Joint Report to Congress, July 31, 2007; Economic Growth and Regulatory Paperwork Reduction Act, 62036-62104 [07-5385]

Agencies

• Federal Financial Institutions Examination Council

[Federal Register Volume 72, Number 211 (Thursday, November 1, 2007)]
[Notices]
[Pages 62036-62104]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-5385]



[[Page 62035]]

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Part IV





Federal Financial Institutions Examination Council





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Joint Report to Congress, July 31, 2007; Economic Growth and Regulatory 
Paperwork Reduction Act; Notice

Federal Register / Vol. 72, No. 211 / Thursday, November 1, 2007 / 
Notices

[[Page 62036]]


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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL


Joint Report to Congress, July 31, 2007; Economic Growth and 
Regulatory Paperwork Reduction Act

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Notice.

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SUMMARY: Pursuant to section 2222 of the Economic Growth and Regulatory 
Paperwork Reduction Act of 1996 (EGRPRA), the Federal Financial 
Institutions Examination Council (FFIEC) is publishing a report 
entitled ``Joint Report to Congress, July 31, 2007, Economic Growth and 
Regulatory Paperwork Reduction Act'' prepared by its constituent 
agencies: The Board of Governors of the Federal Reserve System (Board), 
the Federal Deposit Insurance Corporation (FDIC), the National Credit 
Union Association (NCUA), the Office of the Comptroller of the Currency 
(OCC), and the Office of Thrift Supervision (OTS) (collectively, the 
Agencies).

FOR FURTHER INFORMATION CONTACT: OCC: Heidi Thomas, Special Counsel, 
Legislative and Regulatory Activities Division, (202) 874-5090; or Lee 
Walzer, Counsel, Legislative and Regulatory Activities Division, (202) 
874-5090, Office of the Comptroller of the Currency, 250 E Street, SW., 
Washington, DC 20219.
    Board: Patricia A. Robinson, Assistant General Counsel, (202) 452-
3005; or Michael J. O'Rourke, Counsel, (202) 452-3288; or Alexander 
Speidel, Attorney, (202) 872-7589, Legal Division; or John C. Wood, 
Counsel, Division of Consumer and Community Affairs, (202) 452-2412; or 
Kevin H. Wilson, Supervisory Financial Analyst, Division of Banking 
Supervision and Regulation, (202) 452-2362, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551. For users of Telecommunication Device for the 
Deaf (TDD) only, contact (202) 263-4869.
    FDIC: Steven D. Fritts, Associate Director, Division of Supervision 
and Consumer Protection, (202) 898-3723; or Ruth R. Amberg, Senior 
Counsel, Legal Division, (202) 898-3736; or Susan van den Toorn, 
Counsel, Legal Division, (202) 898-8707, Federal Deposit Insurance 
Corporation, 550 17th Street, NW., Washington, DC 20429.
    OTS: Karen Osterloh, Special Counsel, Regulations and Legislation 
Division, (202) 906-6639; or Josephine Battle, Program Analyst, 
Operation Risk, Supervision Policy, (202) 906-6870, Office of Thrift 
Supervision, 1700 G Street, NW., Washington, DC 20552.
    NCUA: Ross P. Kendall, Staff Attorney, Office of the General 
Counsel, (703) 518-6562, National Credit Union Administration, 1775 
Duke Street, Alexandria, VA 22314-3428.

SUPPLEMENTARY INFORMATION: EGRPRA requires the FFIEC and the Agencies 
to conduct a decennial review of regulations, using notice and comment 
procedures, to identify outdated or otherwise unnecessary regulatory 
requirements imposed on insured depository institutions. 12 U.S.C. 
3311(a)-(c). The FFIEC and the Agencies have completed this review and 
comment process.
    EGRPRA also requires the FFIEC or the appropriate agency to publish 
in the Federal Register a summary of comments that identifies the 
significant issues raised and comments on these issues; and to 
eliminate unnecessary regulations to the extent that such action is 
appropriate. 12 U.S.C. 3311(d). The FFIEC also must submit a report to 
Congress that includes a summary of the significant issues raised and 
the relative merits of these issues, and an analysis of whether the 
appropriate agency is able to address the regulatory burdens associated 
with these issues by regulation or whether the burdens must be 
addressed by legislative action. 12 U.S.C. 3311(e). The attached report 
fulfills these requirements for the recently completed review of 
regulations. The text of the Joint Report to Congress, July 31, 2007, 
Economic Growth and Regulatory Paperwork Reduction Act, follows:

Preface \1\
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    \1\ John M. Reich, Director of the Office of Thrift Supervision 
and the leader of the interagency EGRPRA program, wrote this 
Preface.
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    Prudent regulations are absolutely essential to maintain rigorous 
safety and soundness standards for the financial services industry, to 
protect important consumer rights, and to assure a level-playing field 
in the industry. As a regulator, I clearly understand the need for 
well-crafted regulation.
    However, outdated, unnecessary or unduly burdensome regulations 
divert precious resources that financial institutions might otherwise 
devote to making more loans and providing additional services for 
countless individuals, businesses, nonprofit organizations, and others 
in their communities. Over the years, Congress passed a variety of laws 
to deal with problems that have cropped up and the regulators adopted 
numerous regulations to implement those laws. In fact, over the past 17 
years, the federal bank, thrift, and credit union regulators have 
adopted more than 900 rules. Accumulated regulation has reached a 
tipping point for many community banks and has become an important 
causal factor in recent years in accelerating industry consolidation.
    In passing the Economic Growth and Regulatory Paperwork Reduction 
Act of 1996 (EGRPRA), Congress clearly recognized the need to eliminate 
any unnecessary regulatory burden. That is why Congress directed the 
Federal Financial Institutions Examination Council and its member 
agencies to review all existing regulations and eliminate (or recommend 
statutory changes that are needed to eliminate) any regulatory 
requirements that are outdated, unnecessary, or unduly burdensome.
    As this comprehensive report makes clear, the agencies have worked 
diligently to satisfy the requirements of EGRPRA. Over a three-year 
period ending December 31, 2006, the agencies sought public comment on 
more than 130 regulations, carefully analyzed those comments (as 
indicated in this report), and proposed changes to their regulations to 
eliminate burden wherever possible.
    In addition to obtaining formal, written comments on all of our 
regulations, the federal banking agencies hosted a total of 16 outreach 
sessions around the country involving more than 500 participants in an 
effort to obtain direct input from bankers, representatives of 
consumer/community groups, and many other interested parties on the 
most pressing regulatory burden issues.
    Besides reviewing all of our existing regulations in an effort to 
eliminate unnecessary burdens, the federal banking agencies worked 
together to minimize burdens resulting from new regulations and current 
policy statements as they were being adopted. We also reviewed many 
internal policies in an effort to streamline existing processes and 
procedures. Finally, we have sought to communicate our regulatory 
requirements, policies and procedures more clearly to our 
constituencies to make them easier to understand.
    On the legislative front, the federal banking agencies worked 
together, preparing and reviewing numerous legislative proposals to 
reduce regulatory burden, testifying before Congress on several 
occasions about the need for regulatory burden relief, and providing 
technical assistance to the staff of the Senate Banking Committee and 
the House Financial Services

[[Page 62037]]

Committee on their regulatory relief bills. Congress ultimately passed, 
and the President signed into law, the Financial Services Regulatory 
Relief Act of 2006. As part of this process, the agencies, 
representatives of the industry, and consumer and community groups were 
asked to provide positions on the many legislative proposals that were 
submitted to Congress. The 2006 Act included a number of important 
regulatory relief provisions.
    Financial institutions of all sizes suffer under the weight of 
unnecessary regulatory burden, but smaller community banks 
unquestionably bear a disproportionate share of the burden due to their 
more limited resources. While it is difficult to accurately measure the 
impact regulatory burden has played in industry consolidation, numerous 
anecdotal comments from bankers across the country as well as from 
investment bankers who arrange merger and acquisition transactions 
indicate it has become a significant factor. Accordingly, I am deeply 
concerned about the future of our local communities and the 
approximately 8,000 community banks under $1 billion in assets that 
represent 93 percent of the industry in terms of total number of 
institutions but whose share of industry assets has declined to 
approximately 12.5 percent, and whose share of industry profits have 
declined to approximately 11.2 percent (as of December 31, 2006).
    Community banks play a vital role in the economic wellbeing of 
countless individuals, neighborhoods, businesses and organizations 
throughout our country, often serving as the economic lifeblood of 
their communities. Many of the CEOs of these institutions are concerned 
about their ability to profitably compete in the future, unless there 
is a slowdown in the growth of new banking regulations.
    Ultimately, a significant amount of the costs of regulation are 
borne by consumers, resulting in higher fees and interest rates. If 
financial services are going to continue to be affordable, and in fact 
if we are going to be successful in bringing more of the unbanked into 
the mainstream, constant vigilance will be required to avoid the 
increasing costs resulting from the burden of accumulated regulations.
    With every new regulation or policy imposed on the industry, I 
think it is important for Congress and the agencies to consider the 
regulatory burden aspects and to minimize those burdens to the extent 
possible. I want to take this opportunity to thank my colleagues at 
each of the agencies for their active support and participation on this 
interagency project. The staffs at each of the agencies devoted much 
time and energy to make sure we met not only the letter of the EGRPRA 
law, but the spirit as well. We look forward to continuing to work with 
Congress on these important issues and continuing to use the valuable 
information about regulatory burden issues that was shared with the 
agencies by the many participants in the EGRPRA process.

I. Joint Agency Report

A. Introduction

    This report describes the actions by the Federal Financial 
Institutions Examination Council (FFIEC) and each of its member 
agencies: The Board of Governors of the Federal Reserve System (the 
Board), Federal Deposit Insurance Corporation (FDIC), National Credit 
Union Administration (NCUA), Office of the Comptroller of the Currency 
(OCC), and Office of Thrift Supervision (OTS), hereinafter ``the 
Agencies,'' \2\ to fulfill the requirements of the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996 (EGRPRA). Section 2222 of 
EGRPRA requires the Agencies to:
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    \2\ In 2006, the State Liaison Committee, which represents state 
bank and credit union regulators, was added to the FFIEC as a voting 
member.
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     Conduct a decennial review of their regulations, using 
notice and comment procedures, in order to identify those that impose 
unnecessary regulatory burden on insured depository institutions;
     Publish in the Federal Register a summary of comments 
received during the review, together with the Agencies' identification 
and response to significant issues raised by the commenters;
     Eliminate any unnecessary regulations, if appropriate; and
     Submit a report to Congress that discusses the issues 
raised by the commenters and makes recommendations for legislative 
action, as appropriate.
    The Agencies have completed the first decennial review of their 
regulations. This report to Congress includes both the Agencies' 
comment summary and their discussion and analysis of significant issues 
identified during the EGRPRA review process. The report also describes 
legislative initiatives that would further reduce unnecessary 
regulatory burden on insured depository institutions, including, in 
some cases, references to current initiatives being considered by 
Congress. Separately, the Agencies have published in the Federal 
Register a summary of comments received, together with the Agencies' 
identification and response to significant issues raised by the 
commenters. Finally, since the inception of the EGRPRA review process 
in 2003, the Agencies have individually and collectively started a 
number of burden-reducing initiatives. This report describes those 
accomplishments.
    Throughout the EGRPRA process, NCUA participated in the planning 
and comment solicitation process with the federal banking agencies. 
Because of the unique circumstances of federally insured credit unions 
and their members, however, NCUA established its own regulatory 
categories and publication schedule and published its notices 
separately. NCUA's notices were consistent and comparable with those 
published by the federal banking agencies, except on issues unique to 
credit unions. In keeping with this separate approach, the discussion 
of NCUA's regulatory burden reduction efforts and analysis of 
significant issues is set out separately in Part II of this report. The 
summary of comments received by NCUA is contained in Appendix II-B.
    The Agencies' EGRPRA-mandated review coincided with work in the 
109th Congress on regulatory relief legislation. Each Agency presented 
testimony to congressional oversight committees about priorities for 
regulatory burden relief and described the burden-reducing impact of 
legislative proposals that were under consideration by Congress. The 
Agencies' ongoing work on the EGRPRA review laid the foundation for 
them to achieve consensus on a variety of burden-reducing legislative 
proposals. A number of these proposals were enacted as part of the 
Financial Services Regulatory Relief Act of 2006 (FSRRA), which was 
signed into law on October 13, 2006.\3\ Appendix I-A of this report 
highlights key burden-reducing provisions included in that legislation.
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    \3\ Pub. L. 109-351.
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B. The Federal Banking Agencies' EGRPRA Review Process

1. Overview of the EGRPRA Review Process
    Consistent with the requirements of EGRPRA, the federal banking 
agencies first categorized their regulations, and then published them 
for comment at regular intervals, asking commenters to identify for 
each of the categories regulations that were outdated, unnecessary or 
unduly burdensome.\4\
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    \4\ As noted above, the NCUA developed its own categories of 
regulations and published its notices separately from the bank 
regulatory agencies. Details relating to its regulatory categories 
and its burden reduction efforts are set out Part II of this report. 
The summary of comments received by NCUA is attached as Appendix II-
B of this report.

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    The 131 regulations were divided into 12 categories, listed below 
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alphabetically:

     Applications and Reporting
     Banking Operations
     Capital
     Community Reinvestment Act
     Consumer Protection
     Directors, Officers and Employees
     International Operations
     Money Laundering
     Powers and Activities
     Rules of Procedure
     Safety and Soundness
     Securities

    Semiannually, the federal banking agencies published different 
categories of regulations. The first Federal Register notice was 
published on June 16, 2003. It sought comment on the agencies' overall 
regulatory review plan as well as the following initial three 
categories of regulations for comment: Applications and Reporting; 
Powers and Activities; and International Operations.\5\ The federal 
banking agencies requested public comment about the proposed categories 
of regulation, the placement of the rules within each category and the 
agencies' overall plan for reviewing all of their regulations.
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    \5\ 68 FR 35589.
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    The federal banking agencies adjusted the proposed publication 
schedule due to concerns raised that the consumer regulation category 
encompassed so many different regulations that it would prove too 
burdensome to respond adequately within the comment period timeframe. 
As a result, the agencies divided that category into two notices with 
smaller groups of regulations for review and comment.
    There were a total of six Federal Register notices, each issued at 
approximately six-month intervals with comment periods of 90 days. In 
response to these comment requests, the agencies received more than 850 
letters from bankers, consumer and community groups, trade associations 
and other interested parties.
    There were numerous recommendations to reduce regulatory burden or 
otherwise improve existing regulations. Each recommendation was 
carefully reviewed and analyzed by the staffs of the appropriate 
federal banking agency or agencies to determine whether proposals to 
change specific regulations were appropriate.
    To further promote public input, the federal banking agencies also 
co-sponsored 10 outreach sessions for bankers, as well as 3 outreach 
sessions for consumer and community groups, in cities around the 
country. The agencies then sponsored three joint banker and consumer/
community group focus meetings in an effort to develop greater 
consensus among the parties on legislative proposals to reduce 
regulatory burden. (Please refer to Appendix I-B for a more complete 
discussion of the federal banking agencies' EGRPRA review process as 
well as a table indicating the timing and categories of regulations 
that were published for comment as part of the EGRPRA process.)
2. Significant Issues Arising From the EGRPRA Review and the Federal 
Banking Agencies' Responses
    Section 2222 of EGRPRA requires a summary of the significant issues 
raised by the public comments and the Agencies' responses and comments 
on the merits of such issues and analysis of whether the Agencies are 
able to address the issues by regulation or whether legislation is 
required. Several significant issues received substantial federal 
banking agency support and were successfully included in the FSRRA 
during the 109th Congress. Below is a summary of the significant issues 
and relevant comments received by the federal banking agencies together 
with the banking agencies' recommendations.
a. Bank Secrecy Act/Currency Transaction Report
    Issues:
    (1) Should the $10,000 Currency Transaction Report (CTR) threshold 
be increased to some higher level?
    (2) Can the CTR forms be simplified to require less information on 
each form?
    (3) Should the existing CTR exemption process be revised to make it 
less burdensome on the industry, such as by adopting a ``seasoned 
customer'' exemption?
    Context: The $10,000 threshold for filing CTRs has not changed 
since the requirement was first established by the Department of the 
Treasury some 30 years ago. Financial institutions are required to 
report currency transactions in excess of $10,000. These reports are 
filed pursuant to requirements implemented in rules issued by the 
Department of the Treasury and are filed with the Internal Revenue 
Service. In addition to the appropriate federal supervisory agency for 
the financial institution (including the Board, FDIC, OCC, and OTS), 
the Financial Crimes Enforcement Network (FinCEN), Federal Bureau of 
Investigation (FBI), and other federal law enforcement agencies use CTR 
data. The FBI and other law enforcement bodies have stated that CTR 
requirements serve as an impediment to criminal attempts to legitimize 
the proceeds of a crime. Moreover, they serve as a key source of 
information about the physical transfer of currency, at the point of 
the transaction.
    Comments: Many of the written and oral comments received during the 
EGRPRA process reflected widespread concern that the reports' 
effectiveness had become degraded over time, because ever-larger 
numbers of transactions met or surpassed the threshold, resulting in 
growing numbers of CTR filings. Many commenters and participants in the 
outreach meetings expressed concern that, with the increased number of 
CTR filings, the federal banking and law enforcement agencies were not 
able to make effective use of the information being provided. 
Commenters noted that the low threshold for CTR filings created more 
regulatory burden for banks. One commenter noted that certain policies 
such as requiring banks to continue filing for exempt status for 
transactions between themselves were unnecessary.
    Several commenters raised concerns about the burdens associated 
generally with the CTR process and the utility of the information that 
depository institutions must provide. To ease some of this burden, 
commenters urged the adoption of a broader ``seasoned customer'' 
exemption, as well as other reforms in the CTR process. The federal 
banking agencies received several comments about the difficulties of 
obtaining a CTR exemption under current procedures. Some bankers 
contended that it was easier for a bank to file a Suspicious Activity 
Report (SAR) than to undertake the determination that a customer 
qualified for an exemption from the CTR filing requirement. One 
commenter suggested that the Agencies grant exemptions through a one-
time filing (and eliminate the yearly filing requirement).
    Although the federal banking agencies received extensive comments 
on the burdens associated with the CTR filing process, there were no 
concrete suggestions as to what types of information were unnecessary 
in the context of a CTR filing. One commenter suggested that lowering 
the threshold would reduce duplicative paperwork burden, while another 
noted that the process of requesting an exemption from CTR reporting 
was too complicated. Another commenter suggested replacing

[[Page 62039]]

daily CTR filings with monthly cash transaction reporting.
    Current Initiatives: Congress recently enacted legislation that 
requires the Government Accountability Office (GAO) to conduct a study 
of the CTR process. Section 1001 of the FSRRA requires the Comptroller 
General of the United States to conduct a study and submit a report to 
Congress within 15 months of enactment of the legislation on the volume 
of CTRs filed. The FSRRA also requires the Comptroller General to 
evaluate, on the basis of actual filing data, patterns of CTRs filed by 
depository institutions of various sizes and locations. The study, 
which will cover a period of three calendar years before the 
legislation was enacted, will identify whether, and the extent to 
which, CTR filing rules are burdensome and can or should be modified to 
reduce burden without harming the usefulness of such filing rules to 
federal, state, and local anti-terrorism, law enforcement, and 
regulatory operations.
    The study will examine the:
    1. Extent to which financial institutions are taking advantage of 
the exemption system available;
    2. Types of depository institutions using the exemption system, and 
the extent to which the exemption system is used;
    3. Difficulties that limit the willingness or ability of depository 
institutions to reduce their CTR reporting burden by taking advantage 
of the exemption system;
    4. Extent to which bank examination problems have limited the use 
of the exemption system;
    5. Ways to improve the use of the exemption system, including 
making the exemption system mandatory so as to reduce the volume of 
CTRs unnecessarily filed;
    6. Usefulness of CTR for law enforcement, in light of advances in 
information technology;
    7. Impact that various changes in the exemption system would have 
on the usefulness of CTR; and
    8. Changes that could be made to the exemption system without 
affecting the usefulness of CTR.
    The study is to contain recommendations, if appropriate, for 
changes in the exemption system that would reflect a reduction in 
unnecessary costs to depository institutions, assuming a reasonably 
full implementation of the exemption system, without reducing the 
usefulness of the CTR filing system to anti-terrorism, law enforcement, 
and regulatory operations.
    The GAO produced a report in April 2006 that looked at Bank Secrecy 
Act (BSA) enforcement and made three recommendations to improve 
coordination among FinCEN and the federal banking agencies:
    1. As emerging risks in the money laundering and terrorist 
financing area are identified, the federal banking agencies and FinCEN 
should work together to ensure that these are effectively communicated 
to both examiners and the industry through updates of the interagency 
examination manual and other guidance, as appropriate;
    2. To supplement the analysis of shared data on BSA violations, 
FinCEN and the federal banking agencies should periodically meet to 
review the analyses and determine whether additional guidance to 
examiners is needed; and
    3. In light of the different terminology the federal banking 
agencies use to classify BSA noncompliance, FinCEN and the federal 
banking agencies should jointly assess the feasibility of developing a 
uniform classification system for BSA violations.\6\
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    \6\ See ``Bank Secrecy Act: Opportunities Exist for FinCEN and 
the Banking Regulators to Further Strengthen the Framework for 
Consistent BSA Oversight,'' Report to the Committee on Banking, 
Housing and Urban Affairs, U.S. Senate, U.S. Government 
Accountability Office, at pages 19-20 (April 2006).
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    The federal banking agencies have undertaken several initiatives 
that address the GAO's recommendations to improve coordination among 
the agencies and FinCEN regarding BSA enforcement, including the 
measures outlined below.
    Under the auspices of the FFIEC BSA/Anti-Money Laundering (AML) 
Working Group, the federal banking agencies, FinCEN, and the Conference 
of State Bank Supervisors (CSBS) continue to meet monthly to address 
all facets related to BSA/AML policy, examination consistency, 
training, and issues associated with BSA compliance. Under the auspices 
of their General Counsels, the federal banking agencies have developed 
and published an Interagency Statement on Enforcement of BSA/AML 
Requirements to help ensure consistency among the agencies in BSA 
enforcement activities.\7\ The federal banking agencies and FinCEN also 
work together to issue appropriate guidance to financial institutions 
on how to meet BSA/AML compliance requirements. One example of a joint 
product is the FFIEC BSA/AML Examination Manual that was issued to 
ensure consistency in BSA/AML examinations by providing a uniform set 
of examination procedures. The manual is a compilation of existing 
regulatory requirements, supervisory expectations, and sound practices 
in the BSA/AML area. The manual provides substantial guidance to 
institutions in establishing and administering their BSA/AML programs 
and is updated to incorporate emerging risks in the money laundering 
and terrorist financing area, as deemed appropriate by the federal 
banking agencies in consultation with FinCEN.\8\ In addition, the 
federal banking agencies have individually and jointly held frequent 
outreach sessions for the industry to discuss such guidance and 
emerging issues.
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    \7\ See Interagency Statement on Enforcement of Bank Secrecy 
Act/Anti-Money Laundering Requirements, July 19, 2007.
    \8\ The FFIEC BSA/AML Examination Manual was issued in 2005 and 
revised in 2006; further revisions are underway for issuance in 
August 2007.
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    Finally, as part of the legislative process leading up to the 
enactment of the FSRRA, Congress considered, but did not enact, other 
statutory proposals for CTR relief. The current Congress also is 
continuing to consider such initiatives and a bill to provide for a 
seasoned customer exemption from CTR filing (H.R. 323, the Seasoned 
Customer CTR Exemption Act of 2007) passed the House of Representatives 
on January 23, 2007. This is similar to a provision passed by the House 
in 2006.
    The federal banking agencies continue to work with FinCEN, as the 
administrator of the BSA, to effectively oversee anti-money laundering 
compliance and ensure the safety and soundness of the financial 
institutions they regulate and to find ways to achieve these goals 
while eliminating unnecessary regulation. Recently, Secretary of the 
Treasury Paulson announced a Treasury initiative to administer the BSA 
in a more efficient and effective manner. The federal banking agencies 
will continue their close coordination with FinCEN to improve its 
communications with the industry. Moreover, the agencies will continue 
to work with Congress to analyze proposed legislative changes and 
provide recommendations and comments as requested.
    Recommendation: The Board, FDIC, OCC, and OTS appreciate the 
comments received concerning the CTR exemption process. The federal 
banking agencies believe that any changes must be carefully balanced 
with the critical needs of law enforcement for necessary information to 
combat money laundering, terrorist financing, and other financial 
crimes. Any changes to the exemption process must not jeopardize or 
detract from law

[[Page 62040]]

enforcement's mission.\9\ The federal banking agencies further believe 
that, in light of the attention and study given to this issue by 
Congress and in other forums, it would be premature to adopt changes in 
this area before the reports and recommendations are complete. 
Therefore, the agencies are not recommending any changes at this time 
but may do so once the GAO finalizes its report.
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    \9\ The FBI has advised that to dramatically alter currency 
transaction reporting requirements--without careful, independent 
study--could be devastating and a significant setback to 
investigative and intelligence efforts relative to both the global 
war on terrorism and traditional criminal activities. Statement of 
Michael Morehart Section Chief, Terrorist Financing Operations, 
Counterterrorism Division, Federal Bureau of Investigation, before 
the Senate Committee on Banking, Housing and Urban Affairs, April 4, 
2006; see also, Statement of Kevin Delli-Colli, Deputy Assistant 
Director, Financial & Trade Investigations Division, Office of 
Investigations, U.S. Immigration and Customs Enforcement, Department 
of Homeland Security, before the Senate Committee on Banking, 
Housing and Urban Affairs, April 4, 2006.
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b. Anti-Money Laundering/Suspicious Activity Report
    Issue: Should the federal banking agencies, together with FinCEN, 
revise or adopt policies relating to SARs to help reduce the number of 
defensive SARs that are being filed?
    Context: Financial institutions must report known or suspected 
criminal activity, at specified dollar thresholds, or transactions over 
$5,000 that they suspect involve money laundering or attempts to evade 
the BSA. SARs play an important role in combating money laundering and 
other financial crimes.
    Comments: Many commenters stated that SAR filing requirements were 
burdensome and costly. Some commenters complained that they filed 
numerous SARs and rarely, if ever, heard back from law enforcement. 
They questioned whether they were simply filing these forms into a 
``black hole.'' One commenter noted that SAR filings make CTR filings 
redundant. Commenters complained both in writing and during the EGRPRA 
bankers' outreach meetings that the filing of SARs and the development 
of an effective SAR monitoring system add to compliance costs for banks 
and imposed a significant regulatory burden on them.
    Current Initiatives: The federal banking agencies, in cooperation 
with FinCEN, seek to pursue effective SAR policies that contribute to 
efforts to track money laundering transactions while minimizing burden 
on regulated institutions that must file such reports. The federal 
banking agencies believe it is important to provide clear guidance to 
financial institutions on all SAR filing issues and will continue to 
work with FinCEN to do so.\10\ In considering what further changes to 
make to SAR policies, it is important to closely coordinate with law 
enforcement so as not to undermine efforts to combat money laundering 
and curtail other illicit financial transactions.
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    \10\ For example, in 2007 FinCEN issued tips for SAR form 
preparation and filing that addressed a variety of issues, including 
what constitutes supporting documentation for a SAR. See ``SAR 
Activity Review, Trends, Tips & Issues,'' Issue 11, May 2007.
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    As noted in the GAO's 2006 report on BSA oversight by the federal 
banking agencies, all of the Agencies have implemented extensive BSA/
AML training for examiners, including joint training through the 
FFIEC.\11\ The federal banking agencies have also stepped up their 
hiring of examiners to meet the need for greater BSA/AML compliance. 
The extensive training federal banking agencies have implemented has 
resulted in greater examiner expertise on BSA/AML matters.
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    \11\ See footnote 6, pages 50-59.
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    In addition, the Department of the Treasury Inspector General 
directed FinCEN to undertake a SAR data quality review, which FinCEN 
subsequently shared with the federal banking agencies. The federal 
banking agencies indicated at the time that they found the analysis of 
the SAR filings to be useful in enabling financial institutions to 
address relevant problems or issues. FinCEN has publicly indicated that 
there is no evidence to suggest that the SAR filings include 
significant numbers of ``defensively filed'' SARs; rather, reviews show 
useful and properly filed reports.\12\
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    \12\ See the prepared remarks of Robert W. Werner, Director, 
FinCEN, before the American Bankers Association/American Bar 
Association Money Laundering Enforcement Conference, October 9, 
2006, available on FinCEN's Web site (https://www.fincen.gov/werner_
statement_10092006.html.
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    Recommendation: The federal banking agencies, along with FinCEN, 
seek to pursue effective SAR policies that contribute to efforts to 
track suspicious transactions while minimizing burden on regulated 
institutions that are required to file such reports. It is important to 
provide clear guidance to financial institutions on all SAR filing 
issues and to continue to work with FinCEN to do so. In considering 
what further changes to make to SAR policies, the Agencies believe that 
it is important to coordinate closely with law enforcement so as not to 
undermine efforts to combat money laundering and curtail other illicit 
financial transactions.
c. Patriot Act
    Issues:
    (1) Can the federal banking agencies provide greater guidance as to 
the types of identification that are acceptable under a bank's Customer 
Identification Program (CIP)?
    (2) Can the recordkeeping requirements under the Uniting and 
Strengthening America by Providing Appropriate Tools Required to 
Intercept and Obstruct Terrorism Act of 2001\13\ (PATRIOT Act) be 
revised to reduce burden?
---------------------------------------------------------------------------

    \13\ Pub. L. No. 107-56, October 26, 2001.
---------------------------------------------------------------------------

    Context: Department of the Treasury and federal banking agency 
regulations require depository institutions to obtain identification 
information from customers as a condition to opening/maintaining 
account relationships.\14\ The regulation requires every depository 
institution to have a written CIP. The CIP must include risk-based 
procedures to enable the depository institution to form a reasonable 
belief that it knows the true identity of each customer. With respect 
to individuals, the regulation requires institutions to obtain, at a 
minimum, the name, date of birth, and address of the prospective 
customer, as well as an identification number, such as a tax 
identification number (for a U.S. person) or, in the case of a non-U.S. 
person, a tax ID number, passport number and country of issuance, alien 
registration number, or the number and country of any other 
identification number evidencing nationality or residence and 
containing a photograph of the individual or similar safeguard. For 
entities such as a corporation, the institution must also obtain a 
principal place of business, local office, or other physical location 
from the business applicant. The CIP must also contain procedures for 
verifying that the customer does not appear on a designated government 
list of terrorists or terrorist organizations. However, to date, the 
government has not designated such a list for purposes of CIP 
compliance.
---------------------------------------------------------------------------

    \14\ See generally 31 CFR 103.121.
---------------------------------------------------------------------------

    The CIP regulations further require institutions to verify the 
identity of customers within a ``reasonable time'' after an account is 
opened. Institutions may conduct such verification through documents, 
non-documentary methods, or some combination of the two. An 
institution's CIP likewise must address situations where the 
institution is unable to verify a customer's identity.
    Comments: During the EGRPRA process, the federal banking agencies 
received extensive comments

[[Page 62041]]

concerning the CIP under the PATRIOT Act. Many commenters noted the 
burden that the requirements impose on institutions and asserted that 
these requirements can cause inconvenience, even for long-time 
customers of a financial institution. Commenters had a number of 
suggestions for improved guidance, including: (1) Amending the 
definition of ``established customer'' to clarify that it refers to a 
customer from whom the bank has already obtained the information 
required by 31 CFR 103.121(b)(2)(i); (2) providing greater clarity 
about the types of identification that are acceptable; and (3) amending 
the definition of ``non-U.S. persons'' to refer only to foreign 
citizens who are not U.S. resident aliens.
    The purpose of the CIP requirements is to aid in addressing both 
money laundering and terrorist financing. It can be crucial to have 
good records about the identity of customers in order to help prosecute 
cases involving money laundering or terrorist financing. Existing rules 
already contain detailed guidance about the types of identification 
that can be used to satisfy the requirements of the PATRIOT Act. In 
addition, the CIP does not apply to existing customers of the financial 
institution provided that the financial institution has a reasonable 
belief that it knows the true identity of the person.
    With respect to recordkeeping requirements, the regulations issued 
pursuant to section 326 of the PATRIOT Act require institutions to keep 
records of their efforts to verify the identity of customers for five 
years after the account is closed. Many institutions commented during 
the EGRPRA process that this recordkeeping requirement was burdensome.
    Current Initiatives: The federal banking agencies have worked in 
close collaboration with FinCEN in an effort to ensure that the 
requirements imposed by the PATRIOT Act are appropriate and necessary, 
and the agencies will continue to work with FinCEN to enhance the 
effectiveness of the Act's requirements while looking for ways to 
reduce the burden on financial institutions. For example, the federal 
banking agencies together with securities and futures industry 
regulators have worked to provide additional guidance on the 
application of the CIP rule. This guidance, in the form of frequently 
asked questions, has been updated as necessary to respond to industry 
questions and can be found on FinCEN's Web site (https://www.fincen.gov/
faqsfinalciprule.pdf). The guidance that applies to depository 
institutions is also incorporated into the FFIEC BSA/AML Examination 
Manual.
    Recommendation: While the federal banking agencies jointly issued 
the regulations at 31 CFR 103.121 with the Department of the Treasury, 
the agencies cannot unilaterally revise the regulation. While the 
agencies regularly discuss PATRIOT Act issues with their counterparts 
in FinCEN and the Department of the Treasury, the authority to amend 
many of the recordkeeping rules required under the PATRIOT Act is 
solely within the jurisdiction of the Department of the Treasury. 
Nonetheless, the comments will be a helpful contribution to the 
discussion of the issues.
d. Interest on Demand Deposits (Regulation Q) and NOW Account 
Eligibility
    Issues:
    (1) Should the prohibition against payment of interest on demand 
deposits be eliminated?
    (2) Should the NOW account eligibility rules be liberalized?
    Context: The prohibition against payment of interest on demand 
deposits is a statutory prohibition and an amendment enacted by 
Congress would be necessary to repeal the prohibition. Section 19(i) of 
the Federal Reserve Act provides that no bank that is a member of the 
Federal Reserve System may, directly or indirectly, by any device 
whatsoever pay any interest on any demand deposit. Similar statutory 
provisions apply to non-member banks and to thrift institutions. The 
Board's Regulation Q implements section 19(i) and specifies what 
constitutes ``interest'' for purposes of section 19(i). As a practical 
matter, the effect of section 19(i) is to prevent corporations and for-
profit entities from holding interest-bearing checking accounts. This 
is because federal law separately permits individuals and non-profit 
organizations to have interest-bearing checking accounts, known as 
``negotiable order of withdrawal,'' or NOW, accounts. (See 12 U.S.C. 
1832.)
    Comments: Several commenters suggested that the prohibition against 
the payment of interest on demand deposits be eliminated. One commenter 
stated that, if the statutory prohibition against payment of interest 
on demand deposits were repealed, the Board should allow a two-year 
phase-in period, during which depository institutions could offer MMDAs 
(savings deposits) with the capacity to make up to 24 preauthorized or 
automatic transfers per month to another transaction account.
    Current Initiatives: For the past several years, Congress has 
considered, but not enacted, legislation that would repeal the 
prohibition in section 19(i) against the payment of interest on demand 
deposits. Some of this legislation also would have made certain changes 
with respect to NOW accounts.
    Recommendation: The federal banking agencies support legislation 
that would repeal the prohibition against payment of interest on demand 
deposits in section 19(i) and related statutes. Such legislation would 
allow corporate and for-profit entities, including small businesses, to 
have the extra earning potential of interest-bearing checking accounts 
and would eliminate a restriction that currently distorts the pricing 
of checking accounts and associated bank services. The federal banking 
agencies, however, do not have a joint position at this time on whether 
to expand NOW account eligibility and, as such, are making no joint 
recommendation with respect to this issue. We will continue to work 
with Congress on these important matters.
e. Home Mortgage Disclosure Act (Regulation C)
    Issues:
    (1) Should the tests for coverage of financial institutions be 
changed to exempt more institutions from the reporting requirements of 
the Home Mortgage Disclosure Act (HMDA)? If so, how?
    (2) Should revisions be made to the data that are required to be 
reported under HMDA, such as revising the reporting requirements for 
higher-priced loans?
    Context: The purpose of HMDA is to provide the public with mortgage 
lending data to help determine whether financial institutions are 
serving the housing needs of their communities, assist public officials 
in distributing public sector investment so as to attract private 
investment to areas where it is needed, and to assist in identifying 
possible discriminatory lending patterns and enforcing 
antidiscrimination statutes. HMDA requires banks, savings associations 
and credit unions that make ``federally related mortgage loans,'' as 
defined by the Board, to report data about their mortgage lending if 
they have total assets that exceed an asset threshold that is now set 
by statute (indexed for inflation in 2007 at $36 million) and a home or 
branch office in a metropolitan statistical area. Board Regulation C, 
which implements HMDA, clarifies that these institutions are subject to 
HMDA reporting for a given year if, in the preceding calendar year, 
they made at least one ``federally related mortgage loan,'' which is

[[Page 62042]]

defined to be a home purchase loan or refinancing of a home purchase 
loan (1) made by an institution that is federally insured or regulated 
or (2) insured, guaranteed, or supplemented by a federal agency or (3) 
intended for sale to Fannie Mae or Freddie Mac. Each federal banking 
agency enforces the requirements of HMDA with respect to the 
institutions for which such agency is the primary federal supervisor.
    Comments: Commenters have suggested revising the coverage tests for 
HMDA reporting requirements so that fewer institutions are subject to 
reporting, such as by raising the statutory asset test or exempting 
institutions that make only a de minimis number of mortgage loans in a 
year. Commenters asserted these changes could be made within the 
framework of HMDA, which provides the Board authority to make 
exceptions to the statute's requirements in certain circumstances. 
Moreover, the Board could also recommend that Congress consider making 
changes in the coverage tests that are not now authorized under HMDA.
    Current Initiatives: With respect to whether revisions should be 
made to the data reporting requirements under HMDA, such as revising 
the reporting requirements for higher-priced loans, the Board completed 
a multi-year review of Regulation C in 2002. As part of this process, 
the Board considered numerous comments from the public on additional 
data to be reported under HMDA relating to the pricing of loans and 
ways to improve and streamline the data collection and reporting 
requirements of Regulation C. As a result of the review, the Board made 
several changes to HMDA reporting requirements, including adding 
reporting requirements for higher-priced loans. In determining whether 
to add each new data requirement, the Board carefully weighed what data 
would be most beneficial in improving HMDA analysis against the 
operational/compliance costs to industry in collecting the data. The 
revisions to Regulation C became effective on January 1, 2004.
    Recommendation: Any expansion of the coverage tests that results in 
fewer institutions subject to HMDA reporting requirements would warrant 
a careful analysis that would include weighing the benefits of reduced 
reporting for institutions against the loss of HMDA data. The more 
financial institutions that are exempted from HMDA data reporting 
requirements, the more difficult it would be for the federal banking 
agencies, other government officials and interested parties to monitor 
and analyze aggregate trends in mortgage lending, and compare the 
mortgage lending of particular institutions to the mortgage lending of 
all other lenders in a given geographic area or product market. It 
would also be more difficult for supervisors to identify institutions, 
loan products, or geographic markets that show disparities in the 
disposition of loan applicants by race, ethnicity or other 
characteristics and that require further investigation under the fair 
lending laws.
    It has been two years since institutions began reporting and 
disclosing data relating to the new reporting items. With so few years 
of reporting data available, it is too early to assess the 
effectiveness of the new data items and consider how the reporting 
requirements could be changed. Any changes would have to take into 
account both the burden on financial institutions and the benefits of 
the new data to policymakers and the public. The Board and other 
federal banking agencies will, however, carefully consider these issues 
after more experience has been gained with the new reporting 
requirements. Several statutory changes to HMDA reporting were 
considered by Congress as part of its consideration of the FSRRA, 
including proposals to expand the HMDA exemptions. While the federal 
banking agencies took differing positions on these proposals, all of 
the agencies recognize that any statutory changes to HMDA reporting 
must be carefully balanced to ensure that consumer protection and 
access to HMDA data for appropriate consumer purposes are not 
diminished.
f. Truth in Lending Act (Regulation Z)
    Issues:
    (1) Should the consumer disclosures required under the Truth in 
Lending Act (TILA), as well as those required under the Real Estate 
Settlement Procedures Act of 1974 (RESPA), be simplified in an effort 
to make them more understandable?
    (2) Should the statutory right of rescission be eliminated for all 
home-secured lending or for certain transactions (such as refinancings 
with new creditors where no new money is provided or refinancings 
involving ``sophisticated borrowers'')? Alternatively, should consumers 
be able to more freely waive their three-day right of rescission for 
home-secured lending?
    Consumer Loan Disclosures
    Context: Ensuring that consumer disclosures, including those in 
mortgage transactions covered by TILA and RESPA, are effective and 
understandable is important in carrying out the purposes of the 
statutes. The volume of paperwork in such transactions has increased 
greatly due in part to reasons other than the required disclosures, 
such as liability-protection concerns of lenders. Nevertheless, it is 
essential to review the disclosure requirements periodically to 
consider whether disclosures are achieving their intended purposes. The 
Board's Regulation Z implements TILA, and each Agency enforces the 
requirements of TILA with respect to the institutions for which such 
agency is the primary federal supervisor.\15\
---------------------------------------------------------------------------

    \15\ See Part II of this report for a discussion of comments 
submitted by credit unions to NCUA on this topic.
---------------------------------------------------------------------------

    Comments: Regulation Z was one of the most heavily commented-upon 
regulations during the EGRPRA review process. A general comment from 
many industry commenters was that consumers are frustrated and confused 
by the volume and complexity of documents involved in obtaining a loan 
(especially a mortgage loan), including the TILA and RESPA disclosures. 
Some commenters acknowledged that the increased volume and complexity 
of loan documents also stemmed from lenders' attempts to address 
liability concerns. Many commenters requested that the required loan 
disclosures be provided in a manner that would facilitate consumer 
understanding of the loan terms. (For a more complete summary of the 
comments received, see the discussion of comments received for TILA/
Regulation Z in Appendix I-C of this report.)
    Current Initiatives: The Board is conducting a multi-stage review 
of Regulation Z, which implements TILA. In 2004, the Board issued an 
advance notice of proposed rulemaking (ANPR) requesting public comment 
on all aspects of the regulation's provisions affecting open-end 
(revolving) credit accounts, other than home-secured accounts, 
including ways to simplify, reduce or improve the disclosures provided 
under TILA.\16\ The next stage of the review is expected to be a review 
of the disclosures for mortgage loan transactions (both open-end and 
closed-end) as well as other closed-end credit, such as automobile 
loans. The multi-stage review will consider revisions to the 
disclosures required under TILA to ensure that disclosures are provided 
to consumers on a timely basis and in a form that is readily 
understandable.
---------------------------------------------------------------------------

    \16\ See 69 FR 70925, December 8, 2004.
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    Recommendation: The federal banking agencies have all testified

[[Page 62043]]

before Congress on the need to simplify and streamline consumer loan 
disclosures. Among other things, the Board's review will consider ways 
to address concerns about information overload, which can adversely 
affect how meaningful disclosures are to consumers. The Board will use 
extensive consumer testing to determine what information is useful to 
consumers to address concerns about information overload. After the 
Board's review and regulatory changes are in place, the agencies will 
consider what, if any, legislative changes may be necessary.
    Revisions to the Right of Rescission
    Context: Under TILA, consumers generally have three days after 
closing to rescind a loan secured by a principal residence. Among other 
things, the right of rescission does not apply to a loan to purchase or 
build a principal residence or a consolidation or refinancing with the 
same lender that already holds the mortgage on the residence and in 
which no new advances are being made to the consumer. The statute 
authorizes the Board to permit consumers to waive this right, but only 
to meet bona fide personal financial emergencies (see 15 U.S.C. 
1635(d); 12 CFR 226.15(e) and 226.23(e)).
    The right of rescission is intended to provide consumers a 
meaningful opportunity to fully review the documents given to them at a 
loan closing and determine if they want to put their home at risk under 
the repayment terms described in the documents. Thus, substantial 
revision to the statutory three-day right of rescission, either through 
allowing waivers more freely or exempting the requirement for some or 
all home-secured loans, would require careful study. Currently, 
consumers are presented with a substantial amount of documents at 
closing, and the final cost disclosures provided at closing may differ 
materially from earlier cost disclosures provided to the consumer. 
Under these circumstances, consumers may benefit by having the 
opportunity to review the terms and conditions of the loan after the 
loan closing. The three-day right of rescission is particularly 
important, and the ability to freely waive that right may potentially 
be more problematic, for loan products and borrowers who are more 
susceptible to predatory lending practices.
    The three-day right of rescission plays an important role in 
protecting consumers, and this may be the case even in refinancings 
with new creditors where no additional funds are advanced. Refinancings 
occur for many reasons and may have terms that place the consumer's 
home more at risk. For example, to obtain a lower initial monthly 
payment, a consumer may refinance a 30-year fixed-rate, home-secured 
loan with a loan that has an adjustable rate, that provides for 
interest-only payments or a balloon payment, or that has a longer loan 
term. Depending on the consumer's circumstances, these changes may 
place the consumer's home more at risk or otherwise be less favorable 
to the consumer. If their refinancing is with a new creditor, consumers 
can use the three-day rescission period to review the terms of these 
loans. Therefore, even in a refinancing with no new funds advanced, the 
right to rescind a transaction with a new creditor can be important to 
consumers. Issues concerning the right of rescission will be considered 
in the course of the Regulation Z review discussed above.
    Comments: Many industry commenters contended that the right of 
rescission was an unnecessary and burdensome requirement, and they 
suggested either eliminating the right of rescission or allowing 
consumers to waive the right more freely than under the current rule 
(which requires a bona fide personal emergency). Representatives of 
consumer and community groups called the right of rescission one of the 
most important consumer protections and urged the regulators not to 
weaken or eliminate that right.
    Recommendation: The Board will consider issues concerning the right 
of rescission in the course of the Regulation Z review discussed above. 
In addition, in 2006 Congress considered regulatory burden relief 
proposals and ultimately enacted the FSRRA. At that time, suggestions 
were made to include amendments to TILA that would expand the 
circumstances under which a consumer could waive the three-day right of 
rescission. All of the federal banking agencies opposed or expressed 
concern about waiving this important consumer protection right without 
adequate safeguards to ensure that consumers are protected from the 
abuses that may occur from expanding the waiver authority.
g. Regulation O
    Issue: While the FSRRA eliminated certain Regulation O reporting 
requirements, several commenters also asked whether the insider lending 
limits should be increased to parallel those permitted under some state 
laws.
    Context: Sections 22(g) and 22(h) of the Federal Reserve Act impose 
various restrictions on extensions of credit by a member bank to its 
insiders. By statute, these restrictions also apply to nonmember state 
banks and savings associations. The Board's Regulation O implements 
sections 22(g) and 22(h) of the Federal Reserve Act for member banks. 
Regulation O governs any extension of credit by a member bank to an 
executive officer, director, or principal shareholder of (1) the member 
bank, (2) a holding company of which the member bank is a subsidiary, 
or (3) any other subsidiary of that holding company. Regulation O also 
applies to any extension of credit by a member bank to a company 
controlled by such a person and a political or campaign committee that 
benefits or is controlled by such a person. Each federal banking agency 
enforces the requirements of Regulation O with respect to the 
institutions for which such agency is the primary federal supervisor.
    Section 22(g) of the Federal Reserve Act specifically prohibits a 
member bank from making extensions of credit to an executive officer of 
the bank (other than certain mortgage loans and educational loans) that 
exceed ``an amount prescribed in a regulation of the member bank's 
appropriate federal banking agency.'' Regulation O currently limits the 
amount of such ``other purpose'' loans to $100,000.
    Comments: A number of industry commenters requested a review of 
Regulation O reporting and threshold requirements because they view 
them as overly burdensome and somewhat ambiguous, with outdated dollar 
amounts that need updating to reflect today's economy.
    Recommendation: The federal banking agencies currently have the 
statutory authority to raise the limit on ``other purpose'' loans for 
institutions under their supervision if the federal banking agencies 
were to determine that such action was consistent with safety and 
soundness. In this regard, the Board plans to consult with the other 
agencies on a proposal to increase the Regulation O limit on other 
purpose loans as part of its upcoming comprehensive review of 
Regulation O.
h. Corporate Governance/Sarbanes-Oxley Act of 2002
    Issues:
    (1) Should banks that are not publicly traded and that have less 
than $1 billion in assets be exempt from the Sarbanes-Oxley Act of 
2002\17\ (SOX)?
---------------------------------------------------------------------------

    \17\ Pub. L. 107-204, July 30, 2002.
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    (2) Should banks that comply with part 363 of the FDIC's rules be 
exempt from section 404 of SOX?\18\
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    \18\ 15 U.S.C. 7262.
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    (3) Should the exemption for compliance with the external

[[Page 62044]]

independent audit and internal control requirements of 12 CFR 363 be 
raised from $500 million to $1 billion?
    Context: SOX was enacted to improve corporate governance and 
financial management of public companies in order to better protect 
investors and restore investor confidence in such companies. Section 
404 of SOX applies directly to public companies only, including insured 
depository institutions and their parent holding companies that are 
public companies, and indirectly to institutions that are subsidiaries 
of holding companies that are public companies. Section 404 of SOX does 
not apply to institutions that are not ``publicly traded,'' such as 
nonpublic companies or subsidiaries of nonpublic companies. Section 404 
of SOX requires the management and external auditors of all public 
companies to assess the effectiveness of internal controls over the 
company's financial reporting.
    Part 363 of the FDIC's regulations establishes annual audit and 
reporting requirements for all insured depository institutions with 
$500 million or more in total assets. Part 363 requires all insured 
depository institutions with $500 million or more to have an annual 
audit of their financial statements conducted by an independent public 
accountant (external auditor). Part 363 also requires that the 
management and external auditors of institutions with $1 billion or 
more in total assets attest to internal controls over financial 
reporting. To be considered ``independent,'' Guideline 14 to part 363, 
which was adopted by the FDIC in 1993, states that the external auditor 
``should be in compliance with the [American Institute of Certified 
Public Accountants'] Code of Professional Conduct and meet the 
independence requirements and interpretations of the [Securities and 
Exchange Commission] and its staff.'' Title II of SOX imposed 
additional auditor independence requirements on external auditors of 
public companies, which the Securities and Exchange Commission (SEC) 
has implemented through rulemaking. Thus, the external auditors of 
nonpublic institutions that are subject to part 363 are expected to 
comply with SOX's auditor independence requirements and the SEC's 
implementing rules.
    Comments: Some commenters focused on the increased burden and costs 
imposed on public companies by S