July 2021 financial reporting, governance, and risk management

Agencies propose third-party risk management guidance

The Federal Reserve Board (Fed), Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) are seeking comments on a comprehensive joint proposal designed to manage risks associated with third-party relationships, including relationships with nonbank fintech firms.

The agencies said the proposal, which was issued on July 13, 2021, would assist banks in identifying and addressing the risks associated with third-party relationships and that it responds to industry feedback requesting agency alignment of third-party risk management guidance.

The proposed guidance would offer a framework based on sound risk management principles for banks to consider in developing risk management practices for all stages in the life cycle of third-party relationships, taking into account the level of risk, the complexity and size of the banking organization, and the nature of the third-party relationship. It would replace each agency’s existing guidance on this topic and would apply to all banking organizations supervised by the agencies.

Comments are due Sept. 17, 2021.

Basel Committee issues paper on crypto asset exposures

On June 10, 2021, the Basel Committee on Banking Supervision (BCBS) published a public consultation document on preliminary proposals for the prudential treatment of banks’ crypto asset exposures. The document builds on the BCBS discussion paper issued in 2019 and is part of a broader ongoing initiative among international financial regulatory bodies.

In the consultative document, the BCBS notes that the growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks. The committee says that crypto assets have exhibited a high degree of volatility and, as exposure increases, could present risks for banks, including liquidity, credit, market, and operational risks along with elevated money laundering and terrorist financing risks.

The proposal divides crypto assets into two groups. The first group fulfills a set of classification conditions and is eligible for treatment under the Basel framework with some modifications and additional guidance, including certain tokenized traditional assets and stablecoins. The second category includes assets such as bitcoins that do not fulfill the classification conditions.

Comments are due Sept. 10, 2021.

BIS working group publishes paper on CBDC technology

The Bank for International Settlements (BIS), on June 8, 2021, released a working paper, “Central Bank Digital Currency: The Quest for Minimally Invasive Technology,” on the range of proposed central bank digital currency (CBDC) architectures, how they could complement existing payment options, and what they imply for the financial system and the central bank of the future. In the paper, the BIS estimates that almost 50 central banks have already launched designs for CBDCs or prototypes.

The paper advocates for and outlines requirements for a “minimally invasive” CBDC design that “upgrades money to the needs of the 21st century without disrupting the tested two-tier architecture of the monetary system,” which involves both the private and public sectors.

The paper’s primary finding is that technological developments inspired by popular cryptocurrency systems (based on anonymity and lacking a central authority) do not meet the requirements for a retail CBDC. Rather the BIS working group found that digital banknotes that run on “intermediated” or “hybrid” CBDC architectures show “particular promise.” The paper adds, “supported with technology to facilitate record-keeping of direct claims on the central bank by private-sector entities . . . [the digital banknotes] economic design should emphasize the use of the CBDC as medium of exchange but needs to limit its appeal as a savings vehicle.”

Fed releases CECL tool

The Fed, on July 15, 2021, released a current expected credit loss (CECL) implementation tool for community banks with assets of less than $1 billion, to help them calculate their CECL allowances. The Scaled CECL Allowance for Losses Estimator (SCALE) is spreadsheet-based and was created from publicly available regulatory and industry data. The CECL methodology became effective for many larger public financial institutions beginning in 2020, and most community banks with assets under $1 billion will implement CECL in 2023.

FDIC issues proposal on real estate lending standards

The FDIC, on June 15, 2021, issued a proposal to amend the Interagency Guidelines for Real Estate Lending Policies. The purpose of the proposed rule is to align the real estate lending standards with the community bank leverage ratio (CBLR) rule, which does not require electing institutions to calculate tier 2 capital or total capital.

The proposed rule would allow “a consistent approach for calculating the ratio of loans in excess of the supervisory loan-to-value limits . . . at all FDIC-supervised institutions, using a methodology that approximates the historical methodology the FDIC has followed for calculating this measurement without requiring institutions to calculate tier 2 capital.” The FDIC also said the new rule would avoid any regulatory burden that could arise if an FDIC-supervised bank decides to switch between different capital frameworks.

The proposal also would help ensure that the FDIC’s regulation regarding supervisory loan-to-value limits is consistent with how examiners calculate credit concentrations, as outlined in a statement issued last year directing examiners to use tier 1 capital plus the appropriate allowance for credit losses as the denominator when calculating credit concentrations.

Comments are due July 26, 2021.

FDIC approves new policy statement on MDIs

The FDIC, on June 15, 2021, voted to approve an update to its policy statement on minority depository institutions (MDIs). The revised statement, which reflects public comments received on the August 2020 proposal, describes the FDIC’s actions to promote the preservation of MDIs and enhance communication between the agency and institutions that are owned and managed by minority groups.

The statement also explains how the FDIC applies examination standards in assessing the performance of MDIs. The FDIC has been working with private sector and philanthropic organizations to establish a mission-driven bank fund to support FDIC-insured MDIs and community development financial institutions (CDFIs).

FinCEN issues anti-money laundering and counterterrorism priorities

On June 30, 2021, the Financial Crimes Enforcement Network (FinCEN) issued governmentwide priorities for anti-money laundering (AML) and countering the financing of terrorism (CFT) policy. FinCEN worked closely with a wide range of financial regulators and other government agencies in producing the first-ever policy. According to the priorities, the most significant AML/CFT threats currently facing the country are corruption, cybercrime, domestic and international terrorist financing, fraud, transnational criminal organization activity, drug trafficking organization activity, human trafficking and human smuggling, and proliferation financing.

FinCEN and the federal financial institution agencies issued a separate interagency statement to provide clarity for banks and credit unions on the AML/CFT priorities. The interagency statement reiterates that the priorities do not “create an immediate change to Bank Secrecy Act (BSA) requirements or supervisory expectations for banks.” The agencies’ statement says they will revise their BSA regulations within the next six months to address how the priorities will be incorporated into banks’ BSA requirements.

The agencies add that they will not examine banks for the incorporation of the priorities into their risk-based BSA programs until the effective date of the revised regulations. The priorities list will be updated every four years, as required by the Anti-Money Laundering Act of 2020.

FFIEC updates BSA/AML examination manual

The Federal Financial Institutions Examination Council (FFIEC), on June 21, 2021, released updates to its BSA/AML examination manual. In the release, the agencies remind institutions that the updates do not establish any new requirements or increased focus on certain areas. Rather, they are intended to provide additional transparency into the exam process and emphasize a risk-based approach to BSA/AML supervision.

Updated sections in the manual include international transportation of currency or monetary instruments reporting, purchase and sale of monetary instruments recordkeeping, reports of foreign financial accounts, and regulatory requirements for special measures issued under Section 311 of the USA Patriot Act. The FFIEC agencies worked closely with FinCEN on the latest updates.

FFIEC issues new AIO exam booklet

The FFIEC, on June 30, 2021, issued a new booklet providing guidance to help examiners assess the risk profile and adequacy of an entity’s information technology architecture, infrastructure, and operations (AIO).

The new booklet, “Architecture, Infrastructure, and Operations,” which replaces the “Operations” booklet issued in July 2004, describes the principles and practices that examiners review to assess an institution’s AIO functions. Specifically, the booklet covers enterprisewide, process-oriented approaches that relate to the design of technology within the overall business structure, implementation of IT infrastructure components, and delivery of services and value for customers. It includes the following:

• Principles and practices for IT and operations as they relate to safety and soundness, consumer financial protection, and compliance with applicable laws and regulations
• Processes for addressing risk related to the design and implementation of IT systems
• Principles to help examiners evaluate the delivery of financial products and services
• Management oversight of AIO and its related components, including governance, common risk management topics, specific activities of AIO, and evolving technologies that examiners could encounter

CFPB reports on consumer reporting, debt collection, payday lending

The Consumer Financial Protection Bureau (CFPB), on June 29, 2021, issued its summer 2021 Supervisory Highlights that provide an update on recent examiner observations during supervisory activities over consumer financial products. The findings cover 2020 examinations in the areas of auto servicing, consumer reporting, debt collection, deposits, fair lending, mortgage origination, mortgage servicing, private education loan origination, payday lending, and student loan servicing.

The report highlights several findings related to consumer reporting, including consumer reporting companies failing to comply with accuracy procedures, failing to place security freezes on consumers’ reports, and failing to update and correct consumer information. The CFPB also notes issues related to debt collection, such as companies making prohibited calls to a consumer’s workplace, failure to cease communication upon written request, and deceptive means of collection.

FSB addresses financial risks from climate change

As part of the annual summit of G-20 finance ministers and central bank governors, on July 7, 2021, the Financial Stability Board (FSB) released its “FSB Roadmap for Addressing Climate-Related Financial Risks” to support global regulatory coordination on climate-related financial risks. It focuses on four main approaches: firm-level disclosures, data, analysis of vulnerabilities, and regulatory and supervisory practices. The FSB is the multinational council, headquartered in Switzerland, tasked with monitoring the global financial system and advising G-20 and major financial bodies on policies and financial stability.

Regarding disclosures, in order to promote consistency, the FSB said in its “Report on Promoting Climate-Related Disclosures” that it will use frameworks based on the work of the Task Force on Climate-Related Financial Disclosures and the in-development International Financial Reporting Standards (IFRS) Foundation sustainability disclosure standards. Once those standards are issued and should the International Organization of Securities Commissions (IOSCO) endorse the standards, local regulators would then adopt their own frameworks for using the international standards. The BIS emphasized the need to coordinate the large and growing number of international initiatives on addressing financial risks from climate change.

The FSB noted in “The Availability of Data With Which to Monitor and Assess Climate-Related Risks to Financial Stability” that the climate data available to financial institutions is not currently suitable for climate risk management and said it is taking further action in 2022 to fill data gaps and identify forward-looking metrics. In a letter to G-20 finance ministers and central bank governors, FSB Chairman and Fed Vice Chairman for Supervision Randal Quarles commented, “Addressing such data gaps will enhance the assessment and monitoring of climate-related risks to financial stability and enable market participants to incorporate climate-related financial risks more effectively in their decisions, including the pricing of credit and allocation of capital.”

SEC commissioner comments on IFRS sustainability standards

Securities and Exchange Commission (SEC) Commissioner Hester M. Peirce issued a statement, on July 1, 2021, highlighting her comment letter responding to the IFRS Foundation’s proposal to amend its constitution to make possible the creation of an International Sustainability Standards Board to set sustainability standards. In her comment letter, she urges “the IFRS Foundation not to wade into sustainability standard-setting because doing so would (i) improperly equate sustainability standards with financial reporting standards, (ii) undermine the Foundation’s current important, investor-centered work, and (iii) raise serious governance concerns.” Peirce warns, “We must be careful not to compromise accounting standard-setting in an effort to achieve objectives other than high-quality financial reporting,” as accounting and sustainability standards are fundamentally different from one another.

SEC chair remarks on ESG

On June 23, 2021, at London City Week, SEC Chair Gary Gensler presented prepared remarks on public company disclosure, market structure, and transparency resulting from ESG initiatives. His remarks on public company disclosure focused on his requests that SEC staff make recommendations on and consider the following:

• Mandatory company disclosures on climate risk and human capital to address the need for consistent, comparable, and useful investment decision-making information
• Climate risk governance, strategy, and risk management, including specific metrics that might be relevant
• Potential requirements for companies that make forward-looking climate commitments
• Ways that funds are marketing themselves to investors as sustainable, green, and focused on ESG matters, and what factors support those claims
• Human capital disclosures that might include metrics such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety

SEC commissioner discusses climate, ESG matters, and the board of directors

SEC Commissioner Allison Herren Lee presented the keynote address at the 2021 Society for Corporate Governance conference on June 28, 2021. She addressed the important role corporate directors play in overseeing climate and ESG issues. Lee discussed:

• Putting ESG matters in context in the recent proxy season. Lee described actions taken during the most recent proxy season and highlighted shareholder proposals related to climate and racial equity and how the increase in such activity shows the importance of addressing and integrating climate and ESG issues into decision-making, risk management, and corporate initiatives.
• Understanding ESG and board obligations. Lee noted that “boards increasingly have oversight obligations related to climate and ESG risks – identification, assessment, decision-making, and disclosure of such risks.”
• Mitigating ESG risks and maximizing ESG opportunities. Lee identified physical, transition, regulatory, reputational, and human capital risks and said enhancing board diversity, increasing board expertise, and inspiring management success present opportunities for boards to position themselves as ESG leaders.

SEC commissioner addresses sustainability of ESG rules

On June 22, 2021, SEC Commissioner Elad L. Roisman spoke at the National Investor Relations Institute’s virtual conference. He focused on three questions, including:

1. “What precise items of ‘E,’ ‘S,’ and ‘G’ information are investors not getting that are material to making informed investment decisions?
2. “If we were able to identify the information investors need, how would the SEC come up with ‘E’ and ‘S’ disclosure requirements – now, and on an ongoing basis? What expertise do we need?
3. “If the SEC were to incorporate the work of external standard-setters with respect to new ESG disclosure requirements: how would the agency oversee them – in terms of governance, funding, and substantive work product – on an ongoing basis? And what kind of new infrastructure would be required inside the SEC and at the standard-setters themselves?”

FASB takes action on CECL agenda items

At the FASB board meeting on July 14, 2021, the board added two projects to its technical agenda. The first project will address whether to remove the accounting for troubled debt restructurings (TDRs) for entities that have adopted the CECL guidance in ASC Topic 326, “Financial Instruments – Credit Losses.” This project also will consider enhancing loan modification disclosures. The second project will consider expanding the scope of the purchased credit deteriorated (PCD) model to all loans acquired in a business combination and modifying the presentation guidance.

The board also discussed its current project on whether gross write-offs and recoveries should be presented in the vintage disclosure or if this project should be removed from its technical agenda and considered in conjunction with the credit losses post-implementation review process. Given the importance to investors, the board decided to keep the project on the technical agenda.

FASB proposes guidance on discount rate for lessees that are not PBEs

On June 16, 2021, the FASB issued a proposed ASU, “Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities,” to provide entities that are not public business entities (PBEs) with more flexibility in how they determine the discount rate and make the risk-free rate election to reduce implementation costs. Currently, Topic 842 provides lessees that are not PBEs with a practical expedient to elect an accounting policy to use a risk-free rate as the discount rate for all leases. The proposed amendments would allow those lessees to make the risk-free rate election by class of underlying asset rather than at the entitywide level. In making the risk-free rate election, entities would be required to disclose to which asset classes it has elected to apply the risk-free rate. Under the proposed amendments, when the rate implicit in the lease is readily determinable for any individual lease, the lessee would use that rate regardless of whether it has made a risk-free rate election.

For entities that have not adopted Topic 842, the amendments would be effective when they adopt Topic 842. For entities that already have adopted Topic 842, the amendments would be effective for fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022. Early adoption would be permitted.

Comments were due July 16, 2021.

SEC updates regulatory agenda; commissioners provide perspective

On June 11, 2021, the SEC announced updates to its regulatory agenda, which lists short- and long-term regulatory actions the SEC plans to take. Highlights of rule-making areas include:

• “Disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk
• “Market structure modernization within equity markets, treasury markets, and other fixed income markets
• “Transparency around stock buybacks, short sale disclosure, securities-based swaps ownership, and the stock loan market
• “Investment fund rules, including money market funds, private funds, and ESG funds
• “10b5-1 affirmative defense provisions
• “Unfinished work directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including, among other things, securities-based swaps and related rules, incentive-based compensation arrangements, and conflicts of interest in securitizations
• “Enhancing shareholder democracy
• “Special purpose acquisition companies
• “Mandated electronic filings and transfer agents”

The SEC’s full agenda is maintained by the Office of Management and Budget (OMB). Commissioners Roisman and Peirce provided perspectives on certain aspects of Chair Gensler’s regulatory agenda on June 14, 2021.

Chair speaks on LIBOR

Chair Gensler discussed the London Interbank Offered Rate (LIBOR) transition in his June 11, 2021, remarks to the Financial Stability Oversight Council (FSOC). He encouraged the FSOC to consider his concerns regarding the robustness of the Bloomberg Short-Term Bank Yield Index (BSBY), which is a rate that “a number of commercial banks are advocating as a replacement for LIBOR.” He said that he believes BSBY has many of the same flaws as LIBOR and cautioned against the pitfalls of allowing BSBY as a replacement rate.

Chair addresses executive trading plans

On June 7, 2021, Chair Gensler announced at the CFO Network Summit that he had directed SEC staff to recommend changes to Exchange Act Rule 10b5-1, which provides affirmative defenses for corporate insiders and companies themselves to buy and sell stock when trading plans are adopted in good faith (that is, before insiders or the company become aware of material nonpublic information).

SEC names new Corp Fin director, moves acting director to chief counsel

The SEC, on June 14, 2021, announced that Renee Jones has been appointed director of the Division of Corporation Finance (Corp Fin). John Coates, Corp Fin’s acting director since February 2021, has been named SEC general counsel. Both appointments were effective June 21, 2021. Jones most recently served as professor of law and associate dean for academic affairs at Boston College Law School. Previously, she practiced at Hill & Barlow law firm.

SEC announces new enforcement director

FinREC proposes updates to CECL implementation guidance for broker-dealers

The AICPA’s Financial Reporting Executive Committee (FinREC) issued a working draft detailing proposed updates to the AICPA Accounting Guide “Brokers and Dealers in Securities.” The proposed guidance addresses implementation of ASC Topic 326.

The proposed updates include the following:

• A new section in Exhibit 6-8, Note 2, “Current Expected Credit Losses (CECL),” with guidance on:

- Financial assets measured at amortized cost basis that are eligible for the collateral maintenance practical expedient and those that are not

- Off balance sheet credit exposures

- Receivables from customers

- Securities borrowed

- Receivables from broker-dealers and clearing organizations

• Updates to Note 9 in Exhibit 6-8 for “Receivable From and Payable to Customers”
• Additions to Chapter 5 to provide guidance for SEC-registered broker-dealers as they develop an accounting policy footnote titled “Financial Instruments – Credit Losses”