Current financial reporting, governance, and risk management topics
Agencies propose changing restrictions on Volcker rule “covered funds”
The Federal Deposit Insurance Corp. (FDIC), Federal Reserve Board (Fed), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC), on Jan. 30, 2020, issued a notice of proposed rulemaking (NPR), which precedes a proposed rule, to modify restrictions on “covered funds” – hedge funds and private equity funds – to clarify areas of compliance uncertainty and change limits on activities that the Volcker rule did not intend to restrict. The aim of the proposed changes is to facilitate capital formation, protect safety and soundness and financial stability, and provide greater clarity and certainty about what activities are permitted.
Comments are due April 1, 2020.
Fed finalizes rule for determining bank control
On Jan. 30, 2020, the Fed finalized revised regulations for determining whether a company can exercise a controlling influence over another company under the Bank Holding Company Act or the Home Owners’ Loan Act. The final rule is mostly consistent with the rule proposed in April 2019 and describes the types of relationships that the Fed would view as supporting a determination of control.
The rule includes a tiered structure for the revised presumptions of control, based on the level of voting ownership at three different levels: 5%, 10%, and 15%. Additional factors, including the size of a company’s total equity investment, rights to director representation, and the scope of business relationships, also are considered. The Fed’s release includes a chart showing how different combinations of the factors would or would not result in a determination of control.
The rule is effective April 1, 2020.
NCUA proposes rules on subordinated debt and combination transactions
The National Credit Union Administration (NCUA) board proposed two rules at its open meeting on Jan. 23, 2020.
The first proposed rule would create a new subpart in the NCUA’s final risk-based capital rule that would allow certain eligible credit unions to issue subordinated debt for regulatory capital standards. The proposed rule contains requirements related to applying for authority to issue subordinated debt, credit union eligibility to issue subordinated debt, prepayments, disclosures, securities laws, and the terms of a subordinated debt note.
The other proposed rule clarifies the process for federally insured credit unions merging with or assuming liabilities of financial institutions that are not credit unions. The proposed rule simplifies the basic requirements that apply to these combination transactions, clarifies the nature and ramifications of proposed transactions for credit union directors, makes regulatory provisions applicable to all asset purchases, and lists other NCUA regulations that apply to each particular transaction.
Comments for the subordinated debt rule are due 120 days after publication in the Federal Register . Comments related to the combination transactions rule are due March 30, 2020.
CFPB clarifies definition of abusive acts and practices
On Jan. 24, 2020, the CFPB issued a policy statement providing a framework for how it intends to apply the “abusive” standard under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Beginning immediately, the CFPB will:
- Focus on situations where the harm to consumers outweighs the benefit.
- Avoid citing both abusiveness and unfairness or deception violations arising from mostly the same facts.
- Seek monetary relief for abusive acts or practices only when there has been a lack of a good faith effort to comply with the law. However, the CFPB will continue to seek restitution for injured consumers regardless of good faith or bad faith.
FASB updates codification for CECL (SEC SAB 119) and leases
The FASB issued, on Feb. 6, 2020, Accounting Standards Update (ASU) No. 2020-02, “Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).” This ASU inserts a paragraph to address the Nov. 19, 2019, issuance of SEC Staff Accounting Bulletin (SAB) 119, “Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326.” The SAB updates existing staff guidance on developing a systematic methodology for estimating credit losses, and it explains the documentation the staff typically would expect from registrants in support of estimates of current expected credit losses (CECL) for lending activities, when material.
The ASU also updates the SEC section of Topic 842 to incorporate an SEC staff announcement made at the December 2019 AICPA National Conference on Current SEC and PCAOB Developments. The SEC announced that for a public business entity that otherwise would not meet the definition of a public business entity except for a requirement to include or the inclusion of its financial statements or financial information in another entity’s filing with the SEC, the SEC would not object to it adopting Topic 842 for fiscal years beginning after Dec. 15, 2020, and interim periods within fiscal years beginning after Dec. 15, 2021, in accordance with ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates.”
SEC proposes changes to MD&A and other disclosures
On Jan. 30, 2020, the SEC announced that it is proposing amendments to modify certain Regulation S-K financial disclosure requirements and is issuing guidance on key performance indicators (KPIs) and metrics in management’s discussion and analysis (MD&A).
The proposed amendments would eliminate duplicative disclosures including item 301 (selected financial data) and item 302 (supplementary financial data). They also would amend item 303 (MD&A).
Proposed changes to MD&A requirements include:
- Adding a new item 303(a) to state the principal objectives of MD&A
- Replacing item 303(a)(4), off balance sheet arrangements, with a principles-based instruction to guide registrants to discuss off balance sheet arrangements in the broader context of MD&A
- Removing item 303(a)(5), tabular disclosure of contractual obligations
- Including a new item 303 disclosure requirement for critical accounting estimates
- Changing the item 303(b) interim MD&A requirement to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter
The guidance on KPIs and metrics provides that, where companies disclose metrics, the SEC would expect to see additional disclosures such as:
- Definition of the metric and how it is calculated, including estimates and assumptions
- Reasons why the metric provides useful information to investors
- Description of how management uses the metric in managing or monitoring the performance of the business
- Description of changes in the method for calculating metrics and reasons for the changes, if applicable
The guidance also reminds companies of the requirements in Securities Exchange Act rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and notes that companies should consider these requirements when disclosing metrics.
Comments on the proposed amendments are due 60 days after publication in the Federal Register.
SEC publishes cybersecurity and resiliency observations
On Jan. 27, 2020, the SEC’s Office of Compliance Inspections and Examinations shared cybersecurity and operational resiliency examination observations in a report highlighting approaches taken by market participants in the following areas:
- Governance and risk management
- Access rights and controls
- Data loss prevention
- Mobile security
- Incident response and resiliency
- Vendor management
- Training and awareness
The publication notes that not all of the practices described are suitable for all organizations, but the SEC is providing these observations, including example practices and controls to safeguard against threats and respond to incidents, to help market participants as they consider ways to improve cybersecurity preparedness and operational resiliency.
Corp Fin updates guidance on Regulation S-K interpretation
On Jan. 24, 2020, the SEC’s Division of Corporation Finance (Corp Fin) updated its Compliance and Disclosure Interpretations (C&DI) of Regulation S-K. New questions 110.02, 110.03, and 110.04 provide guidance on preparing item 303, MD&A of financial condition and results of operations.
SEC announces conference on municipal securities disclosures
The SEC announced, on Jan. 23, 2020, that it will host a conference, “Spotlight on Transparency: A Discussion of Secondary Market Municipal Securities Disclosure Practices,” at its Washington, D.C., headquarters on March 10, 2020. The event also will be livestreamed.
The conference will focus on the following areas:
- Municipal securities secondary market disclosures
- Municipal issuers’ voluntary disclosure practices
- Buy-side perspectives of the state of secondary market disclosures
- Rule 15c2-12
The conference is open to the public, with preregistration available.