Financial Institutions Executive Briefing
Aug. 14, 2013
The Financial Institutions Executive Briefing offers updates on financial reporting, governance, and risk management topics from Crowe Horwath LLP. In each issue of this electronic newsletter, you will find abstracts of recent standard-setting activities and regulatory developments affecting financial institutions.
From the Federal Financial Institution Regulators
Final Rule Issued to Implement Basel III Regulatory Capital Requirements and Resources
The Federal Reserve Board (Fed) announced on July 2, 2013, the issuance of a final rule implementing new regulatory standards on bank capital adequacy and liquidity agreed to by the members of the Basel Committee on Banking Supervision, commonly referred to as Basel III. The Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) approved the final rule a week later.
Mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the rule increases the minimum requirements for both the amount and quality of capital held by banks. As adopted, the final rule makes changes to the U.S. regulatory capital framework in an effort to strengthen the regulatory capital of U.S. banking organizations, consistent with the current Basel III accord.
The final rule will become effective on Jan. 1, 2014, for the banks subject to the advanced approaches rule – generally those with more than $250 billion in assets or a consolidated total on-balance-sheet foreign exposure of at least $10 billion. The mandatory compliance date is delayed until Jan. 1, 2015, for all banks other than the advanced-approach banks.
All of the agencies have provided resources to help banks understand and implement the new regulatory capital rules. A short pamphlet and a quick reference guide to the new capital rule are available from the OCC. The FDIC has posted a video presentation and other information on its website. The Fed is using an “Ask the Fed” website to conduct programs on Basel III implementation and encourage banks to submit technical inquiries.
The FDIC is also offering a free teleconference on Thur., Aug. 15, 2013, at 11 a.m. Eastern, on this final rule.
Supplementary Leverage Ratio Proposed for Large Banks
The FDIC, the OCC, and the Fed jointly proposed a new rule on July 9, 2013, to significantly increase the leverage ratio standards for the largest, most systemically significant U.S. banking organizations. The proposed rule, which currently would apply to the eight largest U.S. banking organizations, would require a supplementary leverage ratio of 6 percent to be considered “well capitalized” for prompt corrective action purposes. Companies failing to meet other supplementary leverage ratio requirements in the proposed rule would be subject to restrictions on discretionary bonus payments and capital distributions.
There is a 60-day comment period on the proposed new rule.
Appraisal Rule Amendments Proposed
Six financial regulators announced on July 10, 2013, a proposed new rule, “Appraisals for Higher-Priced Mortgage Loans – Supplemental Proposal,” creating exemptions from certain appraisal requirements that are scheduled to go into effect Jan. 18, 2014. After that date, for certain mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the existing rule requires creditors to obtain appraisals that meet specified standards, provide applicants with a notification about the use of the appraisals, and give applicants a copy of the written appraisals.
The proposed amendments would exempt three types of higher-priced mortgages from these appraisal requirements: loans of $25,000 or less, certain streamlined refinancing agreements, and certain loans secured by manufactured housing.
There is a 60-day comment period on the proposed amendments.
Federal Reserve Community Banking Publication Available
The Fed has published the second-quarter 2013 issue of “Community Banking Connections,” a quarterly publication focusing on safety and soundness issues affecting community banks. The latest issue includes a cover story by a Federal Reserve Bank of Minneapolis official about avoiding the mistakes that led to the recent financial crisis. Additional story topics include contingency funding plans, investing in securities without relying on external credit ratings, and lessons learned about loan participations.
Stress-Test Guidance Proposed for Medium-Size Firms
On June 30, 2013, the Fed, the FDIC, and the OCC issued for public comment a proposed rule, “Proposed Supervisory Guidance on Implementing Dodd-Frank Act Company-Run Stress Tests for Banking Organizations With Total Consolidated Assets of More Than $10 Billion but Less Than $50 Billion,” on implementing company-run stress tests required by Dodd-Frank. The testing is applicable to all financial companies with more than $10 billion but less than $50 billion in total consolidated assets. The goal of the proposed guidance is to help these companies conduct stress tests appropriately scaled to their size, complexity, risk profile, business mix, and market footprint. The proposal includes a discussion of supervisory expectations for stress-test practices and offers additional information about the methodologies that should be used.
Comments are due to the OCC and the FDIC on Sept. 25, 2013, and to the Fed on Sept. 30, 2013.
From the Consumer Financial Protection Bureau (CFPB)
Mortgage Rules Readiness Guide Published
In July, the CFPB released “2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide” to help banks understand and comply with the bureau’s new mortgage rules. The guide consists of four parts:
- Summary of the rules – A brief discussion of each of the eight rules, including links to the rule-specific CFPB website pages
- Readiness questionnaire – A self-assessment banks can use to develop an implementation plan and assess their progress toward compliance with the rules
- Frequently asked questions – A section addressing topics such as how to contact the CFPB about the rules, who is covered, and CFPB examination procedures
- Tools – Links to further information and CFPB-prepared tools to assist banks in complying with the new rules
The guide is designed to be used by banks of all sizes, but the CFPB cautions that it is not a substitute for the rules and their official interpretations, which provide definitive information about requirements.
Debt Collection Regulatory Rulemaking Initiative Launched
The CFPB has launched a regulatory initiative on debt collection practices. At a July 10, 2013, “field hearing” in Portland, Maine, CFPB Director Richard Cordray emphasized the bureau’s intention to begin rulemaking on debt collection and added that consumer protection laws related to debt collection apply to debt holders as well as third-party collectors. In conjunction with Cordray’s speech, the CFPB released two bulletins alerting banks and other regulated entities about its concerns.
The first, CFPB Bulletin 2013-07, focuses on unfair, deceptive, or abusive acts or practices (UDAAPs). It presents a nonexhaustive list of what the CFPB considers UDAAPs in the collection of consumer debt, including collections not authorized by an agreement, failure to post payments properly, and the taking of property without legal right. The second, CFPB Bulletin 2013-08, covers representations made to consumers about the effects that payments on debts in collection might have on credit reports and credit scores.
From the Financial Accounting Standards Board (FASB)
Final ASU Issued: Benchmark Interest Rates for Hedge Accounting
Accounting Standards Update (ASU) 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes,” was issued on July 17, 2013, and is the culmination of Emerging Issues Task Force (EITF) Issue No. 13-A. This guidance includes the federal funds effective swap rate (also known as the overnight index swap rate) as a U.S. benchmark interest rate for hedge accounting purposes. Previously only the interest rates on direct U.S. Treasury obligations and the London Interbank Offered Rate (LIBOR) swap rate could be used as benchmark interest rates.
Amendments in the ASU also remove the restriction on using different benchmark rates for similar hedges. The guidance applies on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of issuance and requires no new recurring disclosures.
Final ASU Issued: Presentation of an Unrecognized Tax Benefit
ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” was issued on July 18, 2013, and is the culmination of EITF Issue No. 13-C. Under this guidance, an unrecognized tax benefit, or a portion of one, must be presented in the statement of financial position as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward or a tax credit carryforward – except to the extent an NOL or tax-credit carryforward at the reporting date is not available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the entity does not intend to use the deferred tax asset for such purposes. In these situations, the unrecognized tax benefit would be presented as a liability and not combined with deferred tax assets.
The guidance requires no new disclosures and should be applied prospectively for public entities for fiscal years, and interim reporting periods within those years, beginning after Dec. 15, 2013. Nonpublic entities should apply the guidance for fiscal years, and interim periods within those years, beginning after Dec. 15, 2014. Early adoption and adoption on a retrospective basis are permitted.
Proposal Issued: Definition of a Public Business Entity and Implications for Financial Institutions
A potentially significant proposal for financial institutions was issued by the FASB on Aug. 7, 2013. The proposal, “Definition of a Public Business Entity: An Amendment to the Master Glossary,” is intended to eliminate the complexity and diversity created by the multiple definitions of a nonpublic entity and public entity existing in current U.S. generally accepted accounting principles (GAAP). A key point is that the proposed definition would apply more broadly than just to those who file with the U.S. Securities and Exchange Commission (SEC).
Under the proposed definition, a “public business entity” would meet any one of the following criteria:
- It is required by the SEC to file or furnish financial statements, or does file or furnish financial statements, with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- It is required by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the act, to file or furnish financial statements with a regulatory agency.
- It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities.
- It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.
- Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.
Given that the definition would not be limited to those who file with the SEC and would encompass certain entities that have regulatory and legal requirements to make financial statements publicly available, the scope of the definition could be much broader than it is under current practice. As such, we encourage financial institutions to evaluate this proposal and consider responding.
For many standards issued by the FASB, the effective dates are typically earlier for public entities than nonpublic entities. Also, the proposed definition would clarify which entities potentially would qualify for alternative accounting and reporting guidance and be within the scope of the FASB’s “Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies” once the framework is finalized. Those entities deemed to be ”public business entities,” as well as not-for-profit organizations and certain employee benefit plans, would be excluded from using guidance issued by the Private Company Council (PCC).The proposed amendment to the Master Glossary would not affect existing requirements in U.S. GAAP. The FASB does pose the question to respondents about whether the board should undertake a second phase to examine the possibility of amending current U.S. GAAP with a new definition resulting from this proposed ASU.
The FASB also published a “FASB in Focus,” a summary of the background and purpose of the proposal.
Comments on the proposed amendment are due Sept. 20, 2013.
Proposal Issued: Transfers to Other Real Estate
On July 19, 2013, the FASB issued a proposed ASU, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Collateralized Mortgage Loans Upon a Troubled Debt Restructuring,” which is intended to clarify when an in-substance repossession or foreclosure has occurred. Under the proposed guidance, developed by the EITF as Issue No. 13-E, an in-substance foreclosure or repossession occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon (1) the creditor obtaining legal title to the residential real estate property or (2) completion of a deed in lieu of foreclosure or similar legal agreement under which the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan, even though legal title may not yet have passed. When these conditions have been met, the creditor would derecognize all or a portion of the consumer mortgage loan and recognize the residential real estate property collateralizing the loan. In other words, the asset would be transferred to other real estate only when the lender has obtained legal title or a deed in lieu of foreclosure (or other legal agreement) has been completed.
The proposed guidance would also require additional disclosures about the recorded investments in foreclosed residential real estate and consumer mortgage loans in the process of foreclosure.
Comments are due Sept. 17, 2013.
Proposal Issued: Consolidated Collateralized Financing Entities
A proposed ASU, “Consolidation (Topic 810): Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity,” issued by the FASB on July 19, 2013, is intended to resolve diverse practices in the accounting for the difference upon initial consolidation between the fair value of assets and the fair value of liabilities of a collateralized financing entity. The guidance, developed by the EITF as Issue No. 12-G, would apply to entities that are required to consolidate a collateralized financing entity (CFE) under the Variable Interest Entity (VIE) subsections of FASB Accounting Standards Codification (ASC) Subtopic 810-10. Entities are often required to consolidate CFEs, such as collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) entities. A CFE is an entity that holds financial assets, issues beneficial interests in those financial assets, and has no more than nominal equity.
All of the beneficial interests that have recourse to the related financial assets of the CFE are classified as financial liabilities. The proposed guidance specifies how those financial liabilities should be measured. Under the fair value option guidance of ASC Topic 825, an entity that consolidates a collateralized financing entity would not be permitted to measure the financial liabilities at fair value.
Comments are due Sept. 17, 2013.
Revenue Recognition: Transition Resource Group to Be Formed
The FASB and the International Accounting Standards Board (IASB) announced on July 26, 2013, plans to create a joint transition resource group focused on the converged standard on revenue recognition, which is scheduled to be issued in the third quarter of 2013. The group will not issue guidance, but it will provide information to help the FASB and the IASB identify interpretive issues that could cause the new guidance to be applied in diverse ways and help the board to determine what, if any, action is needed to resolve issues that arise related to application diversity.
The resource group will convene after the final standard has been issued, and the group’s primary activities will take place before the standard takes effect in 2017.
From the Securities and Exchange Commission (SEC)
Ban on General Solicitation Lifted
On July 10, 2013, the SEC adopted a new rule, “Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings,” that essentially lifts the ban on general solicitation or advertising for certain private securities offerings. As a result, startups, hedge funds, and other private firms will be permitted to openly advertise in private offerings to raise capital. While some restrictions will apply, the passage of this rule also is expected to permit advertising to the masses via email, billboards, and social media. The SEC has prepared a fact sheet about the new rule.
In connection with this new rule, the SEC also issued for comment a proposed rule, “Amendments to Regulation D, Form D and Rule 156,” which would require issuers to provide additional information about these securities offerings to better enable the SEC to monitor the market now that the ban has been lifted. The proposal also provides for additional safeguards as the market changes and new practices develop. The SEC has prepared a fact sheet describing the proposed amendments to the private-offering rules.
There is a 60-day comment period on the rule proposal.
SEC Advised to Require Disclosure of Auditor Attestation of ICFR
The Government Accountability Office (GAO) issued a report to the SEC in July titled “Internal Controls: SEC Should Consider Requiring Companies to Disclose Whether They Obtained an Auditor Attestation.” The report advises the SEC, in order to enhance transparency and investor protection, to consider requiring public companies to explicitly disclose whether they obtained an auditor attestation of their internal controls over financial reporting (ICFR).
The GAO report notes that since the implementation of the Sarbanes-Oxley Act’s requirement for auditor attestation, companies exempt from the requirement have had more financial restatements than nonexempt companies, and the percentage of restatements by exempt companies has exceeded those of nonexempt companies. The SEC responded, according to the report, that investors could determine attestation status from publicly available information. However, the SEC does not require exempt companies to disclose in their annual reports whether they obtained an auditor attestation voluntarily, and ordinarily the SEC does not require companies to disclose voluntary compliance with requirements from which they are exempt.
Two Final Rules Issued for Broker-Dealers
On July 31, 2013, the SEC issued two related rules for broker-dealers intended to “substantially increase protections for investors who turn their money and securities over to broker-dealers registered with the SEC,” according to the SEC news release.
The SEC announced a final rule titled “Financial Responsibility Rules for Broker-Dealers,” which includes amendments to the net capital, customer protection, books and records, and notification rules for broker-dealers. According to the commission, the amendments are “designed to better protect a broker-dealer’s customers and enhance the SEC’s ability to monitor and prevent unsound business practices.” These amendments will become effective 60 days after their publication in the Federal Register.
The SEC news release includes a fact sheet that summarizes the main provisions of this new rule.
The SEC also announced a final rule, “Broker-Dealer Reports,” which requires broker-dealers to file new reports with the SEC that should result in higher levels of compliance with the SEC’s financial responsibility rules. Certain broker-dealers are required to begin filing a new quarterly report (called Form Custody) with the SEC that contains information about whether and how the broker-dealer maintains custody of its customers’ securities and cash.
Currently, the Securities Exchange Act and Rule 17a-5 require a broker-dealer to file an annual report with the SEC and the self-regulatory organization (SRO) designated to examine that broker-dealer. Under the rule amendments:
- A broker-dealer that has custody of customer assets must file a “compliance report” with the SEC to verify it is adhering to capital requirements, protecting assets they hold, and periodically sending account statements to customers. The broker-dealer also must engage an independent public accountant registered with the Public Company Accounting Oversight Board (PCAOB) to prepare a report based on an examination of certain statements made in the broker-dealer’s compliance report.
- A broker-dealer that does not have custody of customer assets must file an “exemption report” with the SEC and engage a PCAOB-registered independent public accountant to prepare a report based on a review of certain statements made in the exemption report.
Broker-dealers subject to the Form Custody filing requirements must begin filing the form with their designated examining authority (DEA) 17 business days after the calendar quarter or fiscal year, as applicable, ended Dec. 31, 2013. Also, under the new rule, a broker-dealer that is a member of the Securities Investor Protection Corporation (SIPC) also must file its annual report, including financial statements, with SIPC for fiscal years ending on or after Dec. 31, 2013.
For the requirements for broker-dealer annual reports filed with the SEC and SRO, the effective date is for fiscal years ending on or after June 1, 2014. The annual reports are due 60 calendar days after the end of the fiscal year.
The SEC news release includes a fact sheet that summarizes the main provisions of this new rule.
Financial Reporting Manual Updated
The staff of the SEC’s Division of Corporation Finance (Corp Fin) published a new version of the “Financial Reporting Manual,” dated July 16, 2013. The new edition reflects changes through March 31, 2013, including updates of issues related to real estate acquisitions and properties securing mortgages, summarized financial data of equity method investees, and the definition of a non-GAAP financial measure.
The manual is intended as an internal reference document for SEC staff, but preparers and others might find it a useful reference for financial reporting matters.
For More Information
Sydney K. Garmong
Dennis M. Hild