October 2021 financial reporting, governance, and risk management

Fed publishes paper on bank-fintech partnerships

The Federal Reserve Board (Fed) on Sept. 9, 2021, published a paper, “Community Bank Access to Innovation Through Partnerships,” highlighting how community banks can partner effectively with fintech companies. The paper provides an overview of the evolving banking and fintech landscape, discusses the benefits and risks of different partnerships, and offers key considerations for engaging in these partnerships.

The paper reminds institutions to review their own research, risk profile, and third-party risk management programs to evaluate how fintech partnerships fit into the institutions’ strategic objectives. It is the latest of several initiatives the Fed and other federal regulators have undertaken in recent months to help promote responsible innovation for community banks. These initiatives include interagency guidance for community banks on vendor due diligence over fintech partnerships, proposed broader interagency third-party risk management guidance, and a request for information on banks’ use of artificial intelligence.

The Fed, Federal Deposit Insurance Corp. (FDIC), and Office of the Comptroller of the Currency (OCC) continue to conduct “innovation office hours,” encouraging banks and technology providers to meet with their respective primary regulators’ innovation policy staff members to discuss technology and innovation initiatives.

FDIC releases strategic plan for 2022-2026

The FDIC, on Sept. 15, 2021, published a draft of its five-year strategic plan for 2022-2026, for which the comment period closed Oct. 1. In this most recent strategic plan, the FDIC highlights several strategic challenges, most notably the continued concern about the trajectory of the nation’s economy as the COVID-19 pandemic recovery persists. The FDIC notes that “while the banking industry continues to perform well, the interest-rate environment and economic uncertainty continue to pose challenges for many institutions. Overall, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to remain on a long-term, sustainable growth path.” The FDIC also highlights competitive challenges for community banks, especially from noncommunity banks and nonbank fintech companies.

The plan addresses banks’ investments in innovative technologies and the related cybersecurity threats posing risks to the industry and the FDIC. In addition, the FDIC says it will continue to promote greater economic inclusion by helping more underserved households and communities benefit from products and services of FDIC-insured institutions.

Basel Committee urges banks to up their cyber risk preparedness

With cybersecurity incidents continuing to pose a threat to the financial system, the Basel Committee on Banking Supervision on Sept. 20, 2021, issued a newsletter to promote the widespread adoption of measures to strengthen cybersecurity, following principles released earlier this year on operational resilience and operational risk.

According to the newsletter, “Cyber threats and incidents, such as ransomware attacks, have emerged as a growing concern for the banking sector over the past several years, posing risks to the safety and soundness of individual banks and the stability of the financial system.” The newsletter notes that cybersecurity concerns have heightened further with the onset of the COVID-19 pandemic and related expansion of remote work arrangements and reliance on digital channels.

The committee does not endorse any specific tool or framework but recommends adopting practices that align with widely accepted industry standards. Doing so, the committee says, should improve “fundamental elements that include effective cyber risk management, diligent cyber hygiene practices, appropriate methods for identifying and protecting against cyber threats, and enhanced response and recovery capabilities.”

In addition, the newsletter notes that the committee will take additional steps “as needed to foster individual banks’ safety and soundness and limit potential financial stability implications.”

FASB votes to issue proposals on CECL vintage disclosures and TDRs

At its Oct. 13, 2021, board meeting, the FASB continued its deliberations on two CECL projects. Related to vintage disclosures, the board decided to require an entity to disclose current year gross write-offs, but not recoveries, by year of origination within its vintage disclosure with a prospective transition approach for the proposed amendments. As a reminder, the vintage disclosure table is optional for nonpublic business entities.

The board also addressed troubled debt restructurings (TDR) guidance for creditors that have adopted Accounting Standards Update (ASU) 2016-13 and agreed that TDR recognition and measurement guidance will be eliminated for those adopters. Further, the board decided to require enhanced disclosures by creditors associated with modifications made to borrowers experiencing financial difficulty and to not require disclosure of modifications that represent only an insignificant delay in payment. For the TDR amendments related to recognition and measurement, the board decided on the prospective transition approach, with an option to elect a modified retrospective transition approach. In addition, disclosure enhancements related to modifications made to borrowers experiencing financial difficulties will be prospective.

For both vintage disclosures and TDRs, the board has directed staff to draft two proposed ASUs, each with a 30-day comment period.

FASB adds investments in tax credits project to agenda

At its Sept. 22, 2021, board meeting, the FASB voted to add a new project on investments in tax credits to the Emerging Issues Task Force agenda. The project will focus on expanding the existing proportional amortization method used for certain low-income housing tax credits investments to other investments in tax credits, such as new markets tax credits, historic rehabilitation tax credits, and renewable energy tax credits. The project will explore whether the existing criteria for an investment to be accounted for using the proportional amortization method would work for different types of tax credits and whether certain clarifications and changes are needed.

FASB proposes clarifications to fair value measurement guidance for certain equity securities

On Sept. 15, 2021, the FASB issued a proposed ASU, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions,” to clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This proposal would affect all entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities.

Comments are due Nov. 14, 2021.

Chair appears before House committee

Oct. 5, 2021, SEC Chair Gary Gensler testified before the U.S. House of Representatives Committee on Financial Services. Gensler addressed market structure, predictive data analytics, disclosures, and funds and investment management. He closed with comments on enforcement and examinations and resources at the SEC.

Gensler discussed the Treasury market, non-Treasury fixed income markets, equity markets, security-based swaps, and crypto asset markets and described the market structure-based projects that he has asked SEC staff to review. These projects include enhancing resiliency and competition in the Treasury market, reconsidering some initiatives on Treasury trading platforms, bringing greater efficiency and transparency to the non-Treasury fixed income markets, and updating the SEC’s rules to address new technologies. He described the rules going into effect this year and next year for security-based swaps and the rules in process for the registration and regulation of security-based swap execution facilities. He also identified the need for additional investor protections in crypto finance, issuance, trading, and lending and the need to work with other regulators on this.

After touching on the potential conflicts and systemic risk that might arise with predictive data analytics, Gensler spoke about the importance of consistent, comparable, and decision-useful disclosures related to climate risk, human capital, and cybersecurity. He also discussed special purpose acquisition companies (SPACs) and his request to staff for recommendations on enhancing SPAC disclosures. Gensler provided testimony related to enhancing disclosures with regard to how Chinese companies issue securities in the U.S. Finally, he mentioned tightening insider trading rules.

While discussing funds and investment management, he highlighted the increasing number of funds that market themselves as “green,” “sustainable,” “low-carbon,” and similar. Gensler noted the importance of understanding what supports those claims and shared that the SEC staff is developing a proposal on cybersecurity risk governance, which will address issues such as cyberhygiene and incident reporting.

Chair remarks on SPACs

Chair Gensler presented prepared remarks before the Small Business Capital Formation Advisory Committee on Sept. 27, 2021. Gensler concentrated his remarks on the unprecedented surge in SPACs, which provide an alternative to traditional IPOs. He said the many costs of SPACs include sponsor fees, dilution for the private investment in public equity investors, and fees for investment banks and financial advisers. He has requested recommendations from the SEC staff about how the SEC might update its rules so that investors are better informed about the fees, costs, and conflicts that might exist with SPACs. He said that enhanced disclosures and other provisions can increase competition in this market and shared a final thought that “it is worth considering what we have learned from SPACs and direct listings, and whether there are any changes that might be appropriate for traditional IPOs.”

Commissioner remarks on risks

On Sept. 24, 2021, before the “Symposium on Building the Financial System of the 21st Century” hosted by the Program on International Financial Systems and Harvard Law School, Commissioner Caroline Crenshaw presented remarks on assessing risks. She warned, “In times of consistent and positive stock market returns, we should not be lulled into complacency,” and said market participants and regulators must continually be aware of and assess risks. Crenshaw added, “the difficulty of anticipating the unknown does not relieve us of our responsibility to be proactive.”

Crenshaw noted that risks are both from within the financial system and external. Related to risks within, Crenshaw discussed riskier investments with higher yields, swaps, and options trading. She said, “Effective compliance and risk management at financial institutions doesn’t just protect those institutions and their shareholders, it also helps make financial markets more resilient.” She shared that some of these investments and strategies are very risky and can result in significant losses. For external risks, Crenshaw concentrated her remarks on climate, cybersecurity, and geopolitical risks. She further highlighted actions the SEC is taking relating to these risks and stressed the need for disclosures.

SEC staff issues sample comment letter on climate change disclosures

On Sept. 22, 2021, the Division of Corporation Finance issued a sample comment letter addressing the types of comments staff might offer related to an issuer’s climate-related disclosures or lack thereof. While not an exhaustive list, the letter can help registrants consider how current disclosure rules apply to climate-related disclosure.

Chair remarks on LIBOR transition

On Sept. 20, 2021, Chair Gensler spoke on LIBOR to the “SOFR Symposium” hosted by the Fed’s Alternative Reference Rates Committee. He gave a short history of LIBOR transition and reiterated his June 11 message that the Bloomberg Short-Term Bank Yield Index (BSBY), championed by certain commercial banks as an alternative to LIBOR, might have the same conceptual perils as LIBOR. In conclusion, he shared that he agreed with the committee that the Secured Overnight Financing Rate (SOFR) is a preferable alternative rate.

SEC names new general counsel

On Sept. 28, 2021, the SEC announced that Dan Berkovitz, a Commodity Futures Trading Commission (CFTC) commissioner, has been named SEC general counsel, effective Nov. 1, 2021. Berkovitz will replace John Coates, who will return to teaching at Harvard University. Berkovitz has served as a CFTC commissioner since September 2018. Prior to that he was a partner and co-chair of the futures and derivatives practice at the law firm WilmerHale, an adjunct professor at Georgetown University Law School, and vice chair of the American Bar Association Committee on Derivatives and Futures Law. He also served as the CFTC’s general counsel from 2009 to 2013.

PCAOB adopts final inspection and investigations rule

On Sept. 22, 2021, the PCAOB adopted a final rule related to its responsibilities under the Holding Foreign Companies Accountable Act (HFCAA). The HFCAA requires the board to determine and communicate to the SEC whether it is unable to inspect or investigate registered public accounting firms located in a foreign jurisdiction. The SEC, in certain circumstances under the law, will be required to take further action related to registrants with audit opinions rendered in those foreign jurisdictions.

The final rule is subject to SEC approval before becoming effective.

PCAOB announces 2021 forum on auditing small businesses and broker-dealers

On Sept. 20, 2021, the PCAOB announced that the 2021 forum for auditors of small businesses and auditors of broker-dealers will be prerecorded and made available on its website starting Oct. 20, 2021. The recordings will include perspectives from the PCAOB and the Financial Industry Regulatory Authority.