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 White House
Executive Order to Scale Back Dodd-Frank Act Issued
On Feb. 3, 2017, President Donald Trump signed an executive order
that will begin the process of scaling back certain financial regulations implemented in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act
as well as certain pieces of the Department of Labor’s fiduciary rule as described in the Feb. 3, 2017, presidential memorandum
The order sets core principles for the regulation of the U.S. financial system and directs the secretary of the U.S. Department of the Treasury to consult with regulatory agencies and the Financial Stability Oversight Council (FSOC) and then report to the president on existing laws, treaties, regulations, guidance, reporting, and recordkeeping policies that inhibit operating the financial system in accordance with the core principles.
Executive Order to Reduce Regulation and Control Regulatory Costs Issued
President Trump issued, on Jan. 30, 2017, an executive order
aimed at reducing the growth of regulatory costs and the volume of regulation.
Under the order, when proposing a new regulation, an agency must identify two existing regulations to be considered for elimination, and the agency must offset new regulatory costs by eliminating the same costs from at least two regulations. Effective immediately, most executive departments and agencies also will be required to maintain a total incremental budgetary cost of zero or less for all finalized regulations, unless required by law or approved by the director of the Office of Management and Budget (OMB).
The order also directs the OMB to provide details on how the order will be implemented and how costs will be accounted for. Regulations related to foreign affairs, defense, or national security as well as rules related to internal agency affairs or those exempted by the OMB are exempt from this order.
The language of the order is not specific about what agencies are covered, but independent regulatory agencies such as the U.S. Securities and Exchange Commission (SEC) might be exempt. Despite the exemption, some agencies might still choose to follow the guidance of the president.
From the Federal Financial Institution Regulators
Semiannual Risk Perspective With Focus on Sales Practices Issued
On Jan. 5, 2017, the Office of the Comptroller of the Currency (OCC) released
its “Semiannual Risk Perspective
” for fall 2016 outlining top risks facing national banks and federal savings associations based on information through June 30, 2016. In addition to strategic, credit, operational, and compliance risks, the OCC highlights governance over sales practices as a significant risk issue for large banks. According to the report, “Control breakdowns over the governance of retail product sales practices can erode trust in the banking system. Effective systems to detect and address fraud and possible unfair or deceptive practices in a timely manner, including effective complaint management systems, are critical.”
At midsize and community banks, the OCC will continue to focus on strategic risk, credit risk, compliance risk, and cyber resiliency. For larger institutions, the OCC will concentrate on sales practices, operational risk, third-party risk, and compliance risk management – specifically on change management addressing the Truth in Lending Act
and the Real Estate Settlement Procedures Act of 1974
(TILA-RESPA) integrated disclosures, flood insurance, the Home Mortgage Disclosure Act
, and the Military Lending Act
The report also identifies the continuing trend of banks easing underwriting practices to increase loan volume, which is compounded by increased risk layering, including more policy exceptions, higher loan-to-value ratios, and weaker covenants. The OCC noted continued particular concern about commercial real estate concentration risk at community banks.
Related to the continued high compliance risk, the OCC notes, “Technology developments and innovation designed to improve operational efficiency or to enhance product and service offerings by increasing access to financial services and convenience to customers may create vulnerabilities that can be exploited by criminals. Timely identification of these vulnerabilities, and the design and application of effective controls to mitigate resulting risks, continue to present challenges for some banks.”
Updated Third-Party Risk Management Exam Procedures Issued
The OCC, on Jan. 24, 2017, issued
an updated set of exam procedures to help examiners assess banks’ third-party risk management programs. These exam procedures supplement guidance that the OCC previously issued in October 2013 in OCC Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance.”
Progress Report on Faster Payments Project Issued
The Board of Governors of the Federal Reserve System (Fed) released
, on Jan. 26, 2017, a status update on its faster payments initiative. The progress report highlights achievements on the five strategies identified in January 2015 including: stakeholder engagement, faster payments, payment security, payment efficiency, and enhanced Fed services. The report also documents actions taken by the Fed’s Faster Payments Task Force and Secure Payments Task Force. A final report with recommendations on faster payments is expected to be released in mid-2017.
Comments on Alternative Capital for Credit Unions Sought
At its Jan. 19, 2017, meeting
, the National Credit Union Administration (NCUA) board unanimously approved an advance notice of proposed rulemaking (ANPR) to gather comments on alternative forms of capital that federally insured credit unions might use to meet capital standards requirements. The ANPR, “Alternative Capital
,” was published in the Federal Register on Feb. 8, 2017.
According to the notice, the NCUA is contemplating changes to the existing secondary capital regulation for low-income designated credit unions and whether to authorize federally insured credit unions to issue supplemental capital instruments that would count only toward a credit union’s requirement of risk-based net worth.
The NCUA is seeking comments on various topics including:
- Necessary related regulatory changes
- Possible tax implications linked to issuing alternative capital, specifically for state-chartered credit unions
- Director and management liability issues related to alternative capital
- Investor protection concerns and whether the sale of secondary capital should be restricted to knowledgeable institutional investors
- The impact of alternative capital on credit unions’ mutual ownership structure
A statutory goal of prompt corrective action “to resolve the problems of insured credit unions at the least possible long-term loss” to the Share Insurance Fund has led the NCUA to look at expanded options for credit unions to build capital beyond retained earnings.
Comments are due by May 9, 2017.
From the State Regulators
BSA/AML Self-Assessment Tool Released
On Jan. 31, 2017, state financial regulators and the Conference of State Bank Supervisors (CSBS) released
a new voluntary self-assessment tool aimed at helping banks and nondepository financial institutions manage Bank Secrecy Act
(BSA) and anti-money laundering (AML) risk. The jointly developed tool is meant to help institutions better identify, monitor, and communicate BSA/AML risk; reduce uncertainty about BSA/AML compliance; and promote greater transparency within the industry.
From the Financial Accounting Standards Board (FASB)
Guidance Simplifying the Test for Goodwill Impairment Issued
On Jan. 26, 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
.” What started as a recommendation by the Private Company Council to permit private entities to amortize goodwill has resulted in a standard to simplify goodwill impairment testing for all entities that have goodwill reported in their financial statements. The topic of amortizing goodwill remains on the FASB’s research agenda.
ASU 2017-04 eliminates step two of the goodwill impairment test (the hypothetical purchase price allocation used to determine the implied fair value of goodwill) when step one (determining if the carrying value of a reporting unit exceeds its fair value) is failed. Instead, entities simply will compare the fair value of a reporting unit to its carrying amount and record goodwill impairment for the amount by which the reporting unit’s carrying amount exceeds its fair value.
The FASB also removed the requirements that reporting units with zero or negative carrying amounts perform a qualitative assessment and, if they fail that qualitative test, that they perform step two. As such, the same impairment test will apply to all reporting units, regardless of carrying amount. Entities will be required, however, to disclose the amount of goodwill attributable to those reporting units that have a zero or negative carrying amount.
Entities still have the option to apply a qualitative assessment of a reporting unit to determine if a quantitative impairment test is required.
For public business entities (PBEs) that are SEC filers, the standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after Dec. 15, 2019. For calendar year-end SEC filers, it first applies to tests performed on or after Jan. 1, 2020.
For PBEs that are not SEC filers, it is effective for annual or interim tests in fiscal years beginning after Dec. 15, 2020. For calendar year-end PBEs that are not SEC filers, it first applies to tests performed on or after Jan. 1, 2021.
For other entities, it is effective for annual or interim tests in fiscal years beginning after Dec. 15, 2021. For calendar year-end non-PBEs, it first applies to tests performed on or after Jan. 1, 2022.
Early adoption is permitted for interim or annual tests performed on testing dates after Jan. 1, 2017.
SEC Observer Comments Codified
In January 2017, with the issuance of ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings
,” the FASB codified SEC observer comments made at two Emerging Issues Task Force (EITF) meetings.
The first SEC observer comment, found in ASC 250 10-S99-6, relates to the recent major accounting standards (for credit losses, leases, and revenue recognition) that have not yet been adopted. Existing guidance, Staff Accounting Bulletin (SAB) Topic 11.M (also known as SAB 74), addresses the disclosure of the impact that the standards are expected to have on a registrant’s financial statements when adopted in the future.
The guidance states that if a registrant does not know or cannot reasonably estimate the impact that adoption of the recent major accounting standards is expected to have on the financial statements, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures. Those disclosures should contain information to help readers assess the significance of the impact that the standards will have on the financial statements of the registrant when adopted, including:
- A description of the effect of the accounting policies that the registrant expects to apply, if determined
- A comparison to the registrant’s current accounting policies
- A description of the status of the registrant’s process to implement the new standards
- The significant implementation matters yet to be addressed
The second comment addresses the update to SEC guidance related to an already effective standard, ASU 2014-01, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” The update refers to the proportional amortization method of accounting for investments in qualified affordable housing projects, consistent with ASU 2014-01, rather than the previously accepted effective yield method.
From the Securities and Exchange Commission (SEC)
Comments on Pay Ratio Disclosure Rule Sought
On Feb. 6, 2017, acting SEC Chair Michael S. Piwowar released a public statement
requesting comments from stakeholders on the August 2015 pay ratio disclosure rule that requires issuers to disclose the ratio of median annual employee compensation to the CEO’s annual compensation in fiscal years beginning on or after Jan. 1, 2017. Piwowar requested “public input on any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed.”
Comments are due March 23, 2017.