Weekly RoundUp
May 9, 2024

FDIC, OCC, and FHFA Issue Notice Regarding Proposed Rulemaking on Incentive-Based Compensation Arrangements

In this issue. The Federal Deposit Insurance Corporation (FDIC), the Office of Comptroller of the Currency (OCC), and the Federal Housing Finance Agency (FHFA) issued a joint notice regarding proposed rulemaking on incentive-based compensation arrangements; the Board of Governors of the Federal Reserve System (Federal Reserve), FDIC, and the OCC issued a guide to assist community banks to develop and implement third-party risk management practices; the Federal Reserve sought input on extending operating days to weekends and holidays for the Fedwire Funds Service (Fedwire Funds) and National Settlement Service (NSS); and the Securities Exchange Commission (SEC) charged an audit firm and its owner with massive fraud affecting more than 1,500 SEC filings. These and other developments are discussed in more detail below.

Regulatory Developments

FDIC, OCC, and FHFA Issue Notice Regarding Proposed Rulemaking on Incentive-Based Compensation Arrangements
On May 6, the FDIC, OCC, and FHFA issued a joint notice of proposed rulemaking concerning incentive-based compensation arrangements as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The proposal’s regulatory text was previously proposed in 2016. The proposed rule applies to depository institutions, registered broker-dealers, credit unions, investment advisers, Fannie Mae, Freddie Mac, and any other financial institution that regulators deem appropriate that have $1 billion or more in assets (covered financial institutions). The Dodd-Frank Act requires federal regulators to prohibit incentive-based compensation arrangements that encourage inappropriate risks by providing executive officers, employees, directors, or principal shareholders with excessive compensations, fees, or benefits, or that could lead to a material financial loss to the covered financial institution. It includes prohibitions on incentive-based compensation arrangements that do not balance risk and financial rewards, are not compatible with effective risk management and controls, and are not supported by strong corporate governance. The balance of risk and reward should include financial and non-financial measures of performance. Once the National Credit Union Administration, the Federal Reserve, and the SEC adopt the proposed rule, there will be a 60-day comment period.

Agencies Issue Guide to Assist Community Banks to Develop and Implement Third-Party Risk Management Practices
On May 3, the Federal Reserve, FDIC, and OCC released a guide to support community banks in managing risks posed by third-party relationships. The guide is intended to supplement the agencies’ June 2023 guidance to all banking institutions on the same topic but is more narrowly targeted toward community banks. The guide describes the life cycle of a third-party relationship with a bank, which is divided into five stages: (1) planning, (2) due diligence and third-party selection, (3) contract negotiation, (4) ongoing monitoring, and (5) termination. The agencies recommend that banks ask questions at each stage regarding the financial, legal, and security risks that the partnership poses. The agencies also include recommendations for setting up oversight of the third-party relationship by methods, such as periodic independent reviews.

Federal Reserve Seeks Input on Extending Operating Days and Hours for Fedwire Funds and National Settlement Services
On May 1, the Federal Reserve approved a proposal to increase the operating hours of the Fedwire Funds and NSS to “enhance the safety and efficiency of the U.S. payment system by extending the hours in which settlement in risk-free central bank money can occur.” Fedwire Funds and NSS are large-value payment services operated by the Federal Reserve Banks, with Fedwire Funds allowing participating financial institutions to send and receive individual electronic fund transfers up to one penny less than $10 billion that are immediate, final, and irrevocable, and NSS allowing for immediate, final, and irrevocable settlement of obligations arising from private-sector clearing arrangements (e.g., check clearinghouses, a private-sector ACH network, and securities settlement systems). Under the proposal, Fedwire Funds would operate 22 hours per day, 7 days per week, every day of the year, and NSS would operate 21.5 hours per day - closing 30 minutes earlier than the Fedwire Funds - 7 days per week, every day of the year. The Federal Reserve is not proposing changes to the Fedwire Securities Service or the FedNow Service for retail instant payments. Under the proposal, final implementation would occur no earlier than two years after the migration of Fedwire Funds to the new ISO 20022 message format for large-value payments and instant payment services, currently expected to occur in March 2025. Comments will be accepted up to 60 days after publication in the Federal Register.

Litigation & Enforcement Developments

SEC Charges Audit Firm BF Borgers and Its Owner with Massive Fraud Affecting More Than 1,500 SEC Filings
On May 3, the SEC announced that it had charged audit firm BF Borgers CPA PC (BF Borgers) and its owner, Benjamin F. Borgers (together, Respondents), with deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023. The SEC also charged the Respondents with: (1) falsely representing to their clients that the firm’s work would comply with PCAOB standards; (2) fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and (3) falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards. Without admitting or denying the SEC’s findings as to each of them, BF Borgers agreed to pay a $12 million civil penalty, and Benjamin Borgers agreed to pay a $2 million civil penalty to settle the SEC’s charges. Both Respondents also agreed to, effective immediately, permanent suspensions from appearing and practicing before the SEC as accountants.

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