September 2023 financial reporting, governance, and risk management

FDIC issues banking profile for second quarter 2023

On Sept. 7, 2023, the FDIC released the quarterly banking profile covering the second quarter of 2023. FDIC Chair Martin Gruenberg remarked on the resilience of the industry, observing strong performance in key metrics such as net income, asset quality, and capitalization. However, Gruenberg also noted the continued risks of inflation, rising market interest rates, and geopolitical uncertainty, as well as challenges faced specifically by the commercial real estate industry.

According to the report, FDIC-insured banks and savings institutions earned $70.8 billion in the second quarter of 2023, a decrease of $9 billion or 11.3% from the previous quarter. The FDIC noted that net income would have been roughly flat compared to the prior quarter without the three failed-bank acquisitions of the past two quarters.

The report provides these additional second quarter statistics:

• Net interest income totaled $174.3 billion for the second quarter of 2023, down from $175.7 billion in the first quarter of 2023. From the previous quarter, the average net interest margin decreased 3 basis points to 3.28%.
• The average return on assets ratio was 1.21%, down from 1.36% in the first quarter of 2023.
• Total loan and lease balances increased $86.5 billion (0.7%) from the previous quarter, largely driven by increases in credit card loans and loans to nondepository financial institutions.
• Total deposits were $17.7 trillion in the second quarter of 2023, a decline of $98.6 billion (0.5%) from the previous quarter. The decrease was driven by a reduction in estimated uninsured deposits, which dropped 2.5%, while insured deposits increased by 0.8%.
• The noncurrent loan rate increased 1 basis point to 0.76% compared to the previous quarter.
• Community banks’ quarterly net income totaled $7.1 billion in the second quarter of 2023, an increase of $236.2 million, or 3.4%, compared to the previous quarter.
• Unrealized losses on available-for-sale and held-to-maturity securities totaled $558.4 billion, up $42.9 billion, or 8.3%, compared to the previous quarter.
• The deposit insurance fund balance totaled $117 billion as of the end of the second quarter, an increase of $897 million from the previous quarter.

The total number of FDIC-insured commercial banks and savings institutions declined from 4,672 in the first quarter of 2023 to 4,645 in the second. During the second quarter, two banks opened, one bank failed, and 27 institutions merged. The number of institutions on the FDIC’s problem bank list remained unchanged at 43. Total assets of problem banks decreased by $12 billion from the previous quarter to $46 billion.

NCUA issues second quarter 2023 performance data

On Sept. 7, 2023, the National Credit Union Administration (NCUA) reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the second quarter of 2023. Highlights include the following statistics:

• The number of federally insured credit unions declined to 4,686, down from 4,712 in the previous quarter. In the second quarter, 2,931 federal credit unions and 1,755 federally insured, state-chartered credit unions existed.
• Total assets reported for federally insured credit unions rose by 3.8% to $2.22 trillion, up $82 billion from a year ago.
• Net income totaled $17.4 billion in the first half of 2023 at an annual rate, down $0.4 billion (2.1%) compared to the same period a year earlier.
• The annualized return on average assets was 79 basis points in the second quarter of 2023, down from 85 basis points in the first half of 2022.
• The credit union system’s net worth increased by $13.2 billion, or 5.9%, over the year to $235.9 billion. The aggregate net worth ratio was 10.63% in the second quarter of 2023, up from 10.42% a year earlier.

Banking agencies issue long-term debt proposal for large banks

On Aug. 29, 2023, the OCC, the Fed, and the FDIC jointly issued proposed long-term debt requirements for certain insured depository institutions (IDIs) and other entities. The proposed rules would improve the loss-absorbing capacity of covered entities and IDIs, providing a greater range of options for resolution in the event of a failure.

The proposal would require certain large bank holding companies, large insured depository institutions, and certain intermediate holding companies of foreign banking organizations to maintain eligible long-term debt of, at minimum, the greater of 6% of the institution’s total risk-weighted assets, 2.5% of its total leverage exposure (if required to maintain a supplementary leverage ratio), or 3.5% of its average total consolidated assets. The minimum debt requirements would be phased in over a three-year implementation period.

Comments are due Nov. 30, 2023.

FDIC issues resolution plan proposal; FDIC and Fed propose resolution plan changes

On Aug. 29, 2023, the FDIC advanced a proposal to strengthen resolution plan requirements for certain financial institutions, under which banks with more than $100 billion in total assets would be required to submit comprehensive resolution plans on a periodic basis. Among other updated requirements, such banks would have to provide a strategy to facilitate an orderly and efficient resolution, including timely access to insured deposits, maximized value from sale or disposition of assets, and minimized loss to creditors. Banks with $50 billion to $100 billion in total assets would submit more limited informational filings.

Additionally, the FDIC and the Fed jointly issued proposed guidance on resolution plans for banks with more than $250 billion in total consolidated assets. The guidance outlines agency expectations related to capital, liquidity, governance, and operational capabilities, and it notes strategies that covered entities should consider when developing a resolution plan.

Comments on both proposals are due Nov. 30, 2023.

FinCEN issues notice on tax evasion and insurance fraud

On Aug. 15, 2023, the Financial Crimes Enforcement Network (FinCEN) issued a notice on trends toward increasing state and federal payroll tax evasion and workers’ compensation insurance fraud in the residential and commercial real estate construction industries. The notice describes common fraud schemes, which often are perpetrated using shell companies and fraudulent documents. It warns of common red flags, including new specialized construction companies with little online presence, owners with no prior involvement in the industry using a non-U.S. passport as identification, and companies with a recently acquired workers’ compensation policy that covers a small number of employees paired with an unusually high volume of transactions, often from different cities or states.

Treasury and IRS propose rules on the sale and exchange of digital assets by brokers

On Aug. 25, 2023, the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations on the sale and exchange of digital assets by brokers. The rules would subject such brokers to the same information reporting requirements as brokers of securities and other financial instruments.

Among other requirements, the rules would require brokers to furnish a new Form 1099-DA to help taxpayers calculate their gains on digital assets. The proposed rules also include information reporting requirements for digital asset consideration received by sellers in reportable real estate transactions. Brokers would be required to comply with new information reporting requirements beginning in 2026, for sales and exchanges occurring in 2025.

Comments on the proposal are due Oct. 30, 2023. Treasury and the IRS will hold a public hearing on Nov. 7, 2023, with a second public hearing scheduled on Nov. 8, 2023, if additional time is needed to accommodate requests to comment.

FASB issues joint venture accounting guidance

On Aug. 23, 2023, the FASB issued Accounting Standards Update (ASU) 2023-05, “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement,” to provide guidance on how a joint venture initially recognizes and measures contributions received at its formation date.

The ASU, which does not amend the definition of a joint venture, requires a joint venture to apply a new basis of accounting at its formation date by valuing the net assets contributed at fair value for both business and asset transactions. The value of the net assets in total is then allocated to individual assets and liabilities by applying Topic 805 with certain exceptions. The formation date of a joint venture is defined as the date when an entity initially meets the definition of a joint venture, which is not necessarily the date the legal entity was formed. All facts and circumstances, including assessing multiple arrangements, need to be considered when determining the formation date.

The ASU allows a joint venture to apply measurement period guidance in accordance with Subtopic 805-10, allowing the amounts recognized upon formation to be adjusted for provisional items during the measurement period not to exceed one year from the formation date.

The ASU is effective for joint ventures with a formation date on or after Jan. 1, 2025, and is required to be applied prospectively. If adequate information is available, joint ventures with a formation date prior to Jan. 1, 2025, have an option to elect to apply the guidance retrospectively.

More details on the ASU appear in the Crowe article “FASB Finalizes ASU on Joint Venture Accounting.”

FASB votes to finalize crypto assets fair value guidance

At its Sept. 6, 2023, board meeting, the FASB voted to finalize its proposal on accounting for holdings of certain crypto assets at fair value. Consistent with the original proposal, the standard will require holdings of in-scope crypto assets to be measured at fair value at each reporting date with changes in fair value recorded through earnings. The final standard also will require entities to provide detailed disclosure about crypto assets measured at fair value, including an annual rollforward of an entity’s crypto asset holdings.

For all entities, the standard will be effective for reporting periods beginning after Dec. 15, 2024, including interim periods. Early adoption will be permitted. Entities must adopt the guidance using a modified retrospective approach, recording a cumulative effect adjustment to equity (or net assets) as of the beginning of the year of adoption. The final ASU is expected to be issued in the fourth quarter of 2023.

More details can be found in the Crowe article “FASB to Finalize Fair Value Guidance for Crypto Assets.”

FASB votes to finalize changes to income tax disclosures

At its Aug. 30, 2023, board meeting, the FASB voted to finalize a proposed ASU, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which will provide additional transparency into an entity’s jurisdictional tax exposure. Public business entities (PBEs) will enhance disclosures primarily related to information about rate reconciliation and income taxes paid. The board affirmed the majority of proposed changes and expects to issue a final ASU in the fourth quarter of 2023.

The forthcoming ASU will require that PBEs disclose on an annual basis specific categories in the rate reconciliation and additional information for reconciling items meeting a certain quantitative threshold. The ASU also will require that entities other than PBEs disclose qualitative information about specific categories of items and individual jurisdictions that result in a significant difference between the statutory tax rate and the effective tax rate.

Regarding income taxes paid, the ASU will require that all entities disclose, on an annual basis, 1) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and 2) the income taxes paid (net of refunds received) disaggregated by individual jurisdictions exceeding 5% of total taxes paid (net of refunds received). Additionally, the ASU will require that all entities disclose 1) income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and 2) income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign.

For PBEs, the amendments will be effective for fiscal years beginning after Dec. 15, 2024, and interim periods within fiscal years beginning after Dec. 15, 2025. For entities other than PBEs, the amendments will be effective for fiscal years beginning after Dec. 15, 2025, and interim periods within fiscal years beginning after Dec. 15, 2026. Early adoption will be permitted. The amendments will be applied on a prospective basis, with a retrospective option.

More details can be found in the Crowe article “FASB to Enhance Income Tax Disclosure Requirements.”

SEC issues final rule on private fund advisers

On Aug. 23, 2023, the SEC adopted a final rule, “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews,” and amendments. The final rule includes provisions for different groups of advisers. For example, under the final rule:

• Registered private fund advisers must provide investors with quarterly statements of fund-level information, obtain a financial statement audit for each private fund, and obtain a fairness opinion or valuation opinion in connection with adviser-led secondary transactions.
• All private fund advisers are subject to restrictions on certain activities that are against the public interest and protection of investors, unless the adviser adequately discloses or, in some cases, obtains consent for such activities. Private fund advisers also are subject to prohibitions on certain activities that result in preferential treatment to any investor.
• All registered advisers must annually document in writing the adequacy and effectiveness of their compliance policies and procedures.

The rule is effective Nov. 13, 2023.

SEC issues final rule on exchange exemptions

On Aug. 23, 2023, the SEC adopted a final rule narrowing the exemptions for SEC-registered brokers and dealers from membership in a registered national securities association. The rule broadens oversight of the Financial Industry Regulatory Authority (FINRA), which is the only such association. Notably, under the amended rule, proprietary trading broker-dealer firms that trade off the exchange where they are members are no longer exempt.

The rule is effective Nov. 6, 2023.

SEC reopens comment period on custody rule proposal

On Aug. 23, 2023, the SEC reopened the comment period for its proposed rule “Safeguarding Advisory Client Assets.” Given new audit requirements under the private fund advisor rule, the reopened comment period will allow stakeholders additional time to consider the new requirements in conjunction with the proposed amendments to the current custody rule’s audit provision.

Comments are due Oct. 30, 2023.

SEC chief accountant issues statement on risk assessment by auditors and management

On Aug. 25, 2023, SEC Chief Accountant Paul Munter issued a statement on the importance of a comprehensive risk assessment that not only focuses on risks that directly affect the financial statements but also considers broader issues such as cybersecurity breaches, nonfinancial regulatory breaches, and revision restatements that could result in a material risk.

Munter encouraged management to consider external inputs such as regulator observations and analyst reports, and he said auditors should consider factors such as an entity’s changes in strategy and consistency of management’s messaging to investors. In addition, Munter emphasized the importance of professional skepticism and cautioned auditors against unintentionally rationalizing away evidence that the root cause of a deficiency further indicates a pervasive, entitywide risk.

CorpFin issues new C&DIs

In August, the Division of Corporation Finance (CorpFin) issued multiple new compliance and disclosure interpretations (C&DIs). Highlights include the following:

• Exchange Act rules (updated Aug. 25, 2023). The new interpretations address questions on the cooling-off period and participation in 401(k) plans under the amended Rule 10b5-1.
• Exchange Act forms (updated Aug. 30, 2023). The new interpretations address questions on Form F-SR filing requirements for foreign private issuers or affiliated purchasers that have not repurchased registered equity securities as well as filing requirements for repurchases in the final quarter of the fiscal year.
• Exchange Act Section 16 (updated Aug. 25, 2023). The new interpretation clarifies that the Rule 10b5-1(c) checkbox on Form 4 is not applicable to trading plans adopted prior to the effective date of the amendment to Rule 10b5-1.
• Regulation AB (updated Aug. 30, 2023). The new interpretation clarifies the definition of a “timely” filing for Form SF-3 eligibility.
• Regulation S-K (updated Aug. 25, 2023). The new interpretations address questions on required disclosures under Item 408(a)(1) for plans terminated due to expiration or completion as well as applicability of Item 408(a) for trading arrangements covering securities in which a director or officer has a pecuniary interest.

Division of Examinations publishes risk alert on investment adviser examinations

On Sept. 6, 2023, the Division of Examinations published a risk alert providing details on the division’s risk-based approach for selecting registered investment advisers for examination and for determining the scope of risk areas to examine. While the risk-based approach is evolutionary and based on macro factors such as market conditions and industry practices, the staff also considers entity-specific factors such as those related to an adviser’s business activities and regulatory history. The risk alert also lists examples of typical information requested throughout the examination process.

SEC issues order for new national market data plan

On Sept. 1, 2023, the SEC issued an order directing the equity exchanges and FINRA to develop and file a new national market system (NMS) plan to govern consolidated equity market data. The SEC cited concerns about lack of efficiency and conflicts of interest inherent to the operation of the three existing NMS plans. The equity exchanges and FINRA are required to submit a new plan for public notice and comment within 45 days after publication in the federal register.

SEC approves funding amendment to CAT NMS plan

On Sept. 6, 2023, the SEC approved an amendment to the NMS plan governing the Consolidated Audit Trail (CAT), adopting a revised funding model called the “Executed Share Model.” The amendment establishes a framework for allocating fees to develop and operate the CAT among participants and industry members based on executed equivalent share volume. It also modifies the method for calculating this volume. Participants will be required to submit Section 19(b) filings to impose fees on the industry members. These public filings will include details on the fees, including budgeted prospective CAT costs and certain costs previously covered entirely by the participants.

SEC publishes sample letter on XBRL disclosures

On Sept. 7, 2023, the SEC published an illustrative sample letter containing examples of comments that could be issued by CorpFin regarding a company’s extensible business reporting language (XBRL) disclosures.

PCAOB issues annual broker-dealer inspection report

On Aug. 10, 2023, the PCAOB released its “Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers,” which includes observations from inspections during 2022, guidance about and examples of effective procedures, and information about the inspection approach. According to the report, the percentage of firms with audit and attestation engagement deficiencies increased to 90%, up from the 78% identified in 2021.

The PCAOB also notes that this report should help broker-dealer owners and audit committees or equivalents as they oversee the work of their auditors and engage on financial reporting. With the report, the PCAOB released “Supplementary Information Related to Audits of Brokers and Dealers,” which provides comparative data about selected firms and engagements and the results of PCAOB inspections over multiyear periods.