Appendix A

DISCLOSURE REQUIREMENTS FOR BANK HOLDING COMPANIES

In order to provide full disclosure to investors through Commission filings, the Commission has adopted disclosure standards for bank holding companies to supplement disclosure

required by GAAP, including the following:

Article 9 of Regulation S-X

Article 9, first adopted in the early 1970's, prescribes

the form and content of financial statements for bank holding companies in Commission filings. In addition, Article 9 requires general disclosures concerning foreign activities.

Industry Guide 3

Guide requires statistical disclosures by bank holding

companies.

The Guide was implemented in 1976 in response to

the impact of real estate industry problems on banks in 1973-74. These matters indicated the need for more detailed analytical data to enable investors to assess the risks inherent in banking operations. Guide 3 requires disclosure of: distributions of assets, liabilities and equity; information concerning the investment portfolio; types of loans, including domestic loan concentration (by industry) and foreign loan concentration; interest rate sensitivity; risk elements; and loan loss experience.

2

Staff Accounting Bulletins 49 and 49A

Issued by the Commission's staff in October 1982, SAB 49 calls for disclosures by bank holding companies about loans to foreign countries that are experiencing liquidity problems. Similarly, the staff issued SAB 49A in January 1983 to provide guidance concerning additional disclosures concerning the restructuring of existing debt in these countries, fundings of additional borrowings and related matters.

Staff Accounting Bulletin 50

SAB 50, issued in March 1983, expresses the staff's view with respect to financial statement and Industry Guide disclosures required in filings involving the formation of one-bank holding companies.

Staff Accounting Bulletin 56

This SAB, issued in February 1984, sets forth the staff's views concerning disclosures about allocated transfer risk reserves mandated by the bank regulators for purposes of the supervisory and regulatory functions of those agencies.

Mr. DINGELL. Mr. Sampson.

STATEMENT OF CLARENCE SAMPSON

Mr. SAMPSON. Thank you, Mr. Chairman.

Chairman Dingell, and subcommittee members, I will address the issues of GAAP/RAP differences-GAAP, Generally Accepted Accounting Principles, and RAP, Regulatory Accounting Principles, and accounting for restructured loans.

To begin, all financial statements filed with the SEC must be prepared in accordance with GAAP. The banking agencies generally require that GAAP be followed, but have made exceptions for specific transactions or reports. The primary GAAP/RAP difference for banks is that the maximum goodwill amortization period permitted by the bank regulators are shorter than those permitted under GAAP, as are the SEC's.

The bank regulators require sales of receivables with recourse to be accounted for as financings rather than as sales, as generally required under GAAP.

Bank regulators do not permit in-substance defeasance. They require the debt to remain on the balance sheet as a liability. GAAP treats the debt as extinguished if certain criteria are met.

Net worth certificates issued by the FDIC are included in capital for RAP purposes. Under GAAP, the net worth certificate and the related receivables are offset and no accounting recognition is given to the transaction.

In addition to these accounting standard differences, the bank regulators do not require the financial statements of all banks to be audited by an independent public accountant. However, we have been informed by the bank regulators that many of the financial statements filed with those agencies are, in fact, so audited.

With respect to restructured loans, GAAP provides standards of accounting for troubled debt restructurings in financial accounting standard No. 15. FAS 15 generally provides that no loss need be recognized for modifications of the terms of a loan unless the total of all future payments will not be sufficient to recover the amount of the loan.

The effect of this is that losses of interest due to modifications are accounted for in the future periods in which the below-normal return is received. This treatment is consistent with the historical cost model on which GAAP is based.

Accounting for impairment of loans and other assets requires only that the balance sheet amount be recoverable at some time in the future. It need not include a normal return on the amount invested.

FAS 15 also calls for continued disclosure of information about troubled debt restructurings including the amount of interest income recognized and that which would have been recognized under the original terms.

It is important to note that loan losses must be recognized after a restructuring if it is probable that the recorded amount will not be collected and the amount of loss can be estimated. Also, additional loan loss reserves may become necessary on restructured loans be

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cause assessments of collectibility must be made on an ongoing basis.

Thank you.

Mr. DINGELL. Mr. Lynch.

STATEMENT OF GARY G. LYNCH

Mr. LYNCH. Chairman Dingell, and members of the subcommittee, the Commission has the authority through the Federal securities laws to investigate and take enforcement action with respect to securities fraud committed by a bank, by a bank holding company or by associated persons or with respect to reporting violations committed by a bank holding company.

Since 1981, the Commission has brought about 18 enforcement actions against banking institutions or against persons associated with banking institutions. Two-thirds of those cases have involved bank holding companies reporting directly to the Commission and 11 have involved financial statement disclosure problems. The remaining cases have involved such issues as market manipulation, disclosures relating to changes in corporate control and insider trading.

The most prevalent problem dealt with in recent years by the Enforcement Division is the failure of banks to establish adequate loan loss allowances. The level of loan loss reserves has a direct effect on the bottom line profits reported by a financial institution. For example, the Commission has since the beginning of 1984 brought four injunctive actions alleging that the income of the banking institutions involved was materially overstated as a result of the institutions' failures to establish an adequate loan loss allowance. These include SEC and OCC v. Charles D. Fraser and others, where the SEC and the Comptroller of the Currency brought an action against the former chairman and CEO of the First National Bank of Midland, TX and SEC v. Charles E. McMahen, and others, where we sued three of the former senior executives of the Southwest Bancshares. The Commission brought an action to correct the loan loss reserve problems In The Matter of Uticabankshares.

The Commission also brought enforcement actions involving a variety of other bank disclosure issues. In the Michigan National case, the Commission proceeded administratively against the bank holding company and its former president for allegedly failing to disclose significant benefits received by the president resulting from related party transactions with the bank.

In an administrative proceeding against Richard A. Chepul, the Commission suspended from accounting practice before the Commission the former chief financial officer of the bank holding company, based on his participation in filings that allegedly concealed the bank holding company's deteriorating financial condition.

In the Citizen's Trust case, the Commission alleged that a bank holding company failed to maintain accurate books and records concerning its transactions and dispositions of assets as required by the accounting provisions of the Foreign Corrupt Practices Act.

Approximately 30 of our current open investigations involve banks or bank holding companies. When the SEC conducts its in

vestigations, the staff consults with the banking agency with statutory jurisdiction over the bank involved in the investigation.

While agency examination reports are by law confidential, and the banking agencies interpret the confidentiality requirement strictly, the agencies have provided us with such examination reports or portions of such reports upon our request.

In recent years we have worked together to streamline the process and we are now receiving the requested information from the banking agencies more quickly than we did in the past. We also provide the SEC's investigative files to the banking agencies on request and provide them advance notice of proposed enforcement actions which involve banks under their supervision.

Thank you.

Mr. DINGELL. Thank you, sir.

Mr. Hodges.

Mr. HODGES. I have no statement.

Mr. DINGELL. The Chair thanks you all for a very helpful statement. I am pleased to hear there is more speedy interchange between the SEC and the bank regulatory agencies. I believe this is very much in the public interest.

Mr. Shad, perhaps I could direct these questions to you and Mr. Lynch.

First, you have indicated that the SEC does coordinate work with the Federal agencies that are responsible for administering and enforcing securities laws and banking laws. That would include both your State and Federal regulatory bodies?

Mr. SHAD. It is principally Federal, but there would be occasions where State regulatory bodies might be involved.

Mr. DINGELL. Could you explain how the SEC works with the Federal Home Loan Bank Board?

Mr. SHAD. We have direct jurisdiction over about 70 savings and loan association holding companies. We do not have regulatory jurisdiction over about 300 S&L's, individual savings and loans, that are not part of a holding company.

On occasion, when we have had important problems or, concerns with some of the S&L holding companies, we have apprised-in some cases I have directly apprised the chairman-the Federal Home Loan Bank Board, and our two staffs have consulted with one another frequently.

Mr. DINGELL. Is there any question as to your authority to address the behavior of savings and loans with regard to investor fraud?

Are there any limitations on the power of the SEC that would be any different than they might be under a corporation in a different line of work which might be differently situated?

Mr. SHAD. Not as to fraud in the marketplace.

Mr. DINGELL. Now, with regard to the reporting requirements, what are the powers and limitations of the SEC in connection with these matters?

Mr. SHAD. Well, as to those that file with us, we have direct jurisdiction over the form and substance of their filings and they are reviewed. We review a very high percentage of the S&L holding companies.