January 2021 financial reporting, governance, and risk management

January financial reporting, governance, and risk management

Message from Mike Percy, Managing Partner, Financial Services

Dear FIEB readers,

It still seems early enough in 2021 to wish you a happy new year. Let’s hope 2021 is a far better year than 2020. While we have positive news on deploying the most recent stimulus and the COVID-19 vaccines, we still have much uncertainty. From what I have read, and heard, I am cautiously optimistic.

With earnings releases starting to come in, we are seeing a mixture of financial results – on both fourth quarter and year-over-year results as compared to prior periods. It is still very early in the earnings release season to speculate on how the industry fared for 2020. Of course, we will have a much better viewpoint for our next month’s issue.

I think many of those working remotely for almost 10 months, including me, are wondering about the future work landscape. I hope we will have a better picture as 2021 unfolds. Meanwhile, I hope this message finds you, your friends, your family, and your colleagues safe.

Matters of importance from the federal financial institution regulators

Agencies propose requirement for notification of computer security incidents

On Dec. 18, 2020, the Federal Reserve Board (Fed), Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) released a proposal to require banks to notify their federal regulator within 36 hours if they experience certain computer security incidents. These incidents include situations where a bank cannot deliver services to a significant portion of its customer base or when crucial operations are jeopardized as well as situations where the overall stability of the financial sector might be affected. The rule also includes notification requirements for service providers of banks.

Comments are due by April 12, 2021.

Agencies propose changes to suspicious activity report requirements

In December 2020, the FDIC, OCC, and National Credit Union Administration (NCUA) released notices of proposed rulemaking to allow the agencies to issue exemptions for suspicious activity report filing for institutions that develop innovative solutions to meet Bank Secrecy Act requirements more efficiently and effectively. The proposed rules would require in many cases an exemption from the Financial Crimes Enforcement Network (FinCEN) as well.

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

NCUA finalizes subordinated debt rule

On Dec. 17, 2020, the NCUA finalized a rule to create a new subpart in the NCUA’s final risk-based capital rule to allow certain eligible credit unions to issue subordinated debt for regulatory capital standards. The 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 rule is effective Jan. 1, 2022.

FDIC issues final rule on brokered deposits and interest-rate restrictions

On Dec. 15, 2020, the FDIC issued a final rule to modernize brokered deposit regulations to reflect industry changes and better meet customer needs. The rule implements a new framework to determine whether deposits qualify as brokered deposits, reflecting use by banks of new technologies to interact with customers. The rule also modifies the methodology for calculating the interest-rate restrictions.

The rule is effective Jan. 1, 2022.

CFPB task force releases report on consumer financial protection

On Jan. 5, 2021, the Consumer Financial Protection Bureau (CFPB) Taskforce on Federal Consumer Financial Law released a report including approximately 100 recommendations for improving consumer protections. The task force focused on five principles: 1) consumer protection, 2) information and education, 3) competition and innovation, 4) regulatory modernization and flexibility, and 5) inclusion and access.

Recommendations focus on expanding financial system access for unbanked or underbanked populations. They include authorizing the CFPB to issue federal licenses to financial technology (fintech) companies and identifying opportunities to coordinate efforts among regulatory agencies. The acting comptroller of the currency released a statement in response to the task force report, noting that the OCC should continue to issue federal fintech charters.

CFPB issues final rule on debt collection disclosures

On Dec. 18, 2020, the CFPB issued a final rule implementing Fair Debt Collection Practices Act (FDCPA) requirements relating to consumer disclosures. The new rule requires clearer disclosures at the outset of debt collection, including information about the debt and the consumer’s rights. The rule includes a model form for the disclosure.

The new rule follows another final rule issued in October 2020 relating to the FDCPA. The FDCPA applies to “debt collectors,” generally defined as anyone collecting debt for another party or those collecting their own debts using a different name.

The rule is effective Nov. 30, 2021.

CFPB issues two final rules related to qualified mortgages

On Dec. 10, 2020, the CFPB finalized two rules related to qualified mortgage (QM) loans.

The first rule amends Regulation Z to remove the existing 43% debt-to-income (DTI) ratio as a general QM standard and replace it with a price-based approach. The second rule creates a new category called “seasoned QMs.” A covered transaction would receive a safe harbor from ability to repay liability at the end of the 36-month seasoning period as a seasoned QM if certain requirements are satisfied, including:

The loan was a first-lien, fixed-rate transaction.
The loan had no more than two 30-day delinquencies and no delinquencies of 60 or more days within the seasoning period.
The loan was held in the creditor’s portfolio during the seasoning period.
The creditor considered and verified the DTI at origination.

The rules are effective March 1, 2021. However, the general QM rule has a mandatory effective date of July 1, 2021.

Paycheck Protection Program (PPP)

New law reinstates and changes PPP

H.R. 133, Consolidated Appropriations Act, 2021, enacted on Dec. 27, 2020, addresses the extension of and changes to the PPP under Section N, Title III in the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. Under the new laws, the PPP has been extended through March 31, 2021. The new guidance includes these PPP updates:

The PPP loan’s covered period can be any length between 8 and 24 weeks as set by the borrower.
Additional expenses including operations expenditures, property damage costs, supplier costs, and worker protection expenditures will be covered.
Eligibility is expanded to include 501(c)(6)s, housing cooperatives, and destination marketing organizations, among other types of organizations.
Greater flexibility for seasonal employees is provided.
Certain existing PPP borrowers can request to modify their first-draw PPP loan amount.
Certain existing PPP borrowers are now eligible to apply for a second-draw PPP loan, if the following criteria are met:
- Previously received a first-draw PPP loan and will use or has used the full amount only for authorized uses.
- Has 300 or fewer employees
- Demonstrates at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020

On Jan. 8, 2021, the Small Business Administration (SBA) and the U.S. Department of the Treasury announced that the PPP would reopen on Jan. 11 for community financial institutions to make loans to new borrowers and on Jan. 13 for second-draw loans. On Jan. 14, 2021, the SBA and Treasury announced that the PPP for first and second draws would open to PPP-eligible lenders with $1 billion or less in assets on Jan. 15 and would open on Jan. 19 to all participating lenders.

New guidance addressing the changes to the PPP includes:

The interim final rule on PPP as amended by the Economic Aid Act combines rules released for PPP forgivable loans for first-time borrowers and includes changes made by the Economic Aid Act.
The interim final rule on second-draw PPP loans describes the differences between first-draw PPP loans and second-draw PPP loans.
PPP guidance from SBA Administrator Jovita Carranza on accessing capital for minority, underserved, veteran, and women-owned business concerns provides a commitment from the SBA that at a minimum the first two days of the new PPP application window will be open exclusively to applications from community banks.

Main Street Lending Program (MSLP)

Fed continues to update FAQs

The Fed updated the MSLP frequently asked questions document on Dec. 29, 2020, to provide additional guidance on the program, which ended on Jan. 8, 2021. The Fed revised its response to question L13, addressing the date by which eligible lenders needed to submit loans and how those requests are being processed.

On the same date, the Fed also updated its Main Street for Nonprofit Organizations frequently asked questions.

Troubled debt restructurings (TDRs) and current expected credit losses (CECL)

Consolidated Appropriations Act extends TDR and CECL relief

H.R. 133, Consolidated Appropriations Act, 2021, which was signed into law on Dec. 27, 2020, extends certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Section 4013 of the CARES Act provided temporary relief from troubled debt restructuring (TDR) and is amended by Division N, Section 540 of H.R. 133, by extending the end date from Dec. 31, 2020, to the earlier of Jan. 1, 2022, or 60 days after the date on which the COVID-19 national emergency terminates. It also adds specific reference to insurance companies in addition to the previously covered financial institutions.

Division N, Section 541 of H.R. 133 extends CARES Act Section 4014, which provided optional temporary relief from CECL guidance. Under this extension, insured depository institutions, bank holding companies, and their affiliates would not be required to adopt Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” before the earlier of the first day of the entity’s fiscal year that begins after the date on which the COVID-19 national emergency terminates or Jan. 1, 2022.

After the CARES Act was enacted on March 27, 2020, the Securities and Exchange Commission (SEC) staff clarified that once the deferral was elected by a registrant, Dec. 31, 2020, adoption of CECL was required, retrospective to Jan. 1, 2020 (ignoring an early termination of the national emergency). Under the amendments, a registrant electing the delay under the CARES Act is further delayed until Jan. 1, 2022, effective as of Jan. 1, 2022 (absent an early termination of the national emergency). With regard to the amendments to Section 4014, the SEC staff indicated it would not object to a registrant early adopting on Dec. 31, 2020, retrospective to Jan. 1, 2020, or Jan. 1, 2021, effective as of Jan. 1, 2021.

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From the Financial Accounting Standards Board (FASB)

FASB clarifies scope of reference rate reform guidance

The FASB, on Jan. 7, 2021, issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” to clarify the scope of ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides temporary, optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference the London Interbank Offered Rate or another reference rate that is expected to be discontinued.

The ASU addresses questions about whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is expected to be modified as a result of reference rate reform, commonly referred to as the “discounting transition.”

The amendments clarify that certain optional expedients and exceptions in Topic 848 do apply to derivatives that are affected by the discounting transition.

The amendments in ASU 2021-01 are effective immediately for all entities. The amendments do not apply to contract modifications made after Dec. 31, 2022; new hedging relationships entered into after Dec. 31, 2022; and existing hedging relationships evaluated for effectiveness in periods after Dec. 31, 2022, except for hedging relationships existing as of Dec. 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods after Dec. 31, 2022).

FASB proposes goodwill triggering event accounting alternative

On Dec. 21, 2020, the FASB issued a proposed ASU, “Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events,” to reduce the cost and complexity of private companies evaluating triggering events and potentially measuring a goodwill impairment at an interim date. The proposed amendments would be available to private companies and not-for-profit entities that report in-scope financial information (for example, reporting goodwill or any line item affected by a goodwill impairment) on only an annual basis. Entities providing interim financial information prepared in accordance with GAAP that includes goodwill or any line item affected by a goodwill impairment (for example, net income) would be precluded from applying the proposed accounting alternative. As proposed, financial institutions with quarterly call reporting requirements would not be eligible for the alternative.

The proposed ASU would be effective prospectively for annual periods beginning after Dec. 15, 2019. Early application would be permitted.

Comments are due on Jan. 20, 2021.

From the Securities and Exchange Commission (SEC)

SEC final rule on Regulation S-K amendments becomes effective with early adoption

The SEC, on Nov. 19, 2020, adopted amendments that simplify and enhance certain Regulation S-K disclosure requirements. The amendments eliminate duplicative disclosures and modernize and improve management’s discussion and analysis (MD&A) for the benefit of investors, while simplifying compliance efforts for registrants. Specifically, the requirement for selected financial data (Item 301) has been eliminated, the requirement to disclose supplementary financial information (Item 302) has been streamlined to replace the current requirement of quarterly tabular disclosure with a principles-based requirement for material retrospective changes, and MD&A (Item 303) requirements have been amended.

Among other changes to Item 303, changes to MD&A include clarifying disclosure requirements for liquidity and capital resources, streamlining disclosure requirements for results of operations, adding a new item for critical accounting estimates, replacing off balance sheet arrangements with a requirement to discuss such obligations in a broader context, eliminating tabular disclosure of contractual obligations, and streamlining required information regarding interim periods.

The rule is effective Feb. 10, 2021. Registrants are required to comply with the rule beginning with the first fiscal year ending on or after Aug. 9, 2021.

For filings after Feb. 10, 2021, registrants may choose to early adopt the final amendments as long as the amended item is adopted in its entirety. The final rule provides the following: “For example, upon effectiveness of the final amendments, a registrant may immediately cease providing disclosure pursuant to former Item 301, and may voluntarily provide disclosure pursuant to amended Item 303 before its mandatory compliance date. In this case, the registrant must provide disclosure pursuant to each provision of amended Item 303 in its entirety, and must begin providing such disclosure in any applicable filings going forward.”

SEC issues statement on digital asset securities custody by broker-dealers

The SEC issued, on Dec. 23, 2020, a statement and request for comment regarding the custody of digital asset securities by broker-dealers. The statement addresses the application of the Securities Exchange Act Rule 15c3-3 to digital asset securities.

The SEC press release about the statement details the SEC’s position as follows: “for a period of five years, a broker-dealer operating under the circumstances set forth in the statement will not be subject to a Commission enforcement action on the basis that the broker-dealer deems itself to have obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities for the purposes of paragraph (b)(1) of Rule 15c3-3. These circumstances, among other things, include that the broker-dealer limits its business to digital asset securities, establishes and implements policies and procedures reasonably designed to mitigate the risks associated with conducting a business in digital asset securities, and provides customers with certain disclosures regarding the risks of engaging in transactions involving digital asset securities.”

As part of the statement, the SEC is requesting comments to specific questions to gather additional insight into the developing standards and best practices for custody of digital asset securities. The information gathered as part of this request will serve to inform potential future SEC actions.

The statement and request for comment will be effective 60 days after publication in the Federal Register.

SEC proposes Securities Act amendments

The SEC, on Dec. 22, 2020, proposed an amendment to Rule 144 under the Securities Act of 1933. The proposed amendment would revise the holding period determination for securities acquired upon the conversion or exchange of market-adjustable securities that meet certain criteria as defined in the amendment. The proposal is designed to reduce the risk of unregistered distributions in connection with sales of those securities. Related to this amendment, the SEC also proposed amendments to update and simplify the Form 144 filing requirements.

Under the current Rule 144, securities acquired solely in exchange for other securities of the same issuer are deemed to have been acquired at the same time as the securities surrendered for conversion or exchange. Under the proposed amendments, the holding period for the underlying securities acquired upon conversion or exchange of certain market-adjustable securities would not begin until conversion or exchange, thereby requiring that a purchaser would need to hold the underlying securities for the applicable Rule 144 holding period before reselling them under Rule 144.

The proposed amendments to Form 144 would mandate electronic filing of the form, remove the requirement to file a Form 144 with respect to sales of securities issued by companies that are not subject to Exchange Act reporting, and revise the filing deadline to match the Form 4 filing deadline.

Comments are due March 22, 2021.

Clayton leaves SEC

On Dec. 23, 2020, SEC Chairman Jay Clayton ended his tenure at the SEC and issued a statement that includes his letter to President Donald Trump. In it he thanked all of those at the SEC for their service to investors, the markets, and the country. He highlighted some results of the past four years, including the resilience of the markets, noting that they have grown significantly since December 2016 and have weathered the economic shocks of the pandemic. The SEC under Clayton has focused on modernizing the regulatory framework and adopted more than 90 rules. Inspection and enforcement efforts focused on the needs of American households and returned a record of approximately $3.5 billion to harmed investors. Clayton highlighted the importance of promoting capital formation and said that appropriate investor protections should be in place to ensure that bad actors have no place in the markets. He said it was an honor and privilege to serve the public as SEC chair.

SEC names acting chair

On Dec. 28, 2020, the SEC announced that Elad L. Roisman has been named acting chair of the SEC. Roisman joined the SEC as a commissioner in September 2018. Previously he was chief counsel to the U.S Senate Committee on Banking, Housing, and Urban Affairs.

Chief accountant to leave SEC

On Jan. 13, 2021, the SEC announced that Sagar Teotia will conclude his tenure at the SEC by the end of February. Teotia was named as the chief accountant in July 2019 after previously serving as acting chief accountant since May 2019 and deputy chief accountant since March 2017. He also previously served as a professional accounting fellow in the Office of the Chief Accountant.

Acting enforcement director leaves SEC

On Jan. 12, 2021, the SEC announced that Marc Berger will conclude his tenure this month. Berger joined the agency as director of the New York regional office in December 2017 and was named deputy director of the Division of Enforcement in August 2020.

Berger replaced Stephanie Avakian, Division of Enforcement director, who departed after the SEC’s announcement on Dec. 10, 2020. Avakian led the division as co-director and then director for the past four years.

SEC announces departure of chief of staff

The SEC announced, on Dec. 23, 2020, that Sean Memon will end his tenure as the SEC’s chief of staff in January 2021. Memon joined the SEC as deputy chief of staff in May 2017 and was named chief of staff in June 2019. In his current position, Memon served as principal adviser to former SEC Chairman Jay Clayton on legal, policy, and management matters.