United States Disclosure Standards for Banks

United States
Disclosure
Standards for Banks
Randall
Guynn
& Margaret
Tahyar,
AsiaLaw
Supplement
Partners’
DAVIS POLK 81 WARDWELL
W
e \vill
not
pretend
th;It
United
States
he difficult,
sensitise or require the attenti<tn
of senior
management
and, just as importantly,
identify
the rn;\n\
areas which will cause little or ii<> prt,hlem.
As \vith all summaries we ha\*e not included
easer)
\ve ha\,e not
conceivable
detail ii-r this one. III particular,
disclosure standards are easy. It is the
primary argument of tlii5 article, however,
that they are not as difficult or impractical
as many fear. By the beginning of 1998, 37 foreign b;lnks
distinguished
between an offering of securities
publicI\
from a wide range of countries
had publicly-listed
registered
with
the
US
SEC
and
a
pri\.ate
offering
to
securities on the New York Stock Exchange.
Many
institutional
invest<>rs
under
Rule
144A.
Instead,
we
have
multiples
of that number have raised capital through a
set forth the discl<,sure \ve believe ~vc~uld jiener;lllp
hc
type of institutional
oft&in, (1 kno\vn as 21 Rule 144A
I
necessary,
as
8
theoretic;tl
matter,
Tot;I
offering.
In addition,
many foreign
hanks have raised debt in offerings
United States securities laws la\v firm tt> pro\ride a discl<6ure opinion
for most hanks. A detailed
chart,
exempt
from
US Securities
and
operate on the generai
comparing
the
requirements
and
Exchange
Commission
(SEC)
market customs cd a public offering and
registration
requirements
through
principle that a bank or any
a Rule 144A c>fferinz, is set forth at the
their branches in the United States.
other company selling
end of this ztrticle. Mt~l-e~n~er. wc’ have
The foreign hank path to the US
concc’ntr;lted
primarily
c)ii those
capital
markets is hecomin::
tvellsecurities must provide an
disciosurc
elements
th;lt
arc
p:irticul;ir
trod.
to
foreign
banks,
nc>t
the
more
general
investor
with
all
of
the
We
believe
that
bank
requirements
of
the
US
securities
laws
management
is typically aware that
“material”
information
that
ahout which much has heen written.
disclosure
standards in the United
For a standard reference article on that
States are more demanding
than in a “reasonable”
or “prudent“
topic, pIcase e-mail t;lh~nr@jl,\\l.coiii.
their
home
market
and in the
investor would want to
In the first section <>i this ill-tiCIf we
Euromarkets.
Wt?
suspect
discuss
US disclosure stand&s
and the
management
is often forced to make
know before parting with
special
statistical
or
“forIll”
decisions
about whether
to raise
his
money.
requirements
for
hanks.
In
the
sect&
capital in the United States without
section we summarize the inform;itic>n
a clear idea of the types of disclosure
that
foreign
hanks
typically disclose in an <&ermg itimed
that are customary or required for US securities offerings
primarily
at
US
inve5tors.
by hanks. As a result, we believe there IS often a higher
level of apprehension
than necessq.
The purpose of this
article is to fill that information
gap and permit bank
management
to assess US disclt,sure staildards against the
requirements
and customs of their home market and the
Euromarkets.
With the information
in this article, bank
management
sl~ould he able to evaluate areas that might
THE ASIALAW
GUIDE TO FINANCIAL MARKETS
US DISCLOSURE
STANDARDS
United
States securities
laws operate
<)I> the general
principle
that a bank or i\lly other cc~mpany selling
securities
must provide
an investor
\vith 811 of the
“material”
information
that ;I l’re;~st~ni~l~l~l’ or “prudent”
investor
would
money.
Many
standard
different.
other
known
want
to know
countries
around
before
parting
the world
with
his
have a similar
but the practical application
of the standard is
The difference between the United States and
countries
litigation
is threefold.
culture
First, there IS the US’s wellunder
which
the
disclosure,
Guide
3 are also commonly
in part because
management’s
below) without
found
in Rule 144A ofterlngb,
it is very difficult
to draft
an adequate
discussion
and analysis (see discusslcm
many of the Guide 3 tables. WC dc> not
believe
that
in order for a law firtn
opinion
in a Rule 144A offering
to give a discl<>surc
all of the Guide
3 tat&>
especially in an equity offering, will be judged in hindsight
by hostile adversaries.
Second, there is a strong and
tnust be present in substantially
the same form as the SEC
requires. We believe that the Guide 3 tables are a tneans
adequately-financed
regulatory
agency, the SEC, which
formally
and informally
polices disclosure
standards.
to the end of providing
the investor
with all material
information.
They are nor the end in and of themselves.
Third,
The tables should
the materiality
standard
tnust be evaluated
against
the standards and customs of the United
Srates’ very
transparent
securities
markets,
not the bank’s hotne
market or the Euromarket.
Disclosure must be drafted with
all three of these differences
in mind and with an
awareness that a declaration
of effectiveness
by the SEC
does not insulate a foreign
bank from liability
for a
material
misstatement
or omission
in the offering
document.
In addition to this overall “materiality”
standard, the
SEC has imposed certain statistical
“form” requirements
on publicly-offered
securities.
Certain
of these fortn
requirements
have set the customary floor for disclosure in
the United States and have therefore come to be expected
in the context of the US markets. In a 144A offering, the
SEC’s form requirements
do not apply but the long custom
of their use in the public markets means that, as a practical
matter, many but not all of them are customarily disclosed
in placements to institutional
investors.
For banks there
are two significant
SEC form
requirements
that are likely to be very different and more
detailed than in the bank’s home market and in the
Euromarkets.
The first is the SEC’s “Statistical
Disclosure
by Bank Holding Companies”,
otherwise known as Guide
3. Guide 3 is a set of about 25 required tables and also
includes
required
narrative
information
on a bank’s
deposits, loans and investments.
Guide 3 has existed since
the early 1970s and was last revised by the SEC in 1986.
Significant
changes have occured since that time in bank
accounting
standards and the business of banking. The
SEC has a project to revise Guide 3, but it is not clear
when proposed revisions will be published.
Guide 3 applies in any public offering by a foreign
bank in the United States just the same as it would apply
to a US bank. The SEC staff has been quite open-minded
about waivers of certain types of Guide 3 information
for
foreign banks if the bank can show that it does not have
the information,
that it would cause significant expense to
produce it or that the infortnation
is not relevant for it.
The SEC is more likely to grant a waiver if the bank can
provide
alternative
information
which
may be more
relevant to the bank’s operations.
Significant
elements of the infortnation
required by
10
with
a strong
he imposed
dollop
of
on a Rule
common
144A
sense
offering
and
an
understanding
of the way chat the foreign hank operates,
as well as in light of the experience of other foreign banks.
In a Rule 144A offering,
the focus can he on providing
material infortnation
rather than on filling in the SEC’s
pre-set tables. As a result, tabular information
is often
substantially
easier for a foreign bank to prepare because ir
can, in most cases, use its existing
tnanagement
information
systems to create the rahles. Moreover, there
is room to replace the tabular information
with narrative
if that makes more sense in the particular
situation.
Finally, it is possible to modernize
the Guide 3 tables,
sotne of which are shelving their age, as the business of
banking has changed significantly
since many of these
tables were first conceptualized
in the 1970s.
We will provide one example of what we mean. Guide
3 requires that the amount of time deposits in amounts
greater than US$lOO,OOO be disclosed. The US domestic
context of this requirement
is that only deposits of less
than US$lOO,OOO are insured in the United States. But
this table often has no tneaning outside of the United
States
where
there
is nothing
magic
about
the
US$lOO,OOO number, and it has even less meaning in a
systetn where deposits are uninsured.
The purpose of the
table is to illustrate whether there are “hot” deposits that
will flow out of the bank or the banking system quickly at
any sign of trouble. In a Rule 144A offering we would not
recommend
that this table be slavishly followed.
Instead,
we would work with hank management,
and based on the
balance sheet and structure of the bank’s deposits and the
risks of its banking
system, create a table or other
disclosure that serves the same purpose - to show the risks
of “hot” deposits that tnight be pulled quickly.
There
should be no need to impose upon bank management
a
requiretnent
to categorize deposits by whether
they are
greater than US$lOO,OOO, something
that the bank’s
information
systems may not be set up to capture.
The second SEC “form” requiretnent
was enacted in
1997 and will be imposed on companies,
depending
on
size, during the next two years. it is the Market Risk
Disclosure
Rule. This
rule is intended
to require
significant
additional
statistical and narrative disclosure
THE ASIALAW
GUIDE TO FlNANClAL
MARKETS
about
derivatives
bear market
risk.
and other
financial
instruments
It also requires a narrative
discussion
the goals and strategy of risk management
assumptions
and limitations
of any models
measure
marerial
market
interest
risk.
It requires
rate, equity,
foreign
that
..
ot a hank’s ottering
guideline
to
be
tailored
document.
to
each
What
tallows
hank’s
in light of the securities to be offered
to whom they will he offered. It should
with
be read
light
and other
contained
market
risks to disclose
statistical
forward-lc>oking
information
about future potential
losses from its market
in
of the
more
15 ;t
individual
circumstances
the insestors
and the
used to
any company
currency
of
elements
detailed
and
also
infc>rmari~~n
in the chart that fc~llo\vs this article.
risks. It requires disclosure about financial
instruments.
a
category that is much broader than just derivatives.
A
bank may choose to disclose the information
in tabular
Financial
Statements
and Reconciliation
In an SEC-registered
deal, the financial
statements
for II
1.J,ln k must include n reformatting
fc~otnote, the notes must
include a numher of US-GAAP
(Generally
Accepred
form, by a sensitivity
Accounting
analysis or through
a Value at Risk
(VaR) model. The Market Risk Dtsclosure Rule imposes
a standard of disclosure that is greater than that required
Principles)
items,
and
net
income
;~nd
stockholders’
equity must he reconciled
to US GAAII
None of this is necessary in a Rule 144A offermg and the
preparation
of fmancial statements
in a format thar the
SEC will accept is often major work for the hank and its
outside accountants.
by virtually all other countries in the world and greater
than
that
required
by
the
Base1 Committee’s
recommended
standards. The nominal amounts or creditrisk weighted
amounts
of derivative
contracts are irrelevant for the purposes
The MD&A section
of the Market Risk Disclosure
Rule.
Instead, the Rule reduires an assessment
is often dense and
of the risk of loss, in fair value, earnings
turgid and can reflecf
or cash flow from market risk sensitive
instruments.
For an article
that
too much over-cautious
Description
of Business
and
Strategy
A complete description
of the business
areas covered, the types of cu‘;Tomerb
targeted
and the bank’s
products
should he provided.
Also a stew c)f the
contains a detailed discussion of this
key elements of the hank’s organlzatlon
lawyering
and not
rule, e-mail [email protected].
and, for an equity deal, its brr,lreg)
The Market Risk Disclosure
Rule
should be provided.
The hus~ness
enough of the strong,
applies directly only in SEC-registered
description
is virtually IXZZJCIa sensitive
deals hut we expect it, like Guide 3, to
clear story that
area.
Most banks large enough
to
have an impact on disclosure in Rule
contemplate
an offering in the United
management
should
144A offerings as well. As with Guide
States are listed in their own country or
are
alread)
pro\riding
3, the Market
Risk Disclosure
Rule,
be telling.
similaishould be viewed as a means to an end,
inft~rmation
in their honi~ m.irket.
not a goal in and of itself. It should be
Morectver, a Jrscrlptic>n cti rhe I~l>~nrs>
applied in a Rule 144A offering with a strong sense of the
is often the type of information
that investor rclilTions 01.
corporate communications
is already ll~i~kil~~
;~vail;thlc.
market risks of the bank and in light of the compromises
that other similar banks have made. We also believe that,
The description
of strategy
often
requires
senior
at least in the Rule 144A context,
an intelligent
management
time and attention
but the key work is in
application
of the Market
Risk Disclosure
Rule may
how to communicate
not whether to communicate.
provide a bank with more options for disclosure than have
previously existed.
Management’s
Discussion
and Analysis
Here is one example.
We often work on bank
Thr Management’s
Discussit)n snd Analysis, ohen c;~lleJ
an
“MD&A”
hy American
lawyers
and investment
securities offerings where bank management
tells us that
the SEC’s traditional
interest rate gap or mrsmatch table
hankers, IS a discussion, usdly
ccnwr~-r~
the hsr rhrec
does not provide useful information
and does not reflect
years and any interim periods, of the balance shrct anit
income statement from the Il~illlil~~lll~lltl~
point
of ~ICM’.
the way that the bank internally
manages interest rate
risk. The Market Risk Dtsclosure Rule makes it clear that
The idea is t<) provide management
with an <>ppoI-[unlt\
a bank can choose either a modernized
interest rate
to present the reasons hehind significant
chanxc:, and
mismatch table, a sensitivity analysis or a VaR analysis to
trends m recent income statements
and balance sheets.
disclose its interest rate risk.
The
SEC also expects
that
known
trend
and
uncertainties
will he revealed.
As you mighr ~m;tg~ne,
CORE ELEMENTS
OF AN OFFERING
DOCUMENT
depending upon
the bank’s indtvidual
cil-cumstances
the
In this section we set forth the core business and statistical
management’s
discussion
;IIIJ
analysi5
can IX quite
THE ASIALAW
GUDE TO FINANCIAL MARKETS
11
sensitive.
In our experience,
however,
there
always a way to work with bank management
investors the material information.
The MD&A
reflect
section
is often dense and turgid
too much over-cautious
of the strong,
clear
story
lawyering
that
to
and can
and not enough
management
telling.
This section should he written
as simple as possible, and should reflect
view of its own business.
is virtually
to provide
should
be
in English that is
the management’s
It should he inviting
to read and
make use of tables and graphs where that is a better way to
present the material.
We are sympathetic
to the need to
control
risks in this section
in light
of the fact that the
SEC and plaintiffs
lawyers have traditionally
focused on
the MD&A.
The MD&A
is stronger, and therefore less risky, when
it reflects a sound understanding
of the business and risks
of banking.
For example, it is important
to draft the net
interest
income
section
of the MD&A
wit-h an
understanding
of the trends in net interest margin, spreads
and the average balance sheets. It is not helpful to
investors to tell them that net interest income increased,
that interest income increased and that interest expense
increased.
Investors should know whether the increases
were driven by volume or rate changes and whether net
interest margin is rising or falling. Investors should also he
told management’s
views on the trends in net interest
margin, the proportion
of net income that is attributable
to fee income and whether that proportion
is growing.
Credit Risk
The bank’s management
of credit risk is one of the most
material elements for an investor and, not surprisingly,
substantial elements of Guide 3 speak to credit risk. A
foreign bank should expect to provide tabular information
categorizing its loan portfolio and its sub-standard or nonperforming
loans, by type of loan.
Sample categories
consumer,
large corporate,
and
might
be mortgage,
medium-sized business. The SEC will generally permit the
bank to use the categories that are required in its home
country.
A geographic
breakdown
should
also be
provided.
Guide 3 requires that these tables sl~ow five
years of information
and the SEC staff feels quite strongly
that three years is usually not enough.
We have only had
one experience where the SEC agreed to only three years
of information
and that was for a country where there had
been a coup, a radical restructuring
of the entire banking
system and intense inflation.
In that case there were
strong arguments that anything older than three years was
simply a different country.
The bank should also expect to provide a significant
discussion of its primary bank regulators’ rules on interest
accrual and when a loan is placed on non-accrual
status,
the provisions
that must be made for non-performing
12
loans and the rules and regulations
non-performing.
for classifying
loans a.\
Guide 3 also requires mbular
information
atx,ut ;t
hank’s reserves OFallowances and details on the changes in
such reserves.
encc>urage
hanking
Some
hidden
reserves
systems
and,
permit
offering,
such hidden
reserves, if they
disclosed, would be a significant
problem.
144A offering,
hidden
and even
for an SEC-registered
c~di
not
reserves are difficult
and the bank
should he prepared to discuss them in detail with
underwriters
and their counsel even if they are
ultimately
disclosed in the offering document.
In some markets
requirements
where
tllere
hi
Even in a Rule
are limited
the
not
disclosure
for credit risk, there are often delicate
issues
in the disclosure of credit risk and it is an area that bank
management
should consider carefully. In other tnarkets,
the Central Bank publishes the data and hanks are already
accustomed to significant disclosure in this area.
Interest
Rate Risk
Quaint as it may seem, Guide 3 is so old chat it predates
the US savings and loan crisis of the late 1980s. As an
artifact from the early 1970s it perfectly preserves one
atritude of that time - tt simply has no requirement
that
incerest rate risk be disclosed! For years, the SEC staff has
informally
imposed an interest rate mismatch table on all
SEC-registered
bank offermgs, to fill this gap. The new
Market Risk Disclosure Rule fills this gap in a forma! way,
requiring that interest rate risk be disclosed and suggesting
a mode! interest
rate gap table.
The Market
Risk
Disclosure Rule also would permit a sensitivity or Value at
Risk analysis of interest rate risk. Whatever
method
is
used to illustrate
interest rate risk, off-balance
lledging
strategies should be taken into account.
There is also a Guide 3 requirement
for average
balance sheets, showing average interest rates earned on
different types of liabilities and assets and a table which
allocates changes in interest income between changes in
volume and rate. The average balance sheets and volume
and rate tables are mandatory
in a public
offering.
Average balance sheets are often initially daunting
for a
foreign bank but tend to be one of the more informative
tables in explaining
the bank’s performance.
Although
Guide 3 requires that they be provided on the basis of a
daily average, weekly or monthly averages can be provided
if they are representative
of the bank’s balance sheet. The
SEC has been quite sympathetic
on this point.
Average balance sheets in a slimmed-down
form often
also appear in Rule 144A offerings and even when they do
not appear in the offering
document
they have been
produced for back-up diligernce and for cross-checking
of
the management’s
discussion and analysis of net interest
income.
THE ASIALAW
GUlDE TO FINANCIAL
MARKETS
A bank should
income
also be prepared
investments
Guide 3’s required
tables
mix debt and equity
cm
“investment
investments
its fixed-
regulatory
rules are set forth
and average yield.
document
as a marketing
to disclose
hy type, maturity
securities”
which
are very outdated.
Rule 144A offerings, we recommend
a sensible
of the SEC’s tahtes \\hich split> equity risk ad
rate risk into their separate comp~ments.
For
updating
interest
primer for US investors on
regime. There are \~irtuatty
this dis&>sure,
!10111(3
which
very early
in the offcrlng
ttx)! where they can serve i1s i1
the tiome
country’s regulator\
never any sensitiviries
is 21 m;ittcr
cd puhtic
reccmi
Operational
Risks
Significilnt
operati<&
risks ShoutJ he describe‘!.
would vary from bank to hank
hut,
at the
lnonwllt,
price risk that it faces. It is not necessary to disclose them
Year 2000 prohtem
Liquidity
Risk
A bank should he prepared to discuss, and provide tabular
information
on, the structure of its deposit base; including
the extent to which it has core retail deposits, it reties on
interhank
or other \vhotesate funding,
its deposits are
divided
between demand,
ttme and savings and other
npc~li
its operating
significant
elements
depending
environment.
Deposit insurance or the tack of it should
be dtscussed.
Currency
Risk
Exposure to currency risk should also be discussed. This
includes the extent to which loans are funded in one
currency
and lent in another,
the extent
to which
borrowers’ ability to repay is dependent
upon the stability
of exchange rates between certain currency
pairs, the
extent to which the hank has cross-border outstandings
and the hank’s exposure to fluctuations
in exchange rates,
which it may be managing with derivatives. The extent to
which a bank is taking positions in the foreign currenq
markets or acting as a dealer for customers should also be
discussed.
This information
can be provided
by a
combination
of narrative,
tables and Value at Risk
analysis. Finally, any information
on exchange controls or
currency boards in the ho;ne country should be discussed.
Legal
Risk
The bank’s legal and regulatory environment
should be
described. This includes the role of the central bank
and
other regulators, the power of the hanking authorities,
legal risks, such as the ahillty to foreclose or enforce
cottaterat,
the types of capital adequacy rules in place,
restrictions on dividends, gc>\rernment p<>!~c~eson bailouts
and
potential
changes in law or regulation
that might
Ixlve a material impact on the bank. The point is not to
provide a summary of local hanking laws. It is to provide
an overview
of the most significant
teg~at risks and
strengths
in the home country.
Sometimes
the key
THE ASIALAW
GUIDE TO FINANCIAL MARKETS
the
CoIIlltry.
Equity
Risk
A bank should he prepared to disclose the value of its
equity investments
and
provide an estimate of the equity
by name. A hank with a significant equity portfolto might
disclose its investments
by \ratue and type of Industry.
;th,ut
II>
certainty
include
a report
on
the
and whether
The\
~I.OIIIJ
b;mk’s progress w’ttll the
it u~ould impost
2000 dtsctosure
materl;ll
Ytvr
XI are.1 ot
costs. The SEC has ~na&
focus. It might also include, for example, a dlscusslon of
human resources, skilled labor sht~rtages, internal tr;tinin(:
programs, investments
in technt&>gy,
or preparatic)ns for
the Eun).
CONCLUSION
Iii the experience
of the ;iutht>rs, and inany
other> at our
firm, hank disclosure require5 ai understandung
cji the
business of banks, the experience
of other
hanks
approaching
the disclosure pnjcess and a wiltmgness
to
think through the practical application
of the SEC’s rules
to each country’s hanking system and regulations.
We
hetieve that the SEC staff IS mucl~
more open
to
reasonable
tvaivers from Guide
3 than is comm~~il\
believed.
That having heen said, it is clear that the US
SEC’s standards for bank disclosure are more detailed
and higher than in most other markets, and a hank
approaching
the US capital markets will need to grapple
with that fact.
Rule 144A Offering
SEC Form F-l Registration
Circular
Financial Statements
Three years of income statements and two years
of balance sheet.
Same.
Financial statements must be reformatted to
meet SEC requirements for banks OTa
reformatting footnote to the financial statements
prepared. A reformatting footnote is the most
popular option.
Not required.
Two years of net income and stockholders’
equity must be reconciled to US GAAP
(Generally Accepted Accounting Principles).
Reconciliation to US GAAP not required.
Market practice is to provide an appendix
stating the major differences between home
country GAAP and US GAAP.
Cash flow statements must be included and may
be prepared in accordance with IAS standards.
Can be excluded.
Latest interim financials must be included.
Latest interim financials included as a matter of
market practice.
Selected financial information, income and
balance sheet, must be provided for five years
and any interim periods. Only significant line
items are presented and the most recent year is
translated into US dollars.
Selected financial information provided for five
years in most cases, three years in other cases.
The most recent year is translated into US dollars.
If latest balance sheet is more than 10 months
old at the time of effectiveness, interim financials
must be reconciled to US GAAP.
Not required.
A capitalization table, showing short and long
term debt, shareholders’ equity and minority
interest both before and after the proposed
offering is provided as a matter of market
practice.
Same.
For debt and preferred stock, the ratio of
earnings to fixed charges must be disclosed.
Market practice is to include ratio if material.
Management’s
Discussion & Analysis
A discussion, from the point of view of
management, of the reasons behind the changes
and trends in all significant income statement
and balance sheet items. All known material
trends must be discussed. Covers three years of
income and two of balance sheet plus any
interim periods.
14
Same.
THE ASIALAW
GUIDE TO FiNANClAL
MARKETS
SEC Form F-l Registration
Rule 244A Offering
Circular
Risk Factors
Separate section specifically describing the risk
factors associated with the securities, the
country and other elements. Not required for
all banks from all countries, more typical for
emerging market banks and not typical for
Western European banks. After October 1,
1998 must be in “plain English”.
Same.
Business Description
Detailed description of the business of the bank,
usually running at least six to seven pages and
covering all significant aspects of the business
and the structure of the bank.
Same.
Risk Management
Risk Management. Discussion of bank’s risk
management, policies and committees.
Should
contain a discussion of the known limitations
in
VaR models or other risk analysis. The goals
and strategy of risk management and use of
derivatives and instruments should be discussed.
Similar.
Interest Rate Risk
Interest Rate Risk. Typically
an interest rate
asset/liability
gap table is included.
Alternatively,
sensitivity analysis or Value at
Risk analysis can be provided.
Same.
Average Balance Sheets. Three years of average
Abbreviated form usually included. Even if not
disclosed, information
in it is part of diligence to
underwriters and their counsel and forms basis
of management’s discussion and analysis of net
interest income and net interest margin.
balance sheets, showing interest income/expense
and average rates/yield on all major categories
of assets and liabilities.
Must be separated by
domestic and international
categories for those
banks with significant international
operations.
Averages are supposed to be daily but the SEC
has accepted weekly or monthly from foreign
banks.
Volume and Rate Arzalysis. Three years of
changes in net interest income, showing volume
and rate analysis. Must be separated by
domestic and international
categories for those
banks with significant international
operations.
Sometimes dealt with textually rather than by a
table. Often not disclosed, but is part of
diligence to underwriters and their counsel and
forms the basis of management’s discussion and
analysis of net interest income and net interest
margin.
Margin and Average Spread. Three years of
Three years of net interest margin and spread
usually disclosed although not in the tabular
average interest-earning
assets, net interest
continued
THE ASIALAW
GUIDE TO FINANCIAL MARKETS
otmka,
15
SEC Form F-I Registrafion
Rule 144A 0 fferiq
Circular
income, gross margin, net interest margin, and
average spread.
form required by Guide 3.
Interest-Earning Deposits. Interest-earning
deposits with other banks, segregated by country
or region for three years.
Included only if material.
Securities Portfolio-Value. For each of the last
three years, report on securities held, show book
value, discuss market value and any valuation
allowance, discuss differences between trading
and held to maturity, segregate by domestic and
international and by government and other
securities.
Textual or tabular discussion of securities
portfolio with all material elements typicall)
included. Can be divided between debt and
equity.
Securities Portfolio-Yields. For each of the last
three years, show the book amount of securities
that are due in one year or less, after one year to
five years, after five years to ten years and state
the weighted average yield for each range of
maturities. For banks with significant
international holdings, segregate domestic and
international.
Show material elements only.
Credit Risk
L
Loans by T)qe. For each of the last five years,
disclose loans by types of customer, ie,
commercial, financial, agricultural, real estate,
mortgage, consumer, construction. The SEC has
suggestedcategories but will permit banks to use
their own internal categories as shown in
internal management information systems.
Similar, dependin g on materiality and loan
growth patterns.
Loans by Maturity and Interest Rate Sensitivity.
For each of the last five years show loans that
Ire due in less than one year, one to five years,
and over five years. The loans must be set forth
mytype and the total amount of loans that are
“ixed or variable rate must be shown.
Substantially the same depending on materiality
and loan growth patterns.
Loa Losses. A fin year analysis of loan losses,
3y type, including changes in the allowance for
oan losses, recoveries, net charge offs and
3rovisions. Also five year analysis of the
allocation of the allowance. SEC staff sometimes
-equires that this discussion be updated for
nterim periods.
Substantially similar, depending on materiality.
4iubstandard, Problem Loans and other Risk
;5iements in the Loan Portfolio. For each of the
1ast five years, show non-accruing loans by type.
14 substantial narrative discussion of the bank’s
1mderwriting and credit control policies, the
Substantially similar.
16
THE ASiAlAW
GUIDE TO FlNANCiAL
MARKETS
!
Rule 144A OffeGg
SEC Form F-I Registration
Circular
policy for placing loans on non-accrual, of
provisioning policies, of all risk elements in the
portfolio and of potential problem loans is
required. The amount of interest that would have
been recorded had non-accruing loans been
current must be disclosed. SEC staff may require
that the information be included for interim
periods.
Liquidity
Risk
Deposits. For each of the last three years, show
types of deposits (demand, time, etc) in excess of
10% of average total deposits and segregated
between domestic and foreign.
Should be specifically tailored to the structure of
the balance sheet.
Large Deposits. For last year end show time
deposits in excess of US$lOO,OOO by time
remaining to maturity (under three months, three
to six months, six to twelve months, over twelve
months).
Dependence on large time deposits disclosed to
the extent material and according to context in
the home country.
Short-Term Borrowings. Show short-term
borrowings, for each of the last three years, to
the extent they exceeded 30% of stockholders’
equity.
Disclosed if material.
Currency Risk
Cross-Border Outstandings. Geographic
breakdown of foreign country outstandings, as
of each of the last three years, required if such
outstandings are greater than 1% of total assets.
Disclosure by type of borrower also required
and, if there are significant loans to countries
with liquidity difficulties additional disclosure is
required.
Cross-border outstandings disclosed to the
extent material. Should be formatted for the
bank’s risk profile rather than a pre-set table.
Exchange Controls and Exchange Information.
Discussion of any applicable exchange controls
and exchange rates.
Same.
Foreign Exchange Risk. If material show
potential future losses from forward contracts
and other financial instruments by VaR,
sensitivity or table.
Similar.
Equity Risk
Equity Price Risk. A table, sensitivity or VaR
analysis showing equity price risk if material.
THE ASIALAW
GUIDE TO FINANCIAL MARKETS
Similar.
17
Rule 144A Offeriq
SEC For-m F-l Registration
Information
on the Home Country,
Taxation and Markets
Legal Risk. Discussion of the supervision and
regulation of the banking system in the home
country. The purpose is to show key legal risks.
For banks from countries in which other banks
have issued securities in the US, this section
becomes fairly standard and precedents may
exist.
Same.
Competition. Several paragraphs on competition
in the home market.
Same.
Trading Markets. Description of any trading
markets in the home country for the securities.
Any applicable US trading market is also
included.
Same.
Home Country Economic lnfornzatiolz or Annex.
As a matter of market custom, an annex on the
home country economy is prepared for emerging
markets. This is nor necessary for G-7 countries
and for most other Western European countries.
Same.
Taxation. Material elements of home country
and US taxation of securities is described.
Same.
The Underwriting
Circular
and the Securities
Underwriting. Two to three page description of
the plan of distribution, the names of the
underwriters, the underwriter’s compensation
and other details.
Substantially same.
Affiliate of Bank as Underwriter. An affiliate of
the bank may participate in the underwriting
group outside of the United Stares and subject to
certain restrictions. An authorized Section 20
susidiary is required to participate in the US
underwriting.
Same.
Description of the Securities. Description of the
securities being offered, often running several
pages, is required. Includes interest rates,
calculation methods, events of defaults,
procedures for note holders meetings, etc.
Same.
Custody Risk. Custody risk, clearance and
settlement mechanics are also described.
Same.
Market for the Securities. Description of the
trading market for the securities and the home
country exchanges.
Same.
THE ASIALAW
GUIDE TO NNANCIAL
MARKETS
SEC Form F-l Registratiorz
Rule 144A Offering
Use of Proceeds. The use of the proceeds must
be disclosed, including any temporary
investments. If the proceeds will be used for an
acquisition or to repay debt, it must be
disclosed. The SEC staff often focuses attention
on this section.
Same.
Circular
Other Disclosure Requirements
Material Properties. Material properties must be
disclosed. This is usually a short and easy
section for banks.
Same.
Material Litigation. Material litigation must be
disclosed.
Same.
Directors aud Officers. Names, ages and
biographical information on directors and senior
officers are provided. If, and onZ>fif, aggregate
compensation is disclosed in the home market, it
must be disclosed here. Material transactions
between the bank and directors and officers
must be disclosed. If the bank, as many do,
gives home mortgage and other consumer loans
to officers and directors, the number is typically
disclosed as an aggregate.
Material information only, although as a
marketing matter, biographical and other data
on the directors and senior management is
sometimes included.
Controlling Ownership. Any ownership of more
than 5% of the stock of the bank must, if
known to the bank, be disclosed, and all
substantial and controlling ownership disclosed.
Ownership of company stock by the officers and
directors must be disclosed and any family
relationships between them.
Controlling or influential shareholdings only.
Reiated Party Transactions. All material
transactions with related parties must be
disclosed, usually in the aggregate. For some
banks, particularly those controlled by families,
and with outstanding loans to members of the
control group this can sometimes be sensitive.
Material related party transactions will form
part of the diligence and may be disclosed.
Material Contracts. Copies of all material
contracts must be attached to the registration
statement and become public. This includes
general contracts and the contracts related to the
offering. Sometimes, confidential treatment can
be obtained from the SEC for certain contracts.
This is sometimes sensitive.
Copies need not be attached but material
contracts may need to be discussed generally.
Expenses. Significant expenses related to the
offering must be disclosed.
Not necessary.
continued
TUE ASIALAW
GUlDE TO FINANCIAL MARKETS
overleo
19
SEC Form F-l Registration
Rule 144A 0 ffering Circular
On-Going
Reporting
Requirements
Annual. An annual report on Form 20-F must
be filed within six months after the end of each
fiscal year. The annual report must contain
substantially all of the F-l disclosure.
Copies of annual home country reports need to
be furnished with the SEC.
Interim. Interim reports made public in the
home country must also be furnished to the
SEC. Interim financials do not need to be
reformatted or reconciled.
Copies of interim home country reports need to
be furnished to the SEC.
Materiality and Listing. Listing agreements and
the securities laws will require that certain
material events that may affect the price of the
securities be disclosed. The NYSE requires that
a company act promptly to dispel any rumors.
Not applicable.
General warning - The article and chart attached are simplifications of complex legal and regulatory reqzrirenlcrlts.
They should not be relied upon as legal advice and should be used with art understanding that indiuidual
circumstances may vary greatly.
20
THE ASIALAW
GUIDE TO FINANCIAL MARKETS