What Happened?

Shareholders lost billions when two banks collapsed in the spring of 2023, and a new federal watchdog report says a gap in oversight may have left investors in the dark before the failures hit.

The Government Accountability Office (GAO), Congress's independent auditing arm, published a report Sept. 3 addressed to the House Financial Services Committee. It found that all three banks that failed in spring 2023 described internal limits on interest rate and liquidity risk in their public filings, but never told investors when those limits were crossed or what the bank did about it.

Why Does it Matter to Me?

If you own bank stocks, a retirement account, or a mutual fund, this matters to you. Investors rely on public disclosures to decide whether a company is safe to put money into. The GAO found that the rules meant to protect those investors have a structural hole.

Under the Securities Exchange Act of 1934, the U.S. Securities and Exchange Commission (SEC) normally reviews public companies' risk disclosures. But for banks that operate without a holding company, Congress gave that review role to banking regulators instead. Banking regulators focus on whether the overall banking system is stable, not on whether individual shareholders have the information they need to make sound decisions.

The GAO found at least 11 banks currently operate in this structure, meaning their public risk disclosures face no review from the SEC.

Both Sides, Now

The GAO issued two recommendations. First, it said Congress should reconsider who has authority to review annual financial disclosures for public banks without holding companies. Second, it said the SEC should issue clearer guidance to help companies decide what risk information is significant enough to require disclosure to investors.

The SEC disagreed with the second recommendation. The GAO said the SEC should carry it out anyway, and the disagreement remains unresolved.

The report does not include on-record responses from banking regulators, Congress, or the banks themselves. The GAO's position is that investors are not getting the same protections they would receive if these banks had a different corporate structure.

What Happens Next?

The report was addressed to the House Financial Services Committee, which oversees banking and securities law. For anything to change, Congress would need to act on the GAO's first recommendation, or the SEC would need to reverse course on the second. Neither step is scheduled. No legislation has been introduced, and no hearing date has been set.

Until Congress acts or the SEC changes its position, banks in this structure will continue to have their investor disclosures reviewed by banking regulators rather than the SEC.

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