where comparative financial statements are presented, all reported periods should conform with the rules adopted herein.

FOR FURTHER INFORMATION CONTACT: Marc D. Oken (202-272-2157), Edmund Coulson (202) 272-2130, or Eugene W. Green (202-272-2161), Office of the Chief Accountant, or Howard P. Hoges, Jr. (202-272-2553), Division of Corporation Finance, Securities and Exchange Commission, Washington, D. C. 20549.

SUPPLEMENTARY INFORMATION: The Commission has adopted a comprehensive revision of Article 9 of Regulation S-X, which governs the form and content of financial statements filed for bank holding companies. This revision, undertaken as part of the Commission's project to coordinate disclosure requirements under the Securities Act of 1933 [15 U. S. C. 77a et seq.] and the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.], is intended to simplify and improve financial reporting requirements. The rules delete certain existing Article 9 requirements that are duplicative of GAAP or that are no longer necessary. The final rules generally reflect current financial reporting practices, except for the income statement presentation of investment securities gains or losses, the disclosure requirements for loans to related parties and parent company financial information. These issues are discussed further below.

Certain disclosure requirements (which were previously included in Article 9 and thus were required in the primary financial statements) have been relocated as part of the Industry Guides for Disclosure by Bank Holding Companies: Securities Act Industry Guide 3 and Exchange Act Industry Guide 3 ("Guide 3").¹  The most significant of these include information about short-term borrowings, disclosure of investment concentrations, and certain details about foreign activities. The Commission has concluded that these disclosures are primarily analytical in nature and thus are similar in character to the other types of disclosures called for by Guide 3.

The Commission solicited public comments on the proposed revision of Article 9 and Guide 3 in Release No. 33-6417 (July 9, 1982) [47 FR 32158 (July 26, 1982)]. That release contained a detailed discussion of the proposed revisions. Rather than repeat those discussions, this release focuses on the principal differences from the proposal and the bases for such revisions.

The Commission received one hundred and ten letters of comment on the proposals. Most commentators expressed general support for the revisions; however, numerous suggestions were made regarding various aspects of the proposals. The two areas frequently commented on related to the proposed revision of the requirements for reporting investment security transactions and the proposed modification of the disclosure requirements dealing with loans to related parties. The Commission has carefully weighed the views of commentators and has accordingly made certain revisions to the proposed requirements. The views of commentators and the Commission response thereto are discussed below.

Investment Securities Gains or Losses. * * * [Text omitted]

Loans to Related Parties. The requirements regarding related party loan disclosures have been modified from the proposal in two significant ways. First, as proposed, the rules would have increased the range of relatives included as related parties by deleting the "same residence" provision of the existing requirement. In response to comments indicating that the inclusion of distant relatives was impractical and of little significance to investors, and also for purposes of achieving consistency with the revised Item 404 of Regulation S-K,²  the Commission's final rules apply to members of the "immediate family" only. This revision will encompass more relatives than encompassed by the former rules, but will be significantly less burdensome than the proposal. Second, the proposed requirement that the amount of related party loans include loans to any corporation or organization of which an executive officer, director or principal shareholder of the registrant or any of its significant subsidiaries is an officer (but not a principal shareholder) has been deleted. This change is made in response to comments that the proposed rules would greatly expand the definition of related parties without providing meaningful information to financial statement users.

Certain other changes have been made in an effort to achieve greater consistency with the Commission's recent actions concerning Item 404 of Regulation S-K. The principal change in this respect is an exclusion from the related party loans required to be reported of all indebtedness which in the aggregate did not exceed $60,000 during the latest fiscal year.

Substantial commentary was also received regarding the proposed requirement to compute the weighted average amount of related party loans outstanding during the year and, in some cases, to discuss individual transactions when such weighted average amount significantly exceeded the amount of related party loans at the balance sheet date. In light of these comments the final rules have been revised to amend this aspect of the proposal; the final rules call for an analysis of the amount of aggregate loans to related parties from the beginning to the end of the period for the latest fiscal year. The Commission believes that this disclosure should adequately inform investors as to the significance of loan transactions with related parties without imposing an undue burden on registrants.

* * * [Text omitted]

Cash and Due from Banks. The proposed instruction regarding restricted cash balances has been modified with respect to the reference to Federal Reserve requirements. This change was made in response to statements by commentators that disclsoure of such balance at the end of the year would rarely be of interest to investors, particularly since the reserve requirements are based on average balances. These commentators suggested that point in time disclosures are generally not meaningful since they could fluctuate significantly. The final requirements make reference to disclosure of average Federal Reserve balances. They also retain the general requirement to disclose withdrawal and usage restrictions and compensating balance requirements. (See Section 203.02.b of the Codification of Financial Reporting Policies for related discussion of disclosures of average restricted balances.)

Short-Term Investments. The rules being adopted for interest-bearing deposits in other banks have been revised in response to the comments. Under the proposal, these deposits would have been presented in a new short-term investment category. Commentators stated that these deposits can have maturities longer than one year and that their risk characteristics differ from those of other short-term investments. Accordingly, the final rules require interest-bearing deposits in other banks to be included as a separate line item following cash and due from banks. In addition, the final rules require Federal funds sold and securities purchased under resale agreements to be shown as a separate caption, with all other short-term investments presented separately. This presentation is consistent with the new Bank Audit Guide which has been approved for issuance by the American Institute of Certified Public Accountants.

Nonperforming Loans. The Commission proposed several minor changes to the Guide 3 requirements involving the determination and reporting of nonperforming loans. Various commentators questioned these modifications as well as some requirements which were retained from the existing rules. Since the Commission plans to consider publishing a separate proposal regarding disclosures about nonperforming loans, no changes from the present requirements regarding nonperforming loans have been made in this release.

Bankers' Acceptances. * * * [Text omitted]

Parent Company Financial Information. * * * [Text omitted]

CODIFICATION UPDATE:

The "Codification of Financial Reporting Policies" announced in Financial Reporting Release No. 1 (April 15, 1982) [47 FR 21028] is updated to:

1. Add the following sentence to the bracketed introduction to Section 401: * * * [Text omitted]

2. Add the section of this release entitled "Investment Securities Gains or Losses" to Section 401.04.

3. Add the last paragraph of the section of this release entitled "Loans to Related Parties" to Section 401.02.

4. Include as Section 401.06 the section of this release entitled "Bankers' Acceptances."

5. Include as Section 401.07 the section of this release entitled "Parent Company Financial Information."

The Codification is a separate publication issued by the SEC. It will not be published in the Federal Register/Code of Federal Regulations system.

List of Subjects in 17 CFR Parts 210.231 and 241

Accounting, Reporting requirements, Securities.

The Commission hereby amends 17 CFR Chapter II as follows:

PART 210 FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

1. By removing §§210.9-01 to 210.9-05 and adding new §§210.9-01 to 210.9-07 as follows: * * * [Text omitted]

2. By revising §210.12-01 as follows: * * * [Text omitted]

PART 231 INTERPRETIVE RELEASES RELATING TO THE SECURITIES ACT OF 1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

3. By revising the Securities Act Industry Guide 3 [Statistical Disclosure by Bank Holding Companies] of Part 231 by adding new Item VII and by revising the general instructions and the remaining items. The full text of the revised industry guide, as proposed, is set out below. * * * [Text omitted]

4. By amending Part 231 by adding this release, Release No. 33-6458 (March 7, 1983) to the list of interpretive releases set forth thereunder.

PART 241 INTERPRETIVE RELEASES RELATING TO THE SECURITIES EXCHANGE ACT OF 1934 AND GENERALY RULES AND REGULATIONS THEREUNDER

5. By conforming Exchange Act Industry Guide 3 [Statistical Disclosure by Bank Holding Companies] to the amendments proposed for Securities Act Industry Guide 3.

6. By amending Part 241 by adding this release, Release No. 34-19570 (March 7, 1983) to the list of interpretive releases set forth thereunder.

PART 240 GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

7. By revising paragraph (b)(1) of §240.14a-3 to read as follows: * * * [Text omitted]

8. By revising paragraph (a)(1) of §240.14c-3 to read as follows: * * * [Text omitted]

AUTHORITY

These amendments are being adopted pursuant to the authority in Sections 6, 7, 8, 10 and 19(a) [15 U. S. C. 77f, 77g, 77h, 77j, 77s] of the Securities Act of 1933; Sections 12, 13, 15(d) and 23(a) [15 U.S.C. 78l, 78m, 78o(d), 78w] of the Securities Exchange Act of 1934; Sections 5(b), 14 and 20(a) [15 U. S. C. 79e, 79n, 79t] of the Public Utility Holding Company Act of 1935; and Sections 8, 30, 31(c) and 38(a) [15 U. S. C. 80a-8, 80a-29, 80a-30(c), 80a-37(a)] of the Investment Company Act of 1940.

As required by Section 23(a)(2) of the Securities Exchange Act, the Commission has specifically considered the impact that the amendments will have on competition. The Commission finds that compliance with the amendments will not impose a burden on competition.

By the Commission.

¹ Items 801 and 802 of Regulation S-K.

² On December 2, 1982, the Commission adopted final rules regarding disclosure of certain relationships and transactions involving management; Securities Act Release No. 6441 (December 13, 1982) [47 FR 5566].