The five federal banking agencies (Federal Reserve, CFPB, FDIC, NCUA, and OCC – collectively Agencies) issued a proposed rule on October 20 on the role of supervisory guidance. The proposal codifies and expands upon a 2018 statement from the same agencies about which we previously reported. In November 2018, the Agencies (aside from the NCUA) received a petition for a rulemaking, as permitted under the Administrative Procedure Act, requesting that the Agencies codify the 2018 statement.
The main thrust of the 2018 statement was that supervisory guidance does not have the force and effect of law, and that the Agencies do not take enforcement actions based on supervisory guidance. The current proposal not only reaffirms and clarifies the 2018 statement but, in certain respects, goes further.
The proposal states that the goal of the rule is “to confirm that the agencies will continue to follow and respect the limits of administrative law in carrying out their supervisory responsibilities.” The proposal clarifies that the issuance of MRAs (matters requiring attention) are covered within the scope of regulatory “criticisms.” It also states that supervisory criticisms should not include “generic” or “conclusory” references to safety and soundness; rather they should be specific as to the identified issues. Further, 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, regulations, or order, including a demonstrably unsafe or unsound practice.
One of the most significant aspects of the proposed rule is that it would expressly bar MRAs/supervisory criticisms on the basis of supervisory guidance, stating that "[e]xaminers will not criticize… 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.”
The guidance may only be referenced 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.”
This proposal brings agencies not covered by the August 31, 2020 OIRA Directive (about which we also have reported), largely within that Directive. It is also consistent with an AG Order issued at the beginning of the incumbent administration in 2017, prohibiting the US Department of Justice from publishing most guidance.
While this proposed rule, if finalized, may offer some clarifications and ease some compliance burdens on industry, its practical impact may very well be that it all depends on where a particular entity sits in any given fact pattern. The same entity that does not want to be regulated by “squishy” agency guidance on one day may crave that guidance the next day.
Further, the proposed rule may create ambiguity by allowing supervisory criticisms to be based on, among other things, “practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution….” Inasmuch as safety-and-soundness issues are frequently addressed in supervisory guidance rather than regulations, will safety-and-soundness criticisms that reflect prudential guidance be within the scope of the proposed rule?
Final action to adopt the proposed rule is by no means assured. The comment period on the proposed rule will close 60 days after publication in the Federal Register, which will extend the rulemaking proceeding into at least late December, well after the November 3 presidential election. If there is a change in administration, would the Agencies adopt the proposed rule prior to the inauguration of the new president? And if they do and there is a change in party control of the Senate (assuming no change in control of the House), would a final rule be reviewable and subject to invalidation under the Congressional Review Act, which allows Congress by joint resolution and the approval of the president to disapprove an agency rule within 60 days of the rule’s adoption? The answers to these questions, as should be readily apparent, are not clear, although answers may begin to emerge after the upcoming election.