Applicability of Annual Independent Audits and Reporting Requirements for Fiscal Years Ending in 2021
| Citation | 85 FR 67427 |
| Record Number | 2020-23630 |
| Published date | 23 October 2020 |
| Section | Rules and Regulations |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 85 Issue 206 (Friday, October 23, 2020)
[Federal Register Volume 85, Number 206 (Friday, October 23, 2020)]
[Rules and Regulations]
[Pages 67427-67433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23630]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 363
RIN 3064-AF63
Applicability of Annual Independent Audits and Reporting
Requirements for Fiscal Years Ending in 2021
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Interim final rule and request for comment.
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[[Page 67428]]
SUMMARY: In light of recent disruptions in economic conditions caused
by the coronavirus disease 2019 (COVID-19) and strains in U.S.
financial markets, some insured depository institutions (IDIs) have
experienced increases to their consolidated total assets as a result of
large cash inflows resulting from participation in the Paycheck
Protection Program (PPP), the Money Market Mutual Fund Liquidity
Facility (MMLF), the Paycheck Protection Program Liquidity Facility
(PPPLF), and the effects of other government stimulus efforts. Since
these inflows may be temporary, but are significant and unpredictable,
the FDIC is issuing an interim final rule (IFR) that will allow IDIs to
determine the applicability of part 363 of the FDIC's regulations,
Annual Independent Audits and Reporting Requirements, for fiscal years
ending in 2021 based on the lesser of their consolidated total assets
as of December 31, 2019, or consolidated total assets as of the
beginning of their fiscal years ending 2021. Notwithstanding any
temporary relief provided by this IFR, an IDI would continue to be
subject to any otherwise applicable statutory and regulatory audit and
reporting requirements. The IFR also reserves the authority to require
an IDI to comply with one or more requirements of part 363 if the FDIC
determines that asset growth was related to a merger or acquisition.
DATES: The interim final rule is effective October 23, 2020 through
December 31, 2021, unless extended by the FDIC. Comments on the interim
final rule must be received no later than November 23, 2020.
ADDRESSES: You may submit comments, identified by RIN 3064-AF63, by any
of the following methods:
Agency Website: https://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency
website.
Email: [email protected]. Include ``RIN 3064-AF63'' on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/RIN 3064-AF63, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
Hand Delivery/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street building (located
on F Street) on business days between 7 a.m. and 5 p.m. All comments
received must include the agency name (FDIC) and RIN 3064- AF63, and
will be posted without change to https://www.fdic.gov/regulations/laws/federal, including any personal information provided.
FOR FURTHER INFORMATION CONTACT: Harrison E. Greene, Jr., Assistant
Chief Accountant, (202) 898-8905, [email protected]; Shannon M. Beattie,
Section Chief and Deputy Chief Accountant, (202) 898-3952,
[email protected]; John Rieger, Chief Accountant, (202) 898-3602,
[email protected]; Mark G. Flanigan, Senior Counsel, (202) 898-7426,
[email protected]; Joyce M. Raidle, Counsel, (202) 898-6763,
[email protected]; and Merritt Pardini, Counsel, (202) 898-6680,
[email protected], Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429. For the hearing
impaired only, Telecommunication Device for the Deaf (TDD), (800) 925-
4618.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Selected Government Responses Related to the Pandemic
B. Section 36 of the Federal Deposit Insurance Act (FDI Act) and
Part 363 of the FDIC Regulations
C. Effects of Government Response Programs on IDI Growth
II. The Interim Final Rule
III. Expected Effects
IV. Alternatives Considered
V. Administrative Law Matters
A. Administrative Procedure Act
B. Congressional Review Act
C. Paperwork Reduction Act
D. Regulatory Flexibility Act
E. Riegle Community Development and Regulatory Improvement Act
of 1994
F. Use of Plain Language
I. Background
A. Selected Government Responses Related to the Pandemic
Recent events have significantly and adversely impacted the global
economy and financial markets. The spread of COVID-19 has slowed
economic activity in many countries, including the United States.
Sudden disruptions in financial markets placed increasing liquidity
pressure on money market mutual funds (MMFs) and raised the cost of
credit for most borrowers. MMFs faced redemption requests from clients
with immediate cash needs and potentially the need to sell a
significant number of assets to meet these redemption requests, which
further increased market pressures. In order to prevent the disruption
in the money markets from destabilizing the financial system, on March
18, 2020, the Board of Governors of the Federal Reserve System (Board
of Governors), with approval of the Secretary of the Treasury,
authorized the Federal Reserve Bank of Boston (FRBB) to establish the
MMLF pursuant to section 13(3) of the Federal Reserve Act.\1\ Under the
MMLF, the FRBB is extending nonrecourse loans to eligible borrowers to
purchase assets from MMFs. Assets purchased from MMFs are posted as
collateral to the FRBB. Eligible borrowers under the MMLF include IDIs.
Eligible collateral under the MMLF includes U.S. Treasuries and fully
guaranteed agency securities, securities issued by government-sponsored
enterprises, and certain types of commercial paper. The MMLF is
scheduled to terminate on December 31, 2020, unless extended by the
Board of Governors.\2\
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\1\ 12 U.S.C. 343(3).
\2\ See Federal Reserve Board announces an extension through
December 31 of its lending facilities that were scheduled to expire
on or around September 30 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200728a.htm).
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Small businesses also face severe liquidity constraints and a
collapse in revenue streams, as millions of Americans were ordered to
stay home, severely reducing their ability to engage in normal
commerce. Many small businesses were forced to close temporarily or
furlough employees. Continued access to financing will be crucial for
small businesses to weather economic disruptions caused by COVID-19
and, ultimately, to help restore economic activity.
In recognition of the exigent circumstances facing small
businesses, Congress created the PPP as part of the Coronavirus Aid,
Relief, and Economic Security Act (CARES Act).\3\ PPP loans are fully
guaranteed as to principal and accrued interest by the Small Business
Administration (SBA), the amount of each being determined at the time
the guarantee is exercised. As a general matter, SBA guarantees are
backed by the full faith and credit of the U.S. Government. PPP loans
also afford borrowers forgiveness up to the principal amount of the PPP
loan if the loan proceeds are used for certain eligible expenses. The
SBA reimburses PPP lenders for any amount of a PPP loan that is
forgiven. PPP lenders are not held liable for any representations made
by PPP borrowers in connection with a borrower's request for PPP loan
forgiveness.\4\ On June 5, 2020, the
[[Page 67429]]
Paycheck Protection Program Flexibility Act of 2020 (PPP Flexibility
Act) was signed into law, amending key provisions of the CARES Act,
including provisions related to loan maturity, deferral of loan
payments, and loan forgiveness.\5\ Among other changes, the amendments
increase from two to five years the maturity of PPP loans that are
approved by the SBA on or after June 5, 2020, and provide greater
flexibility for borrowers to qualify for loan forgiveness.
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\3\ Public Law 116-136 (Mar. 27, 2020).
\4\ Under the PPP, eligible borrowers generally include
businesses with fewer than 500 employees or that are otherwise
considered by the SBA to be small, including individuals operating
sole proprietorships or acting as independent contractors, certain
franchisees, nonprofit corporations, veterans' organizations, and
Tribal businesses. The loan amount under the PPP would be limited to
the lesser of $10 million and 250 percent of a borrower's average
monthly payroll costs. For more information on the Paycheck
Protection Program, see https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.
\5\ Public Law 116-142 (June 5, 2020). The SBA subsequently
issued an interim final rule revising the SBA's interim final rule
implementing sections 1102 and 1106 of the CARES Act temporarily
adding the Paycheck Protection Program to the SBA's 7(a) Loan
Program published on April 15, 2020. See 85 FR 20811 (Apr. 15, 2020)
and 85 FR 36308 (June 16, 2020).
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In order to provide liquidity to small business lenders and the
broader credit markets, and to help stabilize the financial system, on
April 8, 2020, the Board of Governors, with approval of the Secretary
of the Treasury, authorized each of the Federal Reserve Banks to extend
credit under the PPPLF pursuant to Section 13(3) of the Federal Reserve
Act.\6\ Under the PPPLF, the Federal Reserve Banks are extending
nonrecourse loans to institutions that are eligible to make PPP loans,
including IDIs. Under the PPPLF, only PPP loans that are guaranteed by
the SBA with respect to both principal and interest and that are
originated by an eligible institution may be pledged as collateral to
the Federal Reserve Banks (loans pledged to the PPPLF). The maturity
date of the extension of credit under the PPPLF \7\ equals the maturity
date of the PPP loans pledged to secure the extension of credit.\8\ No
new extensions of credit will be made under the PPPLF after December
31, 2020, unless extended by the Board of Governors and the Department
of the Treasury.
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\6\ 12 U.S.C. 343(3). On April 30, 2020, the facility was
renamed the Paycheck Protection Program Liquidity Facility, from
Paycheck Protection Program Lending Facility. See Periodic Report:
Update on Outstanding Lending Facilities Authorized by the Board
under Section 13(3) of the Federal Reserve Act May 15, 2020, Board
of Governors of the Federal Reserve System (https://www.federalreserve.gov/publications/files/mlf-msnlf-mself-and-ppplf-5-15-20.pdf).
\7\ The maturity date of the extension of credit under the PPPLF
will be accelerated if the underlying PPP loan goes into default and
the eligible borrower sells the PPP Loan to the SBA to realize the
SBA guarantee. The maturity date of the extension of credit under
the PPPLF also will be accelerated to the extent of any PPP loan
forgiveness reimbursement received by the eligible borrower from the
SBA.
\8\ Under the SBA's interim final rule, a lender may request
that the SBA purchase the expected forgiveness amount of a PPP loan
or pool of PPP loans at the end of the covered period. See Interim
Final Rule ``Business Loan Program Temporary Changes; Paycheck
Protection Program,'' 85 FR 20811, 20816 (Apr. 15, 2020) and 85 FR
36308 (June 16, 2020).
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The FDIC, Board of Governors, and Comptroller of the Currency
adopted interim final rules on March 23, 2020, and April 13, 2020,
respectively, to allow banking organizations to neutralize the
regulatory capital effects of purchasing assets under the MMLF program
and loans pledged to the PPPLF.\9\ Consistent with Section 1102 of the
CARES Act, the April 2020 interim final rule also required banking
organizations to apply a zero percent risk weight to PPP loans
originated by the banking organization under the PPP for purposes of
the banking organization's risk-based capital requirements. On June 26,
2020, the FDIC adopted a rule that mitigates the deposit insurance
assessment effects of participating in the PPP, PPPLF and MMLF.\10\
Among other changes, the final rule provides an offset to an IDI's
total assessment amount for the increase in its assessment base
attributable to participation in the PPP and MMLF. The FDIC remains
committed to considering additional, targeted adjustments to mitigate
to the greatest extent possible unintended consequences resulting from
pandemic-related stimulus actions.
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\9\ See 85 FR 16232 (Mar. 23, 2020) and 85 FR 20387 (Apr. 13,
2020). These rules were finalized on September 29, 2020. See https://www.fdic.gov/news/board/2020/2020-09-15-notice-sum-b-fr.pdf.
\10\ See 85 FR 38282 (June 26, 2020).
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B. Section 36 of the Federal Deposit Insurance Act (FDI Act) and Part
363 of the FDIC Regulations
Section 36 of the FDI Act (section 36) was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 and imposes
annual audits and reporting requirements on IDIs that meet certain
asset thresholds.\11\ The purpose of section 36 is to facilitate early
identification of needed improvements in financial management at IDIs.
Section 36 grants the FDIC discretion to set the asset size threshold
for compliance with these statutory requirements, but mandates a
minimum threshold of $150 million in consolidated total assets. Part
363 of the FDIC's regulations implements section 36.\12\ Currently, an
IDI becomes subject to the annual independent audits and reporting
requirements of part 363 with respect to any fiscal year in which its
consolidated total assets as of the beginning of such fiscal year are
$500 million or more.\13\ Additionally, an IDI with consolidated total
assets of $1 billion or more as of the beginning of any fiscal year
must provide management's assessment of, and the independent public
accountant's report, on the effectiveness of internal control over
financial reporting (ICFR).\14\
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\11\ 12 U.S.C. 1831m.
\12\ 12 CFR 363.
\13\ 12 CFR 363.1(a).
\14\ 12 CFR 363.2(b)(3) and 12 CFR 363.3(b).
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Part 363 also includes requirements related to audit committees
based on consolidated total assets. More specifically, each IDI with
consolidated total assets of $500 million or more but less than $1
billion at the beginning of its fiscal year must establish an
independent audit committee of its board of directors, the members of
which must be outside directors, a majority of whom must be independent
of management of the IDI.\15\ Each IDI with consolidated total assets
of $1 billion or more at the beginning of its fiscal year must
establish an independent audit committee of its board of directors, the
members of which must be outside directors who are independent of
management of the IDI.\16\ Audit committees of IDIs with consolidated
total assets of $3 billion or more as of the beginning of their fiscal
year are required to include members with banking or related financial
management expertise, have access to their own outside counsel, and not
include any large customers of the institution.\17\
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\15\ 12 CFR 363.5(a)(2).
\16\ 12 CFR 363.5(a)(1).
\17\ 12 CFR 363.5(b).
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The determination of whether an IDI is subject to the annual
independent audit and reporting requirements of part 363, including
certain additional requirements based on asset size, is based on its
consolidated total assets as of the beginning of its fiscal year.\18\
For example, an IDI whose fiscal year begins on January 1, 2020, and
ends on December 31, 2020, would determine whether it met the base
asset threshold for compliance with part 363 as well as the other asset
thresholds set forth in part 363 based upon its consolidated total
assets of December 31, 2019. As another example, an IDI whose fiscal
year begins on July 1, 2020, and ends on
[[Page 67430]]
June 30, 2021, would determine whether it met the base asset threshold
for compliance with part 363 as well as the other asset thresholds set
forth in part 363 based upon its consolidated total assets of June 30,
2020.
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\18\ For measuring total assets, Guideline 1 to part 363
provides that an IDI should use the total assets reported on its
most recent Report of Condition (Call Report), the date of which
coincides with the end of its preceding fiscal year. If its fiscal
year ends on a date other than the end of a calendar quarter, it
should use the Call Report for the quarter end immediately preceding
the end of its fiscal year.
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C. Effects of Government Response Programs on IDI Growth
Participation in the PPP, PPPLF, or MMLF programs, and effects of
other stimulus programs, have caused certain IDIs to experience a
temporary increase in their consolidated total assets and thus become
subject to part 363 based on certain asset size thresholds set forth
within part 363. While some of these IDIs may have reached these
thresholds through organic growth or other means, it is likely that
others would not have reached these thresholds but for the effects of
the government programs and other types of stimulus. For example, an
IDI that receives funding under the PPPLF would increase its
consolidated total assets (equal to the amount of PPP loans pledged to
the Federal Reserve Banks), and increase its liabilities by the same
amount. An IDI that obtains additional funding, such as additional
deposits or secured borrowings, to make PPP loans would increase its
total liabilities and consolidated total assets by that amount of
funding.\19\ Similarly, an IDI that participates in the MMLF would
increase its consolidated total assets by the amount of assets
purchased from MMFs under the MMLF and increase its liabilities by the
same amount. Moreover, some institutions reported general, and likely
temporary, increases in deposits due to inflows from PPP proceeds,
deposits of funds made in connection with other CARES Act-related
programs, and general shifts of liquid funds to safety.
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\19\ An IDI that relies on existing funding, including deposits
already at the institution, to make PPP loans would not increase its
total liabilities or total assets.
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Absent the regulatory relief proposed in this IFR, some IDIs that
participate in these programs, or have otherwise been affected by
volatility in cash flows related to the pandemic, will be forced to
incur additional compliance and related expenses. These expenses
include engaging independent auditors, performing assessments of ICFR,
reviewing and filing reports, and modifying the makeup of their boards
of directors in order to comply with the requirements of part 363.
II. The Interim Final Rule
Under the IFR, the FDIC seeks to negate the cost and burden effects
of potentially temporary asset growth associated with pandemic-related
programs and similar impacts. The IFR accomplishes this by allowing
IDIs to determine the applicability of part 363 of the FDIC's
regulations for fiscal years ending in 2021 based on the lesser of the
IDI's (a) consolidated total assets as of December 31, 2019, or (b)
consolidated total assets as of the beginning of their fiscal years
ending in 2021. For example, an IDI with a fiscal year beginning July
1, 2020, and ending June 30, 2021, would normally determine part 363
compliance requirements as of its fiscal year ended June 30, 2020.
Under the IFR, an IDI experiencing growth would instead use its
consolidated total assets as of December 31, 2019, for purposes of
determining its compliance requirements with part 363. In this example,
if the IDI's consolidated total assets were less than $500 million as
of December 31, 2019, it would not become subject to part 363 for its
fiscal year beginning July 1, 2020 and ending June 30, 2021, even if
its total consolidated total assets were $500 million or more as of
June 30, 2020.
Based on consolidated total assets as of December 31, 2019, and
June 30, 2020, this proposal would, as further discussed below,
potentially apply to approximately 290 IDIs:
156 IDIs based on the number of IDIs that had consolidated
total assets of $500 million or more as of December 31, 2019, compared
to the number of IDIs that had consolidated total assets of $500
million or more as of June 30, 2020;
107 IDIs based on the number of IDIs that had consolidated
total assets of $1 billion or more as of December 31, 2019, compared to
the number of IDIs that had consolidated total assets of $1 billion or
more as of June 30, 2020; and
27 IDIs based on the number of IDIs that had consolidated
total assets of $3 billion or more as of December 31, 2019, compared to
the number of IDIs that had consolidated total assets of $3 billion or
more as of June 30, 2020.
The FDIC recognizes the benefits of the part 363 requirements and
that some IDIs may have experienced organic or other growth that would
have resulted in them reaching the thresholds regardless of the impacts
of pandemic-related programs and associated effects. However, the FDIC
is balancing the risk that some IDIs will not become subject to part
363 requirements based on their consolidated total assets as of their
actual fiscal year ends in 2020 with the operational simplicity of
``freezing'' the date to determine the applicability of the regulation
for all IDIs experiencing growth based on their consolidated total
assets as of December 31, 2019. The FDIC has determined that such
targeted and time-limited relief from application of the part 363
requirements is necessary and appropriate, in order to ease the
compliance and expense burden on such institutions during this crucial
period for the financial services industry.
Notwithstanding the temporary relief provided by this IFR, IDIs
remain subject to any audit and reporting requirements applicable under
other laws and regulations. Also, the FDIC reserves the authority to
require an IDI to comply with one or more requirements under part 363
if the FDIC determines that asset growth was related to a merger or
acquisition. Additionally, staff notes that approximately 54 percent of
IDIs (IDIs with less than $500 million in consolidated total assets)
that are not subject to part 363 have audits performed by independent
public accountants.\20\
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\20\ Call Report Data, March 31, 2020. The level of audit work
performed on an institution is reported in the March Call Report
each year and can be found on line M.1 in the Memorandum to Schedule
RC.
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Sections 36(d) and (f) of the FDI Act obligate the FDIC to consult
with the other Federal banking agencies in implementing these
provisions of the FDI Act, and the FDIC has performed the required
consultation.
III. Expected Effects
Under part 363 of the FDIC's regulations, each IDI with
consolidated total assets of $500 million or more as of the beginning
of a fiscal year must, among other things, have its financial
statements audited by an independent public accountant, prepare a
management report describing certain aspects of its internal control
framework and its compliance with laws and regulations, and have an
audit committee that oversees the work of the independent public
accountant. Part 363 also contains a number of more detailed and
specific requirements that are triggered at asset sizes of $1 billion
and $3 billion, regarding management reporting, responsibilities of the
independent public accountant, and the responsibilities and composition
of the audit committee. Part 363 also describes the conditions under
which these requirements may be satisfied at the holding company level.
Broadly speaking, by granting temporary relief from the audit and
reporting requirements of part 363, the IFR is likely to support
participation in the PPP, PPPLF, and MMLF programs by IDIs, which could
benefit customers and U.S. economic activity. More specifically, the
IFR does this by
[[Page 67431]]
determining the applicability of the regulation for all IDIs based on
the lesser of their (a) consolidated total assets as of December 31,
2019, or (b) consolidated total assets as of the beginning of their
fiscal years ending in 2021, in order to ameliorate potential increases
in compliance costs for IDIs as a result of their participation in the
PPP, PPPLF, and MMLF. Under the IFR, IDIs that cross the $500 million,
$1 billion, or $3 billion asset thresholds just described during fiscal
years ending in 2021 will avoid the costs of complying with part 363
that they otherwise would have incurred as a result of crossing those
thresholds. IDIs that already exceeded those thresholds at year-end
2019, however, must continue to comply with the associated part 363
requirements.
The IFR thus will only affect those entities that cross one or more
of the part 363 thresholds after year-end 2019, and while the temporary
relief the IFR provides is in effect. It is difficult to estimate how
many IDIs will be directly affected by the IFR because the FDIC does
not know how many banks with a fiscal year ending after June 30 will
increase assets above one of the thresholds in Part 363 between June 30
and the end of the year. Nonetheless, this rule is expected to relieve
IDIs from incurring additional expenses if they experience an increase
in consolidated total asset levels that could cause the IDI to become
newly subject to certain part 363 requirements.
The following analysis utilizes Consolidated Reports of Condition
and Income (Call Report) data to assess changes in consolidated total
assets between December 31, 2019, and June 30, 2020, for IDIs in order
to identify IDIs that are likely to be directly affected by the IFR.
Specifically, the analysis determines whether the change in
consolidated total assets for an IDI between December 31, 2019, and
June 30, 2020, might entail a change in compliance requirements for
part 363 absent the interim final rule, assuming that the asset level
at the end of the six-month period is representative of the ``beginning
of the fiscal year'' period criteria for determining applicability of
part 363, or its various elements.
The various thresholds included in part 363 and the potential
effects of the temporary freeze in IDIs' total consolidated assets for
determining compliance with the regulation's audit and reporting
requirements are examined in the following section.
Threshold for Compliance With Part 363
Part 363 applies to any IDI with respect to any fiscal year in
which its consolidated total assets as of the beginning of such fiscal
year are $500 million or more. As of December 31, 2019, there were
5,177 IDIs, of which 1,453 IDIs were above the part 363 base threshold,
which is $500 million or more in consolidated total assets.\21\ As of
June 30, 2020, this number had increased to 1,609 IDIs.\22\ Therefore,
assuming that the asset level as of June 30, 2020, would be
representative of the ``beginning of the fiscal year'' period criteria
for determining applicability of part 363 absent the IFR, 156
institutions would be likely to avoid costs associated with complying
with this aspect of the rule.
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\21\ Call Report Data, December 2019.
\22\ Call Report Data, June 2020.
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According to Sec. Sec. 363.2(b)(3) and 363.3(b), IDIs with
consolidated total assets of $1 billion or more as of the beginning of
their fiscal year are required to include an assessment by management
of, and a report of the independent public accountant on, the
effectiveness of internal control structures and procedures in their
part 363 annual report. As of December 31, 2019, 796 IDIs were above
the consolidated total asset threshold of $1 billion or more.\23\ As of
June 30, 2020, this number had increased to 903 IDIs.\24\ Therefore,
assuming that the asset level as of June 30, 2020 would be
representative of the ``beginning of the fiscal year'' period criteria
for determining the requirements of Sec. Sec. 363.2(b) and 363.3(b),
absent the IFR, 107 institutions would be likely to avoid costs
associated with complying with this aspect of the rule.
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\23\ Call Report Data, December 2019.
\24\ Call Report Data, June 2020.
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According to Sec. 363.5(b), IDIs with total assets of more than $3
billion as of the beginning of their fiscal year are required to have
audit committee members with banking or related financial management
expertise, who have access to their own outside counsel, and are not
large customers of the institution. As of December 31, 2019, 315 IDIs
were above the Sec. 363.5(b) consolidated total asset threshold of
more than $3 billion.\25\ As of June 30, 2020, this number had
increased to 342 IDIs.\26\ Therefore, assuming that the asset level as
of June 30, 2020, would be representative of the ``beginning of the
fiscal year'' period criteria for determining the audit committee
member requirements of Sec. 363.5(b), absent the IFR, 27 institutions
would be likely to avoid costs associated with complying with this
aspect of the rule.
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\25\ Call Report Data, December 2019.
\26\ Call Report Data, June 2020.
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Summary
The IFR would not affect compliance obligations for IDIs that are
bound by part 363 as of December 31, 2019. The number of entities that
will avoid costs because of the IFR is likely to differ from the
numbers suggested by this analysis because consolidated total asset
levels are likely to continue to change throughout the remainder of
calendar year 2020 and because compliance costs are likely to depend in
part on IDIs' eligibility for part 363 compliance at the holding
company level.\27\ It is difficult to estimate regulatory compliance
cost savings as a result of the IFR because such costs depend on the
individual characteristics of institutions, the extent of their current
audit and reporting activities, and the extent to which they avail
themselves of this temporary reduction in compliance requirements,
among other things.
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\27\ Regulations regarding the compliance by subsidiaries of
holding companies are set forth in 12 CFR 363.1(b).
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Finally, the FDIC believes that the temporary relief provided by
the IFR is unlikely to substantively affect the safety and soundness of
affected IDIs because it only grants short-term temporary relief and
IDIs would continue to be subject to any otherwise applicable statutory
and regulatory audit and reporting requirements. The FDIC also
maintains a number of other regulatory and supervisory tools to oversee
the safety and soundness of IDIs.
IV. Alternatives Considered
The FDIC has considered alternatives to the rule, but believes the
IFR represents the most appropriate option for covered institutions.
The FDIC considered the status quo alternative of maintaining part 363
in its current form, but believes that the challenges for IDIs
associated with the COVID-19 pandemic, and costs to comply with the
rule for IDIs with temporary asset growth, necessitate targeted and
time-limited relief from the application of part 363 requirements.
Finally, and as previously discussed, the temporary relief granted to
certain IDIs by the IFR, is unlikely to negatively affect the safety
and soundness of IDIs. Therefore, the FDIC believes it is appropriate
to grant IDIs this temporary relief.
V. Administrative Law Matters
A. Administrative Procedure Act
The FDIC is issuing the interim final rule without prior notice and
the
[[Page 67432]]
opportunity for public comment and the delayed effective date
ordinarily prescribed by the Administrative Procedure Act (APA).\28\
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\28\ 5 U.S.C. 553.
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Pursuant to section 553(b)(B) of the APA, general notice and the
opportunity for public comment are not required with respect to a
rulemaking when an ``agency for good cause finds (and incorporates the
finding and a brief statement of reasons therefor in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' \29\ The FDIC
believes that the public interest is best served by implementing the
interim final rule immediately upon publication in the Federal
Register.
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\29\ 5 U.S.C. 553(b)(B).
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As discussed above, the spread of COVID-19 has slowed economic
activity in many countries, including the United States. Specifically,
the disruptions in financial markets have caused depository
institutions to receive inflows of deposits--contributing to the
increase of deposits at Federal Reserve Banks--and to hold significant
amounts of Treasuries. Because the interim final rule will mitigate a
potential additional compliance burden and expense for financial
institutions participating in Federal government programs intended to
ease financial disruptions, the FDIC finds there is good cause
consistent with the public interest to issue the rule without advance
notice and comment.
The APA also requires a 30-day delayed effective date, except for
(1) substantive rules, which grant or recognize an exemption or relieve
a restriction; (2) interpretative rules and statements of policy; or
(3) as otherwise provided by the agency for good cause.\30\ Because the
interim final rule will provide a temporary exemption and relief to
affected IDI, the interim final rule is exempt from the APA's delayed
effective date requirement.\31\ While the FDIC believes that there is
good cause to issue this interim final rule without advance notice and
comment and with an immediate effective date, the FDIC is interested in
the views of the public and request comment on all aspects of the
interim final rule.
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\30\ 5 U.S.C. 553(d).
\31\ 5 U.S.C. 553(d)(1).
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B. Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\32\ If a rule is deemed a ``major rule'' by the Office of
Management and Budget (OMB), the Congressional Review Act generally
provides that the rule may not take effect until at least 60 days
following its publication.\33\ The Congressional Review Act defines a
``major rule'' as any rule that the Administrator of the Office of
Information and Regulatory Affairs of the OMB finds has resulted in or
is likely to result in (A) an annual effect on the economy of
$100,000,000 or more; (B) a major increase in costs or prices for
consumers, individual industries, Federal, State, or local government
agencies or geographic regions, or (C) significant adverse effects on
competition, employment, investment, productivity, innovation, or on
the ability of United States-based enterprises to compete with foreign-
based enterprises in domestic and export markets.\34\ For the same
reasons set forth above, the FDIC is adopting the interim final rule
without the delayed effective date generally prescribed under the
Congressional Review Act. The delayed effective date required by the
Congressional Review Act does not apply to any rule for which an agency
for good cause finds (and incorporates the finding and a brief
statement of reasons therefor in the rule issued) that notice and
public procedure thereon are impracticable, unnecessary, or contrary to
the public interest.\35\ In light of current market uncertainty and the
need for IDIs to prepare an audit plan in advance of the beginning of
their fiscal years, the FDIC believes that delaying the effective date
would be contrary to the public interest. As required by the
Congressional Review Act, the FDIC will submit the final rule and other
appropriate reports to Congress and the Government Accountability
Office for review.
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\32\ 5 U.S.C. 801 et seq.
\33\ 5 U.S.C. 801(a)(3).
\34\ 5 U.S.C. 804(2).
\35\ 5 U.S.C. 808.
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C. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995 (PRA), the FDIC may not conduct or sponsor, and a respondent is
not required to respond to, an information collection unless it
displays a currently valid Office of Management and Budget (OMB)
control number. The FDIC has reviewed this interim final rule and
determined that it would not introduce any new or revise any collection
of information pursuant to the PRA. Therefore, no submissions will be
made to OMB for review.
D. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \36\ requires an agency to
consider whether the rules it proposes will have a significant economic
impact on a substantial number of small entities.\37\ The RFA applies
only to rules for which an agency publishes a general notice of
proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed
previously, consistent with section 553(b)(B) of the APA, the FDIC has
determined for good cause that general notice and opportunity for
public comment is unnecessary, and therefore the FDIC is not issuing a
notice of proposed rulemaking. Accordingly, the RFA's requirements
relating to initial and final regulatory flexibility analysis do not
apply. Nevertheless, the FDIC seeks comment on whether, and the extent
to which, the interim final rule would affect a significant number of
small entities.
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\36\ 5 U.S.C. 601 et seq.
\37\ Under regulations issued by the Small Business
Administration, a small entity includes a depository institution,
bank holding company, or savings and loan holding company with total
assets of $600 million or less and trust companies with total
average annual receipts of $41.5 million or less. See 13 CFR
121.201.
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E. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\38\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
IDIs, each Federal banking agency must consider, consistent with the
principle of safety and soundness and the public interest, any
administrative burdens that such regulations would place on depository
institutions, including small depository institutions, and customers of
depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and
amendments to regulations that impose additional reporting,
disclosures, or other new requirements on IDIs generally to take effect
on the first day of a calendar quarter that begins on or after the date
on which the regulations are published in final form, with certain
exceptions, including for good cause.\39\
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\38\ 12 U.S.C. 4802(a).
\39\ 12 U.S.C. 4802.
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For the reasons described above, the FDIC finds that good cause
exists under section 302 of RCDRIA to publish this interim final rule
with an immediate effective date. As such, the final rule
[[Page 67433]]
will be effective immediately upon publication in the Federal Register.
Nevertheless, the FDIC seeks comment on RCDRIA.
F. Use of Plain Language
Section 722 of the Gramm-Leach Bliley Act \40\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The FDIC has sought to present the
interim final rule in a simple and straightforward manner. The FDIC
invites comments on whether there are additional steps it could take to
make the rule easier to understand. For example:
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\40\ 12 U.S.C. 4809.
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Has the FDIC organized the material to suit your needs? If
not, how could this material be better organized?
Are the requirements in the regulation clearly stated? If
not, how could the regulation be more clearly stated?
Does the regulation contain language or jargon that is not
clear? If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes to the format would make the regulation
easier to understand? What else could we do to make the regulation
easier to understand?
List of Subjects in 12 CFR Part 363
Accounting, Administrative practice and procedure, Banks, banking,
Reporting and recordkeeping requirements.
Authority and Issuance
For the reasons stated in the preamble, the FDIC amends part 363 of
chapter 1 of title 12, Code of Federal Regulations, as follows:
PART 363--ANNUAL INDEPENDENT AUDITS AND REPORTING REQUIREMENTS
0
1. The authority citation for part 363 is revised to read as follows:
Authority: 12 U.S.C. 1819, 1831m.
0
2. Revise Sec. 363.1(a) to read as follows:
Sec. 363.1 Scope and definitions.
(a) Applicability. (1) This part applies to any insured depository
institution with respect to any fiscal year in which its consolidated
total assets as of the beginning of such fiscal year are $500 million
or more. Notwithstanding the foregoing and for all requirements in this
part, with respect to any fiscal year ending in 2021, an insured
depository institution's consolidated total assets shall be determined
based on the lesser of (a) an insured depository institution's
consolidated total assets as of December 31, 2019, or (b) an insured
depository institution's consolidated total assets as of the beginning
of its fiscal year ending in 2021. The requirements specified in this
part are in addition to any other statutory and regulatory requirements
otherwise applicable to an insured depository institution.
(2) Until December 31, 2021, the FDIC reserves the authority to
require an insured depository institution to comply with one or more
requirements under this part if the FDIC determines that asset growth
was related to a merger or acquisition.
* * * * *
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on October 20, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-23630 Filed 10-21-20; 4:15 pm]
BILLING CODE 6714-01-P
