GT - Banking & Securities Update - Fall 2012

FALL 2012

Banking & Securities Update

In this issue

3 Banks News from the Hill
Audit and accounting update 11 Dodd-Frank Act implementation
3 FASB: Proposed OCI reclassification guidance 11 JOBS Act implementation
released for comment 12 Tax policy outlook for the presidential election
3 FAF seeks input on the implementation of Statement
No. 141(R) 13 Broker-dealers
3 AICPA issues a Yellow Book independence practice aid Regulatory and corporate governance update
4 FASB proposed expanded liquidity risk and interest 13 PCAOB reports on its interim inspection program for
rate risk disclosures auditors of brokers and dealers
4 FASB moves forward with alternative impairment 13 FINRA requests comment on proposed supplementary
model for financial instruments schedule for derivatives and other off-balance-sheet items
5 FASB seeks feedback on private company reporting 14 Amendments to SEC Rule 17a-5 and financial
framework responsibility rules
14 Regulatory Notice 12-36: FINRA and ISG delay effective
Regulatory and corporate governance update date for enhanced Electronic Blue Sheets submissions
6 PCAOB releases inspection process guidance for 14 FINRA modifies proposed rule requiring carrying/clearing
audit committees member firms to maintain certain records in a central
6 PCAOB issues revised standard on audit committee location and keep them current
communications 15 FINRA Regulatory Notice 12-25: Additional guidance on
6 OCC releases guidance on troubled debt restructurings FINRA’s new suitability rule
7 OCC issues updated guidance on common 15 CFTC approves new financial rules submitted by NFA to
accounting issues for banks strengthen the protection of customer funds held by FCMs
7 OCC issues guidance on investor-owned one- to four- 16 NFA submits proposed amendments to rules governing
family residential properties direct reporting to regulators of customer segregated/
7 SEC Regulations Committee publishes highlights of secured assets held at approved custody locations
June 27 meeting 16 SEC approves consolidated audit trail to monitor and
7 OCC report discusses risks facing national banks analyze trading activity
and federal savings associations 16 UK government issues LIBOR discussion paper
9 Agencies extend comment period on regulatory 16 Basel III capital and liquidity requirements affecting
capital proposals broker-dealers
9 Joint release: Agencies issue proposed rule on 17 SEC adopts new compensation committee listing
appraisals for higher-risk mortgages standards in compliance with Dodd-Frank Act
9 CFPB proposes new mortgage servicing rules 17 Public Comments on FINRA’s Proposed Regulation of
10 SEC staff publishes disclosure guidance for smaller Crowdfunding Activities Available
financial institutions
10 SEC sample letter sent to certain financial institutions 18 Resources
regarding structured note offering disclosures in
prospectus supplements and Exchange Act reports
10 FDIC advisory on effective credit risk management
practices for purchased loan participations

About this publication
The responsibility for maintaining the integrity and reliability of an organization’s financial statements ultimately rests on the audit
committee’s shoulders. Moreover, audit committees, management, and boards of directors at banks and securities firms must
keep pace with emerging regulations such as current and upcoming accounting pronouncements, and new rules stemming from
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Grant Thornton LLP’s quarterly Banking & Securities
Update provides brief updates on the key audit, accounting, regulatory and tax issues you need to be familiar with in order to
safeguard the integrity of your organization’s financial statements.

Banks

Audit and accounting update
FASB: Proposed OCI reclassification FAF seeks input on the implementation The GAO’s revisions combine a
guidance released for comment of Statement No. 141(R) Conceptual Framework (Framework)
The FASB proposed for comment an The Financial Accounting Foundation with certain rules that are outright
Accounting Standards Update (ASU), (FAF), parent organization of the FASB, prohibitions. It provides more
Presentation of Items Reclassified Out is looking for participants to complete adaptability in situations and gives
of Accumulated Other Comprehensive a survey as part of the foundation’s auditors some “room” to assess unique
Income, which would improve the post-implementation review of FASB circumstances that cannot be addressed
presentation of reclassifications out of Statement No. 141(R), Business by rules. The new Framework is
other comprehensive income (OCI) Combinations. The purpose of the consistent with AICPA and International
by requiring enhanced disclosures in survey is to evaluate the effectiveness of Federation of Accountants — a threats
the financial statements. The proposed the accounting standard. and safeguards approach based on
guidance is designed to provide financial Stakeholders can register to become facts and circumstances that may be
statement users with information survey participants on the FAF’s website. unique to specific audit environments,
about the amounts reclassified from both individually and in the aggregate.
accumulated OCI and with a road map AICPA issues a Yellow Book While the AICPA currently does not
to related financial disclosures. The independence practice aid require threats to be evaluated in the
proposal was developed in response The AICPA has presented a webcast to aggregate, the AICPA has an exposure
to stakeholders’ concerns about the help participants understand the Yellow draft that will move their rules closer to
significant costs to financial statement Book independence practice aid. View the GAO view. The GAO also requires
preparers to apply the guidance originally the webcast. documentation to support consideration
issued in ASU 2011-05, Presentation of The Government Accountability of independence, which goes beyond the
Comprehensive Income. Office (GAO) issued standards revising AICPA’s requirements.
The FASB has published an FASB the Yellow Book effective for financial The practice aid illustrates how to
In Focus article, “FASB Proposal on audits and attestation engagements for evaluate and document all nonaudit
Improving the Presentation Requirements periods ending on or after Dec. 15, 2012, services in one document for a particular
for Reclassifications Out of Accumulated and effective for performance audits engagement. It provides detailed
Other Comprehensive Income,” to beginning on or after Dec. 15, 2011. instructions, as well as examples of
provide additional information regarding nonaudit services and reference to the
this proposed ASU. particular paragraph in the Yellow Book
Comments on the proposal are due that applies in order to evaluate threats
by Oct. 15, 2012. to independence (such as management

3 Banking & Securities Update – Fall 2012

participation and self-review threats) that In addition, financial institutions The comment period on the proposed
require safeguards, and how to apply would be required to disclose: disclosures ended on Sept. 25, 2012.
those safeguards to eliminate threats or • carrying amounts of classes of To provide constituents with
reduce them to an acceptable level. The financial assets and financial liabilities additional information related to this
practice aid also provides guidance and presented in a table and segregated proposal, the FASB has released an
examples in order to evaluate whether by expected maturities, including off- In Focus article, “FASB Proposal on
management possesses suitable skill, balance-sheet financial commitments Liquidity Risk and Interest Rate Risk
knowledge or experience (similar to and obligations; and Disclosures,” and a podcast recorded by
AICPA ET 101-3), and documentation • information presented in a table Board member Marc Siegel.
of that assessment. about time deposit liabilities, View the complete article and
In addition, the practice aid provides including the cost of funding, podcast.
a decision flowchart to assist in the during the previous four quarters
evaluation process, along with a glossary (depository institutions only). FASB moves forward with alternative
of common words and phrases used in impairment model for financial
the Yellow Book standards. Entities that are not financial instruments
institutions would be required to Using key concepts agreed on jointly
FASB proposes expanded liquidity risk disclose expected cash flow obligations with the IASB, the FASB began
and interest rate risk disclosures segregated by their expected maturities developing an alternative to the three-
The FASB issued a proposed ASU, but excluding financial assets. bucket impairment model for financial
Disclosures about Liquidity Risk instruments at its Aug. 22, 2012, meeting.
and Interest Rate Risk, to expose Interest rate risk disclosures The current expected credit losses model
for comment-enhanced disclosure The following proposed interest rate risk would use a current single-measurement
requirements for certain risks related to disclosures would apply only to financial objective estimate of expected credit
financial assets, liabilities, obligations and institutions: losses rather than the dual-measurement
other financial instruments for public, • Carrying amounts of classes of approach taken in the three-bucket
nonpublic and not-for-profit entities.1 financial assets and financial liabilities model. For more information, refer to
according to time intervals based the FASB’s financial instruments project
Liquidity risk disclosures on the contractual repricing of the update page.
The FASB has proposed certain financial instruments
liquidity risk disclosures that would • An interest rate sensitivity table that
provide information about the risk shows the effects of hypothetical,
that a reporting entity will not meet its instantaneous shifts of interest
financial obligations. The extent of some rate curves on net income and
of these disclosures would vary by type shareholders’ equity
of entity. All entities would be required • Quantitative or narrative disclosures
to disclose the following information: of the entity’s exposure to interest
Entities that are not
• Available liquid funds, including rate risk, including discussion about
unencumbered cash, high-quality significant changes in the amounts and financial institutions
liquid assets, and borrowing timing in the quantitative tables, and would be required
availability, in a tabular format how the entity managed those changes to disclose expected
• Additional quantitative or narrative during the current reporting period
disclosure of the entity’s exposure to cash flow obligations
liquidity risk, including discussion segregated by their
about significant changes in expected maturities but
the amounts and timing in the
quantitative tables, and how the
excluding financial assets.
entity managed those changes during
the current reporting period

1
FASB material contained herein was used with permission and is available at www.fasb.org.


FASB seeks feedback on private The staff paper summarizes the The preliminary framework was
company reporting framework following six factors that differentiate developed by the FASB staff after
The FASB has released an invitation to financial reporting considerations for consultations with Board members and
comment on a FASB staff paper, Private private versus public companies: discussions with stakeholders who have
Company Decision-Making Framework: • Types and number of financial had significant and diverse experience
A Framework for Evaluating Financial statement users with private company financial
Accounting and Reporting Guidance • Access to management statements. The final framework will be
for Private Companies, in order to • Investment strategies developed jointly by the FASB and the
solicit feedback on its proposed private • Ownership and capital structures Private Company Council.
company decision-making framework. • Accounting resources The comment period ends Oct. 31, 2012.
The framework project is not intended • Learning about new financial
to create an entirely new conceptual reporting guidance
framework for private company financial
reporting. Instead, it is designed to The staff paper also identifies four
identify (1) the different needs of users areas in which financial accounting and
of private company versus public reporting guidance might differ for
company financial statements, and (2) private versus public companies:
opportunities to reduce the complexity • Recognition and measurement
and costs involved in preparing financial • Disclosures
statements of private companies in • Display (presentation)
accordance with U.S. GAAP. • Effective date

5 Banking & Securities Update – Winter 2011
Fall 2012

Banks

Regulatory and corporate
governance update
PCAOB releases inspection process The new communications OCC releases guidance on troubled
guidance for audit committees requirements in AS 16, which remain debt restructurings
The Public Company Accounting subject to SEC approval, will be effective The Office of the Comptroller of the
Oversight Board (PCAOB) released for audits and quarterly reviews of Currency (OCC) released OCC 2012-10,
Information for Audit Committees financial statements for fiscal years Troubled Debt Restructurings, to
About the PCAOB Inspection Process to beginning on or after Dec. 15, 2012 (that address numerous queries received
assist audit committees in their oversight is, fiscal years ending Dec. 31, 2013, for from bankers and examiners on the
role by clarifying the PCAOB audit calendar-year entities, including 2013 accounting and reporting for troubled
inspection process. This document quarterly reviews). debt restructurings (TDRs), especially
includes information on the nature of The transitional amendments, which for loan renewals and extensions of
a PCAOB inspection of an audit firm are also subject to SEC approval, will substandard commercial loans.
and provides questions about PCAOB make the communications requirements OCC 2012-10 reviews the
inspections that audit committees in AU Section 380, Communication with authoritative guidance on identifying
may want to ask their auditors. View Audit Committees, apply to audits of a TDR, including the changes codified
additional details about the guidance. brokers and dealers. Those amendments in ASU 2011-02, A Creditor’s
will be effective for the periods that Determination of Whether a
PCAOB issues revised standard on PCAOB standards become applicable Restructuring Is a Troubled Debt
audit committee communications to audits of brokers and dealers (upon Restructuring. It also discusses how to
The PCAOB released Auditing Standard adoption by the SEC of its amendments to account for the loan after it has been
(AS) No. 16, Communications with Exchange Act Rule 17a-5), if such periods identified as a TDR.
Audit Committees, which requires precede the effective date of AS 16.
auditors to provide certain information
to audit committees on a timely basis.
In conjunction with the related and
transitional amendments to existing
PCAOB standards, AS 16 is expected to
enhance auditor communications with
audit committees overall.


OCC issues updated guidance on SEC Regulations Committee publishes • Interaction of retrospective
common accounting issues for banks highlights of June 27 meeting adoption of new accounting
The views in the Bank Accounting The highlights of joint meetings between standards and registration
Advisory Series represent interpretations the Center for Audit Quality’s SEC statement requirements — The
by the Office of the Chief Accountant Regulations Committee and the SEC SEC staff said that if a registrant
and are neither official rules nor staff summarize issues discussed. The adopts a new accounting standard
regulations of the OCC. highlights do not represent official positions retrospectively in its most recent
The OCC updated its Bank of the AICPA or the CAQ and are not interim financial statements, but
Accounting Advisory Series, which authoritative positions or interpretations does not revise its annual financial
expresses the views of the OCC’s Office issued by the SEC or its staff. statements prior to filing a new or
of the Chief Accountant on accounting The Center for Audit Quality (CAQ) amended registration statement
issues of interest to banks. issued the highlights of the June 27, 2012, (other than Form S-8), the registrant
The updated series features the joint meeting of its SEC Regulations should expect a comment from
following new or revised questions: Committee and the SEC staff. Practice the SEC asking for the basis for
• Topic 2A, Troubled Debt issues discussed include the following: its conclusion that the impact is
Restructurings, questions 36 immaterial.
through 38 • Restricted cash classification
• Topic 2B, Nonaccrual Loans, — According to the SEC staff, a View the highlights of the meeting.
questions 31 and 32 registrant holding cash or short-term
• Topic 2G, Acquired Loans, questions investments in a foreign jurisdiction OCC report discusses risks facing
5 through 8 where the indefinite reinvestment national banks and federal savings
• Topic 4, Allowance for Loan and assertion has been made would associations
Lease Losses, questions 51 and 52 not be required to classify the cash In July 2012, the OCC released its
• Topic 5A, Other Real Estate Owned, and investments as restricted in the spring 2012 Semiannual Risk Perspective
questions 2 and 34 balance sheet. report, which discusses top risks facing
• Topic 5C, Other Miscellaneous national banks and federal savings
Assets, questions 7 and 8 • Pension-related non-GAAP associations. The report addresses three
financial measures — If registrants key challenges to the banking system:
OCC issues guidance on investor- do not provide sufficient context the continuing effects of a weak housing
owned one- to four-family residential with respect to pension-related market; revenue challenges related to
properties non-GAAP financial measures, thus ongoing market volatility and slow
On Sept. 17, 2012, the OCC issued making the measures potentially economic growth; and the possibility
guidance on appropriate credit risk misleading to investors, then those that banks, in an effort to improve
management practices for investor- registrants can expect to receive SEC profitability in a lackluster market, may
owned, one- to four-family residential staff comments. take on excessive risks. Key points raised
real estate lending where the primary in the report included the following:
repayment source for the loan is • Pro forma adjustments that meet
rental income. This recent guidance the continuing-impact criterion — • Mortgage overhang — Large banks
discusses policies and processes related The SEC staff indicated that a pro with extensive mortgage operations
to loan underwriting standards, loan forma adjustment to the statement continue to be challenged by the
identification and portfolio monitoring of operations that has more than burden of residential mortgages that
expectations, allowance for loan and a one-time effect would meet the are severely delinquent or currently
lease losses (ALLL) methodologies, continuing-impact criterion in being foreclosed upon. This issue
and internal risk assessment and rating Regulation S-X, Article 11, Pro continues to affect the economic
systems. View the article. Forma Financial Information, even if environment for all banks.
the item has an impact for less than
12 months following the transaction.


• Operational risk — As banks try • Domino effects from the European addition, while allowances for loan losses
to boost income and operating economy — Europe has experienced declined somewhat in 2011, they remain
economies of scale, they may try to a sharp decline in economic growth historically high. Nevertheless, according
spend less on systems and processes. given issues with its sovereign debt to the report, “The U.S. banking
The use of third-party products and the potential breakup of the industry continues to emerge from the
or distribution systems may also eurozone. Both of these issues have recession of 2007 [through] 2009 and to
increase this risk. contributed to weak global economic adjust to significant shifts in its operating
activity, increased uncertainty in and regulatory environments,”4 and
• Asset quality risk — While asset financial markets and decreased credit banks of all sizes will continue to be
quality indicators are showing quality. As a result, large European challenged by the operational risks
improvement, it has come at a slow and U.S. financial institutions have imposed by these shifts.
pace. The rate of delinquency for experienced an increase in the cost of The OCC’s Semiannual Risk
home loans remains above average, long-term debt and equity financing, Perspective report will be released by the
and although commercial real estate which is further hampering market OCC twice a year and will analyze four
is showing improvement, it continues confidence and economic recovery.3 main areas: the operating environment;
to be plagued by high vacancy rates the condition and performance of the
and problem assets. The report also indicated that levels national banking system; funding,
of capital across the industry, especially liquidity and interest rate risk; and
• Weak loan growth — With the for larger banks, are strong and of better regulatory actions. The current report
exception of commercial and quality than before the recession. In reflects data as of Dec. 31, 2011.
industrial lending, loan growth
remains weak for many banks. As a
result, asset yields banks of all sizes
have been squeezed. Furthermore,
as banks compete for higher-earning
assets, underwriting standards have
also been under pressure.

• Low interest rates — As interest
rates remain low, margin upside
has been limited because banks
have been unable to further reduce
funding costs. This environment is
also making banks more susceptible
to rate shocks. In an effort to obtain
higher yields, many banks are adding
to their investment portfolios and
extending the durations of those
portfolios. Furthermore, banks may
face additional risks by entering into
new or less familiar markets to offset
declining revenues.2

2
Office of the Comptroller of the Currency. “OCC Report Discusses Risks Facing National Banks and Federal Savings Associations.” Available at
www.occ.gov/news-issuances/news-releases/2012/nr-occ-2012-106.html.
3
Ibid.
4
Ibid.


Agencies extend comment period on Joint release: Agencies issue proposed – Provide the borrower with a
regulatory capital proposals rule on appraisals for higher-risk statement saying that any
The three federal banking regulators — mortgages appraisal is for the creditor’s
the Board of Governors of the Federal On Aug. 15, 2012, the six federal sole use and that the borrower
Reserve Board (FRB), the Federal financial regulatory agencies — the FRB, may choose to have a separate
Deposit Insurance Corporation (FDIC), the Consumer Financial Protection appraisal conducted at his or
and the OCC — have extended the Bureau (CFPB), the FDIC, the Federal her expense
comment period on three notices of Housing Finance Agency, the National – Provide the borrower with a
proposed rulemaking (NPRs) that would Credit Union Administration, and copy of the appraisal without
revise and replace the agencies’ current the OCC — proposed new appraisal charge at least three days
capital rules.5 The comment period, requirements such as the following for before closing
which was originally slated to end on higher-risk mortgage loans:
Sept. 7, 2012, was extended until Oct. • Requiring a creditor to use
22, 2012, to allow interested parties more • Defining a higher-risk mortgage loan reasonable diligence in determining
time to understand, assess and comment as a residential mortgage loan that is whether a second appraisal must be
on the proposals. secured by a principal dwelling and performed
The NPR titled Regulatory that has an annual percentage rate that
Capital Rules: Regulatory Capital, exceeds the average prime offer rate by • Proposing a safe harbor of steps
Implementation of Basel III, Minimum 1.5%, 2.5% or 3.5%, depending on the the lender should take to confirm
Regulatory Capital Ratios, Capital type of mortgage loan that appraisals are being conducted
Adequacy, Transition Provisions, and according to regulatory and statutory
Prompt Corrective Action seeks to • Requiring a lender to take the requirement
strengthen risk-based and leverage following actions before originating a
capital requirements. higher-risk mortgage loan: This proposed rule is mandated by
The NPR titled Regulatory Capital – Obtain a written appraisal by the Dodd-Frank Act. The comment
Rules: Advanced Approaches Risk-Based a certified or licensed appraiser period for the proposal expires on Oct.
Capital Rules; Market Risk Capital Rule who has physically visited the 15, 2012, and the rule is expected to be
would revise the advanced approaches interior of the mortgaged finalized by the end of 2012.
risk-based capital rules consistent with property
Basel III requirements. The proposal – Have another appraiser CFPB proposes new mortgage
also seeks to apply market risk capital conduct an appraisal that servicing rules
regulations to thrift institutions and analyzes any difference in On Aug. 10, 2012, the CFPB proposed
thrift holding companies. the sales price, changes new mortgage servicing rules to help
The NPR titled Regulatory Capital in market conditions, and protect consumers. Among other things,
Rules: Standardized Approach for Risk- improvements made to the the new rules would require mortgage
Weighted Assets; Market Discipline property if the collateral was servicers to provide timely mortgage
and Disclosure Requirements proposes acquired by the seller within statements, give earlier notice of interest
revisions to rules for computing risk- 180 days of the current rate increases and guidance about what
weighted assets and was developed in transaction and the property is to do if payments are not affordable,
response to issues raised by the financial being sold at a higher price than correct credit full payments promptly,
crisis. Additionally, consistent with the seller paid and offer options to help borrowers
Dodd-Frank Act mandates, this NPR avoid foreclosures and costly force-
seeks to eliminate reliance on credit placed hazard insurance. The CFPB will
ratings. View the original notice. be accepting comments until Oct. 9,
2012. View the CFPB’s summary of the
proposals.

5
Federal Deposit Insurance Corporation. “Agencies Seek Comment on Regulatory Capital Rules and Finalize Market Risk Rule.” Available at www.fdic.gov/news/news/press/2012/pr12068.html.


SEC staff publishes disclosure guidance SEC sample letter sent to certain FDIC advisory on effective credit risk
for smaller financial institutions financial institutions regarding management practices for purchased
The statements in the CF Disclosure structured note offering disclosures in loan participations
Guidance represent the views of the staff prospectus supplements and Exchange The FDIC issued a Financial Institution
in the Division of Corporation Finance. Act reports Letter discussing recommended practices
This guidance is not a rule, regulation, or In April 2012, the SEC’s CorpFin for purchased loan participations
statement of the Securities and Exchange Office of Capital Markets Trends including:
Commission. Further, the Commission issued to certain financial institutions an
has neither approved nor disapproved illustrative letter that addresses common • Loan Policy Guidelines for
its content. issues the SEC staff has noted regarding Participations – Procedures
The staff of the SEC’s Division of structured note offering disclosures in for originating and purchasing
Corporation Finance has published CF registration statements and, in some participation loans, requirements for
Disclosure Guidance: Topic 5, “Staff instances, in Securities Exchange Act of thorough borrower due diligence,
Observations Regarding Disclosures of 1934 reports. and a review of the purchasing bank’s
Smaller Financial Institutions,” which The illustrative letter highlights contractual rights and obligations
summarizes the staff’s observations after the following areas in which financial should be included in loan policies.
reviewing financial statement disclosures institutions might enhance their
filed by smaller financial institutions. disclosures regarding future structured • Loan Participation Agreements –
These observations cover Management’s note offerings: A description of the responsibilities
Discussion and Analysis, as well as • Product names of the lead institution, requirements
accounting policy disclosures, and the • Product pricing and value for procuring borrower credit
following topics: • Use of proceeds and reasons for information, procedures for
offerings addressing defaults and dispute
• Allowance for loan losses • Plans of distribution resolution practices should
• Charge-off and non-accrual policies • Liquidity be contained in a written loan
• Commercial real estate • Issuer credit risk participation agreement.
• Loans measured for impairment • Tax consequences
based on collateral value • Referenced asset or index disclosures • Independent Credit and Collateral
• Credit risk concentrations • Disclosure formats Analysis – Institutions that purchase
• Troubled debt restructurings and • Exhibits participation loans should follow the
modifications same credit and collateral analysis
• Other real estate owned For further information, refer to the procedures it would execute if it
• Deferred taxes SEC staff’s sample letter. originated the loan.
• FDIC–assisted transactions
• Due Diligence and Monitoring
of Participations in Out-of-
Territory or Unfamiliar Markets
– Management may need to
perform additional due diligence for
participations comprising “out-of-
territory” loans or credit facilities.
In April 2012, the SEC’s CorpFin Office of Capital
View the letter.
Markets Trends issued to certain financial institutions
an illustrative letter that addresses common issues the
SEC staff has noted regarding structured note offering
disclosures in registration statements and, in some
instances, in Securities Exchange Act of 1934 reports.


Banks

News from the Hill
Dodd-Frank Act implementation JOBS Act implementation For banks and bank holding
Regulatory agencies continue to The Jumpstart Our Business Startups companies, the threshold for triggering
implement the nearly 400 rulemaking (JOBS) Act passed by Congress and Exchange Act Section 12(g) registration
requirements and various studies signed into law by President Barack has been raised from 500 shareholders to
outlined in the Dodd-Frank Act. As of Obama is one of the most significant 2,000. The higher threshold will allow
Sept. 4, 2012, the SEC, the Commodity changes in securities law in quite some smaller banks to raise capital by selling
Futures Trading Commission (CFTC), time. The primary beneficiaries of the stock to new shareholders without
bank regulators and other agencies had JOBS Act reforms are a new class of having to register with the SEC. In
finalized 131 rules and proposed 135; issuers known as emerging growth addition, employees who have received
however, 132 rulemaking requirements companies (EGCs). Title I of the JOBS their shares in an exempt transaction as
needed to be proposed.6 Act defines EGCs and covers, among part of an employee compensation plan
The SEC has been charged with other things, the reduced regulatory are excluded from the shareholder count.
implementing most of the rules and disclosure alternatives available to Of course, banks and bank holding
mandated by the Dodd-Frank Act but them. The provisions of Title I became companies that are EGCs and want to
has frequently cited lack of resources as effective upon enactment of the JOBS raise capital through an IPO now have
a reason for failing to complete the work Act, which is expected to greatly the option of going public with a lighter
on time. As of Sept. 4, 2012, the SEC had improve many companies’ access to compliance burden. They can follow less
finalized 30 rules, proposed 45 and had capital. Many banks have been on a stringent financial statement reporting
yet to propose 21. quest for additional capital since the and disclosure requirements in their
Bank regulators have finalized only financial crisis began in 2008. The JOBS initial equity registration statement.
31 of 135 rules. While 56 rules have been Act provides a number of opportunities They will also be subject to fewer
proposed, another 48 have not. that boards of directors and management Sarbanes-Oxley reporting requirements.
of community banks should evaluate. These looser standards will apply until
the institution no longer qualifies as an
EGC. Either option should aid in raising
much-needed capital.

6
Davis Polk & Wardwell LLP. Dodd-Frank Progress Report, Sept. 4, 2012. Available at www.davispolk.com/Dodd-Frank-Rulemaking-Progress-Report/.


One of the most notable aspects A number of new rules have yet to The JOBS Act also instructed the
of the JOBS Act for banks and bank be promulgated by the SEC. These SEC to study the impact on IPOs of:
holding companies is the increase in rules would: • the transition to decimalization — in
the threshold under which they may this context, the trading and quoting
deregister with the SEC from 300 • increase the offering threshold for of securities in penny increments; and
shareholders to 1,200 (the threshold Regulation A filings from $5 million • decimalization relative to the
remains at 300 for all other types of to $50 million or create a new liquidity of small- and middle-
companies). SNL Financial estimates exemption similar to Regulation A capitalization securities.
that there are approximately 300 with the $50 million threshold before
reporting banks in the United States SEC registration is required (there is In addition, the SEC was asked to
that currently have fewer than 1,200 no deadline for rulemaking); determine whether there is sufficient
shareholders and thus are eligible to • end an SEC ban on small company economic incentive to support the trading
deregister with the SEC and cease advertisements to solicit capital of small- and middle-capitalization
adhering to the agency’s reporting in private offerings that rely on securities. The SEC report, issued on July
obligations.7 This increased threshold Regulation D or Rule 144A (rules 20, 2012, opposed increasing tick sizes
reduces annual costs for qualifying were required by July 4, 2012, and but recommended further study of the
banks and bank holding companies SEC proposed rules were issued on issue. Read the report.
because they won’t have to file Aug. 29, 2012);
periodic forms such as Forms 10-Q or • allow the solicitation of funds over Tax policy outlook for the presidential
10-K under the Exchange Act. Some the Internet, known as crowdfunding election
smaller banks that are publicly held (rules are required by December 2012), Taxes are emerging as a major campaign
may consider deregistration to avoid through the Capital Raising Online issue, and the outcome of the election will
the time and expense involved with While Deterring Fraud and Unethical likely affect how tax matters are addressed.
SEC reporting. In the two weeks after Non-Disclosure Act of 2012 or the Pertinent legislative action remains unlikely
President Obama signed the JOBS Act, ‘‘CROWDFUND Act” ; and during the campaign.
three banks announced their intent • raise the mandatory registration View a comparison of the candidates’
to deregister as reporting companies, requirement for private issuers from tax platforms.
thereby reducing their annual reporting 500 to 2,000 shareholders or 500
and compliance costs. non-accredited investors (there is no
deadline for rulemaking).

Key Dodd-Frank Act timeline for the rest of 2012/early 2013

September–December
• Five banking regulators will try to finalize the Volcker rule by the end of 2012, according to news reports.
• The FRB plans to finish writing stricter standards for systemically important financial institutions, or SIFIs.
• The FRB expects to release a proposal to impose new fees on SIFIs, whether the institutions are banks or not.
• The FRB plans to release proposals to implement two oversight requirements for SIFIs other than banks.

September–January
• Final rules on credit risk retention may be released. The CFPB may finish the ability-to-repay rule before then; that rule is expected to be finalized by January 2013.

September–October
• Banking regulators are expected to issue a report that will describe allowable investment activities for banks; this report is required by Section 620 of the Dodd-Frank Act.

October–December
• Rules on margin standards for swaps are expected from the CFTC, the SEC and bank regulators.

7
SNL Financial. www.snl.com/.


Broker-dealers

Regulatory and corporate governance
update
PCAOB reports on its interim inspection The resultant PCAOB Report on FINRA requests comment on proposed
program for auditors of brokers the Progress of the Interim Inspection supplementary schedule for derivatives
and dealers Program Related to Audits of Brokers and other off-balance-sheet items
On Aug. 20, 2012, the PCAOB released and Dealers describes deficiencies On Feb. 9, 2012, the SEC approved
its first report on the progress of its observed in the following areas: Financial Industry Regulatory Authority
interim inspection program for auditors • Audit procedures related to the (FINRA) Rule 4524, Supplemental
of brokers and dealers, providing an computation of customer reserve and FOCUS Information, under which
overview of the new program and the net capital requirements applicable carrying and clearing firms
audit deficiencies identified in the initial • Audits of financial statements must file operational or financial
group of inspected audits. • Auditor independence schedules or reports that FINRA
In this first assessment, carried out believes to be necessary or appropriate
over a five-month period from October During the interim inspection to protect investors or the public interest
2011 through February 2012, PCAOB program, the PCAOB expects to review as supplements to FOCUS reports.
inspectors reviewed 10 audit firms, approximately 100 audit firms and Accordingly, on May 4, 2012, FINRA
covering portions of 23 audits of brokers cover portions of more than 170 audits issued Regulatory Notice 12-23, which
and dealers registered with the SEC. The of brokers and dealers through 2013. called for comment on the authority’s
PCAOB identified deficiencies in all of The program is currently designed to proposed supplementary schedule for
the audits inspected. include a cross-section of audits of derivatives and other off-balance-sheet
These audits were required to be SEC-registered brokers and dealers. items (OBS schedule). This schedule
conducted under GAAS as issued by The PCAOB will continue the interim would need to be filed within 22 business
the AICPA and not under PCAOB inspection program until new rules for a days of calendar quarter-end.
standards. permanent program become effective.
View the full article and the complete
interim report.


After the financial crisis hit, FINRA Amendments to SEC Rule 17a-5 and Regulatory Notice 12-36: FINRA and
began monitoring carrying and clearing financial responsibility rules ISG delay effective date for enhanced
firms’ leverage and liquidity closely, and Although the effective date that was Electronic Blue Sheets submissions
gathering other information pertinent originally proposed — Dec. 31, 2011 — FINRA and the other interested members
to these firms’ proprietary positions and has passed, the SEC, in consultation of the Intermarket Surveillance Group
their financing and off-balance-sheet with the PCAOB, has yet to issue its (ISG) have extended the effective dates
transactions. FINRA’s aim in proposing final amendments to SEC Rule 17a-5. for firms to submit new data elements for
the OBS is to obtain more consistent Comment letters from industry Electronic Blue Sheets. These extensions
and comprehensive information professionals seeking clarification on correspond to the recent SEC extension
about carrying and clearing firms’ off- the proposed amendments have raised of the compliance dates for Rule 13h-1
balance-sheet assets, liabilities and other concerns. The SEC has asked industry (the Large Trader reporting rule).
commitments. Ultimately, FINRA is groups to develop a workable framework Effective Nov. 30, 2012, and May 1,
looking to make more effective ongoing for addressing some of those concerns. 2013, firms must begin submitting the
assessments of the impact that off- One of the outstanding issues is additional formats of Blue Sheets data
balance-sheet activities have on clearing how to create a framework for defining specified in Regulatory Notice 11-56 to
and carrying firms’ leverage, capital, material noncompliance under the FINRA and the other ISG interested
liquidity and ability to protect customers. financial responsibility rules, along with members. These extensions will allow
Under the proposed reporting the concept of material weakness as it broker-dealers additional time to develop,
requirements, firms would have to relates to the net capital calculation, the test and implement the enhancements.
disclose their gross exposures in financing customer reserve formula, possession
transactions such as collateral swaps, or control standards, SEC Rule 17a-13 FINRA modifies proposed rule requiring
along with repurchase agreements, mandates, and customer statements. carrying/clearing member firms to
reverse repurchase agreements and other The net capital and customer maintain certain records in a central
transactions whose values are netted under reserve calculations are derived from location and keep them current
GAAP or held to maturity. Firms would the firm’s financial information, and FINRA has modified Proposed Rule
report their interests in and exposures noncompliance may be easiest to 4516 requiring each carrying or clearing
to variable interest entities. In addition, measure within those two categories. member firm to maintain certain records
the OBS schedule would require firms Different views have arisen with in a central location and keep them
to disclose their non-regular way settling regard to what constitutes material current in order to facilitate a faster
transactions, including those involving noncompliance. Some constituents and more orderly transfer of customer
to-be-announced securities and those believe that noncompliance or material accounts to another broker-dealer
with delayed settlement or delivery. Firms noncompliance occurs only if a broker- should the member firm no longer
would also have to report underwriting dealer fails the net capital test or fails continue to operate.
and other financing commitments, and to make the deposit that is required to Industry concern regarding the
gross notional amounts in centrally and satisfy its customer reserve formula, original version of Proposed Rule 4516
non-centrally cleared derivatives contracts resulting in a hindsight deficiency. surfaced after the Lehman Brothers
involving commodities, equities, interest The financial responsibility rules bankruptcy. More recently, FINRA
and foreign exchange rates, and credit do not have quantitative requirements has taken issue with MF Global, which
default swaps. such as those pertaining to possession has had a number of problems with the
The comment period ended June 4, or control, quarterly security transfer of information such as customer
2012. Implementation is expected in verification, or mailing and reporting statements and positions, and other
early 2013.8 of customer statements. Frameworks client information.
View the notice and comments to measure noncompliance or material
submitted. noncompliance may involve benchmarks
such as excess capital or total securities
as a percentage of securities held by the
depository institution. Discussions about
these topics are continuing.

8
Financial Industry Regulatory. “Supplemental FOCUS Information.” Available at www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p126237.pdf.


The original version of Proposed CFTC approves new financial rules (2) Controls over the treatment of
Rule 4516 generated a high volume of submitted by NFA to strengthen excess segregated and Part 30 secured
responses by brokers who disagreed with the protection of customer funds held customer funds
FINRA about the need for this mandate, by FCMs • FCMs must maintain written
which would have required all brokers On July 13, 2012, the CFTC approved policies and procedures regarding
to have a system to document where all new financial rules submitted by the the maintenance of excess (i.e.,
of their books and records were located National Futures Association (NFA) proprietary or residual) funds in
relative to the transfer of customers’ that enhance the protection of customer customer segregated accounts and
positions. In response to brokers’ funds held by futures commission Part 30 secured accounts.
concerns, the rule has been modified to merchants (FCMs). The new rules are set • Any withdrawals that are in excess
apply only to firms whose total customer forth in NFA Financial Requirements of 25% of the excess segregated or
reserve formula credits exceed $100 Section 16 and in an Interpretive Notice Part 30 secured funds that are not
million as determined pursuant to SEC titled NFA Financial Requirements for the benefit of customers must
Rule 15c3-3. Section 16 FCM Financial Practices be preapproved in writing by senior
and Excess Segregated Funds/Secured management.
FINRA Regulatory Notice 12-25: Amount Disbursements. • FCMs must inform the NFA of any
Additional guidance on FINRA’s new The new NFA rules require FCMs withdrawal of 25% or more of the
suitability rule to strengthen their controls over the excess segregated or Part 30 secured
In May 2012 FINRA issued Regulatory treatment and monitoring of funds held amounts that are not for the benefit
Notice 12-25 to provide additional for customers trading on U.S. contract of customers.
guidance on the rule in response markets (excess segregated accounts)
to industry questions prior to the and funds held for foreign futures (3) Reporting and recordkeeping
implementation on July 9, 2012. FINRA and foreign option customers trading • FCMs must file segregation and Part 30
Regulatory Notice 12-25 discusses on foreign contract markets (Part 30 secured amount computations with
the new FINRA Rule 2111 that secured accounts). Three areas of reform the NFA each day.
requires, in part, that a broker-dealer included in the NFA rules are as follows: • FCMs must file detailed information
or associated person “have a reasonable with the NFA regarding the
basis to believe that a recommended (1) Part 30 secured accounts depositories holding customer funds
transaction or investment strategy FCMs must hold sufficient funds in Part and the investments made with
involving a security or securities is 30 secured accounts to meet their total customer funds as of the 15th and last
suitable for the customer, based on obligations to customers who trade on business days of each month.
the information obtained through foreign markets. FCMs should calculate • FCMs must file additional monthly
the reasonable diligence of the [firm] total balances owed to customers using net capital and leverage information
or associated person to ascertain the the net liquidating equity method. FCMs with the NFA.
customer’s investment profile.” In will no longer be permitted to use the
general, FINRA’s new suitability rule alternative method, which had allowed In addition, Section 16 and the
retains the core features of the previous them to hold a smaller amount of funds Interpretive Notice outline the process
NASD suitability rule, NASD Rule that represented the margin on foreign by which the NFA can initiate a
2310. In addition, Rule 2111 codifies futures. Membership Responsibility Action
several important interpretations of the against an FCM that may not have
predecessor rule and imposes a few new sufficient funds to maintain targeted
or modified obligations. View the notice. amounts of excess segregated and Part 30
secured funds. View the article.


NFA submits proposed amendments SEC approves consolidated audit trail UK government issues LIBOR
to rules governing direct reporting to to monitor and analyze trading activity discussion
regulators of customer segregated/ On July 11, 2012, the SEC approved a On Aug. 10, 2012, the UK government
secured assets held at approved new rule requiring the national securities launched a discussion paper outlining
custody locations exchanges and FINRA to establish a initial proposals for reforming the
The NFA submitted proposed marketwide consolidated audit trail framework for setting and governing
amendments to Financial Requirements that will enhance regulators’ ability to LIBOR. The paper sought responses
Section 4 to the CFTC. These monitor and analyze trading activity. from a variety of market experts and
amendments would require FCMs to The new rule requires the exchanges international stakeholders over a four-
provide their designated self-regulatory and FINRA to jointly submit a week period that ended on Sept. 7, 2012.
organization (SRO) with online read- comprehensive plan detailing how they The paper offered preliminary analysis
only access to bank accounts containing would develop, implement and maintain concerning:
FCM customer segregated/secured funds. a consolidated audit trail that must • the role that LIBOR plays in the
Further, the proposed amendments would collect and accurately identify every financial markets;
add Regulation 1.49 to the list of CFTC order, cancellation, modification and • the flaws in the current structure of
regulations that are also considered to trade execution for all exchange-listed setting LIBOR and its governance
be NFA requirements in the event of a equities and equity options across all and oversight; and
violation by FCMs, retail foreign exchange U.S. markets. • a range of options for reform,
dealers or introducing brokers. The Currently, there is no single including the issue of transition.
NFA’s board of directors approved both database of comprehensive and readily
amendments on Aug. 16, 2012. The NFA accessible data regarding orders and The UK government was expected
submitted the proposed amendments to executions. Each SRO instead uses its to report in time for changes to be
the CFTC on Aug. 21, 2012. The CFTC own separate audit trail system to track addressed in legislation. It continues to
is currently in the process of reviewing the information relating to orders in its work in concert with its international
proposed amendments. View the complete respective markets. Existing audit trail partners to formulate a globally
NFA letter. requirements vary significantly among consistent solution. View the full article.
markets, which means that regulators
must obtain and merge large volumes Basel III capital and liquidity
of disparate data from many types of requirements affecting broker-dealers
entities when analyzing market activity. Grant Thornton hosted a broker-
FINRA will work with other SROs dealer symposium on June 19, 2012, at
to submit a national market system plan which several broker-dealer industry
that will help close regulatory data gaps. professionals discussed the effects of
View the SEC article. the recent financial crises on the global
regulatory framework for financial
firms. The Basel Committee on Banking
Supervision has adopted the global
regulatory standard known as Basel III,
which covers bank capital adequacy,
stress testing and market liquidity
risks. The Basel III initiative will put
additional pressure on broker-dealers’
profitability, and particularly on returns
on equity (ROE), given the increased
capital and margin requirements. Balance
sheet assets will also be reduced because
of increased leverage requirements.


One of the challenges broker-dealers SEC adopts new compensation Public Comments on FINRA’s Proposed
are facing under Basel III is how to committee listing standards in Regulation of Crowdfunding Activities
replace or increase their revenues to compliance with Dodd-Frank Act Available
maintain the ROE that shareholders have The SEC approved a final rule directing When the JOBS Act was signed into
come to expect. From a sales practice national securities exchanges and law, it established provisions for
perspective, regulators are concerned national securities associations to crowdfunded securities under the
that new products originally developed establish listing standards that require Capital Raising Online While Deterring
for institutional clients are now being an issuer’s compensation committee to Fraud and Unethical Non-Disclosure
sold — perhaps inappropriately — to consist only of independent members of Act of 2012 or the ‘‘CROWDFUND
retail customers. the board of directors. Act.” The CROWDFUND Act permits
Regulators have been challenged to Additionally, listing standards are issuers to sell up to $1,000,000 worth of
find the appropriate model to determine required to address the following matters securities via crowdfunding within a
the amount of capital that has to be related to an issuer’s compensation 12-month period without registering
maintained by broker-dealers. The committee: with the SEC. Furthermore, under
value-at-risk model for trading assets • The committee’s authority to retain the new law, intermediaries operating
is currently in use. As a result, the SEC compensation advisers “funding portals” are exempt from
and the CFTC have set minimum capital • The committee’s consideration of the registering with the SEC as a broker.
requirements. Under its Consolidated independence of any compensation However, they are subject to the
Supervised Entity program, the SEC adviser SEC’s examination, enforcement
requires that broker-dealers have at • The committee’s responsibility for and rulemaking authority, and they
least $5 billion in tentative net capital the appointment, compensation and must register with an applicable self-
(i.e., net liquid assets). However, this oversight of the work done by any regulatory organization.
proved to be insufficient in the case of compensation adviser In June 2012, FINRA issued a
Lehman Brothers in 2008, when a lack of regulatory notice seeking comments
liquidity exposed the firm’s inability to This final rule was issued to comply on the proposed regulation of
realize its measured fair value. FINRA with Section 952 of the Dodd-Frank Act crowdfunding activities. The comment
is now focusing much more closely and became effective on July 27, 2012. period expired on August 31, 2012. Read
on liquidity, asking firms to maintain View the final rule. the Full Notice and comments received
sufficient liquidity at the broker-dealer by FINRA.
level rather than at the holding company
and to perform stress testing to ensure
liquidity is available when needed.
While there are currently no definitive
SEC rules governing liquidity, industry
experts expect to see some liquidity
rules for securities-based swaps dealers
proposed by the end of the year.

Regulators have been
challenged to find the
appropriate model to
determine
the amount of capital that
has to be maintained by
broker-dealers.


Resources

We provide a number of articles and webcasts on financial reform and other topics affecting the banking and securities industries.
Our thought leadership includes the following:

• Top 10 ways banks can grow in 2012 — During recent years, consumers and businesses alike have been in survival mode.
Many industries, including banking, have cut costs to weather the recession. However, austerity alone will not lead to long-
term growth. This Grant Thornton white paper asserts that even in the midst of challenges, banks can take steps to grow.

• Broker-dealer industry update — Articles provide highlights of Grant Thornton roundtable events that focus on hot topics in
the broker-dealer industry.

• Banking industry hot topics — Articles summarize roundtable events hosted by Grant Thornton to discuss important
developments in the banking industry.

• Merger and acquisition services for banks — As advisers to the banking industry, we help clients initiate and execute M&A
transactions in today’s dynamic global market.

• Financial Bulletin — This electronic publication covers regulations and developments affecting the financial services industry.

• Continual stress tests: Peace of mind for banks and regulators —The Federal Reserve Bank has required 19 of the country’s
largest banks to file comprehensive capital plans and perform stress testing in order to evaluate how their operations would
hold up during another economic crisis. This paper details additional key actions decision-makers can use to help manage
liquidity and solvency expectations throughout many types of economic cycles.

• Making ERM work for your institution — In the wake of the financial crisis, corporate risk has received unprecedented
national exposure, with stakeholders, rating agencies, governance organizations, stock exchanges and the media all sharpening
their focus on enterprise risk management (ERM) and its role within institutions today. Despite this sharpened focus, though,
many institutions are still struggling to implement ERM successfully. This issue of Currency outlines steps you can take to
establish an ERM program that fits the needs of your institution.

• New Developments Summary — Periodic bulletins provide detailed summaries of recent technical developments and accounting
pronouncements.

• Currency — Grant Thornton’s electronic newsletter for bank executives is published periodically and covers issues and trends affecting
financial institutions.

• Allowance for loan and lease losses (ALLL) adjustment factors — The ALLL for a bank has several components. The primary
components consist of loans collectively evaluated for impairment (the FAS 5 component), loans individually evaluated for impairment
(the FAS 114 component), and loans acquired with deteriorated credit quality (the SOP 03-3 component). This paper focuses on the
FAS 5 component of the allowance.

Visit www.GrantThornton.com/financialservices for more information.


About the publication
This Grant Thornton LLP bulletin provides
Banking and Securities practice upcoming events information and comments on current
accounting issues and developments.
Date and time Name Type It is not a comprehensive analysis of
Oct. 24, 2012 4:30–7 p.m. EST Broker-Dealer Industry Hot Topics Symposium (New York, N.Y.) Event the subject matter covered and is not
intended to provide accounting or other
Oct. 25, 2012 3–4:30 p.m. EST The JOBS Act and tick sizes: Decimalization, public policy Webcast advice or guidance with respect to
and the impact on banks the matters addressed in the bulletin.
All relevant facts and circumstances,
Nov. 1, 2012 2–3:30 p.m. EST Compliance, BASEL III, and beyond Webcast including the pertinent authoritative
literature, need to be considered to
Nov. 9, 2012 2–4 p.m. EST Regulatory risk for bank executives Webcast arrive at conclusions that comply with
matters addressed in this document.
Nov. 28, 2012 4:30–7 p.m. EST Banking Industry Hot Topics Symposium (New York, N.Y.) Event
Acknowledgements
Nov. 30, 2012 2:00–3 p.m. EST M&A for banks: Maximizing opportunity as a buyer or a seller Webcast Molly Curl, Kendra Decker, Karen Elliott,
Richard Flowers, Debra Hahn, Peter Ladas,
Dec. 6, 2012 2–4 p.m. EST Banking Industry Update Webcast Kristen Malinconico, Jamie Mayer,
Tariq Mirza, Mary Moore Hamrick,
Dec. 7, 2012 2–4 p.m. EST Broker-Dealer Industry Update Webcast Jeff Moskowitz, Eric Stone.

Contact
For additional information about the
topics covered in this document, please
contact your Grant Thornton adviser or
one of the professionals listed below:

Jack Katz
National Managing Partner
Financial Services
T 212.542.9660
E jack.katz@us.gt.com

Nichole Jordan
National Banking and Securities
Industry Leader
The information contained herein is general in nature and based on authorities that are subject to change. It is not intended T 212.624.5310
and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This E nichole.jordan@us.gt.com
material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and
other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information.
© Grant Thornton LLP
Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect
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