Generally

In an important joint statement issued on September 11, 2018, the federal financial regulatory agencies (the FDIC, the OCC, the Federal Reserve, the NCUA, and the CFPB) clarified the role of supervisory guidance, stating that supervisory guidance “does not have the force and effect of law.” Community and regional banks and other regulated financial institutions are applauding this effort by regulators to ensure that both the regulated and their regulators have a clear understanding of the appropriate role of guidance in supervision. Financial institutions over the years have raised numerous concerns about the application of guidance in the examination process, and will likely view this as a positive step towards providing greater clarity.

The agencies said guidance can provide examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers. “Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach,” the agencies point out in the joint statement.

Agencies’ Five Policies and Practices

The agencies’ five policies and practices related to supervisory guidance clarify the following:

  • The agencies intend to limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance. Where numerical thresholds are used, the agencies intend to clarify that the thresholds are exemplary only and not suggestive of requirements. The agencies will continue to use numerical thresholds to tailor, and otherwise make clear, the applicability of supervisory guidance or programs to supervised institutions, and as required by statute.
  • Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance. Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions. During examinations and other supervisory activities, examiners may identify unsafe or unsound practices or other deficiencies in risk management, including compliance risk management, or other areas that do not constitute violations of law or regulation. In some situations, examiners may reference (including in writing) supervisory guidance 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.
  • Agencies may continue to seek, as at times in the past, public comment on supervisory guidance. Seeking public comment on supervisory guidance does not mean that the guidance is intended to be a regulation that has the force and effect of law. The comment process helps the agencies to improve their understanding of an issue, gather information on institutions’ risk management practices, and find ways to achieve a supervisory objective most effectively and with the least burden on institutions.
  • The agencies will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances going forward.
  • The agencies will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions, and encourage supervised institutions with questions about this joint statement or any applicable supervisory guidance to discuss the questions with their appropriate agency contact.

The joint statement is the most explicit move yet by federal financial regulators to downplay guidance such as advisories, bulletins, and frequently asked questions, which some say could circumvent the more rigorous process of writing regulations.

Prelude to Agencies’ Supervisory Guidance Clarification

This joint statement is consistent with a recent U.S. government theme of reducing the perceived role of guidance documents in regulatory oversight and enforcement.

For example, the U.S. Attorney General Jeff Sessions issued a memorandum in November 2017 that stated that the Department of Justice had “in the past published guidance documents … that effectively bind private parties without undergoing the rulemaking process” and directed the DOJ to revise its policy to “avoid circumventing the rulemaking process.” In January 2018, then-Associate Attorney General Rachel Brand issued such a revised policy “limiting use of agency guidance documents in affirmative civil enforcement cases.”

Similarly, the Government Accountability Office has determined that multiple regulatory guidance documents are, in reality, “rules” for purposes of the Congressional Review Act. The CRA provides Congress with the opportunity to disapprove any rule before it takes effect. Most notably, the GAO determined that Consumer Financial Protection Bureau guidance on indirect auto lending under the Equal Credit Opportunity Act, and interagency guidance on leveraged lending, both constituted “rules” under the CRA because the statements were “designed to implement, interpret or prescribe law or policy.” Congress later invalidated the CFPB’s auto lending guidance under the Equal Credit Opportunity Act, and interagency guidance on leveraged lending. It is unclear whether the agencies’ clarifying statement disclaiming the binding effect of guidance will affect future GAO reviews of guidance documents under the CRA.

Conclusion

While this joint statement does properly confirm that regulatory guidance outside of the rule-making process is not binding and does not have the force of law, regulated institutions should nevertheless exercise caution before deciding to contravene any guidance or other suggestions from their governmental regulators. Guidance does tend to be derived from underlying regulations and laws, so at a minimum financial institutions deciding to forego guidance should understand the origins of that guidance before taking a different approach. As G.K. Chesterton said, “don’t ever take down a fence until you know the reason it was put up.” This cautious approach helps ensure that operations continue to comply with all applicable laws and regulations. This policy-making process should be documented, and a generally conservative philosophy of minimizing departures from regulatory guidance may help minimize risks.

Last (but not least), financial institutions should obtain experienced regulatory counsel to assist them evaluating these issues and developing new policies.