Role of Supervisory Guidance
| Published date | 02 March 2021 |
| Citation | 86 FR 12079 |
| Record Number | 2021-01537 |
| Section | Rules and Regulations |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 86 Issue 39 (Tuesday, March 2, 2021)
[Federal Register Volume 86, Number 39 (Tuesday, March 2, 2021)]
[Rules and Regulations]
[Pages 12079-12086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01537]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 86, No. 39 / Tuesday, March 2, 2021 / Rules
and Regulations
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 302
RIN 3064-AF32
Role of Supervisory Guidance
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule.
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SUMMARY: The FDIC is adopting a final rule that codifies the
Interagency Statement Clarifying the Role of Supervisory Guidance,
issued by the FDIC, Board of Governors of the Federal Reserve System
(Board), Office of the Comptroller of the Currency, Treasury (OCC),
National Credit Union Administration (NCUA), and Bureau of Consumer
Financial Protection (Bureau) (collectively, the agencies) on September
11, 2018 (2018 Statement). By codifying the 2018 Statement, with
amendments, the final rule confirms that the FDIC will continue to
follow and respect the limits of administrative law in carrying out its
supervisory responsibilities. The 2018 Statement reiterated well-
established law by stating that, unlike a law or regulation,
supervisory guidance does not have the force and effect of law. As
such, supervisory guidance does not create binding legal obligations
for the public. Because it is incorporated into the final rule, the
2018 Statement, as amended, is binding on the FDIC. The final rule
adopts the rule as proposed without substantive changes.
DATES: The final rule is effective on April 1, 2021.
FOR FURTHER INFORMATION CONTACT: Rae-Ann Miller, Senior Deputy
Director, (202) 898-3898; Karen Jones Currie, Senior Examination
Specialist, (202) 898-3981; Supervisory Examinations Branch, Division
of Risk Management and Supervision; Luke H. Brown, Associate Director,
(202) 898-3842; David Friedman, Senior Policy Analyst, (202) 898-7168,
Supervisory Policy, Division of Depositor and Consumer Protection;
William Piervincenzi, Supervisory Counsel, (202) 898-6957; Kathryn J.
Marks, Counsel, (202) 898-3896; Jennifer M. Jones, Counsel, (202) 898-
6768, [email protected], Supervision and Legislation Branch, 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:
I. Background
The FDIC recognizes the important distinction between issuances
that serve to implement acts of Congress (known as ``regulations'' or
``legislative rules'') and non-binding supervisory guidance
documents.\1\ Regulations create binding legal obligations. Supervisory
guidance is issued by an agency to ``advise the public prospectively of
the manner in which the agency proposes to exercise a discretionary
power'' and does not create binding legal obligations.\2\
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\1\ Regulations are commonly referred to as legislative rules
because regulations have the ``force and effect of law.'' Perez v.
Mortgage Bankers Association, 575 U.S. 92, 96 (2015) (citations
omitted).
\2\ See Chrysler v. Brown, 441 U.S. 281, 302 (1979) (quoting the
Attorney General's Manual on the Administrative Procedure Act at 30
n.3 (1947) (Attorney General's Manual) and discussing the
distinctions between regulations and general statements of policy,
of which supervisory guidance is one form).
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In recognition of the important distinction between rules and
guidance, on September 11, 2018, the agencies issued the Interagency
Statement Clarifying the Role of Supervisory Guidance (2018 Statement)
to explain the role of supervisory guidance and describe the agencies'
approach to supervisory guidance.\3\ As noted in the 2018 Statement,
the agencies issue various types of supervisory guidance to their
respective supervised institutions, including, but not limited to,
interagency statements, advisories, bulletins, policy statements,
questions and answers, and frequently asked questions. Supervisory
guidance outlines the agencies' supervisory expectations or priorities
and articulates the agencies' general views regarding practices for a
given subject area. Supervisory guidance often provides examples of
practices that mitigate risks, or that the agencies generally consider
to be consistent with safety-and-soundness standards or other
applicable laws and regulations, including those designed to protect
consumers.\4\ The agencies noted in the 2018 Statement that supervised
institutions at times request supervisory guidance and that guidance is
important to provide clarity to these institutions, as well as
supervisory staff, in a transparent way that helps to ensure
consistency in the supervisory approach.\5\
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\3\ See https://www.fdic.gov/news/financial-institution-letters/2018/fil18049.html.
\4\ While supervisory guidance offers guidance to the public on
the FDIC's approach to supervision under statutes and regulations
and safe and sound practices, the issuance of guidance is
discretionary and is not a prerequisite to the FDIC's exercise of
its statutory and regulatory authorities. This point reflects the
fact that statutes and legislative rules, not statements of policy,
set legal requirements.
\5\ The Administrative Conference of the United States (ACUS)
has recognized the important role of guidance documents and has
stated that guidance can ``make agency decision-making more
predictable and uniform and shield regulated parties from unequal
treatment, unnecessary costs, and unnecessary risk, while promoting
compliance with the law.'' ACUS, Recommendation 2017-5, Agency
Guidance Through Policy Statements at 2 (adopted December 14, 2017),
available at https://www.acus.gov/recommendation/agency-guidance-through-policy-statements. ACUS also suggests that ``policy
statements are generally better [than legislative rules] for dealing
with conditions of uncertainty and often for making agency policy
accessible.'' Id. ACUS's reference to ``policy statements'' refers
to the statutory text of the APA, which provides that notice and
comment is not required for ``general statements of policy.'' The
phrase ``general statements of policy'' has commonly been viewed by
courts, agencies, and administrative law commentators as including a
wide range of agency issuances, including guidance documents.
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The 2018 Statement restated existing law and reaffirmed the
agencies' understanding that supervisory guidance does not create
binding, enforceable legal obligations. The 2018 Statement reaffirmed
that the agencies do not issue supervisory criticisms for
``violations'' of supervisory guidance and described the appropriate
use of supervisory guidance by the agencies. In the 2018 Statement, the
agencies also expressed their intention to (1) limit the use of
numerical thresholds in guidance; (2) reduce the issuance of multiple
supervisory guidance documents on the same topic; (3) continue efforts
to make the role of supervisory guidance clear in communications to
examiners and supervised institutions; and (4) encourage supervised
institutions to discuss their concerns about
[[Page 12080]]
supervisory guidance with their agency contact.
On November 5, 2018, the OCC, Board, FDIC, and Bureau each received
a petition for a rulemaking (Petition), as permitted under the
Administrative Procedure Act (APA),\6\ requesting that the agencies
codify the 2018 Statement.\7\ The Petition argued that a rule on
guidance is necessary to bind future agency leadership and staff to the
2018 Statement's terms. The Petition also suggested there are
ambiguities in the 2018 Statement concerning how supervisory guidance
is used in connection with matters requiring attention, matters
requiring immediate attention (collectively, MRAs), as well as in
connection with other supervisory actions that should be clarified
through a rulemaking. Finally, the Petition called for the rulemaking
to implement changes in the agencies' standards for issuing MRAs.
Specifically, the Petition requested that the agencies limit the role
of MRAs to addressing circumstances in which there is a violation of a
statute, regulation, or order, or demonstrably unsafe or unsound
practices.
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\6\ 5 U.S.C. 553(e).
\7\ See Petition for Rulemaking on the Role of Supervisory
Guidance, available at https://bpi.com/wp-content/uploads/2018/11/BPI_PFR_on_Role_of_Supervisory_Guidance_Federal_Reserve.pdf. The
Petitioners did not submit a petition to the NCUA, which has no
supervisory authority over the financial institutions that are
represented by Petitioners. The NCUA chose to join the Proposed Rule
on its own initiative.
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II. The Proposed Rule and Comments Received
On November 5, 2020, the agencies issued a proposed rule (Proposed
Rule or Proposal) that would have codified the 2018 Statement, with
clarifying changes, as an appendix to proposed rule text.\8\ The
Proposed Rule would have superseded the 2018 Statement. The rule text
would have provided that an amended version of the 2018 Statement is
binding on each respective agency.
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\8\ 85 FR 70512 (November 5, 2020).
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Clarification of the 2018 Statement
The Petition expressed support for the 2018 Statement and
acknowledged that it addresses many issues of concern for the
Petitioners relating to the use of supervisory guidance. The Petition
expressed concern, however, that the 2018 Statement's reference to not
basing ``criticisms'' on violations of supervisory guidance has led to
confusion about whether MRAs are covered by the 2018 Statement.
Accordingly, the agencies proposed to clarify in the Proposed Rule that
the term ``criticize'' includes the issuance of MRAs and other
supervisory criticisms, including those communicated through matters
requiring board attention, documents of resolution, and supervisory
recommendations (collectively, supervisory criticisms).\9\ As such, the
agencies reiterated that examiners will not base supervisory criticisms
on a ``violation'' of or ``non-compliance'' with supervisory
guidance.\10\ The agencies noted that, in some situations, examiners
may reference (including in writing) supervisory guidance to provide
examples of safe and sound conduct, appropriate consumer protection and
risk management practices, and other actions for addressing compliance
with laws or regulations. The agencies also reiterated that they will
not issue an enforcement action on the basis of a ``violation'' of or
``non-compliance'' with supervisory guidance. The Proposed Rule
reflected these clarifications.\11\
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\9\ The agencies use different terms to refer to supervisory
actions that are similar to MRAs and Matters Requiring Immediate
Attention (MRIAs), including matters requiring board attention
(MRBAs), documents of resolution, and supervisory recommendations.
\10\ For the sake of clarification, one source of law among many
that can serve as a basis for a supervisory criticism is the
Interagency Guidelines Establishing Standards for Safety and
Soundness, see 12 CFR part 30, appendix A, 12 CFR part. 208,
appendix D-1, and 12 CFR part 364, appendix A. These Interagency
Guidelines were issued using notice and comment and pursuant to
express statutory authority in 12 U.S.C. 1831p-1(d)(1) to adopt
safety and soundness standards either by ``regulation or
guideline.''
\11\ The 2018 Statement contains the following sentence:
``Examiners will not criticize a supervised financial institution
for a `violation' of supervisory guidance.'' 2018 Statement at 2. As
revised in the Proposed Rule, this sentence read as follows:
``Examiners will not criticize (including through the issuance of
matters requiring attention, matters requiring immediate attention,
matters requiring board attention, documents of resolution, and
supervisory recommendations) a supervised financial institution for,
and agencies will not issue an enforcement action on the basis of, a
`violation' of or `non-compliance' with supervisory guidance.''
Proposed Rule (emphasis added). As discussed infra in footnote 13,
the Proposed Rule also removed the sentences in the 2018 Statement
that referred to ``citation,'' which the Petition suggested had been
confusing. These sentences were also removed to clarify that the
focus of the Proposed Rule related to the use of guidance, not the
standards for MRAs.
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The Petition requested further that these supervisory criticisms
should not include ``generic'' or ``conclusory'' references to safety
and soundness. The agencies agreed that supervisory criticisms should
continue to be specific as to practices, operations, financial
conditions, or other matters that could have a negative effect on the
safety and soundness of the financial institution, could cause consumer
harm, or could cause violations of laws, regulations, final agency
orders, or other legally enforceable conditions. Accordingly, the
agencies included language reflecting this practice in the Proposed
Rule.
The Petition also suggested that MRAs, as well as memoranda of
understanding, examination downgrades, and any other formal examination
mandate or sanction, should be based only on a violation of a statute,
regulation, or order, including a ``demonstrably unsafe or unsound
practice.'' \12\ As noted in the Proposed Rule, examiners all take
steps to identify deficient practices before they rise to violations of
law or regulation or before they constitute unsafe or unsound banking
practices. The agencies stated that they continue to believe that early
identification of deficient practices serves the interest of the public
and of supervised institutions. Early identification protects the
safety and soundness of banks, promotes consumer protection, and
reduces the costs and risk of deterioration of financial condition from
deficient practices resulting in violations of laws or regulations,
unsafe or unsound conditions, or unsafe or unsound banking practices.
The Proposed Rule also noted that the agencies have different
supervisory processes, including for issuing supervisory criticisms.
For these reasons, the agencies did not propose revisions to their
respective supervisory practices relating to supervisory criticisms.
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\12\ The Petition asserted that the federal banking agencies
rely on 12 U.S.C. 1818(b)(1) when issuing MRAs based on safety-and-
soundness matters. Through statutory examination and reporting
authorities, Congress has conferred upon the agencies the authority
to exercise visitorial powers with respect to supervised
institutions. The Supreme Court has indicated support for a broad
reading of the agencies' visitorial powers. See, e.g., Cuomo v.
Clearing House Assn L.L.C., 557 U.S. 519 (2009); United States v.
Gaubert, 499 U.S. 315 (1991); and United States v. Philadelphia Nat.
Bank, 374 U.S. 321 (1963). The visitorial powers facilitate early
identification of supervisory concerns that may not rise to a
violation of law, unsafe or unsound banking practice, or breach of
fiduciary duty under 12 U.S.C. 1818.
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The agencies also noted that the 2018 Statement was intended to
focus on the appropriate use of supervisory guidance in the supervisory
process, rather than the standards for supervisory criticisms. To
address any confusion concerning the scope of the 2018 Statement, the
Proposed Rule removed two sentences from the 2018 Statement concerning
grounds for ``citations'' and the handling of deficiencies that do not
constitute violations of law.\13\
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\13\ The following sentences from the 2018 Statement were not
present in the Proposed Rule: ``Rather, any citations will be for
violations of law, regulation, or non-compliance with enforcement
orders or other enforceable conditions. During examinations and
other supervisory activities, examiners may identify unsafe or
unsound practices or other deficiencies in risk management,
including compliance risk management, or other areas that do not
constitute violations of law or regulation.'' 2018 Statement at 2.
The agencies did not intend these deletions to indicate a change in
supervisory policy.
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[[Page 12081]]
Comments on the Proposed Rule
A. Overview
The five agencies received approximately 30 unique comments
concerning the Proposed Rule.\14\ The FDIC discusses below those
comments that are potentially relevant to the FDIC.\15\ Commenters
representing trade associations for banking institutions and other
businesses, state bankers' associations, individual financial
institutions, and one member of Congress expressed general support for
the proposed rule. These commenters supported codification of the 2018
Statement and the reiteration by the agencies that guidance does not
have the force of law and cannot give rise to binding, enforceable
legal obligations. One of these commenters stated that the Proposal
would serve the interests of consumers and competition by clarifying
the law for institutions and potentially removing ambiguities that
could deter the development of innovative products that serve consumers
and business clients, without uncertainty regarding potential
regulatory consequences. These commenters expressed strong support as
well for the clarification in the Proposed Rule that the agencies will
not criticize, including through the issuance of ``matters requiring
attention,'' a supervised financial institution for a ``violation'' of,
or ``non-compliance'' with, supervisory guidance.
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\14\ Of the comments received, some comments were not submitted
to all agencies, and some comments were identical. Note that this
total excludes comments that were directed at an unrelated
rulemaking by the Financial Crimes Enforcement Network of the
Department of the Treasury (FinCEN). This final rule does not
specifically discuss those comments that are only potentially
relevant to other agencies.
\15\ This final rule does not specifically discuss those
comments that are only potentially relevant to other agencies.
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One commenter agreed with the agencies that supervisory criticisms
should not be limited to violation of statutes, regulations, or orders,
including a ``demonstrable unsafe or unsound practice'' and that
supervisory guidance remains a beneficial tool to communicate
supervisory expectations to the industry. The commenter stated that the
proactive identification of supervisory criticism or deficiencies that
do not constitute violations of law facilitates forward-looking
supervision, which helps address problems before they warrant a formal
enforcement action. The commenter noted as well that supervisory
guidance provides important insight to the industry and ensures
consistency in the supervisory approach and that supervised
institutions frequently request supervisory guidance. The commenter
observed that the COVID-19 pandemic has amplified the requests for
supervisory guidance and interpretation and that it is apparent
institutions want clarity and guidance from regulators.
Two commenters, both public interest advocacy groups, opposed the
proposed rule, suggesting that codifying the 2018 Statement may
undermine the important role that supervisory guidance can play by
informing supervisory criticism, rather than merely clarifying that it
will not serve as the basis for enforcement actions. One commenter
stated that it is essential for agencies to have the prophylactic
authority to base criticisms on imprudent bank practices that may not
yet have ripened into violations of law or significant safety and
soundness concerns. The commenter stated that this is particularly
important with respect to large banks, where delay in addressing
concerns could lead to a broader crisis. One commenter stated that the
agencies have not explained the benefits that would result from the
rule or demonstrated how the rule will promote safety and soundness or
consumer protection. The commenter argued that supervision is different
from other forms of regulation and requires supervisory discretion,
which could be constrained by the rule. One of these commenters argued
that the Proposal would send a signal that banking institutions have
wider discretion to ignore supervisory guidance.
B. Scope of Rule
Several industry commenters requested that the Proposed Rule cover
interpretive rules and clarify that interpretive rules do not have the
force and effect of law. One commenter stated that the agencies should
clarify whether they believe that interpretive rules can be binding.
The commenter argued that, under established legal principles,
interpretive rules can be binding on the agency that issues them but
not on the public. Some commenters suggested that the agencies follow
ACUS recommendations for issuing interpretive rules and that the
agencies should clarify when particular guidance documents are (or are
not) interpretive rules and allow the public to petition to change an
interpretation. A number of commenters requested that the agencies
expand the statement to address the standards that apply to MRAs and
other supervisory criticisms, a suggestion made in the Petition.
C. Role of Guidance Documents
Several commenters recommended that the agencies clarify that the
practices described in supervisory guidance are merely examples of
conduct that may be consistent with statutory and regulatory
compliance, not expectations that may form the basis for supervisory
criticism. One commenter suggested that the agencies state that when
agencies offer examples of safe and sound conduct, compliance with
consumer protection standards, appropriate risk management practices,
or acceptable practices through supervisory guidance or interpretive
rules, the agencies will treat adherence to practices outlined in that
supervisory guidance or interpretive rule as a safe harbor from
supervisory criticism. One commenter also requested that the agencies
make clear that guidance that goes through public comment, as well as
any examples used in guidance, is not binding. The commenter also
requested that the agencies affirm that they will apply statutory
factors while processing applications.
One commenter argued that guidance provides valuable information to
supervisors about how their discretion should be exercised and
therefore plays an important role in supervision. As an example,
according to this commenter, 12 U.S.C. 1831p-1 and 12 U.S.C. 1818
recognize the discretionary power conferred on the Federal banking
agencies \16\ which is separate from the power to issue regulations.
The commenter noted that, pursuant to these statutes, regulators may
issue cease and desist orders based on reasonable cause to believe that
an institution has engaged, is engaging, or is about to engage in an
unsafe and unsound practice, separately and apart from whether the
institution has technically violated a law or regulation. The commenter
added that Congress entrusted the Federal banking agencies with the
power to determine whether practices are unsafe and unsound and attempt
to halt such practices through supervision, even if a specific case may
not constitute a violation of a written law or regulation.
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\16\ The Federal banking agencies are the OCC, Board, and FDIC.
12 U.S.C. 1813.
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D. Supervisory Criticisms
Several commenters addressed supervisory criticisms and how they
relate to guidance. These commenters suggested that supervisory
criticisms
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should be specific as to practices, operations, financial conditions,
or other matters that could have a negative effect. These commenters
also suggested that MRAs, memoranda of understanding, and any other
formal written mandates or sanctions should be based only on a
violation of a statute or regulation. Similarly, these commenters
argued that there should be no references to guidance in written formal
actions and that banking institutions should be reassured that they
will not be criticized or cited for a violation of guidance when no law
or regulation is cited. One commenter suggested that it would instead
be appropriate to discuss supervisory guidance privately, rather than
publicly, potentially during the pre-exam meetings or during
examination exit meetings. Another commenter suggested that, while
referencing guidance in supervisory criticism may be useful at times,
agencies should provide safeguards to prevent such references from
becoming the de facto basis for supervisory criticisms. One commenter
stated that examiners also should not criticize community banks in
their final written examination reports for not complying with ``best
practices'' unless the criticism involves a violation of bank policy or
regulation. The commenter added that industry best practices should be
transparent enough and sufficiently known throughout the industry
before being cited in an examination report. One commenter requested
that examiners should not apply large bank practices to community banks
that have a different, less complex and more conservative business
model. One commenter asserted that MRAs should not be based on
``reputational risk,'' but rather on the underlying conduct giving rise
to concerns and asked the agencies to address this in the final rule.
Commenters that opposed the Proposal did not support restricting
supervisory criticism or sanctions to explicit violations of law or
regulation. One commenter expressed concern that requiring supervisors
to wait for an explicit violation of law before issuing criticism would
effectively erase the line between supervision and enforcement.
According to the commenter, it would eliminate the space for
supervision as an intermediate practice of oversight and cooperative
problem-solving between banks and the regulators who support and manage
the banking system and would also clearly violate the intent of the law
in 12 U.S.C. 1818(b). One commenter emphasized the importance of bank
supervisors basing their criticisms on imprudent bank practices that
may not yet have ripened into violations of laws or rules but could
undermine safety and soundness or pose harm to consumers if left
unaddressed.
One commenter argued that the agencies should state clearly that
guidance can and will be used by supervisors to inform their
assessments of banks' practices; and that it may be cited as, and serve
as the basis for, criticisms. According to the commenter, even under
the legal principles described in the Proposal, it is permissible for
guidance to be used as a set of standards that may inform a criticism,
provided that application of the guidance is used for corrective
purposes, if not to support an enforcement action.
According to one commenter, the Proposal makes fine conceptual
distinctions between, for example, issuing supervisory criticisms ``on
the basis of'' guidance and issuing supervisory criticisms that make
``reference'' to supervisory guidance. The commenter suggested that is
a distinction that it may be difficult for ``human beings to parse in
practice.'' According to the commenter, a rule that makes such a
distinction is likely to have a chilling effect on supervisors
attempting to implement policy in the field. According to another
commenter, the language allowing examiners to reference supervisory
guidance to provide examples is too vague and threatens to marginalize
the role of guidance and significantly reduce its usefulness in the
process of issuing criticisms designed to correct deficient bank
practices.
E. Legal Authority and Visitorial Powers
One commenter questioned the Federal banking agencies' reference in
the Proposal to visitorial powers as an additional authority for early
identification of supervisory concerns that may not rise to a violation
of law, unsafe or unsound banking practice, or breach of fiduciary duty
under 12 U.S.C. 1818.
F. Issuance and Management of Supervisory Guidance
Several commenters made suggestions about how the agencies should
issue and manage supervisory guidance. Some commenters suggested that
the agencies should delineate clearly between regulations and
supervisory guidance. Commenters encouraged the agencies to regularly
review, update, and potentially rescind outstanding guidance. One
commenter suggested that the agencies rescind outstanding guidance that
functions as rule, but has not gone through notice and comment. One
commenter suggested that the agencies memorialize their intent to
revisit and potentially rescind existing guidance, as well as limit
multiple guidance documents on the same topic. Commenters suggested
that supervisory guidance should be easy to find, readily available,
online, and in a format that is user-friendly and searchable.
One commenter encouraged the agencies to issue principles-based
guidance that avoids the kind of granularity that could be misconstrued
as binding expectations. According to this commenter, the agencies can
issue separate frequently asked questions with more detailed
information, but should clearly identify these as non-binding
illustrations. This commenter also encouraged the agencies to publish
proposed guidance for comment when circumstances allow. Another
commenter requested that the agencies issue all ``rules'' as defined by
the APA through the notice-and-comment process.
One commenter expressed concern that the agencies will aim to
reduce the issuance of multiple supervisory guidance documents and will
thereby reduce the availability of guidance in circumstances where
guidance would be valuable.
Responses to Comments
As stated in the Proposed Rule, the 2018 Statement was intended to
focus on the appropriate use of supervisory guidance in the supervisory
process, rather than the standards for supervisory criticisms. The
standards for issuing MRAs or other supervisory actions were,
therefore, outside the scope of this rulemaking. For this reason, and
for reasons discussed earlier, the final rule does not address the
standards for MRAs and other supervisory actions. Similarly, because
the FDIC is not addressing its approach to supervisory criticism in the
final rule, including any criticism related to reputation risk, the
final rule does not address supervisory criticisms relating to
``reputation risk.'' Nonetheless, the FDIC affirms that it does not
issue supervisory recommendations, including MRBAs \17\ solely based on
reputation risk.
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\17\ The FDIC does not issue MRAs or MRIAs. Rather, the FDIC
issues MRBAs, which are a subset of supervisory recommendations. See
Statement of the FDIC Board of Directors on the Development and
Communication of Supervisory Recommendations available at https://www.fdic.gov/about/governance/recommendations.html.
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[[Page 12083]]
With respect to the comments on coverage of interpretive rules, the
FDIC agrees with the commenter that interpretive rules do not, alone,
``have the force and effect of law'' and must be rooted in, and derived
from, a statute or regulation.\18\ While interpretive rules and
supervisory guidance are similar in lacking the force and effect of
law, interpretive rules and supervisory guidance are distinct under the
APA and its jurisprudence and are generally issued for different
purposes.\19\ Interpretive rules are typically issued by an agency to
advise the public of the agency's construction of the statutes and
rules that it administers,\20\ whereas general statements of policy,
such as supervisory guidance, advise the public of how an agency
intends to exercise its discretionary powers.\21\ To this end, guidance
generally reflects an agency's policy views, for example, on safe and
sound risk management practices. On the other hand, interpretive rules
generally resolve ambiguities regarding requirements imposed by
statutes and regulations. Because supervisory guidance and interpretive
rules have different characteristics and serve different purposes, the
FDIC has decided that the final rule will continue to cover supervisory
guidance only.
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\18\ See Mortgage Bankers Association, 575 U.S. at 96.
\19\ Questions concerning the legal and supervisory nature of
interpretive rules are case-specific and have engendered debate
among courts and administrative law commentators. The FDIC takes no
position in this rulemaking on those specific debates. See, e.g., R.
Levin, Rulemaking and the Guidance Exemption, 70 Admin. L. Rev. 263
(2018) (discussing the doctrinal differences concerning the status
of interpretive rules under the APA); see also Nicholas R. Parillo,
Federal Agency Guidance and the Powder to Bind: An Empirical Study
of Agencies and Industries, 36 Yale J. Reg 165, 168 n.6 (2019)
(``[w]hether interpretive rules are supposed to be nonbinding is a
question subject to much confusion that is not fully settled''); see
also ACUS, Recommendation 2019-1, Agency Guidance Through
Interpretive Rules (Adopted June 13, 2019), available at https://www.acus.gov/recommendation/agency-guidance-through-interpretive-rules (noting that courts and commentators have different views on
whether interpretive rules bind an agency and effectively bind the
public through the deference given to agencies' interpretations of
their own rules under Auer v. Robbins, 519 U.S. 452 (1997)).
\20\ Mortgage Bankers Association, 575 U.S. at 97 (citing
Shalala v. Guernsey Memorial Hospital, 514 U.S. 87, 99 (1995));
accord Attorney General's Manual at 30 n.3.
\21\ See Chrysler v. Brown, 441 U.S. at 302 n.31 (quoting
Attorney General's Manual at 30 n.3); see also, e.g., American
Mining Congress v. Mine Safety & Health Administration, 995 F.2d
1106, 1112 (D.C. Cir. 1993) (outlining tests in the D.C. Circuit for
assessing whether an agency issuance is an interpretive rule).
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With respect to the question of whether to adopt ACUS's procedures
for allowing the public to request reconsideration or revision of an
interpretive rule, this rulemaking, again, does not address
interpretive rules. As such, the FDIC is not adding procedures for
challenges to interpretive rules through this rulemaking.
In response to the comment that the agencies treat examples in
guidance as ``safe harbors'' from supervisory criticism, the FDIC
agrees that examples offered in supervisory guidance can provide
insight about practices that, in general, may lead to safe and sound
operation and compliance with regulations and statutes. The examples in
guidance, however, are generalized. When an institution implements
examples, examiners must consider the facts and circumstances of that
institution in assessing the application of those examples. In
addition, the underlying legal principle of supervisory guidance is
that it does not create binding legal obligation for either the public
or an agency. As such, the FDIC does not deem examples used in
supervisory guidance to categorically establish safe harbors from
supervisory criticism.
In response to the comments that the Proposal may undermine the
important role that supervisory guidance can play in informing
supervisory criticism and by serving to address conditions before those
conditions lead to enforcement actions, the FDIC agrees that the
appropriate use of supervisory guidance generates a more collaborative
and constructive regulatory process that supports the safety and
soundness and compliance of institutions, thereby diminishing the need
for enforcement actions. As noted by ACUS, guidance can make agency
decision-making more predictable and uniform and shield regulated
parties from unequal treatment, unnecessary costs, and unnecessary
risk, while promoting compliance with the law. The FDIC intends,
therefore, to continue using guidance as part of the supervisory
process. The FDIC does not view the final rule as weakening the role of
guidance in the supervisory process and the FDIC will continue to use
guidance to support the safety and soundness of banks and promote
compliance with consumer protection laws and regulations.
Further, the FDIC does not agree with one commenter's assertion
that the Proposal made an unclear distinction between, on the one hand,
inappropriate supervisory criticism for a ``violation'' of or ``non-
compliance'' with supervisory guidance, and, on the other hand, FDIC
examiners' use of supervisory guidance to reference examples of safe
and sound conduct, appropriate consumer protection and risk management
practices, and other actions for addressing compliance with laws or
regulations. This approach appropriately implements the principle that
institutions are not required to follow supervisory guidance in itself
but may find such guidance useful.
With respect to the comment that visitorial powers do not provide
the Federal banking agencies with authority to issue MRAs or other
supervisory criticisms, the FDIC disagrees. The FDIC's visitorial
powers are well-established. The Supreme Court's decision in Cuomo v.
Clearing House Assn L.L.C. explained that the visitation included the
``exercise of supervisory power.'' \22\ The Court ruled that the
``power to enforce the law exists separate and apart from the power of
visitation.'' \23\ While the Cuomo decision involved the question of
which powers may be exercised by state governments (and ruled that
states could exercise law enforcement powers, but could not exercise
visitorial powers), the decision did not dispute that the Federal
banking agencies possess both these powers. The Court in Cuomo
explained that visitorial powers entailed ``oversight and
supervision,'' while the Court's earlier decision in Watters v.
Wachovia Bank, N.A. explained that visitorial powers entailed ``general
supervision and control.'' \24\ Accordingly, visitorial powers include
the power to issue supervisory criticisms independent of the agencies'
authority to enforce applicable laws or ensure safety and soundness.
For these reasons, the FDIC reaffirms the statement in the preamble to
the Proposed Rule that such visitorial powers have been conferred
through statutory examination and reporting authorities, which
facilitate the FDIC's identification of supervisory concerns that may
not rise to a violation of law, unsafe or unsound practice, or breach
of fiduciary duty under 12 U.S.C. 1818. These statutory examination and
reporting authorities pre-existed 12 U.S.C. 1818, which neither
superseded nor replaced such authorities. The FDIC has been vested with
statutory examination and reporting authorities with respect to banks
under its supervision.\25\
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\23\ Cuomo v. Clearing House Assn L.L.C., 557 U.S. 519,536
(2009).
\23\ Id. at 533.
\24\ Watters v. Wachovia Bank, N.A., 550 U.S. 1, 127 (2007).
\25\ The commenter's reading of the agencies' examination and
reporting authorities would assert that the agencies may examine
supervised institutions and require reports, but not make findings
based on such examinations and reporting, unless the finding is
sufficient to warrant a formal enforcement action under the standard
set out in 12 U.S.C. 1818. This reading is inconsistent with the
history of federal banking supervision, including as described in
the cases cited in the Proposed Rule.
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[[Page 12084]]
In response to comments regarding the role of public comment for
supervisory guidance, the FDIC notes that it has made clear through the
2018 Statement and in this final rule that supervisory guidance
(including guidance that goes through public comment) does not create
binding, enforceable legal obligations. Rather, the FDIC in some
instances issues supervisory guidance for comment in order to improve
its understanding of an issue, gather information, or seek ways to
achieve a supervisory objective most effectively. Similarly, examples
that are included in supervisory guidance (including guidance that goes
through public comment) are not binding on institutions. Rather, these
examples are intended to be illustrative of ways a supervised
institution may implement safe and sound practices, appropriate
consumer protection, prudent risk management, or other actions in
furtherance of compliance with laws or regulations. Relatedly, the FDIC
does not agree with one comment that it should use notice-and-comment
procedures, without exception, to issue all ``rules'' as defined by the
APA, which would include supervisory guidance. Congress has established
longstanding exceptions in the APA from the notice and comment process
for certain ``rules,'' including for general statements of policy like
supervisory guidance and for interpretive rules. As one court has
explained, Congress intended to ``accommodate situations where the
policies promoted by public participation in rulemaking are outweighed
by the countervailing considerations of effectiveness, efficiency,
expedition and reduction in expense.'' \26\
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\26\ Am. Hosp. Ass'n v. Bowen, 834 F.2d 1037, 1045 (D.C. Cir.
1987). The specific contours of these exceptions are the subject of
an extensive body of case law.
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With respect to the commenter's request that the agencies affirm
that they will apply statutory factors while processing applications,
the FDIC affirms that the agency will continue to consider and apply
all applicable statutory factors when processing applications.
In response to the question raised by some commenters concerning
potential confusion between supervisory guidance and interpretive
rules, the FDIC notes that interpretive rules are outside the scope of
the rulemaking. In addition, as stated earlier, interpretive rules do
not, alone, ``have the force and effect of law'' and must be rooted in,
and derived from, a statute or regulation. While interpretive rules and
supervisory guidance are similar in lacking the force and effect of
law, interpretive rules and supervisory guidance are distinct under the
APA and its jurisprudence and are generally issued for different
purposes. The FDIC believes that when it issues an interpretive rule,
the fact that it is an interpretive rule is generally clear. In
addition, these comments relate to clarity in drafting, rather than a
matter that seems suitable for rulemaking.
In response to the two commenters opposing the Proposal, this final
rule does not undermine any of the FDIC's safety and soundness or other
authorities. Indeed, the final rule is designed to support the FDIC's
ability to supervise banks effectively. In addition, the FDIC notes the
question of the role of guidance has been one of interest to regulated
parties and other stakeholders over the past few years. The Petition
and the number of comments on the Proposal are a sign of this interest.
As such, the FDIC believes it will serve the public interest to
reaffirm the appropriate role of supervisory guidance. There are
inherent benefits to the supervisory process whenever institutions and
examiners have a clear understanding of their roles, including how
supervisory guidance can be used effectively within legal limits.
Therefore, the FDIC is proceeding with the rule as proposed.
In response to the commenter expressing concern that language in
the Statement on reducing multiple supervisory guidance documents on
the same topic will limit the FDIC's ability to provide valuable
guidance, the FDIC assures the commenter that this language will not
inhibit the FDIC from issuing new supervisory guidance when
appropriate.
Finally, the FDIC appreciates the other comments related to other
aspects of guidance or the supervisory process, but the FDIC does not
believe that they are best addressed in this rulemaking.
III. The Final Rule
For the reasons discussed above, the final rule adopts the Proposed
Rule without substantive changes. However, the FDIC has decided to
issue a final rule that is specifically addressed to the FDIC and FDIC-
supervised institutions, rather than the joint version that the five
agencies included in their joint Proposal. Although many of the
comments were applicable to all of the agencies, some comments were
specific to particular agencies or to groups of agencies. Having
separate final rules has enabled agencies to better focus on explaining
any agency-specific issues to their respective audiences of supervised
institutions and agency employees.
IV. Administrative Law Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 \27\ (PRA) states that no
agency may conduct or sponsor, nor is the respondent 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 final rule and determined that it does not contain
any information collection requirements subject to the PRA.
Accordingly, no submissions to OMB will be made with respect to this
final rule.
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\27\ 44 U.S.C. 3501-3521.
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a final rulemaking, an agency prepare and make
available for public comment a final regulatory flexibility analysis
describing the impact of the final rule on small entities.\28\ However,
a regulatory flexibility analysis is not required if the agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities.\29\ The Small Business
Administration (SBA) has defined ``small entities'' to include banking
organizations with total assets of less than or equal to $600 million
that are independently owned and operated or owned by a holding company
with less than or equal to $600 million in total assets.\30\ Generally,
the FDIC considers a significant effect to be a quantified effect in
excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-supervised institutions.
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\28\ 5 U.S.C. 601 et seq.
\29\ 5 U.S.C. 605(b).
\30\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
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As of September 30, 2020, the FDIC supervised 3,245 institutions,
of which
[[Page 12085]]
2,434 were considered small for purposes of RFA.\31\ This final rule
does not impose any obligations on FDIC-supervised entities, and FDIC-
supervised entities do not need to take any action in response to this
rule. For these reasons, and under section 605(b) of the RFA, the FDIC
certifies that the final rule will not have a significant economic
impact on a substantial number of small FDIC-supervised institutions.
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\31\ FDIC Consolidated Reports of Condition and Income Data,
September 30, 2020.
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C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \32\ 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
final rule in a simple and straightforward manner and did not receive
any comments on the use of plain language in the Proposed Rule.
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\32\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999), 12 U.S.C. 4809.
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D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\33\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions (IDIs), each Federal banking agency
must consider, consistent with principles 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.\34\ The FDIC has determined that the final rule will not
impose additional reporting, disclosure, or other requirements on IDIs;
therefore, the requirements of the RCDRIA do not apply.
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\33\ 12 U.S.C. 4802(a).
\34\ 12 U.S.C. 4802.
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E. Congressional Review Act
For purposes of Congressional Review Act, the OMB makes a
determination as to whether a final rule constitutes a ``major''
rule.\35\ If a rule is deemed a ``major rule'' by the OMB, the
Congressional Review Act generally provides that the rule may not take
effect until at least 60 days following its publication.\36\
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\35\ 5 U.S.C. 801 et seq.
\36\ 5 U.S.C. 801(a)(3).
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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.\37\ 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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\37\ 5 U.S.C. 804(2).
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List of Subjects in 12 CFR Part 302
Administrative practice and procedure, Banks, banking.
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
0
For the reasons set forth in the preamble, the FDIC adds part 302 to 12
CFR chapter III, subchapter A, to read as follows:
PART 302--USE OF SUPERVISORY GUIDANCE
Sec.
302.1 Purpose.
302.2 Implementation of the Statement Clarifying the Role of
Supervisory Guidance.
302.3 Rule of construction.
Appendix A to Part 302--Statement Clarifying the Role of Supervisory
Guidance
Authority: 5 U.S.C. 552; 12 U.S.C. 1818, 1819(a) (Seventh and
Tenth), 1831p-1.
Sec. 302.1 Purpose.
The FDIC issues regulations and guidance as part of its supervisory
function. This subpart reiterates the distinctions between regulations
and guidance, as stated in the Statement Clarifying the Role of
Supervisory Guidance (appendix A to this part) (Statement).
Sec. 302.2 Implementation of the Statement Clarifying the Role of
Supervisory Guidance.
The Statement describes the official policy of the FDIC with
respect to the use of supervisory guidance in the supervisory process.
The Statement is binding on the FDIC.
Sec. 302.3 Rule of construction.
This subpart does not alter the legal status of guidelines
authorized by statute, including but not limited to, 12 U.S.C. 1831p-1,
to create binding legal obligations.
Appendix A to Part 302--Statement Clarifying the Role of Supervisory
Guidance
Statement Clarifying the Role of Supervisory Guidance
The FDIC is issuing this statement to explain the role of
supervisory guidance and to describe the FDIC's approach to
supervisory guidance.
Difference Between Supervisory Guidance and Laws or Regulations
The FDIC issues various types of supervisory guidance, including
interagency statements, advisories, policy statements, questions and
answers, and frequently asked questions, to its supervised
institutions. A law or regulation has the force and effect of
law.\1\ Unlike a law or regulation, supervisory guidance does not
have the force and effect of law, and the FDIC does not take
enforcement actions based on supervisory guidance. Rather,
supervisory guidance outlines the FDIC's supervisory expectations or
priorities and articulates the FDIC's general views regarding
appropriate practices for a given subject area. Supervisory guidance
often provides examples of practices that the FDIC generally
considers consistent with safety-and-soundness standards or other
applicable laws and regulations, including those designed to protect
consumers. Supervised institutions at times request supervisory
guidance, and such guidance is important to provide insight to
industry, as well as supervisory staff, in a transparent way that
helps to ensure consistency in the supervisory approach.
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\1\ Government agencies issue regulations that generally have
the force and effect of law. Such regulations generally take effect
only after the agency proposes the regulation to the public and
responds to comments on the proposal in a final rulemaking document.
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Ongoing Efforts To Clarify the Role of Supervisory Guidance
The FDIC is clarifying the following policies and practices
related to supervisory guidance:
The FDIC intends to limit the use of numerical
thresholds or other ``bright-lines'' in describing expectations in
supervisory guidance. Where numerical thresholds are used, the FDIC
intends to clarify that the
[[Page 12086]]
thresholds are exemplary only and not suggestive of requirements.
The FDIC will continue to use numerical thresholds to tailor, and
otherwise make clear, the applicability of supervisory guidance or
programs to supervised institutions, and as required by statute.
Examiners will not criticize through supervisory
recommendations (including matters requiring board attention) a
supervised financial institution for, and the FDIC will not issue an
enforcement action on the basis of, a ``violation'' of or ``non-
compliance'' with supervisory guidance. In some situations,
examiners may reference (including in writing) supervisory guidance
to provide examples of safe and sound conduct, appropriate consumer
protection and risk management practices, and other actions for
addressing compliance with laws or regulations.
Supervisory criticisms should continue to be specific
as to practices, operations, financial conditions, or other matters
that could have a negative effect on the safety and soundness of the
financial institution, could cause consumer harm, or could cause
violations of laws, regulations, final agency orders, or other
legally enforceable conditions.
The FDIC also has at times sought, and may continue to
seek, public comment on supervisory guidance. Seeking public comment
on supervisory guidance does not mean that the guidance is intended
to be a regulation or have the force and effect of law. The comment
process helps the FDIC to improve its understanding of an issue, to
gather information on institutions' risk management practices, or to
seek ways to achieve a supervisory objective most effectively and
with the least burden on institutions.
The FDIC will aim to reduce the issuance of multiple
supervisory guidance documents on the same topic and will generally
limit such multiple issuances going forward.
The FDIC will continue efforts to make the role of supervisory
guidance clear in communications to examiners and to supervised
financial institutions and encourage supervised institutions with
questions about this statement or any applicable supervisory
guidance to discuss the questions with their appropriate agency
contact.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on January 19, 2021.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2021-01537 Filed 3-1-21; 8:45 am]
BILLING CODE 6714-01-P
