January 2022 financial reporting, governance, and risk management

| 1/19/2022
January 2022 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

Dear FIEB readers,

It still seems early enough in 2022 to wish you a happy new year. Let’s hope this year marks the end of the pandemic. 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 2021. Of course, we will have a much better viewpoint for our next month’s issue.

Meanwhile, we continue to watch the regulatory and standard-setting landscape – especially on environmental, social, and governance criteria including climate change; digital assets; and cybersecurity – for top-of-mind issues.

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Matters of importance from the federal financial institution regulators

OCC publishes large-bank climate risk principles for public comment

The Office of the Comptroller of the Currency (OCC) on Dec. 16, 2021, issued a set of draft principles designed to support the identification and management of climate-related financial risks at OCC-regulated institutions with more than $100 billion in total consolidated assets. The principles would provide large banks with a high-level framework to use in the management of exposures to climate-related financial risks consistent with existing OCC rules and guidance. The OCC’s proposal, which closely aligns with the Basel Committee’s Task Force on Climate-Related Financial Risk consultative document issued in November 2021, addresses governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis.

Regarding climate-related scenario analysis, the OCC noted that bank management should develop and implement frameworks that correspond to the bank’s size, complexity, business activity, and risk profile. The frameworks’ objectives should be clearly defined and should reflect the bank’s overall climate risk management strategies. The OCC indicated that it intends to appropriately tailor any resulting supervisory expectations to reflect the differing complexities of banks’ operations and business models.

The OCC said it plans to issue subsequent guidance to further distinguish specific roles and responsibilities of boards of directors and management and to incorporate feedback while also considering lessons learned and best practices from the industry and other jurisdictions.

It should be noted that the other federal banking agencies did not join the OCC in issuing this initial climate-related guidance.

Comments are due Feb. 14, 2022.

Financial Stability Oversight Council issues annual report

On Dec. 17, 2021, the Financial Stability Oversight Council (FSOC) issued its comprehensive annual report, which outlines the council’s activities over the past year. The report also provides an update on what the FSOC deems as significant financial market developments and potential threats to U.S. financial stability.

Some of the key recommendations in the annual report include:

  • Climate-related financial risk. “The Council recognizes the critical importance of taking prompt action to improve the availability of data and measurement tools, enhance assessments of climate-related financial risks and vulnerabilities, and incorporate climate-related risks into risk management practices and supervisory expectations for regulated entities, where appropriate.”
  • Digital assets. “The Council recommends that federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and coordinate to address potential issues that arise from digital assets.”
  • London Interbank Offered Rate (LIBOR) transition. “Market participants should act with urgency to address their existing LIBOR exposures and transition to robust and sustainable alternative rates.”
  • Cybersecurity. “The Council recommends that federal and state agencies continue to monitor cybersecurity risks and conduct cybersecurity examinations of financial institutions and financial infrastructures to ensure, among other things, robust and comprehensive cybersecurity monitoring, especially in light of new risks posed by the pandemic, ransomware incidents, and supply chain attacks.”

FDIC chair announces resignation

Federal Deposit Insurance Corp. (FDIC) Chair Jelena McWilliams announced on Dec. 31, 2021, that she will resign from the agency effective Feb. 4, 2022. Her resignation comes following some recent public conflicts among the FDIC’s directors over the powers of the agency’s chairman and board. Board member Martin Gruenberg, who previously served as chair, is expected to be named acting chairman.

Fed issues reminder on counterparty credit risk management

The Federal Reserve Board (Fed) on Dec. 10, 2021, reminded banks about supervisory expectations in interagency guidance from 2011 concerning safe and sound practices with regard to counterparty credit risk management. The Fed’s supervision letter SR 21-19 was prompted largely as a result of the Archegos Capital Management default and related losses by several large banks that had relationships with the investment fund.

The Fed reminded firms that they should “receive adequate information with appropriate frequency to understand the risks of an investment fund, including position and counterparty concentrations, and either reconsider the relationship or set sufficiently conservative terms for the relationship if the client does not meet appropriate levels of transparency.”

Firms also should ensure that the risk management and governance approach applied to an investment fund is capable of identifying the fund’s risk initially and monitoring it throughout the relationship; that applicable areas of the firm are aware of the risk posed by investment fund clients; and that margin practices remain appropriate to the fund’s risk profile as it evolves.

FDIC releases updated information related to brokered deposits

The FDIC on Dec. 29, 2021, released updated Q&A’s related to the brokered deposits rule, which took effect in April 2021. The new Q&A’s address:

  • Circumstances under which third parties can qualify for the exception for third-party administrators of health savings accounts
  • Filing deadlines and penalties for filers that rely on the primary purpose exception for instances when an agent has less than 25% of the total assets under administration for its customers
  • Filing deadlines and penalties for the annual certification under the enabling transactions test

Also on Dec. 29, 2021, the FDIC published a notice of a new business relationship that may now qualify for the primary purpose exception to the brokered deposits rule through a new designated exception. No notice or application is required to be submitted to the FDIC to rely on this exception.

Agencies issue statement on CBLR returning to 9%

With the expiration of coronavirus-related relief provided under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the federal banking agencies, including the FDIC, OCC, and Fed, issued an interagency statement on Dec. 21, 2021, reaffirming that the community bank leverage ratio (CBLR) would revert to a minimum of 9% starting on Jan. 1, 2022. Banking organizations that elect the CBLR framework on their March 31, 2022, call reports will be subject to the requirement.

The agencies reminded banks and bank holding companies with less than $10 billion in assets that the optional CBLR framework includes a two-quarter grace period that generally allows banking organizations additional time to build capital and manage their balance sheets to either remain in the framework or prepare to comply with the generally applicable risk-based and leverage capital requirements.

The CBLR temporarily had been lowered to 8% in spring 2020 consistent with Section 4012 of the CARES Act. That temporary relief expired on Dec. 31, 2021.

FinCEN issues proposed beneficial ownership reporting requirements

The Financial Crimes Enforcement Network (FinCEN) on Dec. 7, 2021, proposed comprehensive regulations to implement the Corporate Transparency Act (CTA) that was included in the broader National Defense Authorization Act for Fiscal Year 2021. The proposal would require corporations, limited liability companies, and similar entities to report certain information about their beneficial owners to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity.

In the proposed rule, FinCEN defines a beneficial owner as an individual that exercises “substantial control over the reporting company,” or owns or controls at least 25% interest in the reporting company. The proposed rule would require a reporting company to provide name, birthdate, address, and a unique identifying number from an acceptable identification document (along with an image of the document) for each beneficial owner and company applicant. Individuals also would have the option to provide beneficial ownership information to FinCEN and obtain a “FinCEN identifier,” which then could be provided in lieu of other required information.

FinCEN is planning additional rulemakings to implement the CTA, including establishing rules for accessing beneficial ownership information through the database and safeguarding the data as well as revising the customer due diligence rule to reflect the new reporting requirements. FinCEN also is in the process of developing the broader database infrastructure.

Comments on the proposal are due Feb. 7, 2022.

FinCEN requests comments on AML/CFT modernization

In a related issuance and as part of its broader work to implement the Anti-Money Laundering Act of 2020, on Dec. 14, 2021, FinCEN issued a request for information (RFI) seeking input on how it can streamline, modernize, and update rules on anti-money laundering and countering the financing of terrorism (AML/CFT) in the U.S.

FinCEN is particularly interested in new and innovative approaches to Bank Secrecy Act compliance that promote a risk-based approach to protecting the financial system from threats to national security posed by various forms of financial crime, including money laundering and terrorism and proliferation financing, while also providing for the reporting of information with a high degree of usefulness to government authorities.

Comments on the RFI are due Feb. 14, 2022.

CFPB issues annual supervisory report

The Consumer Financial Protection Bureau (CFPB) on Dec. 8, 2021, issued the 25th edition of its “Supervisory Highlights” report focusing on examiner observations of several financial products occurring between January and June of 2021. The CFPB flagged several areas where issues were observed, including credit card account management, debt collection, deposits, fair lending, mortgage servicing, payday lending, prepaid accounts, and remittance transfers.

This latest report highlights several mortgage servicing issues, some of which were related to COVID-19 relief measures. Among other things, examiners observed firms charging delinquency-related fees to borrowers in CARES Act forbearances, failing to terminate preauthorized electronic fund transfers, charging consumers unauthorized amounts, misrepresenting loan transaction and payment history in online accounts, and failing to evaluate complete loss mitigation applications within 30 days.

Specifically related to fair lending, the CFPB said it observed pricing discrimination among certain supervised firms that offered pricing exceptions based on competitive offers from other institutions. CFPB examiners “identified lenders with statistically significant disparities for the incidence of pricing exceptions for African American and female applications compared to similarly situated non-Hispanic white and male borrowers.” Additionally, the CFPB noted cases where lenders failed to retain adequate documentation to support certain pricing exceptions.

From the Securities and Exchange Commission (SEC)

SEC commissioner resigns

On Dec. 20, 2021, Commissioner Elad L. Roisman announced his intention to resign his position as commissioner by the end of January 2022. In his statement, Roisman shared that it was a great privilege to serve as a commissioner and an honor to work with his SEC counterparts.

Commissioner remarks on climate change pledges

At a virtual meeting on Dec. 14, 2021, Commissioner Caroline Crenshaw described climate change as a crisis and noted that it will have a substantial impact on the U.S. capital markets. In addressing certain aspects of climate change, she discussed the recent increase in net-zero pledges by public companies and highlighted that in many cases it was unclear how companies would achieve these goals or what information they would need to give investors to evaluate and monitor implementation of these pledges over time. Crenshaw noted that “while net-zero emissions pledges are an important step forward, they underscore the loud, repeated, and sustained calls for decision-useful metrics – metrics calculated using reliable and comparable methodologies that enable investors to decide whether the companies mean what they say.” She specifically called for disclosure of political spending, which may conflict with companies’ net-zero strategies and might further the interests of executives rather than the interests of the investors. Additionally, she noted that linking executive compensation to achieving environmental, social, and governance (ESG) goals further underscores the need for accurate and reliable climate metrics and decision-useful disclosures.

She concluded with comments on the importance of disclosure of information in the private markets and warned of the risks tied to these markets, where the SEC has less visibility and less oversight.

SEC proposes amendments to share repurchase disclosures and reporting

On Dec. 15, 2021, the SEC issued proposed amendments to its rules covering disclosure about an issuer’s repurchases of its equity securities, commonly known as share buybacks. The proposed rules would apply to issuers that repurchase securities registered under Section 12 of the Securities Exchange Act of 1934, including foreign private issuers and certain registered closed-end funds. Under the proposed amendments, issuers would be required to complete and provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. This new form would include disclosure of the class of securities purchased, total amount purchased, average price paid, and the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).

Additionally, the proposed rules would require an issuer to disclose:

  • The objective or rationale for the share repurchases and the process or criteria used to determine the amounts of repurchases
  • Any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction
  • Whether the issuer is making its repurchases pursuant to a plan that it intends to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) and/or the conditions of the Exchange Act Rule 10b-18 nonexclusive safe harbor

Comments are due 45 days after publication in the Federal Register.

SEC proposes amendments to insider trading plans and related disclosures

The SEC on Dec. 15, 2021, issued a proposal, “Rule 10b5-1 and Insider Trading,” for public comment. This proposal includes amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 to enhance disclosure requirements and investor protections against insider trading. The proposal includes updates to Rule 10b5-1(c), which provides an affirmative defense to insider trading for parties that frequently have access to material nonpublic information, including corporate officers, directors, and issuers.

The amendments would update the requirements for the affirmative defense by imposing a cooling-off period before trading could commence under a trading plan, prohibiting overlapping trading plans, and limiting single trade plans to one trading plan in any 12-month period. Additionally, the proposal would require directors and officers to furnish written certifications that they are not aware of any material nonpublic information when they enter into the plans. New disclosures about an issuer’s policies and procedures related to insider trading and practices around the timing of options grants and the release of material nonpublic information also would be required. A new table would report any options granted within 14 days of the release of material nonpublic information and the market price of the underlying securities on the trading days before and after the disclosure of the material nonpublic information.

Comments are due 45 days after publication in the Federal Register.

SEC proposes amendments to money market fund rules

On Dec. 15, 2021, the SEC proposed amendments to certain rules governing money market funds under the Investment Company Act of 1940. As the concerns over the economic impact of the pandemic escalated in March 2020, many investors reallocated their assets, resulting in large outflows from prime and tax-exempt money market funds and creating stress on short-term funding markets. The proposed amendments address concerns about such money market funds, including concerns about redemption costs and liquidity, and are intended to decrease the chances of runs on such funds in times of stress.

The proposed amendments would:

  • Increase liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions
  • Remove provisions permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund’s liquidity drops below an identified threshold
  • Require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures that would require redeeming investors to bear the liquidity costs of their redemptions under certain circumstances
  • Change certain reporting requirements to improve the availability of information about money market funds

Comments are due 60 days after publication in the Federal Register.

SEC proposes rules on security-based swaps and positions

The SEC on Dec. 15, 2021, proposed rules related to security-based swap transactions and positions. The proposal includes the following new rules:

  • Rule 9j-1 would prohibit fraudulent, deceptive, or manipulative conduct in connection with all transactions in security-based swaps.
  • Rule 15Fh-4(c) would prohibit personnel of a security-based swap entity from taking any action to coerce, mislead, or otherwise interfere with the security-based swap entity’s chief compliance officer.
  • Rule 10B-1 would require any person, or group of persons, who owns a security-based swap position that exceeds the threshold amount included in the rule to publicly report to the SEC information required by Schedule 10B on the SEC’s EDGAR filing system.

Comments are due 45 days after publication in the Federal Register.

SEC updates regulatory agenda; commissioners offer perspective

In December 2021, the SEC announced updates to its regulatory agenda, which lists short- and long-term regulatory actions the SEC plans to take. The revised agenda provides updated forecasts for potential rulemaking action on various topics including climate change, human capital, board diversity, and cybersecurity governance. Commissioners Roisman and Hester M. Peirce communicated alternative perspectives on certain aspects of Chair Gary Gensler’s regulatory agenda on Dec. 13.

SEC approves 2022 PCAOB budget and accounting support fee

The SEC on Dec. 15, 2021, approved the PCAOB’s 2022 budget and the related annual accounting support fee. The 2022 budget totals $310.3 million, and the accounting support fee totals $297.9 million; $267.2 million of the support fee will be assessed on public company issuers, and the remaining portion will be assessed on registered broker-dealers. In its announcement of the approval, SEC Chair Gensler noted: “This budget would enable the Board to live up to its potential as envisaged under the Sarbanes-Oxley Act."

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB swears in new chair and board member

Erica Y. Williams was sworn in as chair of the PCAOB on Jan. 10, 2022, and will serve until Oct. 24, 2024. Most recently a litigation partner at Kirkland & Ellis LLP, Williams previously spent more than a decade in various roles at the SEC and served as special assistant and associate counsel to President Barack Obama.

On Jan. 3, 2022, Anthony C. Thompson was sworn in as a PCAOB board member. His term will run through Oct. 24, 2022. Thompson joins the SEC from his position as the executive director and chief administrative officer of the Commodity Futures Trading Commission (CFTC). Prior to his time at the CFTC, Thompson held senior positions at the U.S. Department of Agriculture and served in the United States Air Force for 32 years.

From the American Institute of Certified Public Accountants (AICPA)

AICPA releases ESG-related matters practice aid

On Dec. 5, 2021, the AICPA and Chartered Institute of Management Accountants released a new practice aid, “Considerations of ESG-Related Matters in an Audit of Financial Statements.” The practice aid addresses the responsibilities of management, those charged with governance, and the auditor when considering climate-related matters in an audit of financial statements.

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