The use of supervisory guidance by the federal banking agencies has been the cause of much consternation in the banking industry, given that guidance is, well, guidance, and does not have the force and effect of law. Until recently it was not uncommon for institutions to be cited for violations of or noncompliance with supervisory guidance. However, at the end of October 2020, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, and Bureau of Consumer Financial Protection (collectively, the "Agencies") issued a notice of proposed rulemaking to clarify and codify the Agencies' Role of Supervisory Guidance (Proposed Rule)—thereby setting the record straight.
The Proposed Rule builds on the Agencies' September 2018 Interagency Statement Clarifying the Role of Supervisory Guidance (2018 Guidance) and responds to a petition for a rulemaking seeking to ensure the 2018 Guidance is binding on future agency leadership and staff and to address certain identified ambiguities. With certain clarifications, the 2018 Guidance is codified as an appendix to the rule text. Written comments are due January 4, 2021.
What is supervisory guidance? How is it used? How will the Agencies approach supervisory guidance going forward? Here is what you need to know.
What Supervisory Guidance Does (and What It Does Not Do)
The purpose of supervisory guidance is to "advise the public prospectively of the manner in which the agency proposes to exercise a discretionary power." More specifically, supervisory guidance:
- Outlines supervisory expectations or priorities and sets forth the Agencies' general views on appropriate practices for a given subject area.
- May provide examples of practices that the Agencies generally consider consistent with safety and soundness standards or other applicable laws and regulations. Any thresholds are exemplary only.
- Includes interagency statements, advisories, bulletins, policy statements, questions and answers, and frequently asked questions.
- Does NOT create binding, enforceable legal obligations.
How Is Supervisory Guidance Used (and Not Used)
The Proposed Rule clarifies the uses of supervisory guidance. Specifically, the Proposed Rule provides the following:
- Violations of or noncompliance with supervisory guidance may not serve as a basis for supervisory criticisms.
- Criticisms include the issuance of MRAs and other supervisory criticisms, including matters requiring board attention, documents of resolution, and supervisory recommendations.
- Enforcement actions will not be issued on the basis of violations of or noncompliance with supervisory guidance.
- Supervisory criticisms are not to include generic or conclusory references to safety and soundness, but rather must be specific as to practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.
- Supervisory criticisms may reference supervisory guidance, but only 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.
Agency Approach to Supervisory Guidance
Going forward, in connection with supervisory guidance, the Agencies intend to do the following:
- Limit the use of bring-lines and numerical thresholds in supervisory guidance—again, any thresholds are exemplary only.
- Limit the issuance of multiple guidance documents on the same topic.
- Make the role of supervisory guidance clear to examiners.
- Encourage institutions to engage with their agency contact concerning questions regarding supervisory guidance.
- Seek comments on supervisory guidance to inform the Agencies with respect to a particular supervisory process—not in an effort to make the guidance regulation.
Parties who want to submit a comment or are interested in this topic area should contact the authors for more information.