April 2021 financial reporting, governance, and risk management

| 4/21/2021
April 2021 financial reporting, governance, and risk management

Message from Mike Percy, Managing Partner, Financial Services

Dear FIEB readers,

Before I offer perspectives on the past month, I want to note that I recently observed another evolution of our typical tasks. Like most people, when I take vacation, I set my email to reply that I am out of the office. When I started to perform that task a few weeks ago, it struck me as no longer relevant as I, like many of us, have been away from the office for more than 13 months. So, I corrected my auto-reply message to indicate I would be away from my email.

With earnings releases starting to come in, we are seeing a significant improvement in earnings compared to the first quarter of 2020 for the vast majority of filers that have issued to date. While we have encouraging signs, it is still early to speculate on how collectively the industry fared for the first quarter of 2021. Of course, we will have a much better viewpoint for our next month’s issue.

As expected, the regulatory activity has increased over the past month, including in areas of artificial intelligence, diversity, Bank Secrecy Act/anti-money laundering, and forbearance. We continue to see a great deal of interest in environmental, social, and governance issues, with a focus on climate change disclosures. With the new chair, Gary Gensler, sworn in at the Securities and Exchange Commission, we will see how its policy stance on ESG disclosure unfolds. We have seen increased interest from policymakers from around the world and expect ESG to be a major public policy focus for 2021.

I hope this message finds you, your friends, your family, and your colleagues well.

Matters of importance from the federal financial institution regulators

Agencies issue request for information on banks’ use of artificial intelligence

On March 29, 2021, the Federal Deposit Insurance Corp. (FDIC), Board of Governors of the Federal Reserve System (Fed), Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), and National Credit Union Administration (NCUA) jointly issued a request for information (RFI) to gather insight on financial institutions’ use of artificial intelligence (AI). The agencies are seeking feedback from financial institutions and other industry participants on how they are using these capabilities to provide banking services to consumers or for other business or operational purposes.

In the release, the agencies noted that “with appropriate governance, risk management, and compliance management, financial institutions’ use of innovative technologies and techniques, such as those involving AI, has the potential to augment business decision-making, and enhance services available to consumers and businesses.”

The RFI specifically requests input on appropriate governance, risk management, and controls over AI and on any challenges in developing, adopting, and managing AI. The RFI also solicits respondents’ views on the use of AI in financial services to assist in determining whether any clarifications from the agencies would be helpful for financial institutions’ use of AI in a safe and sound manner and in compliance with applicable laws and regulations, including those related to consumer protection.

Financial institutions and fintech providers are encouraged to review the RFI, and interested parties may submit responses to the agencies by June 1, 2021.

Agencies issue statement on model risk guidance related to BSA/AML

The FDIC, Fed, and OCC along with the NCUA and the Financial Crimes Enforcement Network (FinCEN) on April 9, 2021, issued an interagency statement to address how the risk management principles in the agencies’ “Supervisory Guidance on Model Risk Management” (MRMG) relate to systems or models used by banks to assist in complying with Bank Secrecy Act/anti-money laundering (BSA/AML) laws and regulations. This statement is intended to clarify how the MRMG may be a useful resource to guide an institution’s model risk management framework and assist with BSA/AML compliance efforts.

The agencies emphasized that no specific model risk management framework is required and that this statement does not alter existing BSA/AML regulatory requirements or establish new supervisory expectations. The statement also reminds institutions of the importance of due diligence prior to using third-party models as well as ongoing monitoring of a third party and the model being used for compliance-related activities.

Separately, the agencies issued a related RFI on April 12, 2021, seeking information from interested parties on the extent to which the principles discussed in the MRMG support banks’ compliance with BSA/AML and Office of Foreign Assets Control requirements. The agencies are particularly interested in feedback on how the MRMG principles may support compliance activities and any differences in perceptions regarding their application.

Comments are due June 11, 2021.

OCC issues new CECL handbook

On April 15, 2021, the OCC issued the new “Allowances for Credit Losses” booklet of the Comptroller’s Handbook. The 115-page booklet is prepared for OCC examiners in connection with their examination and supervision of OCC-regulated institutions that have adopted the current expected credit losses (CECL) methodology of estimating allowances for credit losses (ACLs). According to OCC Bulletin 2021-20, “Allowances for Credit Losses: New Comptroller’s Handbook Booklet,” the booklet:

  • “Describes the CECL methodology’s scope, risks associated with ACLs, and seven primary components used to estimate ACLs
  • “Discusses documentation and considerations for
    • “Expected credit losses
    • “Estimation processes, including validation of and internal controls over these processes
    • “The maintenance of appropriate ACLs
    • “The responsibilities of boards of directors and management
    • “Examiner reviews of ACLs
  • “Provides procedures to aid examiners when assessing appropriateness of a bank’s ACL methodologies and balances
  • “Is consistent with the ‘Interagency Policy Statement on Allowances for Credit Losses’ conveyed by OCC Bulletin 2020-49 and the ‘Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses’ conveyed by OCC Bulletin 2019-17

Agencies request public comment on private flood insurance guidance

On March 11, 2021, the FDIC, Fed, OCC, and NCUA along with the Farm Credit Administration requested public comment on 24 proposed supplemental interagency questions and answers regarding the acceptance of flood insurance policies issued by private insurers.

The supplemental Q&As are intended to assist lenders in meeting their responsibilities under the agencies’ final rule issued in February 2019 and address both mandatory and discretionary acceptance of private flood insurance for loans subject to the mandatory purchase requirement.

Comments on the proposed additions to the interagency Q&As must be submitted on or before May 17, 2021.

FDIC encourages voluntary diversity self-assessment

The FDIC’s Office of Minority and Women Inclusion (OMWI) on March 15, 2021, issued a Financial Institution Letter, FIL 17-2021, encouraging all FDIC-supervised financial institutions with 100 or more employees to submit voluntary self-assessments of their diversity policies and practices.

The OMWI assesses the diversity policies and practices among FDIC-regulated institutions based on an organization’s:

  • Commitment to diversity and inclusion
  • Workforce profile and employment practices
  • Procurement and business practices and supplier diversity
  • Practices to promote transparency of organizational diversity and inclusion
  • Self-assessment

The automated self-assessment is accessible through the FDICconnect portal. The assessment is not an examination requirement, and results do not affect an institution’s safety and soundness, consumer compliance, or Community Reinvestment Act examination ratings.

The FDIC is accepting submissions for the financial institution diversity self-assessment until June 30, 2021.

FinCEN issues ANPR on beneficial ownerships

The Financial Crimes Enforcement Network (FinCEN) on April 5, 2021, issued an advance notice of proposed rulemaking (ANPR) requesting public input on the procedures and standards for reporting companies to submit information to FinCEN on beneficial ownerships. This ANPR represents the initial rulemaking activity as required by the Corporate Transparency Act (CTA) that was included in the National Defense Authorization Act for Fiscal Year 2021 (NDAA).

Also as required as part of CTA implementation efforts, FinCEN is seeking input on the development of a confidential and secure database where the gathered beneficial interest information will be maintained. The CTA additionally authorizes FinCEN to disclose certain beneficial ownership information, under certain circumstances, to recipients including federal law enforcement agencies. As part of the broader rulemaking initiative, FinCEN eventually will revise certain customer due diligence requirements for financial institutions to reflect the changes to beneficial ownership reporting, once finalized.

Comments on the ANPR are due May 5, 2021.

CFPB issues bulletin warning mortgage servicers on customers exiting forbearance

The Consumer Financial Protection Bureau (CFPB) issued a compliance bulletin on April 1, 2021, to warn mortgage servicers to “take all necessary steps now to avoid a wave of avoidable foreclosures.” The bulletin directs servicers to dedicate adequate resources and staff to ensure they are prepared for an expected surge in borrowers needing help as they exit COVID-19 relief programs this summer and fall.

The CFPB said it will “closely monitor” servicers’ efforts as they engage with borrowers, respond to requests, and process loss mitigation applications. The CFPB will be paying particular attention to how servicers are:

  • Being proactive and contacting borrowers in forbearance before the end of the forbearance period
  • Working with borrowers to ensure all documentation and information is available to evaluate who needs assistance
  • Assessing language access to comply with the Equal Credit Opportunity Act and other laws related to communications with borrowers with limited English proficiency
  • Evaluating income fairly in determining eligibility for loss mitigation options
  • Handling inquiries promptly
  • Complying with foreclosure restrictions in Regulation X and other federal and state restrictions in order to prevent avoidable foreclosures

CFPB issues proposed rule prohibiting foreclosure notices until Dec. 31

Following its April 1 bulletin, the CFPB issued a proposed set of rules on April 5, 2021, to ensure that servicers and borrowers have the tools and time needed and work together to prevent avoidable foreclosures. The proposal would establish a temporary COVID-19 emergency pre-foreclosure review period under Regulation X that would prohibit mortgage servicers from starting foreclosure until after Dec. 31, 2021.

The proposal also would permit servicers to extend certain streamlined loan modifications to borrowers with COVID-19-related hardships based on the evaluation of an incomplete application. In addition, the proposal would make temporary changes to certain required servicer communications to ensure borrowers are receiving important information regarding their options.

The provisions in the proposal would apply only to mortgage loans secured by the borrower’s principal residence. The proposed effective date of the temporary rule is Aug. 31, 2021, and if finalized, it would remain in effect until Aug. 31, 2022.

The CFPB will accept comments on the proposal until May 10, 2021.

CFPB rescinds numerous policy statements

The CFPB has rescinded a number of policy statements in recent weeks. On March 11, 2021, the bureau rescinded a policy statement that was issued in January 2020 that clarified the bureau’s approach to citing and challenging “abusive” conduct in supervision or enforcement actions.

On March 31, 2021, the CFPB rescinded seven additional policy statements issued in 2020 that provided temporary flexibilities to financial institutions in consumer financial products. These seven rescissions were effective April 1, 2021. In the release, the CFPB asserted that it “intends to exercise the full scope of the supervisory and enforcement authority provided under the Dodd-Frank Act.”

Paycheck Protection Program (PPP)

Government approves PPP extension

A bill to amend the Small Business Act and the Coronavirus Aid, Relief, and Economic Security Act to extend the covered period for the Paycheck Protection Program and for other purposes was introduced in the House (H.R. 1799) and the Senate (S. 723) on March 11, 2021. On March 30, 2021, President Joseph Biden signed the PPP Extension Act of 2021 into law. The act extends the PPP deadline to May 31, 2021, and provides an additional 30 days after that for processing pending applications.

Current developments in climate change and ESG disclosures

SEC issues risk alert on ESG investing

The Securities and Exchange Commission (SEC) Division of Examinations released, on April 9, 2021, a risk alert, “The Division of Examinations’ Review of ESG Investing,” detailing observations from recent exams of investment advisers, registered investment companies, and private funds offering environmental, social, and governance (ESG) products and services. The alert is intended to highlight risk areas and assist firms in developing and enhancing their compliance practices. The alert notes that entities approach ESG investing in various ways. It details observations of deficiencies and internal control weaknesses related to ESG investing from the examinations and provides observations of effective practices. The alert also says that firms should present disclosures that are clear, precise, and tailored to firms’ specific approaches to ESG investing and that align with the firms’ actual practices.

Commissioner issues statement on ESG risk alert

SEC Commissioner Hester M. Peirce issued, on April 12, 2021, a statement following the release of the staff ESG risk alert on April 9. Peirce says, “Firms claiming to be conducting ESG investing need to explain to investors what they mean by ESG and they need to do what they say they are doing.” She says that the risk alert requires some context and should not be interpreted as a sign that ESG investment strategies are a unique consideration for examiners. As with any other investment strategy, the SEC examiners will be looking for consistency between claims and practices and not assessing whether a firm’s strategy is a good one and not attempting to insert its own views in the investment advisory process.

In addition, Peirce notes that the risk alert should be considered with the SEC’s two recent proxy voting interpretive releases, and she clarifies that firms do not need a special set of policies and procedures for ESG or for any investment strategy. Firms’ policies and procedures should be designed around the investment strategies the firm uses, and the risk alert does not create new obligations for registrants. Peirce says that the staff’s role is to understand whether firms are adhering to their own ESG claims.

Peirce concludes that while the risk alert raises questions, she hopes that it will be a useful tool for firms that sell ESG products and services and a useful protection for the investors that buy those products and services.

SEC launches climate and ESG resource page

The SEC has created a new page addressing the SEC’s response to climate and ESG risks and opportunities. The page brings together all of the recent climate- and ESG-related actions in one location.

From the Financial Accounting Standards Board (FASB)

FASB issues goodwill triggering event accounting alternative

On March 30, 2021, the FASB issued ASU 2021-03, “Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events.” This ASU provides private companies and not-for-profit entities with an alternative to monitor and evaluate goodwill impairment triggering events only as of the reporting date, whether the reporting period is an interim or annual period. An entity that elects this alternative is not required to monitor for goodwill impairment triggering events during the reporting period. Under the alternative, an entity should evaluate the facts and circumstances as of the end of each reporting period to determine whether a triggering event exists and, if so, whether it is more likely than not that goodwill is impaired. The ASU does not require incremental disclosures beyond existing disclosure requirements.

The ASU is effective on a prospective basis for fiscal years beginning after Dec. 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance as of March 30, 2021. Furthermore, an entity should not retroactively adopt this ASU for interim financial statements already issued. The ASU provides an unconditional one-time option to adopt the amendments prospectively after its effective date without assessing preferability under Topic 250.

FASB continues to consider changes to goodwill accounting

The FASB is continuing its project work on identifiable intangible assets and subsequent accounting for goodwill, and updates can be found on its project page. At the FASB’s Dec. 16, 2020, board meeting, tentative decisions regarding goodwill included:

  • Goodwill would be amortized on a straight-line basis.
  • The default amortization period would be 10 years unless an entity elects and justifies a different period.
  • A different amortization period would have a cap.
  • No reassessment of amortization period would be required.

At the meeting, the board also directed staff to perform additional research and outreach relating to:

  • Factors and criteria that would justify deviation from the default amortization period
  • Interaction of the factors to consider for the amortization period and the criteria to justify a deviation with the specifics of a cap

The board met again on April 7, 2021, to specifically discuss “(1) subsuming certain identifiable intangible assets in a business combination into goodwill and (2) factors entities could consider when estimating the useful life of goodwill if they choose to deviate from the default period and how such factors might affect the specifics of a potential cap on the amortization period.” As a result of the discussions, the board directed staff to perform additional research and outreach related to:

  • Users’ perspectives on what types of intangible assets provide decision-useful information and which should be incorporated into goodwill
  • Factors that might be used to estimate the useful life of goodwill, including management’s estimated payback period

More from the Securities and Exchange Commission (SEC)

SEC chair sworn in

On March 2, 2021, Gary Gensler, President Biden’s nominee for the SEC chair, appeared before the Senate banking committee. On March 10, 2021, the committee voted 14-10 to approve Gensler both for the remainder of the term of retired Chair Jay Clayton ending on June 5, 2021, and for a full term ending on June 5, 2026. The Senate confirmed Gensler as SEC chair on April 14, 2021, and he was sworn in on April 17.

SEC updates guidance on conducting shareholder meetings

The SEC has updated sections of its staff guidance for conducting shareholder meetings in light of disruptions caused by the COVID-19 pandemic. The April 7, 2020, update addresses changes to the date, time, or location of a shareholder meeting and delays in printing and mailing of full set of proxy materials. The April 9, 2020, update deals with presentation of shareholder proposals in person.

Acting director of Corp Fin releases statement on SPACs

On April 8, 2021, Acting Director of the Division of Corporation Finance (Corp Fin) John Coates released a statement discussing special purpose acquisition companies (SPACs), initial public offerings (IPOs), and liability risk under the securities laws. He says that over the past six months, a significant increase in the use and popularity of SPACs has raised concerns and has increased the scrutiny over these transactions as they continue to evolve.

Coates shares that SEC staff members are continuing to look carefully at SPAC filings and disclosures and their private targets and are providing guidance so that the public can make informed investment and voting decisions about these transactions. The statement also describes basics of a typical SPAC and notes some of the complexities of the transactions. SPACs might offer private companies an alternative pathway to go public and obtain a stock exchange listing, a broader shareholder base, status as a public company with Exchange Act registered securities, and a liquid market for its shares, and this raises questions regarding securities law liability exposure, investor protections, and other filing requirements.

In his statement, Coates says that all those involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. He adds that providing greater clarity on the scope of the safe harbor in the Private Securities Litigation Reform Act (PSLRA) might offer advantages.

Coates’ statement follows the release of a March 31, 2021, staff statement on SPACs. That statement addresses certain accounting, financial reporting, and governance issues that should be carefully considered before a private operating company undertakes a business combination with a SPAC.

On March 31, 2021, acting Chief Accountant Paul Munter also issued a statement, which outlines considerations relating to markets and timing, financial reporting, internal controls, corporate governance, and audit committees. Munter’s statement provides auditing considerations, including independence issues relating to de-SPAC mergers (that is, the combination of the SPAC with the target operating company).

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB releases staff outlook and audit committee resources on 2021 inspections

On April 6, 2021, the PCAOB issued two documents to help auditors and audit committees understand the PCAOB’s 2021 inspection focus:

  • Spotlight: Staff Outlook for 2021 Inspections” provides information auditors might find useful as they plan and perform current and upcoming audits. The document addresses the principal changes the PCAOB plans for 2021 inspections and other areas of planned inspection focus:
    • Audit areas with continued deficiencies
    • Firms’ quality control systems
    • How firms comply with auditor independence requirements
    • Fraud procedures
    • Critical audit matters
    • How firms implement new auditing standards
    • Supervision of audits involving other auditors
    • Responding to cyber threats
    • Auditing digital assets
  • Audit committees can use the “Staff Outlook for 2021 Inspections” document with the companion “Audit Committee Resource: 2021 Inspections Outlook” to engage in meaningful dialogue with their auditor on topics including the auditor’s risk assessment, firms’ quality control systems, how firms comply with auditor independence, fraud procedures, critical audit matters, how firms implement new auditing standards, and supervision of audits involving other auditors.

PCAOB approves new standards advisory group

At its meeting on March 29, 2021, the PCAOB unanimously approved the formation of a new standards advisory group (SAG) that will increase stakeholder engagement and provide opportunities for investors and other stakeholders to advise the PCAOB on key initiatives.

As detailed in its charter, the purpose of the SAG is to advise the PCAOB on:

  • Existing auditing and related attestation standards as well as quality control, ethics, and independence standards
  • Proposed standards
  • Potential new or amended standards
  • Matters other than standards that are significant to the PCAOB

The SAG will perform specific tasks assigned by the PCAOB, and task forces of the SAG will play a critical role in deliberating, producing deliverables, and sharing information on key issues.

The charter establishes an 18-person group of experts, with representatives from the investor community (five), external auditors (four), audit committee members or directors (three), financial reporting oversight personnel (three), and academics and others with specialized knowledge (three).

On April 12, 2021, the PCAOB announced that it is seeking nominations for the SAG for both the 2021-2023 term and the 2021-2024 term. Nominees must meet certain qualifications described in the SAG charter. Links to nomination forms are in the announcement.

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