From the federal financial institution regulators
Agencies issue joint statement on risk-based approach to BSA/AML examsAs part of their ongoing effort to enhance the efficiency and effectiveness of the Bank Secrecy Act/anti-money laundering (BSA/AML) regime, the Board of Governors of the Federal Reserve System (Fed), the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Financial Crimes Enforcement Network, on July 22, 2019, issued a joint statement emphasizing their risk-focused approach to BSA/AML examinations.
The agencies reiterated that they take into account each bank’s individual risk profile when conducting examinations. In addition, the statement details common practices for assessing a bank’s money laundering/terrorist financing risk profile, which helps examiners formulate the examination and evaluate the BSA/AML compliance program.
The interagency statement is intended to improve transparency into the risk-focused approach used for planning and performing BSA/AML examinations and does not establish new requirements.
OCC releases update to the Bank Accounting Advisory Series
On Aug. 15, 2019, the OCC released an update to the Bank Accounting Advisory Series (BAAS). The BAAS covers a variety of topics and promotes consistent application of accounting standards among national banks and federal savings associations. This edition of the BAAS reflects accounting standards issued by the FASB on such topics as hedging and credit losses and includes recent answers to frequently asked questions from the industry and examiners.
The revisions include:
- New questions on topics such as:
- Investments equity securities
- Other real estate owned (OREO)
- Current expected credit losses (CECL), including a new subtopic devoted to off balance sheet credit exposures and additional questions on credit losses on debt securities and the allowance for credit losses
- Updates to topics including, but not limited to:
- Loans moved from nonaccrual to accrual status
- Lessor leases
- Intangible assets
- Troubled debt restructurings
The BAAS does not represent official rules or regulations of the OCC. Rather, it represents the OCC’s Office of the Chief Accountant’s interpretations of generally accepted accounting principles and regulatory guidance based on the facts and circumstances presented. While the BAAS is published by the OCC, the information in the BAAS is relevant to all financial institutions.
OCC bulletin highlights fraud risk management principlesThe OCC, on July 24, 2019, issued a bulletin outlining principles of sound fraud risk management for banks. Among other items, the bulletin identifies and addresses the following principles:
- “A bank should have sound corporate governance practices that instill a corporate culture of ethical standards and promote employee accountability.
- “A bank’s risk management system should include policies, processes, personnel, and control systems to effectively identify, measure, monitor, and control fraud risk consistent with the bank’s size, complexity, and risk profile.
- “A bank’s risk management system and system of internal controls should be designed to
- prevent and detect fraud.
- appropriately respond to fraud, suspected fraud, or allegations of fraud.
- “Bank management should assess the likelihood and impact of potential fraud schemes and use the results of this assessment to inform the design of the bank’s risk management system.
- “Senior management and the board of directors should measure, monitor, and understand fraud losses across the enterprise and employ tools that appropriately quantify and assess loss experience and exposure.”
The OCC adds that fraud risk management can be implemented in a range of ways and does not always need to be structured in a formal fraud risk management program.
OCC updates Comptroller’s Handbook for corporate governance and auditsOn July 25, 2019, the OCC issued a revised edition of the “Corporate and Risk Governance” booklet of the Comptroller’s Handbook. The OCC also updated its “Internal and External Audits” booklet. The new versions of the booklets clarify content and incorporate relevant OCC guidance and auditing standards issued since the previous versions.
FDIC publishes “2019 Risk Review” highlighting credit and market risksThe FDIC published on July 30, 2019, its “2019 Risk Review” emphasizing key risks to banks – primarily community banks – and highlighting high loan concentrations, the interest rate environment, and short-term liquidity challenges. According to the report, although the financial condition of FDIC-supervised banks remains strong, markets have seen increased volatility in recent months.
In this environment of slower loan growth, the FDIC notes that competition among lenders has increased, which poses challenges and creates market demand for certain products resulting in looser underwriting standards. The report also identifies certain sectors including agriculture, energy, commercial real estate, and housing that may face additional credit risks as identified in the report as a result of fluctuations in the market.
Regarding market risk, the report identifies that the current interest-rate environment creates challenges for banks related to earnings and funding and could result in liquidity pressures and difficulty managing into the future if there is a downturn.
NCUA increases appraisals requirement thresholdOn July 18, 2019, the NCUA approved a final rule increasing the threshold for real estate appraisals. For commercial real estate transactions below $1 million, appraisals are not required. The previous threshold was $250,000.
The rule also incorporates into the regulations Section 103 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. This means certain federally related, rural real estate transactions valued below $400,000 will be exempt from appraisal requirements if no state-certified or state-licensed appraiser is available.
The final rule is effective Oct. 22, 2019.
From the Financial Accounting Standards Board (FASB)
FASB proposes to delay effective dates for major accounting standardsOn Aug. 15, 2019, the FASB issued a proposed Accounting Standards Update (ASU), “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” that would provide private entities and certain small public companies additional time to implement the standards on CECL, leases, and hedging.
For credit losses (Topic 326), the proposal maintains the current effective date for SEC filers excluding smaller reporting companies (SRCs) of fiscal years beginning after Dec. 15, 2019, and interim periods within those fiscal years. For all other entities, including SRCs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2022, including interim periods within, which for calendar year-ends is Jan. 1, 2023.
For leases (Topic 842), the proposal retains the current effective date for public business entities (PBEs), not-for-profit conduit bond obligors, and employee benefit plans that file or furnish financial statements with the SEC of fiscal years beginning after Dec. 15, 2018, including interim periods within. For entities other than PBEs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
For hedging (Topic 815), the proposal retains the existing effective date for PBEs, which is fiscal years beginning after Dec. 15, 2018, including interim periods within. For entities other than PBEs, the proposal extends the effective date to fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021.
Additionally, the proposed ASU includes a description of a new FASB philosophy on staggering effective dates for major standards between larger public companies and all other entities, including private companies, smaller public companies, not-for-profit organizations, and employee benefit plans.
More details on the proposal can be found at crowe.com.
Comments are due Sept. 16, 2019.
FASB proposes improvements to guidance on distinguishing liabilities from equityThe FASB issued, on July 31, 2019, a proposed ASU, “Debt – Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The proposal attempts to improve guidance for certain financial instruments – including convertible instruments – with characteristics of liabilities and equity. In response to feedback that identified “liabilities and equity guidance as overly complex, internally inconsistent, and the source of frequent financial statement restatements,” the proposed ASU targets convertible instruments and the derivatives scope exception for contracts in a company’s own equity guidance.
The proposed ASU reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and reduce accounting conclusions based on form over substance and driven by remote contingent events under the derivatives scope exception guidance. Additionally, the proposal addresses the related disclosure and earnings-per-share guidance.
Comments are due Oct. 14, 2019.
FASB proposes clarifications of relationships between accounting standardsOn July 30, 2019, the FASB issued a proposed ASU, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force),” that would increase the comparability of accounting for the ASU on recognition and measurement of financial instruments and the ASU on equity method investments.
ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” provides companies with a measurement alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. The proposed ASU clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method.
The proposal also would give direction on how to apply the guidance in Topic 815, “Derivatives and Hedging,” for certain forward contracts and purchased options to purchase securities that, upon settlement or exercise, would be accounted for under the equity method of accounting.
Comments are due Aug. 29, 2019.
FASB updates various SEC codification sectionsIn July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections,” which amends certain Securities and Exchange Commission (SEC) sections or paragraphs within the Accounting Standards Codification (ASC) to reflect changes in SEC Final Rule Releases No. 33-10532, “Disclosure Update and Simplification,” and 33-10231 and 33-10442, “Investment Company Reporting Modernization.”
Other revisions in ASU 2019-07 update language in the codification to match the electronic Code of Federal Regulations.
In May, the FASB issued a proposed ASU, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,” to address other matters identified by the SEC in its August 2018 Release No. 33-10532, “Disclosure Update and Simplification.” The proposed amendments would modify the disclosure or presentation requirements and provide clarification or technical corrections to a wide range of topics within the ASC.
The comment period closed June 28. The board is redeliberating the proposal.
From the Securities and Exchange Commission (SEC)
SEC proposes to modernize Regulation S-K disclosuresOn Aug. 8, 2019, the SEC proposed amendments to modernize certain disclosures under Regulation S-K. The proposal addresses the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105). The proposed amendments are targeted to “improve these disclosures for investors, and to simplify compliance efforts for registrants. Specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.”
Among other proposed amendments to Items 101, 103, and 105, the changes include the following:
- Item 101. Changes include clarification and expansion of the principles-based approach; additional disclosure topics such as human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business; and emphasis on the regulatory compliance requirement by including material government regulations.
- Item 103. To avoid duplicated disclosures, changes include specifically stating that the required information about material legal proceedings may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document.
- Item 105. Changes include requiring a summary risk factor disclosure if the risk factor section is greater than 15 pages, changing the required disclosures standard from the “most significant” factors to the “material” factors, and requiring risk factors to be organized under relevant headings.
Comments are due 60 days after publication in the Federal Register.
SEC commissioner discusses regulatory reformSEC Commissioner Hester M. Peirce discussed SEC regulatory reform efforts in her remarks before the American Chamber of Commerce in Tokyo on Aug. 7, 2019. Peirce said the “regulation of public companies is a part of our jurisdiction that is crying out for reform. We have seen the trend of companies waiting longer to go public and have been asking ourselves what we can do to encourage companies to go public earlier and to remain public. We want to ensure that retail investors can participate in the growth of these companies.”
She noted that there are various reasons that companies might not go public, including the Sarbanes-Oxley Act requirement that auditors attest to the effectiveness of the company’s internal controls, which has been a deterrent for smaller companies. As such, the SEC recently proposed to eliminate this requirement for certain pre-revenue companies. Additionally, she highlighted other efforts by the SEC to cut unnecessary costs, to modernize and simplify disclosure requirements, to streamline exemptions from registration, and to allow all issuers to “test the waters” with potential investors to gauge their interest, among other efforts.
SEC commissioner addresses cross-border digital assets regulationOn July 30, 2019, SEC Commissioner Peirce spoke at the Singapore University of Social Sciences Convergence Forum: Inclusive Blockchain, Finance, and Emerging Technologies, about opportunities for cross-border cooperation for regulating digital assets. She said that innovation in blockchain and cryptocurrency is challenging us “to think about how better to accommodate innovation in general. Because so much of the activity is taking place outside the United States, we have to think about our regulation with a sensitivity for cross-border considerations, cooperation, and what I call co-learning.”
Peirce said that regulators’ concerns about the cross-border regulation of digital assets in many ways go along with their concerns about regulating all forms of cross-border market activity, including being able to enforce domestic rules, the inability to impose regulations outside U.S. borders, and whether the regulatory structure meets expectations of investors. Peirce warned that international communication and internationalization of markets does not necessarily lead to the internationalization of regulations. She also encouraged jurisdictions to look to regulators for shared consideration of difficult issues and coordination, but not for regulatory directives.
From the Public Company Accounting Oversight Board (PCAOB)
PCAOB schedules 2019 auditor forums on small businesses and broker-dealersThe PCAOB, on July 2, 2019, released location and agenda information for the 2019 small-business and broker-dealer auditor forums. This year, in order to provide a more effective and efficient format, the PCAOB is merging materials that previously were presented at both forums. Each forum will consist of three parts, and attendees may attend all or part of each forum.
The forums are scheduled for Sept. 25-26, 2019, in Chicago and Oct. 2-3, 2019, in Jersey City, New Jersey. The agenda for both locations is the same. Sessions include:
- The New Auditor’s Report: Critical Audit Matters and Other Current Topics
- Inspections Overview
- Case Study: Auditors of Issuers
- Board Member Perspective
- Standard-Setting Update
- Enforcement Update
- SEC Update
- Perspectives From the Financial Industry Regulatory Authority
Forums are open to members of firms that are registered with the PCAOB and audit public companies. There is no fee, but advance registration is required because of space limitations. The Chicago sessions will be streamed online.