Banking agencies issue EGRRCPA statement; SEC revises SRC definition

| 7/18/2018

Current financial reporting, governance, and risk management topics

From the Federal Financial Institution Regulators

Agencies Issue Statements About the Impact of the Economic Growth, Regulatory Relief, and Consumer Protection Act

On July 6, 2018, the Board of Governors of the Federal Reserve System (Fed), the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC) (the federal banking agencies) issued a joint statement detailing rules and associated reporting requirements affected by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), S. 2155. The joint statement provides guidance to regulated institutions on how to comply with regulations and reporting obligations affecting company-run stress testing, resolution plans, the Volcker rule, high-volatility commercial real estate (HVCRE) exposures, examination cycles, and other provisions. The statement also describes interim positions the regulatory agencies will take before incorporating the changes into their regulations.

One important element of this statement relates to company-run stress tests that were required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). A year and a half after EGRRCPA is enacted, financial companies with total consolidated assets of less than $250 billion that are not bank holding companies (BHCs) no longer will be subject to the company-run stress-testing requirements in Dodd-Frank. In contrast, on EGRRCPA’s enactment date, BHCs with less than $100 billion in total consolidated assets were no longer subject to the stress-testing requirements.

To reduce the burden for depository institutions and to remove inconsistency between BHCs and depository institutions, deadlines are being extended until Nov. 25, 2019, for all regulatory requirements related to company-run stress testing for depository institutions with average total consolidated assets of less than $100 billion. At that time, both statutory exemptions will be in effect. In essence, the agencies have ended the Dodd-Frank-mandated company-run stress tests for all banks and BHCs with less than $100 billion in assets.

Once EGRRCPA is enacted, the agencies may require a depository institution to assign a heightened risk weight to HVCRE exposures only as defined in Section 214 of EGRRCPA. Accordingly, the July 6 statement provides that a depository institution is permitted to risk-weight at 150 percent only those commercial real estate exposures it believes meet the statutory definition of HVCRE acquisition, development, or construction (ADC) loans. When reporting HVCRE exposures on Schedule RC-R, Part II of the call report, depository institutions may use available information to “reasonably estimate” and report only HVCRE ADC loans. Alternatively, a depository institution also may continue to report and risk-weight HVCRE exposures in a manner consistent with the current call report instructions, until the agencies take further action.

Regulators also clarified that they will not enforce existing final rules on the Volcker rule, resolution planning, or the treatment of municipal securities as high-quality liquid assets in ways that contradict provisions of the new law. They also announced they will begin rulemaking to implement sections of the law raising the threshold for well-capitalized banks to be eligible for an 18-month examination cycle and treating certain municipal obligations as high-quality liquid assets under the liquidity coverage ratio. In addition, the agencies said they are determining what further action is needed to implement the exemption for appraisal requirements for certain rural transactions.

A number of other changes made by EGRRCPA require regulatory implementation either through a rulemaking or other action, which the agencies say they intend to address at a later date.

Fed Issues a Separate Statement Related to EGRRCPA

The Fed issued an additional independent statement on July 6, 2018, describing how the agency no longer will subject primarily smaller, less complex banking organizations to certain regulations, including those relating to stress testing and liquidity. This statement provides Fed-specific guidance to some of the provisions already detailed in the interagency statement. Additionally, the Fed statement provides that the board will collect assessments from all bank holding companies and savings and loan holding companies with total consolidated assets of $50 billion or more assessed for the year 2017, but it will not collect from those with total consolidated assets of less than $100 billion for the year 2018 and after.

In addition, the Fed will not require holding companies with less than $100 billion in total consolidated assets to comply with the enhanced prudential standards in Regulation YY, the liquidity coverage ratio requirements in Regulation WW, the capital planning requirements in Regulation Y, and other related reporting, disclosure, and recordkeeping requirements. However, the board will continue to supervise the firms to ensure their safe and sound operation.

Agencies Issue Statements on HMDA

On July 5, 2018, the FDIC, the OCC, and the Consumer Financial Protection Bureau (CFPB) each issued a statement acknowledging the partial exemptions granted under EGRRCPA for certain Home Mortgage Disclosure Act (HMDA) data reporting requirements for banks and credit unions originating fewer than 500 closed-end mortgage loans or fewer than 500 open-end lines of credit, as applicable, in each of the two preceding calendar years. The statements provide that EGRRCPA will not affect the format of the loan/application registers for institutions filing HMDA data collected in 2018. Institutions that no longer have to report information for certain data fields as a result of the new law should enter an exemption code for the specified field.

Institutions will not be required to resubmit HMDA data collected in 2018 and reported in 2019 unless data errors are material. Additionally, the agencies do not intend to assess penalties for errors in 2018 HMDA data, and they will credit good faith compliance efforts in their diagnostic examinations of 2018 HMDA data.

The CFPB expects to provide further guidance later this summer on the applicability of EGRRCPA to HMDA data collected in 2018.

Federal Banking Agencies Issue Policy Statement on Cooperation in Enforcement Actions

On June 12, 2018, the federal banking agencies issued a policy on interagency cooperation in enforcement actions aimed at ensuring ongoing coordination of formal corrective action. The statement rescinds the Feb. 20, 1997, policy statement “Interagency Coordination of Formal Corrective Action by the Federal Bank Regulatory Agencies.”

Highlights of the coordination in the new policy statement include:

  • When one of the federal banking agencies determines that it expects to take a formal enforcement action against any agency-supervised institution, it will notify the other federal banking agencies that have an interest in the enforcement action.
  • Notification should be provided at the earlier of the federal banking agency’s written notification to the institution that it is considering an enforcement action against it or when the appropriate responsible federal banking agency official or group of officials determines that formal enforcement action is expected to be taken.
  • If two or more federal banking agencies consider bringing complementary actions, they should coordinate all aspects of the enforcement actions.
The policy statement was effective June 12, 2018.

Agencies Plan Current Expected Credit Losses (CECL) Methodology Q&A Webinar for Community Bankers

The federal banking agencies, in conjunction with the Financial Accounting Standards Board, the U.S. Securities and Exchange Commission, and the Conference of State Bank Supervisors, will host an interagency webinar on July 30, 2018, at 1 p.m. Eastern. Agency representatives will answer questions received from community bankers about the new credit losses accounting standard, which introduces CECL.

Representatives from the functional areas within banking institutions who are involved in the implementation of the new credit losses accounting standard are encouraged to participate.

Advance registration is not required but is encouraged. Webinar materials will be archived for future viewing.

Comptroller of the Currency Discusses Priorities for the Federal Banking System

On June 14, 2018, Comptroller of the Currency Joseph M. Otting testified before the Senate Committee on Banking, Housing, and Urban Affairs regarding his priorities for the OCC and the federal banking system.

Highlights of the testimony included these agency efforts:
  • Modernize the regulatory approach to the Community Reinvestment Act to promote most-needed investment.
  • Encourage banks to fulfill customers’ needs for short-term, small-dollar credit.
  • Promote more efficient compliance with the Bank Secrecy Act and anti-money laundering (BSA/AML) regulations.
  • Simplify regulatory capital and the Volcker rule, especially for small and midsize banks.
  • Operate the OCC as effectively and efficiently as possible.
Otting also gave an overview of the condition of the federal banking system and the primary risks it faces.

OCC Revises and Updates Booklets in Comptroller’s Handbook

On June 28, 2018, the OCC issued several revised booklets in the Comptroller’s Handbook. These include the “Bank Supervision Process,” “Community Bank Supervision,” “Compliance Management Systems,” and “Large Bank Supervision” booklets. The OCC also updated the “Federal Branches and Agencies Supervision” booklet.

Highlights from the revised booklets include:
  • The revised Uniform Interagency Consumer Compliance Rating System is incorporated.
  • Asset management core assessment guidance to the “Large Bank Supervision” booklet is added. No changes are made to factors for assigning the trust component rating in the regulatory ratings core assessment, and examiners continue to use the Uniform Interagency Trust Rating System.
  • Examiner guidance for assessing asset management and BSA/AML/Office of Foreign Assets Control (OFAC) risks is provided, consistent with appendixes J and M of the “Federal Financial Institutions Examination Council BSA/AML Examination Manual.”
  • Relevant aspects of Dodd-Frank are incorporated.
  • The OCC’s bank supervision process is explained using consistent terminology.
  • The roles of the bank’s board of directors and management are clarified.
  • Concepts and references regarding third-party risk management; new, modified, or expanded bank products or services; and corporate and risk governance are revised.

OCC Issues Bulletin on Supervisory Policy and Processes for CRA Performance Evaluations

On June 15, 2018, the OCC issued Bulletin 2018-17, “Supervisory Policy and Processes for Community Reinvestment Act Performance Evaluations,” to clarify its supervisory policies and processes regarding examiner evaluation and communication of bank performance under the Community Reinvestment Act (CRA).

Policy clarifications for all CRA evaluations, which are effective immediately, address these areas:

  • Full-scope and limited-scope review implementation
  • Consideration of activities that promote economic development
  • Demographic, aggregate, and market share data use
  • Evaluation of the borrower distribution of loans outside bank assessment areas
  • Frequency and timing of evaluations
  • The CRA performance evaluation period
  • Home mortgage loan evaluation

These policies and processes apply to the evaluations of all OCC-supervised banks subject to the CRA, regardless of asset size or CRA evaluation type. Transitional procedures are being implemented. Banks that currently are undergoing CRA evaluations but believe these policies will create a burden during ongoing evaluations are encouraged to raise this concern with their examiners.

The OCC continues proceedings on a broader initiative to modernize the CRA exam process.

NCUA Approves Field-of-Membership Rule Changes

The National Credit Union Administration (NCUA) board, at its June 21, 2018, meeting, unanimously approved a final rule amending its regulations governing its chartering and field-of-membership rules with respect to applicants for approval, expansion, or conversion of a community charter.

These are some changes to the existing regulation:

  • An applicant for an original community charter, conversion, or expansion may submit a narrative to establish the existence of the required well-defined local community. Sufficient supporting documentation must accompany the narrative.
  • Where the population of the proposed community exceeds 2.5 million, the NCUA will hold a public hearing on narrative applications.
  • For communities that are subdivided into metropolitan divisions, an applicant may designate a portion of the area as its community, regardless of division boundaries.

The final rule, which does not raise the population limit for a presumptive community, will become effective Sept. 1, 2018.

Also at the June 21 meeting, the NCUA approved a final rule to give members of federally insured credit unions greater transparency when those credit unions seek voluntary mergers. The final merger rule will become effective Oct. 1, 2018.

From the Financial Accounting Standards Board (FASB)

FASB Issues Improvements to Nonemployee Share-Based Payments

On June 20, 2018, the FASB issued Accounting Standards Update (ASU) 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,” to simplify the accounting for nonemployee share-based payments for goods or services to be used in a grantor’s own operations, by aligning it with and including it within the scope of Topic 718 for employee share-based compensation. Although uncommon, some financial institutions may issue awards to nonemployees providing advisory or consulting services (for example, legal advice, investment banking advice).  

The guidance clarifies that the following are outside the scope of Topic 718:

  • Inputs to an option pricing model and the attribution of cost (that is, the vesting period and pattern of recognition) for nonemployee payments
  • Share-based payments to provide financing to the issuer
  • Share-based payments to grant awards in conjunction with selling goods or services to customers as part of a contract under Topic 606, “Revenue From Contracts With Customers”
Under the new guidance, the following changes will apply to nonemployee share-based payment awards:
  • Instead of measuring at the fair value of the consideration received or the fair value of the equity instruments issued, the awards will be measured at grant date fair value.
  • Instead of measuring at the earlier of when a commitment for performance by the counterparty is reached, or the date at which the counterparty’s performance is complete, the awards will be measured at the grant date.
  • Instead of measuring awards with performance conditions at the lowest aggregate fair value, the grantor will consider the probability of satisfying performance conditions contained in the awards.
  • The classification of equity-classified awards no longer will need to be reassessed upon vesting unless award modifications occur after they vest and the nonemployee is no longer providing goods or services.
For public business entities (PBEs), the ASU is effective for fiscal years beginning after Dec. 15, 2018, including interim periods within. For all other entities, it is effective for fiscal years beginning after Dec. 15, 2019, and interim periods within fiscal years beginning after Dec. 15, 2020. Early adoption is permitted, but no earlier than the adoption of Topic 606.

From the Securities and Exchange Commission (SEC)

SEC Revises Smaller Reporting Company Definition

On June 28, 2018, the SEC voted to expand the “smaller reporting company” (SRC) definition to include entities with public float of less than $250 million, which is an increase from the previous public float threshold of $75 million. This means that more entities will qualify for the SRC scaled disclosure accommodations. The SEC did not change the threshold for the definition of “accelerated filer,” which includes the requirement for an auditor attestation of management’s assessment of internal control over financial reporting (ICFR). Accordingly, for those entities with public float between $75 million and $250 million, Section 404(b) of the Sarbanes-Oxley Act (Sarbanes-Oxley), the auditor attestation of ICFR, remains applicable.

Additionally, an entity with no public float or with public float of less than $700 million will qualify as an SRC if annual revenues are less than $100 million during its most recently completed fiscal year.

SEC Chair Jay Clayton has directed the SEC staff to consider providing further relief on Section 404(b) of Sarbanes-Oxley.

The rules will become effective 60 days after publication in the Federal Register.

SEC Approves Inline XBRL reporting

On June 28, 2018, the SEC also voted to require the use of Inline eXtensible Business Reporting Language (XBRL) for tagged data. Inline XBRL involves embedding XBRL data directly into a filing so that the filing can be read by both a human and a machine. The new rules do not change the categories of XBRL filers or the scope of disclosures subject to XBRL requirements.

Effective dates for Inline XBRL within filings are as follows:
  • Large accelerated filers that use U.S. GAAP must comply beginning with Form 10-Q for fiscal periods ending on or after June 15, 2019.
  • Accelerated filers that use U.S. GAAP must comply beginning with Form 10-Q for fiscal periods ending on or after June 15, 2020.
  • All other filers must comply beginning with Form 10-Q for fiscal periods ending on or after June 15, 2021.
The SEC also eliminated the requirement for operating companies to post XBRL data on their websites. The rules are effective 30 days after publication in the Federal Register.

Corp Fin Director Discusses Digital Asset Transactions

In SEC’s Division of Corporation Finance (Corp Fin) Director William Hinman’s address to the Yahoo Finance All Markets Summit on June 14, 2018, he covered the application of aspects of the federal securities laws to digital assets. He addressed whether a digital asset offered as a security can, over time, become something other than a security. He shared his views related to certain specified circumstances in which a digital asset can no longer be a security – that is, when there no longer is any central enterprise being invested in or when the digital asset is sold only to be used to purchase a good or service available through the network on which it was created. He also provided factors to consider when determining whether a digital asset is a security or whether it is structured more like a consumer item (such as a good or service to be purchased).

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Sydney Garmong
Sydney Garmong
Office Managing Partner, Washington, D.C.