Special message from Mike Percy, Managing Partner, Financial Services
Dear FIEB readers,
I continue to hope this message finds you, your friends, your family, and your colleagues safe. With the first quarter reporting largely complete, the financial results are taking shape. As the country cautiously and slowly moves toward reopening, we still face uncertainty with the coronavirus disease (COVID-19). Given the fluid situation, the financial reporting impacts are difficult to predict, especially as we find our way to a new normal.
As you likely have noticed, the regulators have been very busy issuing interim final rules. In case you are wondering, an interim final rule is used when an agency finds that it has good cause to issue a final rule without first publishing a proposed rule. This type of rule becomes effective immediately upon publication in the Federal Register. The agency accepts comments and will alter the rule if warranted.
It’s not business as usual, so we have again reorganized this month’s Financial Institutions Executive Briefing to focus on the most critical issues. We will strive to keep you updated as events unfold.
Regulatory capital
Agencies modify liquidity coverage ratio for banks participating in MMLF and PPPLF
On May 5, 2020, the Office of the Comptroller of the Currency (OCC), the Federal Reserve (Fed), and the Federal Deposit Insurance Corp. (FDIC) announced an interim final rule to neutralize the impact to the Liquidity Coverage Ratio (LCR) based on participation in the recently created Money Market Mutual Fund Liquidity Facility (MMLF) and the Paycheck Protection Program Liquidity Facility (PPPLF) through the Federal Reserve. The LCR rule requires large banks to maintain a certain amount of high-quality liquid assets in order to meet short-term liquidity needs.
Other matters of importance from the financial regulators
FDIC issues proposed rule to address the deposit insurance assessment effect
On May 12, 2020, the FDIC issued a notice of proposed rulemaking that would mitigate the deposit insurance assessment effects of participating in the PPP, PPPLF, and MMLF. The proposed changes include: 1) removing the effect of participation in the PPP and PPPLF on various risk measures used to calculate an insured depository institution’s assessment rate, 2) removing the effect of participation in the PPPLF and MMLF programs on certain adjustments to an insured depository institution’s assessment rate, 3) providing an offset to an insured depository institution’s assessment for the increase to its assessment base attributable to participation in the MMLF and PPPLF, and 4) removing the effect of participation in the PPPLF and MMLF programs when classifying insured depository institutions as small, large, or highly complex for assessment purposes.
In an effort to have the changes applied to assessments starting in the second quarter of 2020, comments on the proposed rule are due on May 27, 2020, which is seven days after publication in the Federal Register.
Agencies issue interim final rule and interagency statement on appraisal requirements
On April 14, 2020, the OCC, Fed, FDIC, National Credit Union Administration (NCUA), and Consumer Financial Protection Bureau (CFPB) issued an interim final rule allowing financial institutions to defer appraisals for certain residential or commercial real estate loans for up to 120 days. The interim rule does not cover loans involving the acquisition, development, or construction of real estate. The temporary change will be in effect until Dec. 31, 2020.
In addition, the agencies issued a joint interagency statement, “Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus,” regarding appraisals. The statement includes both an explanation of existing flexibilities in appraisal standards, such as options for desktop and exterior-only appraisals, and temporary changes to Fannie Mae and Freddie Mac appraisal standards.
Fed issues interim final rule removing transfer limit for savings deposits
On April 24, 2020, the Fed issued an interim final rule allowing financial institutions to suspend enforcement of the six-transfers-per-month limit for savings deposits imposed by Regulation D. This will allow customers better access to funds during the COVID-19 pandemic. Additionally, the Fed recently reduced all reserve requirement ratios to zero, which makes the distinction of a savings deposit unnecessary.
CFPB issues final rule on remittance
On May 11, 2020, the CFPB finalized changes to the Regulation E Remittance Rule, which establishes protections for consumers sending international money transfers. The rule makes permanent a temporary exception allowing institutions to estimate certain exchange rates and third-party fees in disclosures to consumers. Additionally, the rule increases the threshold for determining whether an institution is a remittance transfer provider – and therefore subject to the remittance rule – from 100 remittance transfers annually to 500. The CFPB estimates that the threshold change will reduce regulatory burden on approximately 400 banks and 250 credit unions.
Paycheck Protection Program (PPP)
Small Business Administration and Treasury update FAQ on PPP loans
As reported in the April 2020 Financial Institutions Executive Briefing, the Small Business Administration (SBA) and the U.S. Department of the Treasury issued a frequently asked questions document addressing the Paycheck Protection Program, which is updated as necessary. The document provides guidance to borrowers and lenders regarding the implementation of the PPP. The most recent updates include deeming any borrower with an original principal amount of less than $2 million to have met the required necessity certification (Q&A 46) and extending the safe harbor repayment date to May 18, 2020 (Q&A 47). We suggest checking frequently as the FAQ continues to be updated.
SBA and Treasury issue loan forgiveness application
On May 15, 2020, the SBA, in consultation with the Treasury, issued the PPP Loan Forgiveness Application (Form 3508) and instructions for borrowers. The form and guidance provide options to use an alternative payroll covered period, flexibility on including expenses paid or incurred, exemptions based on rehiring by June 30, and exemptions for written offers to rehire that were declined.
Further guidance will be issued soon to assist borrowers in completing the application and provide lenders guidance on their responsibilities.
AICPA establishes PPP resources site
In addition to its coronavirus resource center webpage, the American Institute of CPAs (AICPA) has created a separate SBA Paycheck Protection Program resources webpage, which brings together many different resources to address the PPP, including loan forgiveness information and frequently asked questions.
Main Street Lending Program
Fed creates program to support small and medium-size businesses
The Fed has established the Main Street Lending Program to support lending to small and medium-size businesses that were in sound financial condition before the COVID-19 pandemic began. The program includes three facilities – the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility – each with its own term sheet. In addition, a frequently asked questions document addresses the purpose and design of the program, the terms of each facility and how each works, eligibility, the application process, and conditions, among other topics.
Loan modifications
Agencies hold webinar on loan modifications
The FDIC, Fed, OCC, and NCUA hosted a webinar for bankers on April 24, 2020, to discuss the revised “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus” that was issued on April 7, 2020. The webinar addressed accounting and regulatory reporting questions and clarified the interaction between current accounting principles and Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The webinar also covered supervisory considerations on past-due and nonaccrual regulatory reporting and regulatory capital considerations. The webinar has been archived for future viewing.
Activities by the FASB
FASB delays revenue recognition and leases for certain entities
On April 21, 2020, the FASB issued a proposed ASU, “Revenue From Contracts With Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities,” to amend the effective dates of the revenue recognition and leases standards for certain entities.
For private companies, the FASB is proposing to delay the effective date of Topic 842 to annual reporting periods beginning after Dec. 15, 2021, and to interim periods within fiscal years beginning after Dec. 15, 2022.
At its May 20 meeting, the board voted to delay Topic 842 as proposed, which should be helpful to financial institutions as well as borrowers.
For Topic 606, the board expanded the scope to include all entities that have not yet adopted the guidance (that is, entities that have not yet issued financial statements or made their financial statements available for issuance reflecting the adoption of Topic 606). For those entities, the effective date will be for annual reporting periods beginning after Dec. 15, 2019, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2020. Early application is permitted. Given most financial institutions have adopted the standard, the impact is more likely for borrowers.
FASB releases cash flow hedge accounting Q&A document
On April 28, 2020, the FASB issued a staff Q&A, “Topic 815: Cash Flow Hedge Accounting Affected by the COVID-19 Pandemic,” in response to stakeholder questions regarding the postponement or cancellation of forecasted transactions related to the effects of the COVID-19 pandemic when applying cash flow hedge accounting under Topic 815, “Derivatives and Hedging.”
Current expected credit losses (CECL)
Agencies issue interagency policy statement on allowances for credit losses and interagency guidance on credit risk review systems
On May 8, 2020, the OCC, Fed, FDIC, and NCUA issued an interagency policy statement on allowances for credit losses to promote consistency with the FASB’s credit losses accounting standard. The statement describes the measurement of expected credit losses using the CECL methodology; the design, documentation, and validation of expected credit loss estimation processes; the maintenance of appropriate allowances for credit losses (ACLs); the responsibilities of boards of directors and management; and examiner reviews of ACLs. The statement will be effective at the time of each institution’s adoption of CECL.
The agencies also issued interagency guidance on credit risk review. The guidance replaces Attachment 1 of the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses and reflects the new CECL standard.
Securities and Exchange Commission (SEC) need to know
Recent developments
SEC provides new COVID-19 FAQs
The SEC Division of Corporation Finance (Corp Fin) COVID-19 frequently asked questions site addresses questions related to its March 25, 2020, COVID-19 order. The FAQs clarify:
- The disclosure required in the Form 8-K and related delayed filing under the COVID-19 order
- Whether a registrant can continue to conduct takedowns using an already effective registration statement while relying on the COVID-19 order for a periodic report, including a Form 10-K
- When a registrant should reassess its eligibility to remain on an effective Form S-3 if it has relied on the COVID-19 order to delay filing a Form 10-K that will serve as a Section 10(a)(3) update
- Whether a registrant relying on the COVID-19 order to delay a required filing is eligible to file a new Form S-3 registration statement between the original due date of a filing and the extended due date, and whether the staff will accelerate the effectiveness of registration statements that do not contain all required information
Items of continuing interest
SEC issues statement on importance of disclosures
On April 8, 2020, SEC Chairman Jay Clayton and Corp Fin Director William Hinman jointly issued a public statement providing observations addressing the importance of disclosure in this time of uncertainty and requesting actions. The statement includes a call to action “that companies provide as much information as is practicable regarding their current status and plans for addressing the effects of COVID-19.” In addressing this call to action the SEC recognizes “that producing forward-looking disclosure can be challenging and believe that taking on that challenge is appropriate” and that “robust, forward-looking disclosures will benefit investors, companies and, more generally, our fight against COVID-19. Such disclosures will facilitate communication and coordination among the public and private sectors.”
Related to developing robust disclosures as the country’s response to COVID-19 has significantly affected the economy and markets, the statement highlights the following:
“Disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.”
SEC provides coronavirus disclosure content guidance
On March 25, 2020, Corp Fin staff issued “Coronavirus (COVID-19): CF Disclosure Guidance: Topic No. 9,” which summarizes the staff’s views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 impacts and disruptions. The staff acknowledges the difficulty in precisely assessing or predicting the company-specific COVID-19 impacts because the actual impacts depend on factors beyond a company’s control. However, the staff also points out that company-specific COVID-19 disclosure (for example, the effects of COVID-19 on the company, management’s expectation of future impacts, and management’s response to current events and plans for related uncertainties) might be material to investment and voting decisions.
The guidance reminds registrants of the need for disclosures related to COVID-19 within the context of the principles-based disclosure system of the federal securities laws and the commission’s focus on registrant disclosure of new and evolving risks and then delves deeper on specific disclosure topics including:
- Assessing and disclosing the impact of COVID-19. The guidance provides a list of questions for registrants to ask with respect to their present and future operations and reminds registrants of the availability of safe harbors for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act.
- The need to refrain from trading prior to the disclosure of material nonpublic information. The guidance reminds registrants of their obligations to monitor their market activities, refrain from selective disclosures, and update disclosures when necessary.
- Reporting earnings and financial results. The staff encourages effective project management steps to address unique and complex accounting issues (for example, early engagement of third-party experts for goodwill impairment assessment) and provides thoughts on non-GAAP measures.
Registrants requiring additional guidance are encouraged to contact the staff directly.
SEC extends conditional reporting deadline relief for public companies
On March 25, 2020, the SEC issued an order, which supersedes its March 4 order, providing registrants affected by COVID-19 temporary relief from certain filing and regulatory requirements. The order provides an additional 45 days to make required Exchange Act filings that would have been due between March 1 and July 1, 2020, if a registrant is unable to meet a deadline because of circumstances related to COVID-19.
The order specifies a Form 8-K is required to be filed by the later of March 16, 2020, or the original report deadline, and the Form 8-K should include:
- A statement that the registrant is relying on the order
- A brief description of why the registrant could not file on time
- The estimated date by which the report or form is expected to be filed
- If appropriate and material, a risk factor explaining the effect of COVID-19 on the registrant’s business
- If the reason the report could not be filed on time relates to the inability of any person, other than the registrant, to furnish any required opinion, report, or certification, an exhibit statement signed by such person stating the specific reasons why he or she is unable to furnish such items
When the delayed report or form is ultimately filed, the issuer must disclose that it relied on the COVID-19 order and state the reasons why it did not file the report or form on a timely basis. A Form 12b-25 would not need to be filed if the report is filed within 45 days of the original filing deadline, and a registrant can rely on Rule 12b-25 if it is unable to file the required reports on or before the extended due date.
Additionally, the SEC clarified that, for purposes of the eligibility to use Form S-3 or Form S-8 and to meet the current public information eligibility requirements of Rule 144(c), a company relying on this temporary relief order will be considered current in its filing requirements under the Exchange Act if it was current as of March 1, 2020, and it files any report due during the relief period within 45 days of the original filing deadline.
The order also provides certain relief for delivery of proxy or information statements to security holders under the Exchange Act when mail delivery is not possible.
On March 31, 2020, staff of Corp Fin released two new compliance and disclosure interpretations, which explain how the staff expects registrants to comply with the order.
SEC coronavirus response page
The SEC is continuing to update its COVID-19 response page, which describes how the SEC is addressing the impact of COVID-19 through maintaining SEC operations continuity; monitoring markets and engaging with market participants; providing guidance and targeted regulatory assistance and relief, enforcement, examinations, and investor education; and extending comment periods for certain pending actions and rules. The page includes links to all of the current resources, guidance, and statements related to COVID-19 available from the SEC.
