October 2023 financial reporting, governance, and risk management

| 10/18/2023
October 2023 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

Dear FIEB readers,

With the 3rd quarter in the rearview mirror, we are seeing how the financial results are unfolding. Of course, we will have a full picture of industry performance next month.

Conference season is well underway!

AICPA & CIMA banking conference

The 48th annual American Institute of Certified Public Accountants (AICPA) and Chartered Institute of Management Accountants (CIMA) banking conference occurred last month. The conference included remarks from the Securities and Exchange Commission and the chief accountants of the federal banking agencies, all of whom provided insight into the evolving regulatory landscape. The conference covered the latest on financial reporting, economic outlooks, and the future of banking, including the evolution of technology and regulation. We have compiled a 22-page summary of the key takeaways and hot topics.

AICPA & CIMA credit union conference

It’s not too late to sign up for the AICPA & CIMA credit union conference, which occurs next week, Oct. 23-25, in Denver, Colorado, or live online. Use the code “CU23” to save $100 on the in-person or the virtual option.

Crowe annual financial services conferences

Our annual conferences are just around the corner. This year we will bring you updates on accounting and financial reporting, risk, tax, and other hot topics to help you get up to speed so you can face challenges, navigate risk, learn from the environment, and plan for what’s next.

I hope you can join us. Please register to attend at one of our seven locations. Two-day sessions begin Nov. 8 and run through Dec. 14, 2023, and provide up to 11 hours of CPE credit.

Thank you for turning to Crowe to keep you informed.

Sign up to receive updates on accounting, governance, risk management, and compliance issues.
From the federal financial institution regulators

FDIC approves corporate governance and risk management proposal

On Oct. 3, 2023, the board of directors of the Federal Deposit Insurance Corp. (FDIC) approved, by notational vote, a proposal on corporate governance, including board responsibilities, board composition and committee structure requirements, and risk management practices. The proposal provides guidance on establishing a comprehensive risk management program, including a formal written statement on the institution’s risk profile and risk appetite that is effectively communicated to employees and regularly reviewed by the board of directors. It also outlines a three-lines-of-defense model of risk management, consisting of front-line business units, an independent risk management function led by a chief risk officer, and an internal audit unit led by a chief audit officer.

The FDIC indicated that the guidelines would align with the heightened standards of the Office of the Comptroller of the Currency (OCC) and the Federal Reserve (Fed) Regulation YY corporate governance and risk management requirements. However, the Fed and OCC guidelines apply only to institutions they supervise with more than $50 billion in assets, while the FDIC guidelines would apply to state nonmember banks over $10 billion in assets. In the release, the FDIC noted that it reserves the right to apply the guidelines to institutions with less than $10 billion in assets if the FDIC determines such institutions’ operations are highly complex or present a heightened risk that warrants the application of these guidelines.

The guidelines would be issued as Appendix C to the FDIC’s regulations Part 364, “Standards for Safety and Soundness,” and would be enforceable by the FDIC under Section 39. Chair Martin Gruenberg, Director Rohit Chopra, and Director Michael Hsu voted for the proposal; Vice Chair Travis Hill and Director Jonathan McKernon voted against the proposed guidelines and issued dissenting statements. The FDIC is requesting comments on all aspects of the proposal, including 14 questions.

Comments are due Dec. 11, 2023.

OCC issues bank supervision operating plan

On Sept. 28, 2023, the OCC released its annual bank supervision operating plan with its supervisory priorities and objectives for the 2024 fiscal year. The plan provides an underlying guide for supervisory strategies, including planning, resource allocation, and examination activities, while noting that strategies for individual banks ultimately will vary based on factors such as an institution’s size, complexity, and risk profile. The operating plan also is subject to change in response to high inflation, rising interest rates, the adverse financial impact of geopolitical events, and other macroeconomic trends.

The OCC highlighted its focus on asset and liability management, noting that examiners should assess the sufficiency of banks’ interest-rate and liquidity risk management policies and practices, including stress testing, sensitivity analyses, and contingency planning. Other areas of focus include cybersecurity and incident response, allowances for credit losses, consumer compliance, climate-related financial risk, and novel activities such as use of distributed ledger technology.

NCUA issues final rule on financial innovation

On Sept. 21, 2023, the National Credit Union Administration (NCUA) issued a final rule on financial innovation for federally insured credit unions. The rule clarifies current regulations on indirect lending and leasing, provides credit unions with greater flexibility to participate in loans acquired through indirect lending arrangements, and replaces certain prescriptive limits on the purchase of eligible obligations with policy and risk management requirements. The intent is to allow credit unions to participate in a broader range of activities offered by the fintech sector.

The final rule is effective Oct. 30, 2023.

FinCEN publishes beneficial ownership compliance guide

On Sept. 18, 2023, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury released a compliance guide for small-business entities that will be required to comply with the beneficial ownership information rule beginning in 2024. The guide offers plain-English explanations of the reporting rule’s provisions, answers key questions for reporting entities, and provides interactive checklists and other illustrative tools.

CFPB issues circular on credit denials using AI

On Sept. 19, 2023, the Consumer Finance Protection Bureau (CFPB) issued a circular emphasizing that creditors must provide accurate and specific reasons for all adverse actions, including when the action is determined using artificial intelligence (AI) or a complex algorithmic model. Creditors may not rely on the reasons provided on CFPB sample forms if these pre-populated reasons do not accurately reflect the principal reason for denial, as these forms are illustrative and are not intended to provide a comprehensive list.

While the CFPB stresses that the information requirements are equally applicable to all credit decisions, the required accuracy and specificity is vital to ensure that unlawful discrimination or other noncompliance is not obscured when credit decisions are reached using AI or algorithmic models.

From the Financial Accounting Standards Board (FASB) 

FASB issues disclosure improvements in response to SEC initiative

On Oct. 9, 2023, the FASB issued Accounting Standards Update (ASU) 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,” incorporating 14 of the 27 disclosures referred by the SEC in Release No. 33-10532, “Disclosure Update and Simplification,” that was issued Aug. 17, 2018. The changes modify the disclosure or presentation requirements of a variety of topics including statement of cash flows, accounting changes and error corrections, earnings per share, interim reporting, commitments, debt, equity, derivatives and hedging, and secured borrowing and collateral.

For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment is the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. If the SEC has not removed the related disclosure from its regulations by June 30, 2027, the amendments will be removed from the codification and not become effective for any entity.

For more information, see the Crowe article “FASB Responds to SEC Rule, Amends Disclosure Requirements.”

FASB announces roundtables

The FASB on Oct. 2, 2023, announced that on Nov. 10, 2023, it will host a public roundtable on the post-implementation review of Topic 606, “Revenue From Contracts With Customers,” to gather feedback on the Topic 606 implementation process, technical issues identified during that process, and other topics to evaluate of the benefits of Topic 606 and related costs. Nonparticipating observers can attend in person in Norwalk, Connecticut, or view it live online.

On Oct. 4, 2023, the FASB announced a public roundtable on a proposed ASU, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses,” to discuss comments and feedback on the proposed ASU. The roundtable is scheduled for Dec. 13, 2023.

From the Securities and Exchange Commission (SEC) 

SEC issues Privacy Act final rule

On Sept. 20, 2023, the SEC issued a final rule revising the SEC’s regulations under the Privacy Act, updating the regulations’ scope, definitions, and provisions over the handling of personal information in the federal government. Among other modernizing changes, the final rule simplifies the process for submitting and receiving responses to Privacy Act inquiries, allows for electronic identity verification, and formally amends document duplication fees to reflect only the direct costs of making records available on electronic storage devices. The final rule also adds a provision for individual members of the public to request certain information if their personal data is disclosed by the SEC.

The final rule is effective on Oct. 26, 2023.

SEC adopts final rule on investment fund names

On Sept. 20, 2023, the SEC adopted a final rule expanding the scope of certain name-related requirements of the Investment Company Act of 1940. The final rule requires any fund with a name that suggests a focus on investments that have “particular characteristics” to maintain, by policy, at least 80% of the value of the fund’s assets in investments with those characteristics. For example, a fund with a name that indicates an investment strategy based in environmental, social, and governance (ESG) factors will be subject to this requirement.

Any terms used in a fund’s name that suggest an investment focus or that the fund’s distributions are tax-exempt must be consistent with the terms’ plain-English meaning or standard industry use. Funds also are required to disclose a definition of terms used in its name, including the investment selection criteria used by the fund in accordance with such terms.

In addition, the final rule requires funds to review their investments at least quarterly to verify compliance with the 80% investment policy; generally, a fund will be given 90 days to return to compliance if its investments fall below the threshold due to drift or unusual circumstances. Funds with derivative holdings will use the notional amount for purposes of determining compliance with the names rule.

The final rule is effective on Dec. 11, 2023.

SEC adopts final amendments to beneficial ownership reporting

On Oct. 10, 2023, the SEC adopted final amendments to certain rules governing beneficial ownership reporting. Among other changes, the amendments shorten the initial Schedule 13D and Schedule 13G filing deadlines for investors that acquire a beneficial ownership greater than 5% of a covered class of equity securities. They also shorten the amendment filing deadlines in the event of changes to information previously reported.

For both initial filings and amendments, the final rule updates the business day cutoff time from 5:30 p.m. Eastern to 10 p.m. Eastern. The final rule includes guidance clarifying that a person is required to disclose interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security. It also requires all Schedule 13D and 13G filings to be made using a structured, machine-readable data language.

The final rule becomes effective 90 days after publication in the Federal Register. Investors will be required to comply with amended Schedule 13G filing deadlines beginning Sept. 30, 2024. Structured data requirements will be effective for both Schedule 13D and 13G filers beginning Dec. 18, 2024.

SEC issues short position and activity reporting final rule

On Sept. 13, 2023, the SEC adopted a final rule increasing the public availability of data on short sale positions and activity. Under the final rule, certain institutional investors will be required to report short sale information to the SEC on the new Form SHO if their monthly average of daily gross short positions in an equity security exceeds $10 million in value or 2.5% as a percentage of shares outstanding. The SEC will then release aggregated data on large short positions by individual security, including daily short sale activity data, to the public.

The final rule becomes effective 60 days after publication in the Federal Register. Institutional investors will be required to comply 12 months after the effective date, and public aggregated reporting will commence three months thereafter.

SEC issues final rule on securities loans reporting

On Sept. 13, 2023, the SEC adopted a final rule requiring any securities lender – including any person, bank, insurance company, or pension plan that loans a security on behalf of itself or another person – to disclose specified loan terms to a registered national securities association (which currently is only the Financial Industry Regulatory Agency [FINRA]) to then be made available to the public. Securities lenders will be required to report lending information at the end of each business day. Under the final rule, FINRA will publicize certain information on an aggregate basis on the following business day, while other information, such as individual loan size, will be disclosed after 20 days.

The final rule becomes effective 60 days after publication in the Federal Register. The rule provides for FINRA to create implementation rules to become effective within 12 months of the final rule’s effective date, and for covered persons to begin reporting required information an additional 12 months thereafter.

SEC issues proposed rule on registration for index-linked annuities

On Sept. 29, 2023, the SEC issued a proposed rule on the offering process and disclosure requirements for registered index-linked annuities (RILAs). Among other changes, the proposal would require RILA issuers to register offerings on Form N-4, which is used by most variable annuities, and would subject RILA advertising and sales literature to existing securities regulations.

Comments are due Nov. 28, 2023.

SEC Investor Advisory Committee meets

The SEC’s Investor Advisory Committee held an online open meeting on Sept. 21, 2023. Topics included:

  • Exempt offerings under Regulation D Rule 506
  • Oversight over accredited investors
  • Human capital management disclosures (recommendation drafted by the Investor-as-Owner subcommittee)
  • Open-end fund liquidity risk management programs and swing pricing (recommendation drafted by the Investor-as-Purchaser subcommittee)

SEC chair speaks to Investor Advisory Committee

SEC Chair Gary Gensler made remarks before the Investor Advisory Committee at its open meeting on Sept. 20, 2023. Gensler highlighted the importance of continued discussion and investor feedback on exempt offerings and the definition of an accredited investor in light of the prevalence and growth of the private markets.

Gensler also remarked on the agenda items concerning recommendations on human capital disclosures and open-end funds. He noted the SEC staff’s ongoing research on the use of such disclosures and potential enhancements such as total workforce spending and turnover. Gensler called for “fire department” support from the Fed for money market and open-end bond funds given the events of 2008 and 2020, emphasizing the importance of the SEC’s recent rules and proposals on liquidity and investor protection related to such funds.

SEC chair testifies before the House Committee on Financial Services

On Sept. 27, 2023, Chair Gensler testified in front of the U.S. House of Representatives Committee on Financial Services, emphasizing the SEC’s wide-ranging role in serving individual investors. He noted the importance of continually updating regulations to address the rapidly evolving and increasingly interconnected markets and broader public participation, while allowing U.S. markets to remain innovative and competitive.

Gensler underscored the value of recent and ongoing activity, including rules and proposals on equity markets and private funds; disclosure requirements related to AI and predictive data analytics, crypto assets, climate risk, and cyber risk; Treasury markets; money market funds; and amendments to Form PF.

From the Public Company Accounting Oversight Board (PCAOB) 

PCAOB reports on inspection observations on engagement quality reviews

The PCAOB on Oct. 12, 2023, released a new staff report, “Inspection Observations Related to Engagement Quality Reviews.” This report focuses on the PCAOB-mandated engagement quality reviews (EQRs) process and says that 42% of firms inspected by the PCAOB in 2022 had a quality control criticism related to EQRs.

In addition to covering audit deficiency trends related to EQRs and good practices and reminders for auditors, the staff report provides key questions related to EQRs that audit committees might want to discuss as they engage with external auditors. These example questions focus on policies and procedures, reviewer experience, and significant judgments discussed.

PCAOB publishes new audit committee resource

On Sept. 28, 2023, the PCAOB released2022 Conversations With Audit Committee Chairs,” a new staff spotlight publication summarizing the results of conversations with 211 audit committee chairs related to the audits of their 2021 financial statements. It presents high-level observations and key takeaways related to staffing, COVID-19, communications, critical audit matters, and information from outside of the financial statements.

PCAOB adopts new standard on auditors’ use of confirmation

The PCAOB, on Sept. 28, 2023, adopted a new standard, AS 2310, “The Auditor’s Use of Confirmation,” to replace in its entirety the current AS 2310, “The Confirmation Process.” The new version is designed to strengthen and modernize the confirmation requirements. Among other changes, the standard includes a new requirement regarding confirming cash and cash equivalents held by third parties or otherwise obtaining relevant and reliable audit evidence by directly accessing information maintained by a knowledgeable external source.

The new standard, which is subject to SEC approval, will be effective for audits of financial statements for fiscal years ending on or after June 15, 2025.

PCAOB holds Investor Advisory Group meeting

On Oct. 10, 2023, the PCAOB held a virtual meeting of its Investment Advisory Group. Topics covered included a standard-setting update, an overview of PCAOB enforcement and investigations, a presentation on firm and engagement performance metrics, and recommendations on critical audit matters. A recording of the meeting is available on the PCAOB Investor Advisory Group Meeting event page.

PCAOB announces leadership changes

On Sept. 27, 2023, the PCAOB announced the SEC’s appointment of George Botic as a PCAOB board member. Botic, who currently serves as the director of the Division of Registration and Inspections, will be replacing board member Duane Desparte, whose term ends on Oct. 24, 2023.

On Sept. 28, 2023, the PCAOB announced that Christine Gunia will serve as acting director of the Division of Registration and Inspections when Botic is sworn in as a PCAOB board member. Gunia has been with the PCAOB since 2004 and since 2018 has served as Division of Registration and Inspections deputy director for the global network firm inspection program.

PCAOB announces 2023 forum on auditing small businesses and broker-dealers

On Sept. 21, 2023, the PCAOB announced that the 2023 forum on auditing of small businesses and broker-dealers will be livestreamed on Oct. 26, 2023. Forum topics will include perspectives from the PCAOB and presentations from FINRA and the SEC. Those who are interested in attending can register on the PCAOB’s forum event page.

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