The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.
From the Federal Financial Institution Regulators
Discussion of Regulatory Burden Reduction Continued
On Feb. 4, 2015, representatives of the Office of the Comptroller of the Currency (OCC), the Federal Reserve (Fed), and the Federal Deposit Insurance Corp. (FDIC) met in Dallas at the second Economic Growth and Regulatory Paperwork Reduction Act of 1996 outreach meeting. Regulatory officials continued to stress that congressional action is necessary to roll back many burdensome, duplicative, and unnecessary banking rules.
In his remarks, Toney Bland, OCC senior deputy comptroller, stated, “Many regulatory requirements are rooted in laws passed by Congress, and changes may require legislative action. In those cases, we will work with Congress to remove unnecessary burdens.” Bland provided three examples of changes the OCC has presented to Congress:
- Allowing banks with up to $750 million in assets to qualify for an 18-month exam cycle
- Exempting all banks with less than $10 billion in assets from the Volcker rule
- Authorizing greater charter flexibility for thrifts
Fed Governor Jerome Powell discussed the Fed’s recent proposal to raise the threshold for regulatory relief for small bank holding companies and provided an estimate that these revisions would affect more than 4,200 organizations.
The next outreach meeting is scheduled for May 4, 2015, at the Federal Reserve Bank of Boston.
New Resource on Third-Party Cyberthreat Resilience Issued
The Federal Financial Institutions Examination Council (FFIEC) issued a new resource to assist financial institutions in managing third-party risks and making sure their vendors are able to withstand cyberattacks. The new resource, “Strengthening the Resilience of Outsourced Technology Services,” is an appendix to the “Business Continuity Planning” booklet in the FFIEC’s IT exam handbook; it covers third-party risk management, the impact of a disruption on a third party’s ability to serve clients, conducting testing with vendors, and other issues related to resilience to cyberthreats.
Buying Failed Banks Web Page Launched by FDIC
The FDIC launched a Web page for banks interested in purchasing a failed bank. The page is designed to assist bankers in understanding how the FDIC makes decisions about the resolution of failing institutions. It provides resources on strategic considerations, the marketing and bidding processes, and regulatory guidance.
OCC “Comptroller’s Handbook” Updated
During January 2015, the OCC released revised booklets to its “Comptroller’s Handbook,” which provide updated guidance in the following areas:
- “Retail Nondeposit Investment Products” – Replacing materials last issued in 1994, this booklet provides guidance to banks and thrifts offering nondeposit investment products to their retail customers. It incorporates changes resulting from the Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act and includes the latest interagency guidance on nondeposit investment products as well as OCC expectations for risk management.
- “Conflicts of Interest” – This booklet updates guidance on Securities and Exchange Commission requirements, trading and market timing, fiduciary purchases of securities underwritten by banks, and indenture trustees. Additionally, it has been revised to include thrifts.
- “Litigation and Other Legal Matters” – This new booklet provides information on identifying legal risks and what supervisors expect in terms of managing legal risk. It also extends the applicability of the OCC legal risk guidance to thrifts.
- “Government Securities Act” – This new booklet consolidates OCC guidance on securities activities and investment securities and replaces various national bank and thrift guidance from the 1990s.
Next Steps on Faster Payments Outlined by the Fed
The Fed on Jan. 26, 2015, released a paper, “Strategies for Improving the U.S. Payment System,” outlining the next steps in developing an infrastructure to speed up electronic payments and settlements. Within the paper, the Fed identifies several strategies and related actions to create a payments system that would offer greater speed, security, efficiency, cross-border options, and stakeholder collaboration.
To achieve its objectives, the Fed plans to launch faster payments and payment security task forces to give bankers and other stakeholders a more formal way to share input. The faster payments task force will develop a policy framework for the new system and identify practical approaches for implementing it. The payments security task force will develop appropriate security standards and expand the Fed’s anti-fraud and payments risk management offerings.
The FDIC released two new technical assistance videos, which address compliance with Consumer Financial Protection Bureau (CFPB) mortgage rules. This completes a series of three videos on the topic. The video released on Jan. 27, 2015, covers the loan originator compensation rule. The final video, released on Feb. 13, 2015, addresses mortgage servicing rules. The three technical assistance videos are intended for compliance officers and staff responsible for ensuring the bank’s mortgage lending and servicing operations comply with the new CFPB rules.
Guidance Issued on Risk-Based Approach to Assessing Customer Relationships
The FDIC on Jan. 28, 2015, issued Financial Institutions Letter FIL-5-2015, “Statement on Providing Banking Services,” to encourage banks to implement a risk-based approach to assessing individual customer relationships as opposed to declining to provide services to an entire customer category. The FDIC affirmed that it does not prohibit or discourage banks with appropriate risk management systems from serving customers with risk profiles that the bank is capable of handling.
The FDIC acknowledges in the guidance that it is aware that some banks may be reluctant to provide services to certain types of customers out of fear they will not be fully able to meet the requirements of the Bank Secrecy Act (BSA). The FDIC is aware that it is not possible for a financial institution to detect and report all potentially illicit transactions flowing through an institution and, therefore, isolated or limited technical violations of the BSA generally do not prompt serious regulatory concern or reflect negatively on management’s supervision or commitment to compliance.
Revised Risk-Based Capital Proposal Issued
The National Credit Union Administration (NCUA) board released, on Jan. 15, 2015, a revised proposed rule, “Risk-Based Capital,” for comment. Revisions include:
- Increasing the total asset threshold to $100 million in total assets from $50 million for credit unions to be exempt from the proposed rule
- Lowering the risk-based capital ratio level for a “well-capitalized” credit union from the originally proposed 10.5 percent to 10 percent
- Reducing risk weights for asset classes including investments, real estate loans, member business loans, corporate credit unions, and credit union service organizations
- Eliminating interest-rate risk from the risk weights
- Eliminating the individual minimum capital requirement
- Extending the time period for a credit union to comply with the proposal, when finalized
The NCUA estimates approximately 22 percent of federally insured credit unions would be subject to the agency’s revised proposal, which does not include supplemental or secondary capital in the risk-based capital standard (except for low-income credit unions). However, the NCUA also is seeking comments on whether additional forms of supplemental capital should be included in the risk-based capital ratio numerator.
The NCUA has a proposed risk-based capital rule resources page, which includes a tool for credit unions to determine the potential impact.
Comments are due within 90 days of publication of the proposal in the Federal Register.
Outline of NCUA Supervisory Priorities for 2015 Released
In its letter to credit unions issued in January 2015, the NCUA provided details of its supervisory priorities for 2015. The letter outlines that examiners will focus on cybersecurity, interest-rate risk, BSA compliance, liquidity and contingency funding plans, and compliance with Truth in Lending Act and Real Estate Settlement Procedures Act Integrated Disclosure Rule and Ability-to-Repay and Qualified Mortgage Standards Rule.
The letter further highlights that the NCUA will streamline examinations for small credit unions with lower risks and will continue to monitor trends in credit unions’ loan portfolios, especially with regard to new products and services.
January Issue of “The NCUA Report” Available Online
The January 2015 issue of “The NCUA Report” has been posted on the NCUA website. This issue includes columns from NCUA board Chairman Debbie Matz, Vice Chairman Rick Metsger, and board member J. Mark McWatters. Articles address the agency’s initiatives and information on supervisory, regulatory, and compliance issues relevant to all federally insured credit unions.
From the Consumer Finance Protection Bureau (CFPB)
Supervised Entities Reminded to Keep Exam Materials Confidential
The CFPB, which directly supervises and issues consumer examination reports for financial institutions with more than $10 billion in assets, reminds such institutions about their responsibilities to keep exam reports and related communications confidential. CFPB Compliance Bulletin 2015-01 defines confidential supervisory information and says that such information can be disclosed only to bank affiliates, individual personnel, and directors to the extent it is relevant to their duties as well as to outside contractors such as accountants and lawyers. The bulletin further highlights that private confidentiality and nondisclosure agreements do not override federal legal restrictions regarding disclosure or confidentiality of information.
Comments on Safe Student Banking Initiative Sought
The CFPB drafted a seven-page questionnaire and scorecard for colleges and universities to use when seeking arrangements with financial institutions to market safe and affordable financial accounts for their students. The CFPB has requested feedback on the draft document, which includes a description of safe financial products to be offered to students. The safe account model would impose no fees for basic services except a monthly maintenance fee and would not permit overdraft fees or nonsufficient funds fees. In addition, the draft document includes contract transparency requirements that would require a financial institution to post the agreement with the college on its website.
The CFPB is seeking feedback from financial institutions, colleges and universities, and students and parents. Comments are due on March 16, 2015.
From the Financial Accounting Standards Board (FASB)
Reminder: Time Deposit Financial Statement Footnote Disclosures
U.S. generally accepted accounting principles (GAAP) have long required, in Accounting Standards Codification (ASC) 942-405-50-1, that time deposits in denominations of $100,000 or more be disclosed in the footnotes to the financial statements. During 2014, the FASB modified the disclosure requirements with the issuance of FASB ASC Editorial and Maintenance Update 2014-07 to reflect the increase in insured deposit limits. The update replaces the reference to denominations “of $100,000 or more” with “that meet or exceed the FDIC insurance limit.” We believe credit unions should similarly disclose time deposits that meet or exceed the NCUA or private insurance limit.
Exposure Draft on Accounting for Income Taxes
As part of its simplification initiative to reduce complexity in accounting standards, on Jan. 22, 2015, the FASB issued proposed ASU “Income Taxes (Topic 740): Intra-Entity Asset Transfers,” which would eliminate the exception prohibiting the recognition of current and deferred income tax consequences for intra-entity asset transfers until the asset or assets have been sold to an outside party. The proposed guidance would require that an entity recognize the current and deferred tax consequences of such asset transfers when the transfers occur and would be applied on a modified retrospective basis.
For public business entities, the FASB expects proposed amendments would be effective for annual periods, including interim periods within those annual periods, beginning after Dec. 15, 2016, with early adoption not permitted. For all other entities, the proposed amendments would be effective for annual periods beginning after Dec. 15, 2017, with early adoption permitted, but not before the effective date for public business entities.
Comments are due May 29, 2015.
From the Financial Accounting Foundation (FAF)
Updated Print Edition of FASB Standards Codification Released
On Jan. 29, 2015, the FAF released an updated print edition of the “FASB Accounting Standards Codification.” The FASB codification represents the authoritative source of generally accepted accounting principles for public and private companies and not-for-profit organizations. The updated edition includes all of the content of the online codification as of Oct. 31, 2014.
From the Securities and Exchange Commission (SEC)
Financial Reporting Manual Updated
The staff of the SEC’s Division of Corporation Finance (Corp Fin) released an updated version of its “Financial Reporting Manual,” including changes through Jan. 12, 2015. The manual has been updated to reflect ASU 2014-17, “Business Combinations (Topic 805): Pushdown Accounting,” and the rescission of Staff Accounting Bulletin Topic 5.J. The manual is intended to be an internal reference document for SEC staff; however, preparers and others might find it useful for financial reporting matters.
Updated Compliance and Disclosure Interpretations Published
The Corp Fin staff on Jan. 23, 2015, issued updates to the Compliance and Disclosure Interpretations for (1) Securities Act Rules (new question 279.01) and (2) Regulation S-T (new question 118.01). These new interpretations include guidance on certain resale limitations under Rule 144 for securities originally acquired from a foreign private issuer and clarification of whether an SEC filing may contain graphics (such as GIF or JPEG image files) that include information that is not text-searchable.
2015 Examination Priorities Announced
The SEC announced on Jan. 13, 2015, its Office of Compliance Inspections and Examinations’ priorities for 2015. The priorities focus on three topics:
- Protecting retail investors, especially those saving for or in retirement
- Assessing marketwide risks
- Using data analytics to identify signs of potential illegal activity
The identified priorities will focus on issues applying to a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges.
From the American Institute of Certified Public Accountants (AICPA)
Technical Q&A Issued on Effect on Benefit Plans of New Mortality Tables
In October 2014, the Society of Actuaries (SOA) issued new mortality tables (RP-2014) and improvement scales (MP-2014). The tables and scales reflect longer life expectancies and an expectation that the trend will continue. The impact will be an increase in pension obligations as well as other postretirement and postemployment benefit obligations that are dependent on mortality assumptions. During the 2014 AICPA national conference on SEC and Public Company Accounting Oversight Board developments, T. Kirk Crews, professional accounting fellow in the SEC Office of the Chief Accountant, commented on mortality assumptions during a speech: “Given plan sponsors have historically utilized the SOA’s mortality data and that data has been updated, the staff does not believe it would be appropriate for a registrant to disregard the SOA’s new mortality data in determining their best estimate of mortality.”
In February 2015, the AICPA issued a technical question and answer, “Effect of New Mortality Tables on Nongovernmental Employee Benefit Plans (EBPs) and Nongovernmental Entities That Sponsor EBPs,” to help sponsors of benefit plans determine how and when the updated mortality tables should be considered. The guidance includes U.S. GAAP references, management’s responsibilities, and auditor requirements.