October 2022 financial reporting, governance, and risk management

OCC releases FY 2023 bank supervision operating plan

On Oct. 6, 2022, the Office of the Comptroller of the Currency (OCC) released its fiscal year (FY) 2023 bank supervision operating plan. The document provides the foundation for policy initiatives and supervisory strategies as applied to individual national banks, federal savings associations, federal branches, federal agencies, and technology service providers. The OCC staff uses the plan to guide supervisory priorities, planning, and resource allocations.

The plan lists areas of heightened focus for supervisory strategies in FY 2023, including operational resiliency, third parties and related concentrations, credit risk management, consumer compliance, fair lending, Bank Secrecy Act/anti-money laundering, and climate-related financial risks.

OCC names new chief climate risk officer

The OCC on Sept. 12, 2022, announced the appointment of Yue (Nina) Chen as chief climate risk officer. Chen will oversee the agency’s Office of Climate Risk and report directly to acting Comptroller of the Currency Michael Hsu. She previously was executive deputy superintendent of the climate division at the New York State Department of Financial Services (DFS). Prior to DFS, Chen served as director of conservation investments at the Nature Conservancy.

Chen is the third person to hold the title of chief climate risk officer within the OCC. The first was OCC veteran Darrin Benhart, who was appointed in July 2021 and held the position before leaving the OCC earlier this year. Jonathan Fink has served in the role in an acting capacity since March while also serving as a senior adviser to Hsu.

FinCEN issues beneficial ownership final rule

The Financial Crimes Enforcement Network (FinCEN) on Sept. 29, 2022, issued a final rule establishing a beneficial ownership information reporting requirement. This represents the initial phase of final rules as required by the Corporate Transparency Act (CTA), which was contained within the National Defense Authorization Act for Fiscal Year 2021. This final rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the U.S. to report information to FinCEN about their beneficial owners, defined as those who ultimately own or control the company.

FinCEN cites that the rule is intended to protect national security and strengthen the integrity and transparency of the financial system by stopping criminal actors from using anonymous shell companies to hide illicit proceeds. The rule is effective Jan. 1, 2024. Reporting companies created or registered before that date will have one year (until Jan. 1, 2025) to file their initial beneficial ownership reports. Once the initial report has been filed with FinCEN, existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.

Fed announces pilot climate risk program for large banks

The Federal Reserve (Fed) on Sept. 29, 2022, announced that six of the nation's largest banks will participate in a pilot climate scenario analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks. The exercise will begin in early 2023 and conclude near the end of the year.

Over the course of the exercise, participating banks will analyze the effects of different climate scenarios on specific portfolios and business strategies, according to the Fed. The climate scenario analysis will be separate from other required bank stress tests, which are designed to assess whether large banks have enough capital to continue lending to households and businesses during a financial crisis. The Fed indicated that the climate stress-testing exercises are exploratory in nature and will not have capital consequences.

The Fed will publish additional details at the beginning of the exercise about how the exercise will be conducted and the climate, economic, and financial variables that make up the scenario narratives.

Fed issues final rule to expand routing requirements to card-not-present transactions

The Fed on Oct. 3, 2022, finalized the rule expanding Regulation II (the implementing regulation for the Durbin Amendment). The final rule requires card-not-present debit card transactions to be enabled for processing on at least two unaffiliated payment card networks. The final rule also states that the debit card issuer is responsible for ensuring at least two unaffiliated networks have been enabled and standardized, and it specifies those certain terms and phrases in the Fed’s Regulation II commentary.

Fed Gov. Michelle Bowman was the only governor to vote against issuing the final rule, stating, “During the public comment process, community banks raised substantial concerns with the proposal. Although the board has attempted to identify the likely effects of the proposed rule based on available information, I believe that significant questions remain about how the rule will affect banks, and particularly community banks, with respect to both fraud and the cost of compliance. Given this continued uncertainty, I do not support the final rule.”

The final rule will be effective July 1, 2023.

FSOC issues stablecoin regulatory recommendations

The Financial Stability Oversight Council (FSOC) on Oct. 3, 2022, released its “Report on Digital Asset Financial Stability Risks and Regulation” in response to President Joe Biden’s executive order “Ensuring Responsible Development of Digital Assets,” issued in March 2022. It reviews financial stability risks and regulatory gaps posed by various types of digital assets and provides 10 recommendations across a variety of areas to address those risks.

In the report, the FSOC pointed specifically to three gaps in the existing regulatory structure with respect to crypto assets activities: limited direct federal oversight of the spot market for crypto assets that are not securities, opportunities for regulatory arbitrage, and whether vertically integrated market structures can or should be accommodated under existing laws and regulations.

To address the regulatory gaps, the FSOC recommends Congress should pass legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto assets that are not securities. The report recommends additional steps to address regulatory arbitrage including coordination and expansion of regulators’ authorities to supervise the activities of affiliates and subsidiaries of crypto asset entities. The report also includes recommendations on bolstering FSOC member agencies’ capacities related to data and to the analysis, monitoring, supervision, and regulation of crypto asset activities.

FASB proposes segment reporting guidance

On Oct. 6, 2022, the FASB issued a proposed Accounting Standards Update (ASU), “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which would require public entities to disclose more information about a reportable segment’s significant expenses. Significant expense categories and amounts subject to disclosure would be derived from expenses that are 1) regularly reported to an entity’s chief operating decision-maker (CODM) and 2) included in a segment’s reported measure of profit or loss. The proposal, however, does not establish a level for assessing the significance of each expense category in that population of expenses.

Public entities also would be required to disclose an amount for “other segment items,” representing the difference between 1) segment revenue less significant segment expenses and 2) the reportable segment’s profit or loss measure. A description of the composition of the “other segment items” would be required.

The proposal would require public entities to provide at each interim period certain segment-related disclosures that are now required only on an annual basis. Public entities also would be required to disclose the name and title of the CODM. The proposed changes to the segment reporting guidance would apply retrospectively.

Comments are due Dec. 20, 2022.

For more information, see the Crowe article “FASB Proposes Changing Segment Reporting Requirements.”

FASB discusses accounting for acquired financial assets under CECL

At its Oct. 12, 2022, board meeting, the FASB continued its discussion on the accounting for acquired financial assets and tentatively decided the following:

• To replace the Master Glossary term “purchased financial assets with credit deterioration” (PCD) with “purchased financial assets” (PFA)
• To require entities to apply:
  • The existing PCD accounting model (hereafter referred to as the PFA model) to all financial assets in the scope of Topic 326, including to credit card receivables, home equity lines of credit, other revolving credit agreements, and trade receivables, that are acquired in 1) a business combination subject to Topic 805 or 2) an asset acquisition at least 90 days after their origination
  • The PFA model to acquired assets not recognized at fair value, primarily contract assets arising from revenue contracts and net investments in leases

FASB discusses reference rate reform

At its Oct. 5, 2022, board meeting, the FASB discussed reference rate reform – fair value hedging as well as related staff research that has taken place since the December 2021 board meeting. Several alternatives were considered, including principles-based approaches for adding new benchmark rates to the Master Glossary. Ultimately, the FASB elected to remove this project from its technical agenda and revisit at a later date, citing a desire to reconsider the issue when market transition with certain reference rates is more mature to permit a more robust decision on a principles-based approach. The FASB also voted in favor of a moratorium on adding new benchmarks to the Master Glossary’s existing list, in conjunction with this decision.

Next the FASB redeliberated its proposed ASU, “Reference Rate Reform (Topic 848) and Derivatives and Hedging (Topic 815): Deferral of the Sunset Date of Topic 848 and Amendments to the Definition of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate,” which defers the sunset date of relief provisions within Topic 848 from Dec. 31, 2022, to Dec. 31, 2024. The board approved the extension.

Based on the moratorium action on the reference rate reform – fair value project, the board elected to not amend the definition of the SOFR overnight index swap rate within the Master Glossary. The proposed change would have had the effect of adding term SOFR as a benchmark interest rate. The FASB noted that while the board is observing the market transition for reference rates, it still is possible for entities to use hedge accounting without the proposed benchmark amendments.

While momentum has been developing in the derivative markets for the use of term SOFRs, without this addition, entities should be mindful of how term SOFR derivatives are used in hedge accounting including transition off LIBOR. For example, a term SOFR derivative could be used in a cash flow hedge of an instrument with the same contractually specified term SOFR without resulting in a mismatch. In contrast, to avoid a mismatch, hedges of benchmark rates (as might be designated in a fair value hedge or a cash flow hedge of rolling fixed rate debt) need to use a derivative tied to a benchmark rate such as SOFR Overnight Index Swap Rate or Fed Funds Effective Rate Overnight Index Swap Rate. Using term SOFR in a benchmark interest-rate hedge would result in a mismatch that would require the use of a more robust effectiveness assessment method such as regression analysis.

The final ASU is expected to be issued by Dec. 31, 2022.

SEC reopens rulemaking comment periods

On Oct. 7, 2022, the SEC announced that, due to a technological glitch known to have occurred as early as June 2021, the comment period for certain proposed rulemakings and a request for comment would be reopened. The SEC indicates it did not receive certain comments previously submitted and suggests interested stakeholders should confirm that their original comment submission appears on the SEC’s website. The 12 affected releases include, among others, proposals on climate-related disclosures, cybersecurity risk governance disclosures, and special purpose acquisition companies.

The comment period for each affected release is reopened until Nov. 1, 2022.

SEC acting chief accountant issues statement on auditor’s responsibility for fraud detection

On Oct. 11, 2022, SEC acting Chief Accountant Paul Munter issued a statement addressing the auditor’s responsibilities with respect to fraud detection. He included observations of shortcomings in detecting fraud; described how the auditor’s responsibilities are addressed in the Public Company Accounting Oversight Board (PCAOB) standards, including the quality control standards; and provided examples of good practices. Under PCAOB auditing standards, auditors have a responsibility to consider fraud and to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by fraud or error. Munter noted that the importance of the auditors’ responsibilities should not be underestimated and warned that changes to the macroeconomic and geopolitical environment in which companies operate might result in new pressures, opportunities, or rationalizations for fraud.

He said fraud risks should be continually reassessed throughout the audit and noted auditors should avoid using the examples of fraud risk considerations and related responses included within the auditing standards as a comprehensive checklist. Munter emphasized that audit responses should be tailored to the identified fraud risk and responsive to changing business environments if auditors are to fulfill their professional responsibilities.

Munter concluded by reiterating that auditors serve an important gatekeeping and investor protection function by helping to verify that issues are promptly identified and addressed so that the auditor has obtained reasonable assurance about whether financial statements are free of material misstatement, whether due to error or fraud.

SEC chair delivers statement on digital asset financial stability risks and regulation

On Oct. 3, 2022, before the FSOC, SEC Chair Gary Gensler delivered a statement on the FSOC’s report on digital asset financial stability risks and regulation. Starting with a clear statement that he supports the report, he described the current crypto market as highly volatile, speculative, and decentralized and noted that crypto markets cannot exist outside of public policy frameworks, regardless of what the crypto industry initially expected or what certain market participants might say. Gensler believes that the majority of tokens in the crypto market are securities and therefore are covered by the securities laws; as such, the many crypto intermediaries are transacting in securities and have to register with the SEC in some capacity.

He noted that all market participants benefit from widespread compliance with the rules, which increases investor confidence in the U.S. markets. However, a lot of noncompliance exists with the securities laws in the crypto market. He shared that the SEC staff is working to help ensure that investors in the crypto market get time-tested protections and a fair playing field. Gensler additionally looks forward to working with Congress to achieve the public policy goals, consistent with maintaining the regulation of crypto security tokens and related intermediaries at the SEC.

SEC Investor Advisory Committee meets

On Sept. 21, 2022, the SEC held a meeting of the Investor Advisory Committee. At the meeting, panel discussions addressed human capital management and labor, proposed Rule 10B-1 position reporting of large security-based swap positions/asset-based swap positions, schedules 13D and 13G beneficial ownership reports, and ESG fund disclosure. The panel on human capital management and labor considered the demand for labor-related performance data from the investor perspective, including investors' views on the quality and decision-usefulness of currently available data, and which information investors would use should it become available and why. Additionally, the committee discussed recommendations it has issued on the cybersecurity disclosure proposal , climate-related disclosure proposal , and accounting modernization project .

SEC adopts pay-versus-performance disclosure rules

On Aug. 25, 2022, the SEC voted to finalize pay-versus-performance disclosure rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules require more transparency about how executive compensation relates to company performance. While the final rules were effective Oct. 11, 2022, registrants must comply with the new requirements in proxy and information statements that include Regulation S-K Item 402 executive compensation disclosure for fiscal years ending on or after Dec. 16, 2022.

To learn more about the SEC pay-versus-performance disclosure rules for executive compensation and what board directors and company management should consider, see the Sept. 22, 2022, Crowe article “SEC Finalizes Pay-Versus-Performance Disclosure.”