February 2022 financial reporting, governance, and risk management

| 2/16/2022
February 2022 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

Dear FIEB readers,

It’s February, and many of our readers are in the throes of the year-end financial reporting process. Transparency in financial reporting is key to providing decision-useful information to investors. On the topic of transparency, on Feb. 7, 2022, Crowe released its “2021 U.S. Transparency Report: Diversity, Equity & Inclusion.” The report offers an analysis of where Crowe stands related to diversity, equity, and inclusion efforts and programs and describes the firm’s immediate and long-term goals.

We are well into earnings season now, and, after – in some cases – a record-setting 2021, the industry is poised to tackle 2022 with all eyes on interest rates and inflation.

As we now reach the middle of the first quarter of 2022, we continue to keep you informed about the many developments throughout the regulatory and standard-setting landscape.

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Matters of importance from the federal financial institution regulators

OCC seeks feedback on compliance risk management for reverse mortgages

The Office of the Comptroller of the Currency (OCC) published a notice on Jan. 28, 2022, seeking feedback on the renewal of its guidance for managing compliance and reputation risks related to reverse mortgage products. The Federal Financial Institutions Examination Council agencies had previously issued final guidance in 2010 to outline the need for institutions to provide adequate information to consumers about reverse mortgage products and to provide qualified independent counseling to consumers considering reverse mortgages. The guidance also addressed related policies, procedures, internal controls, and third-party risk management.

The OCC is now seeking feedback on whether the collection of this information is necessary and practical; the accuracy of the estimates of the burden of information collection; ways to enhance the quality, usefulness, and clarity of the information to be collected; ways to minimize respondents’ information collection burden; and estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information.

Comments are due March 29, 2022.

FDIC approves final rule simplifying deposit insurance for trusts, MSAs

The Federal Deposit Insurance Corp. (FDIC) on Jan. 21, 2022, issued a final rule to simplify deposit insurance calculations for revocable trusts, irrevocable trusts, and mortgage servicing accounts (MSAs). The final rule merges revocable and irrevocable trusts into one category, allowing a simple, common calculation to determine insurance coverage. The FDIC indicated the simplifying rule was prompted by numerous inquiries it receives from banks on insurance coverage for trust deposits, which represent more inquiries than all other types of deposits combined.

Additionally, the final rule amends the rule that governs coverage for MSAs to allow principal and interest funds advanced by a mortgage servicer to be included in the deposit insurance calculation. According to the new rule, each grantor’s trust deposits will be insured up to the standard maximum deposit insurance amount, $250,000, multiplied by the number of trust beneficiaries, not to exceed five. The FDIC said it expects that the majority of trust depositors will experience no change in the coverage for their deposits when the final rule takes effect on April 1, 2024.

NCUA proposes succession planning rule

The National Credit Union Administration (NCUA) board on Jan. 27, 2022, approved a proposed rule requiring the board of directors of a federal credit union (FCU) to establish and adhere to succession planning processes.

Under the proposed rule, a FCU would need to establish a plan for positions such as officers of the board, management officials, executive committee members, supervisory committee members, and credit committee members. The rule would provide federal credit unions with broad discretion in implementing the proposed regulatory requirements to minimize any burden. Although the proposed rule would apply only to FCUs, the NCUA board encourages all credit unions, regardless of asset size, to have a succession plan to fill key positions and ensure their continued operations.

Comments are due April 4, 2022.

FinCEN proposes SAR information-sharing pilot program

The Financial Crimes Enforcement Network (FinCEN) on Jan. 24, 2022, issued a notice of proposed rulemaking (NPR) on the establishment of a pilot program for financial institutions to share suspicious activity reports (SARs) with their foreign branches, subsidiaries, and affiliates.

The limited-duration pilot program would expand the sharing of SARs from previous guidance, which stated that the reports may be shared only internally with foreign head offices, controlling companies, and domestic affiliates. The proposed rule aims to ensure that the sharing of information is limited by the requirements of federal and state law enforcement, considers potential concerns of the intelligence community, and is subject to appropriate standards and requirements regarding data security and the confidentiality of personally identifiable information.

FinCEN said it expects the pilot program to provide valuable feedback as it considers longer-term approaches toward SAR sharing with foreign affiliates. The NPR is seeking feedback on establishing the pilot program, including input on expected costs and benefits, technical challenges, merits of quarterly reporting, and ways to protect SAR confidentiality.

Comments are due March 28, 2022.

From the Financial Accounting Standards Board (FASB)

FASB discusses CECL topics

At its board meeting on Feb. 2, 2022, the FASB moved forward with standard-setting for changes to the vintage disclosures and troubled debt restructurings (TDR). The board also discussed the accounting for acquired financial assets and an agenda request for nonpublic entities.

Regarding vintage disclosures, the board affirmed its decision to require gross charge-off information by vintage but not to require gross recovery information. For TDR accounting, the board affirmed its decision to remove TDR accounting for creditors who have already adopted the current expected credit losses (CECL) standard and denied the request to extend the removal of TDR accounting to entities that have not adopted CECL. The board decided that the new modification disclosure requirements will apply only to modifications of receivables for borrowers experiencing financial difficulty that have a direct effect on the timing or amount of contractual cash flows. The board also decided to shorten the lookback period from cumulative life to 12-month lookback for those modifications. The effective date will be for periods beginning after Dec. 15, 2022, and entities can early adopt by topic. The transition guidance provides for prospective treatment but will permit a modified retrospective approach. For both vintage disclosures and TDR accounting, the board directed the staff to draft a final Accounting Standards Update.

The board discussed the purchased credit deteriorated (PCD) accounting model to address the issue commonly referred to as “the double-count issue.” for non-PCD assets. The accounting model for non-PCD assets results in recording a day one loss through credit expense, which is subsequently accreted through interest income. All board members supported the expansion of the PCD model, with certain exceptions. The board directed staff to perform additional research and outreach on the PCD accounting model.

Lastly, the board also discussed agenda requests for an effective date delay or scope out for nonpublic entities from CECL and decided there will not be any further delay or exemption.

From the Securities and Exchange Commission (SEC)

SEC proposes several rules

On Feb. 9 and 10, 2022, the SEC issued multiple rule proposals:

Each proposal includes a comment period extending through the longer of 60 days from the date published on the SEC’s website or 30 days from the date published in the Federal Register.

SEC chair remarks on money market, open-end bond, hedge funds

On Feb. 4, 2022, SEC Chair Gary Gensler presented a statement before the Financial Stability Oversight Council (FSOC) regarding financial resiliency of money market funds, open-end bond funds, and hedge funds. His statement highlighted how the nature, scale, and interconnectedness of these funds could create financial stability issues.

Gensler said that he believes the SEC has a responsibility to help protect for financial stability. To meet that responsibility, he and the SEC have taken several actions including:

  • Requesting staff to make recommendations for strengthening the resiliency of these fund segments
  • Proposing amendments to the rules that govern money market funds
  • Considering improvements to the fund liquidity rule or considering other reforms to enhance fund liquidity, pricing, and resiliency in possible future stress events for open-end bond funds
  • Proposing amendments to Form PF for hedge funds
  • Proposing a rule to require public reporting of large security-based swap positions
  • Reproposing a new rule to prevent fraud, manipulation, and deception in connection with security-based swap transactions
In closing, Gensler noted that he welcomes the FSOC’s input on the SEC’s ongoing consideration of how to improve resiliency for money market funds, open-end bond funds, and hedge funds.

SEC reopens comment period for pay versus performance

On Jan. 27, 2022, the SEC reopened the comment period on proposed rules for pay versus performance that were issued to address Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The act requires disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance. The reopening of the comment period is meant to allow interested parties additional opportunity to analyze and comment on the proposal considering developments in compensation practices since the first publication in 2015 and to respond to the additional requests for comment included in this release. In the release, Gensler noted, “If adopted, this proposed rule would strengthen the transparency and quality of executive compensation disclosure.”

Comments are due March 4, 2022.

In a dissenting statement, Commissioner Hester Peirce stated that she does not agree with the reopening of the comment period, and she described the original proposal as flawed.

SEC proposes amendments to Regulation ATS, Regulation SCI

Building on a 2020 proposal to enhance transparency and oversight over alternative trading systems (ATS) that trade government securities, the SEC on Jan. 26, 2022, proposed amendments to:

  • Expand Regulation ATS to include ATSs that trade government securities, National Market System stock, and other securities
  • Extend Regulation Systems Compliance Integrity (SCI) to ATSs that trade government securities
  • Expand the definition of “exchange” to include communication protocol systems so that communication protocol systems that operate as ATSs would need to adhere to Regulation ATS
Under the proposed amendments, ATSs that limit securities activities to government securities or repurchase agreements or reverse repurchase agreements on government securities and register as broker-dealers, or are banks, would no longer be exempt from Regulation ATS. The goal is to expand investor protections and enhance cybersecurity by covering more ATSs that trade Treasuries and other government securities under the regulatory framework.

Comments are due 30 days after publication in the Federal Register.

Commissioner Caroline Crenshaw issued a statement supporting the proposal and saying that the proposed amendments advance the objective of fair competition. She said that as part of this proposal, the SEC is “soliciting comment on the possibility of extending the operational transparency requirements of Rule 304 to all categories of ATSs, including ATSs that trade corporate debt securities, municipal securities, and equity securities other than NMS stocks.” It also is soliciting comment “on whether to prohibit certain practices that present potential conflicts of interest, including the disclosure of confidential subscriber information and trading by the broker-dealer operator and its affiliates in the ATS.”

In a dissenting statement on the proposed amendments to Regulation ATS, Commissioner Peirce described the proposal as “too wide-ranging and, given its length, too unwieldy to facilitate careful consideration. . . . And the release goes well beyond government securities, or even fixed-income securities; key parts of the proposal affect trading venues that make any type of security available for trading.” She also criticized the length of the comment period as too short to fully evaluate and analyze the proposal. She concluded her statement with “a final message to those who operate any service that is designed to facilitate any communication between potential buyers and sellers of any type of security: Read this release. Even if you have nothing to do with government securities or even fixed-income, or with traditional securities, read this release. Preferably as soon as it is published on the Commission’s website. It covers a lot of ground, and you should not assume that it has nothing to do with you, because it probably does.”

Chair addresses cybersecurity

SEC Chair Gensler presented a speech on cybersecurity at the Annual Securities Regulation Institute at Northwestern Pritzker School of Law on Jan. 24, 2022. After providing a brief look at the history of cyberattacks and noting that the cost may well be in the trillions, Gensler noted that cybersecurity relates to all parts of the SEC’s mission and that the SEC has many rules that address cyber risk. These rules relate to business continuity, books and records, compliance, disclosure, market access, and anti-fraud, among others. When considering cybersecurity policy, Gensler focuses on cyberhygiene and preparedness, cyber incident reporting to the government, and disclosure.

To provide insight into the SEC’s focus on cyber risks, Gensler indicated he has requested SEC staff recommendations on:

  • Updating and expanding Regulation SCI, which is designed to help ensure entities such as stock exchanges, clearinghouses, alternative trading systems, and self-regulatory organizations have sound technology programs, business continuity plans, testing protocols, and data backups
  • Strengthening cybersecurity hygiene and incident reporting for financial sector registrants, considering guidance issued by the Cybersecurity and Infrastructure Security Agency and others
  • Determining how customers and clients receive notifications about cyber events when their data has been accessed and potentially changing the timing and substance of notifications as required under Regulation S-P
  • Disclosing cybersecurity practices, cyber risks, and cyber events for public companies
  • Further addressing cybersecurity risk related to service providers to protect investors and make sure key services are not disrupted

Chair remarks on dynamic regulations

Before the Exchequer Club of Washington, D.C., on Jan. 19, 2022, Chair Gensler presented prepared remarks on dynamic regulations for a dynamic society specifically highlighting a 1963 report saying that “no regulation can be static in a dynamic society.” He described two guiding principles over dynamic regulations:

  • Continuing to drive efficiency in the U.S. capital markets
  • Modernizing the SEC rules for today’s economy and technologies

He said that efficiency is about lower costs for both issuers and investors and stated that he has requested recommendations from SEC staff about how to move toward increased efficiency in the capital markets through competition and transparency. Gensler then discussed modernizing SEC rules for the current economy and technologies and the importance of innovation in the U.S. markets. He said that the “most dramatic change to our markets is the use of predictive data analytics and artificial intelligence” and that while these developments increase access and choice, they also create significant public policy considerations, including conflicts of interest, bias, and systemic risks.

Commissioner leaves SEC

Elad Roisman issued a departing statement on Jan. 21, 2022, his last day as SEC commissioner. Roisman reflected on his time at the SEC, the importance of the SEC’s mission, and his gratitude for those with whom he has worked.

On the same day, Chair Gensler and Commissioners Peirce, Crenshaw, and Allison Herren Lee jointly issued a statement on Roisman’s departure thanking him for his service to the SEC and highlighting his many contributions.

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB creates new advisory groups

On Jan. 31, 2022, the PCAOB announced the creation of two new advisory groups: the Investor Advisory Group and the Standards and Emerging Issues Advisory Group. These advisory groups have been created to enhance investor and stakeholder engagement and will help the PCAOB gather input from stakeholders and investors on how to improve audit quality. With this announcement, the PCAOB issued a request for public comment to solicit input on the proposed structures of the two new groups and a request for nominations.

The PCAOB expects to announce appointments early this spring and anticipates that public meetings will begin shortly thereafter.

Comments and nominations are due Feb. 28, 2022.

From the American Institute of Certified Public Accountants and the Chartered Institute of Management Accountants (AICPA and CIMA)

AICPA releases digital assets practice aid

During January 2022, the AICPA and CIMA released a practice aid addressing accounting for and auditing of digital assets. The practice aid provides nonauthoritative guidance that is specific to U.S. generally accepted accounting principles and generally accepted auditing standards and is based on existing professional literature and the experience of members of the Digital Assets Working Group.

From the Center for Audit Quality (CAQ)

CAQ introduces Bold Ambition

On Jan. 20, 2022, the CAQ issued its January 2022 edition of Audit Committee Insights, which addresses several topics including one of its new initiatives, Bold Ambition, which is supported by the eight CAQ governing board members, one of which is Crowe. Bold Ambition is designed to bring awareness to the profession’s progress on diversity, equity, and inclusion. It identifies its purpose as “for the public company audit profession to pave the way towards a more inclusive, future state of community.” According to the CAQ, pursuing greater diversity and inclusion in the accounting profession advances equity and opportunity and “it helps the accounting profession better perform its public mission and, ultimately, improve audit quality."

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