On October 22, 2019, the U.S. Government Accountability Office (“GAO”) issued two letters concluding that three Federal Reserve Supervision and Regulation letters, SR 12-17: Consolidated Supervision Framework for Large Financial Institutions, SR 14-8: Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies, and SR 11-7: Guidance on Model Risk Management, are “rules” under the Congressional Review Act (“CRA”) and therefore must be submitted to Congress and the Comptroller General for review before they can take effect.  The GAO letters respond to requests made by several senators for determinations of whether the three SR letters, as well as SR 15-7: Governance Structure of the Large Institution Supervision Coordinating Committee (LISCC) Supervisory Program, are rules under the CRA.  The GAO concluded that SR 15-7 is not a rule under the CRA.

The Federal Reserve uses SR letters, which are a form of guidance, to inform banking organizations of the agency’s supervisory views and expectations.  The SR letters that are the subject of the GAO’s determinations cover the following topics:

  • SR 12-17, which applies to banking organizations with $50 billion or more in consolidated assets, including LISCC firms, addresses core areas of supervisory focus for those institutions, including enhancing resiliency and reducing the impact of failure. Among other things, it requires banking organizations to establish and maintain recovery plans and conduct regular capital and liquidity stress testing.
  • SR 14-8, which applies to the eight U.S. global systemically important banking organizations, articulates more prescriptive expectations for the recovery plans of those institutions and related governance and processes.
  • SR 11-7, issued jointly with the OCC and applicable to all Federal Reserve- and OCC-supervised banking organizations, sets forth expectations for how those institutions should manage risks arising out of their use of quantitative models, including through model validation.
  • SR 15-7 describes the Federal Reserve’s internal structure supporting the supervision of LISCC firms.

The CRA provides Congress with the opportunity to disapprove any rule before it takes effect.  The statute applies to any “rule” as defined under the Administrative Procedure Act (“APA”), which is “an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency.”  The CRA excludes three categories of rules from its requirements: (1) rules of particular applicability; (2) rules relating to agency management or personnel; and (3) rules of agency organization, procedure, or practice that do not substantially affect the rights or obligations of non-agency parties.

The GAO determined that three of the SR letters described above – SR 12-17, SR 14-8, and SR 11-7 – satisfy the definition of a “rule” under the CRA.  It also found that one of the SR letters, SR 15-17, is a “rule” as defined by the APA but falls within the CRA’s exception for rules of agency organization, procedure, or practice, because unlike the other three letters, SR 15-17 does not have a “substantial impact on the regulated community” or “lead to and encourage change to an institution’s internal operations.”  Instead, the GAO noted that SR 15-7 only changes the way institutions interact with the Federal Reserve and does not substantially affect the rights or obligations of the institutions.

It remains to be seen whether the Federal Reserve will now submit SR 12-17, SR 14-8, and, together with the OCC, SR 11-7 to Congress and the Comptroller General for review under the CRA.  Congress has not overturned a rule under the CRA since Democrats were elected to a majority in the House of Representatives in November 2018.  Unless and until the Federal Reserve submits the three letters, the CRA precludes any of them from taking effect.

The GAO’s determinations continue a recent trend reinforcing the non-binding nature of guidance documents and diminishing their importance in the regulatory framework for financial institutions.  In 2017, the GAO made similar determinations that the 2013 CFPB Bulletin on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act and 2013 Interagency Guidance on Leverage Lending were rules under the CRA.  Possibly in response to those developments, the agencies issued a statement in September 2018 affirming that the agencies “do not take enforcement actions based on supervisory guidance” and that guidance “does not have the force and effect of law.”  Given the specific and prescriptive expectations and requirements articulated in SR 12-17, SR 14-8, and SR 11-7, which on their face appear to suggest that these letters create mandatory obligations, the most recent GAO determinations serve as another reminder that these and similar guidance documents cannot impose enforceable obligations on third parties unless the issuing agency satisfies the APA’s notice-and-comment procedures and CRA’s notice requirements.