Stepping off the curb: A better governance structure and effective operating models for regulatory reporting

Regulatory reporting operating model – A new paradigm

Heightened regulatory expectations for regulatory reporting requires institutions to focus on preparing high-quality reports. One key element of this focus should be a governance structure that enforces accountability, measures data quality, mitigates reporting and operational risks, and allocates resources to address data and financial reporting challenges.

An “optimized” regulatory operating model involves managing and measuring regulatory reporting risk as a firm-wide activity. As such, the regulatory reporting operating model should follow a centralized framework, where corporate finance, risk, and business line executives create an equal partnership. Current regulatory expectations reflect that the historical operating models, such as projects with little accountability at the business line, are too often ineffective.  That is, the historical model cannot support the demand for high quality, fit-for-purpose data at a granular level with ever increasing complexity.

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CMS releases ACA plans’ final Notice of Benefit and Payment Parameters for 2019

On April 9, 2018, the Centers for Medicare and Medicaid Services (CMS) released the final version of the annual Notice of Benefit and Payment Parameters (NBPP) for 2019. The NBPP provides the ground rules for the individual and small group health insurance markets for 2019, and is the main body of federal regulation for Exchange plans established by the Affordable Care Act.

Of particular note are provisions granting states additional flexibility to the definition of Essential Health Benefits (EHBs), and other new authorities for states regarding the certification of Qualified Health Plans (QHPs) for network adequacy. CMS stated that, “issuer exits and increasing premiums have threatened the stability of the individual and small group Exchanges” may best be addressed through greater state control over their insurance markets and to support innovative insurance models.

The NBPP is scheduled to be published in the Federal Register on April 17, 2018.

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CMS provides greater payment rate increase for Medicare Advantage, Part D plans for 2019

The Centers for Medicare and Medicaid Services (CMS) on April 2, 2018, released the final version of the 2019 Medicare Advantage (MA) Capitation Rates, combined with the MA and Part D Payment Policies and the Part D Call Letter. CMS followed up with the release of the final rule, Contract Year 2019 Policy and Technical Changes to the Medicare Advantage, Medicare Cost Plan, Medicare Fee-for-Service, the Medicare Prescription Drug Benefit Programs, and the Program for All-inclusive Care for the Elderly (PACE) on Friday, April 6, 2018.

The final rule is scheduled for publication in the Federal Register on April 16, 2018.

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CMS leaders report to Congress on MACRA implementation

On Wednesday, March 21, the House Ways and Means Committee held a hearing on the implementation of the Medicare Access and CHIP Reauthorization Act’s physician payment policies. The committee heard testimony from Demetrios Kouzoukas, Principal Deputy Administrator, and Dr. Kate Goodrich, the Chief Medical Officer for the Centers for Medicare and Medicaid Services (CMS).

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FDIC Part 370 frequently asked questions

For the benefit of insured depository institutions with two million or more deposit accounts (a “Covered Institution” or “CI”), FDIC has recently published a compilation of frequently asked questions (“FAQs”) from the inquiries it had received from covered institutions as well as outreach meetings it had conducted with them. This publication also provides FDIC responses and staff opinions as guidance to covered institutions in implementing 12 C.F.R. Part 370 (“Part 370”).

In the publication, FDIC also notes that the Technical Guide will be updated over time, as when “new information regarding system architecture, interfaces, capabilities, and limitations may come to light resulting in additional feedback” from input from FDIC to covered institutions.

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Allowance for credit losses and FFIEC 002 reporting

The significant changes in the accounting for credit losses (e.g., Current Expected Credit Losses or “CECL”, and International Financial Reporting Standards 9 or “IFRS 9”) can have a unique effect on the US branches and agencies of foreign banking organizations (FBOs).  As US banking institutions are in the process of getting ready for the upcoming requirement, this may also be a good time to discuss the relevant Allowance for Loan and Lease Losses (ALLL) considerations for the US branches and agencies of the FBOs. In this article, we consider the current reporting, common problems, and issues to be considered concerning the adoption of CECL.

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Appeals Court vacates DOL fiduciary rule

On March 15, 2018, the US Court of Appeals for the Fifth Circuit (the “Court”) issued a decision vacating the Department of Labor’s (DOL) “Conflict of Interest Rule” on fiduciary investment advice (the “Rule”).  The court concluded that the DOL exceeded its regulatory authority in implementing the rule, which set forth a new definition of an ERISA investment-advice fiduciary and modified and created new exemptions to prohibited transactions.  Because the court found that the regulatory package is “plainly not amenable to severance,” it vacated the rule in its entirety.

The court has until May 7, 2018 to file the mandate allowing the decision to take effect (giving the government time to file a petition for rehearing en banc or appeal to the Supreme Court). While there are several possible outcomes, including appeal, this decision is the most significant blow to the Rule since its finalization in April 2016.

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Senate passes financial services regulatory reform bill, would amend key Dodd-Frank thresholds

On March 14, 2018, the Senate passed, by a vote of 67 to 31, S. 2155 (the “Economic Growth, Regulatory Relief, and Consumer Protection Act”), which marks the most significant changes to the Dodd-Frank Act since its enactment in 2010.

Most notably, the bill would raise the statutory asset thresholds related to the imposition of enhanced prudential standards (EPS) and the Dodd-Frank Act stress tests (DFAST):

  • EPS – The threshold would be raised from $50 billion to $250 billion, though the Federal Reserve Board (FRB) would retain the authority to impose EPS on banks with between $100 billion and $250 billion in assets.
  • DFAST – The threshold for the FRB’s annual supervisory stress test would be raised from $50 billion to $250 billion and the threshold for the company-run stress test would be raised from $10 billion to $250 billion, though the FRB would be required to conduct a separate, periodic supervisory stress test of banks with between $100 billion and $250 billion in assets.

Below are several key takeaways with respect to the bill’s potential impact on regulatory thresholds.

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Proposed capital rules for swap dealers and security-based swap dealers

In December 2016, the Commodity Futures Trading Commission (“CFTC”) released its re-proposed capital rules for swap dealers (“SDs”) and major swap participants (“MSPs”).1  Additionally, the Securities and Exchange Commission (“SEC”) proposed its capital rules in 20122 for security-based SDs and MSPs.  The CFTC’s re-proposal attempts to accomplish several things, including harmonization with the proposed SEC capital rules.  It further provides optionality for financial and non-financial SDs regarding computing capital under a standardized versus models-based approaches.3  It is important for each financial SD to assess the implications of the proposed rulemaking to its swap dealing operating model.  Questions to consider include:  (1) Why should SDs consider a models-based capital approach versus non-model?  (2) How does entity type (e.g., bank, broker-dealer) impact capital methodology?

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Exam priorities for financial services firms in 2018

The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) recently released their annual examination priorities for 2018.  Although the regulators independently develop their areas of focus, there are five overlapping priorities that securities firms may want to address in the near term.

The SEC’s priorities are organized around five thematic areas: (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and the Municipal Securities Rulemaking Board (MSRB); (4) cybersecurity; and (5) anti-money laundering (AML) programs.

FINRA’s priorities fall into six main categories: (1) fraud, (2) high-risk and firms and brokers, (3) operational and financial risks, (4) sales practice risks, (5) market integrity, and (6) new rules.

Our detailed review reveals five priorities shared by the SEC and FINRA:

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