Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules 8583

12The OECD-based group of countries comprises

all full members of the Organization for Economic

Cooperation and Development (OECD), as well as

countries that have concluded special lending

arrangements with the International Monetary Fund

(IMF) associated with the IMF’s General

Arrangements to Borrow, but excludes any country

that has rescheduled its external sovereign debt

within the previous five years. The OECD includes

the following countries: Australia, Austria,

Belgium, Canada, Denmark, Finland, France,

Germany, Greece, Iceland, Ireland, Italy, Japan,

Luxembourg, Mexico, the Netherlands, New

Zealand, Norway, Portugal, Spain, Sweden,

Switzerland, Turkey, the United Kingdom and the

United States. Saudi Arabia has concluded special

lending arrangements with the IMF associated with

the IMF’s General Arrangements to Borrow.

or bank qualify for placement in a lower

risk category. As part of this review, the

Basle Committee reassessed whether

membership in the OECD (or the

conclusion of special lending

arrangements with the IMF) would, by

itself, be sufficient to ensure that only

countries with relatively low transfer

risk would continue to be eligible for

lower risk weight treatment.

On July 15, 1994, the Basle Committee

made an announcement to clarify that

the reference in the Basle Accord to

OECD members applies to all current

members of the organization. The

announcement also stated that it is the

Basle Committee’s intention, subject to

national consultation, to record a

change to the Basle Accord in 1995 that

would modify the definition of the

OECD-based group of countries for riskbased capital purposes. The change, if

adopted, would exclude from lower risk

weight treatment any country within the

OECD-based group of countries that has

rescheduled its external sovereign debt

within the previous five years. The

Basle Committee announcement was

endorsed by the G–10 Governors.

II. Proposed Rule

In view of the Basle Committee’s

announcement, the FDIC is proposing to

amend its risk-based capital guidelines

to modify the definition of the OECDbased group of countries. Under the

proposal, the OECD-based group of

countries would continue to include

countries that are currently full

members of the OECD, regardless of

entry date, as well as countries that have

concluded special lending arrangements

with the IMF associated with the Fund’s

General Arrangements to Borrow, but

would exclude any country within this

group that has rescheduled its external

sovereign debt within the previous five

years. The effect of the proposed

modification would be to clarify that

membership in the OECD-based group

of countries must coincide with

relatively low transfer risk in order for

a country to be eligible for differentiated

capital treatment.

For purposes of this proposal, an

event of rescheduling of external

sovereign debt generally would include

renegotiations of terms arising from the

country’s inability or unwillingness to

meet its external debt service

obligations. Renegotiations of debt in

the normal course of business generally

do not indicate transfer risk of the kind

that would preclude an OECD-based

country from qualifying for lower risk

weight treatment. One example of such

a routine renegotiation would be a

renegotiation to allow the borrower to

take advantage of a change in market

conditions, such as a decline in interest

rates.

The FDIC invites comment on all

aspects of this proposal.

III. Regulatory Flexibility Act

The Board of Directors of the FDIC

hereby certifies that adoption of this

proposed amendment to part 325 will

not have a significant economic impact

on a substantial number of small

business entities (in this case, small

banking organizations) within the

meaning of the Regulatory Flexibility

Act requirements (5 U.S.C. 601 et seq.).

This amendment will not necessitate the

development of sophisticated

recordkeeping or reporting systems by

small institutions nor will small

institutions need to seek out the

expertise of specialized accountants,

lawyers, or managers to comply with

this regulation. In light of this

certification, the Regulatory Flexibility

Act requirements (at 5 U.S.C. 603, 604)

to prepare initial and final regulatory

flexibility analyses do not apply.

IV. Paperwork Reduction Act

The FDIC has determined that the

proposed amendment, if adopted,

would not increase the regulatory

paperwork burden of state nonmember

banks pursuant to the provisions of the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.). Consequently, no

information has been submitted to the

Office of Management and Budget for

review.

List of Subjects in 12 CFR Part 325

Bank deposit insurance, Banks,

Banking, Capital adequacy, Reporting

and recordkeeping requirements,

Savings Associations, State nonmember

banks.

For the reasons set forth in the

preamble, the Board of Directors of the

Federal Deposit Insurance Corporation

proposes to amend part 325 of title 12

of the Code of Federal Regulations as

follows:

PART 325—CAPITAL MAINTENANCE

1. The authority citation for Part 325

continues to read as follows:

Authority: 12 U.S.C. 1815(a), 1815(b),

1816, 1818(a), 1818(b), 1818(c), 1818(t),

1819(Tenth), 1828(c), 1828(d), 1828(i),

1828(n), 1828(o), 1831o, 3907, 3909; Pub. L.

102–233, 105 Stat. 1761, 1789, 1790 (12

U.S.C. 1831n note); Pub. L. 102–242, 105

Stat. 2236, 2355, 2386 (12 U.S.C. 1828 note).

2. Appendix A to part 325 is amended

by revising footnote 12 in section II.B.2.

to read as follows:

Appendix A to Part 325—Statement of

Policy on Risk-Based Capital

* * * * *

II. * * *

B. * * *

2. * * * 12 * * *

* * * * *

By order of the Board of Directors.

Dated at Washington, D.C. this 31st day of

January, 1995.

Federal Deposit Insurance Cprporation

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95–3692 Filed 2–14–95; 8:45 am]

BILLING CODE 6714–01–P

12 CFR Part 363

RIN 3064—AA83

Annual Independent Audits and

Reporting Requirements

AGENCY: Federal Deposit Insurance

Corporation (FDIC or Corporation).

ACTION: Notice of proposed rulemaking.

SUMMARY: Section 314 of the Riegle

Community Development and

Regulatory Improvement Act of 1994

(RCDRIA) amends sections 36(i) and

36(g)(2) of the Federal Deposit Insurance

Act (FDI Act). Section 36 of the FDI Act

is generally intended to facilitate early

identification of problems in financial

management through annual

independent audits, assessments of the

effectiveness of internal controls and of

compliance with designated laws and

regulations, and more stringent

reporting requirements. Section 314(a)

provides relief from certain duplicative

reporting under section 36 of the FDI

Act for sound, well managed insured

depository institutions with over $9

billion in total assets which are

subsidiaries of multibank holding

companies. Section 314(b) requires the

Corporation to notify a large insured

depository institution in writing if it

decides a review by an independent

public accountant of such institution’s

quarterly financial reports is required.
8584 Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules

The Corporation’s regulations governing

annual independent audits implement

section 36 of the FDI Act and this

proposed amendment seeks to conform

the regulations to the amended statute.

In addition, the FDIC proposes several

minor, technical amendments to the

guidelines and interpretations

(Guidelines), published as an appendix

concerning compliance with certain

provisions of section 36. The FDIC also

proposes to amend the schedule

entitled, ‘‘Agreed Upon Procedures for

Determining Compliance with

Designated Laws’’, to implement recent

amendments to the federal regulations

concerning loans to insiders improve

the format of the procedures, streamline

the specific procedures, and eliminate

ambiguities. These proposed

amendments reflect the experience of

the Corporation, institutions, and

accountants with the existing

procedures during the past year.

DATES: Comments must be received by

April 17, 1995.

ADDRESSES: Send comments to Robert E.

Feldman, Acting Executive Secretary,

FDIC, 550 17th Street, N.W.,

Washington, D.C. 20429. Comments

may be hand-delivered to room 400,

1776 F Street, N.W., Washington, D.C.

20429 on business days between 8:30

a.m. and 5:00 p.m. (FAX number: (202)

898–3838.) Comments will be available

for inspection in room 7118, 550 17th

Street, N.W., Washington, D.C., between

9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT:

Doris L. Marsh, Examination Specialist,

Division of Supervision, (202) 898–

8905, or Sandra Comenetz, Counsel,

Legal Division, (202) 898–3582, FDIC,

550 17th Street N.W., Washington, D.C.

20429.

SUPPLEMENTARY INFORMATION:

I. Background

Section 112 of the Federal Deposit

Insurance Corporation Improvement Act

of 1991 (FDICIA) added section 36,

‘‘Independent Annual Audits of Insured

Depository Institutions’’, to the FDI Act

(12 U.S.C. 1831m). Section 36 requires

the FDIC, in consultation with the

appropriate federal banking agencies, to

promulgate regulations requiring each

insured depository institution over a

certain asset size (covered institution) to

have an annual independent audit of its

financial statements performed in

accordance with generally accepted

auditing standards and section 37 of the

FDI Act (12 U.S.C. 1831n), and to

provide a management report and

independent public accountant’s

attestation concerning both the

effectiveness of the institution’s internal

controls for financial reporting and its

compliance with designated safety and

soundness laws. Section 36 also

requires each covered institution to

have an independent audit committee.

The audit committee of each large

covered institution (total assets

exceeding $3 billion) must meet

additional requirements.

Section 36 also requires the FDIC, in

consultation with the other federal

banking agencies, to designate laws and

regulations concerning safety and

soundness. This section requires the

institution’s independent public

accountant to perform procedures

agreed upon by the Corporation to

determine an institution’s compliance

with these designated laws and

regulations. The ‘‘Designated Laws’’

selected by the Corporation are the

federal laws and regulations concerning

loans to insiders and the federal and

state laws and regulations concerning

dividend restrictions.

In June 1993, the FDIC published 12

CFR part 363 (58 FR 31332, June 2,

1993) to implement the provisions of

section 36 of the FDI Act. Under part

363, the requirements of section 36

apply to each insured depository

institution with $500 million or more in

total assets at the beginning of any fiscal

year that begins after December 31,

1992.

Section 314 of RCDRIA amends

sections 36(i) and 36(g)(2) of the FDI Act

(12 U.S.C. 1831m (i) and (g)(2)). The

purpose of section 314(a) is to provide

relief from certain duplicative reporting

under section 36 of the FDI Act for

sound, well managed insured

depository institutions with over $9

billion in total assets which are

subsidiaries of multibank holding

companies. Section 314(b) requires the

Corporation to notify a large insured

depository institution in writing if it

decides to require a review by an

independent public accountant of such

institution’s quarterly financial reports.

In addition, the federal regulations

concerning loans to insiders (Federal

Reserve Regulation O, 12 CFR part 215),

which are included in one of the

Designated Laws, were amended during

1994.

The FDIC proposes certain

amendments to 12 CFR Part 363, which

conform Part 363 to the amended

statute. The FDIC also proposes several

minor, technical amendments to the

guidelines and interpretations

(Guidelines), published as Appendix A

to part 363, concerning compliance with

certain provisions of section 36.

In addition, a year’s experience with

Part 363 indicates that a clarification of

certain of the specific procedures in

Schedule A to Appendix A of the

Guidelines would make them more

efficient and less burdensome. The FDIC

therefore proposes to amend Schedule A

to Appendix A—Agreed Upon

Procedures for Determining Compliance

with Designated Laws, to reflect the

recent amendments to the federal

regulations concerning loans to insiders

(12 CFR Part 215), improve the format

of the procedures, streamline the

specific procedures, and eliminate

ambiguities. The proposed amendments

reflect the experience of the

Corporation, institutions, and

accountants dealing with the existing

procedures during the past year.

Section 36(g)(2) of the FDI Act

authorizes the FDIC to require

independent public accountants for

‘‘large institutions’’ to review such

institutions’ quarterly financial reports.

This provision is amended by Section

314(b) of RCDRIA to add section 36(g)(3)

which requires the Corporation to notify

a large insured depository institution in

writing if it decides to require a review

of its quarterly financial reports by an

independent public accountant. When

the FDIC adopted Part 363, it elected not

to exercise its authority in this area for

reasons of cost and limited expected

benefits, preferring instead to request

such reviews on a case-by-case basis.

The FDIC has not changed its opinion.

Should the FDIC decide to request an

independent public accountant’s review

of the quarterly financial statements of

a large insured depository institution, it

will make the request in writing.

II. The Proposal

The FDIC proposes to make

conforming amendments to Part 363 so

that it is consistent with section 36 as

amended by section 314 of RCDRIA, and

to make minor, technical, and clarifying

changes to the Guidelines in Appendix

A. In addition, the FDIC proposes to

amend and reformat the specific

procedures in Schedule A to Appendix

A to make them more efficient and less

burdensome.

A. Amendments to the Rule

Section 363.1—Scope. In § 363.1(b),

the phrase ‘‘but less than $9 billion’’

would be deleted from the provisions of

the regulation describing the

institutions eligible to report using the

holding company exception set forth in

section 36(i). This revision would make

the regulation consistent with the

amendment to section 36(i) made by

section 314 of RCDRIA. In addition, the

subsection would be reformatted and

another paragraph added to incorporate

the provisions of section 314(a)(3) of

RCDRIA which identifies the
Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules 8585

circumstances under which the

appropriate federal banking agency may

require a large institution subsidiary of

a holding company to have its own

audit committee and report separately.

Section 363.4—Filing and notice

requirements. The citation in § 363.4(b)

would be corrected so that it is clear

that only the annual report in

§ 363.4(a)(1) is available for public

inspection. This correction would make

the Rule consistent with section 36 of

the FDI Act.

Section 363.5—Audit committees. A

new sentence would be added at the

end of § 363.5(b) to make the rule

consistent with the amendment to

section 36(i) made by section 314 of

RCDRIA. The new sentence prohibits

any large customers of a large insured

depository institution from being

members of the audit committee of the

institution’s holding company if the

institution relies on the audit committee

of the holding company to comply with

this rule.

B. Amendments to Appendix A to Part

363—Guidelines and Interpretations

Guideline 4. Comparable Services and

Functions—An amendment to Guideline

4(c) under ‘‘Scope of Rule’’ would

replace the word ‘‘all’’ with the word

‘‘those’’ to clarify that only information

pertaining to covered institutions must

be included in reports filed under Part

363.

Guideline 9. Safeguarding of Assets.

The third and fourth sentences of

Guideline 9 and the addition of a phrase

to the footnote would be revised. When

Part 363 was adopted, the FDIC

determined that ‘‘safeguarding of

assets’’, as the term relates to internal

control policies and procedures for

financial reporting, should be addressed

in the management report and the

independent public accountant’s

attestation discussed in guideline 18. In

May, 1994, the Committee of

Sponsoring Organizations (COSO) of the

Treadway Commission issued an

Addendum to the ‘‘Reporting to

External Parties’’ volume of COSO’s

September 1992 Internal Control—

Integrated Framework (COSO Report).

The Addendum expanded the

discussion of the scope of a

management report on internal controls

to address additional controls pertaining

to safeguarding of assets. It states that

‘‘Such internal control can be judged

effective if the board of directors and

management have reasonable assurance

that unauthorized acquisition, use or

disposition of the entity’s assets that

could have a material effect on the

financial statements is being prevented

or detected on a timely basis’’. The

FDIC, therefore, believes that the

concern that existed at the time of the

adoption of Part 363 over the lack of

criteria against which the accountant

may judge safeguarding of assets for

financial reporting no longer exists.

Thus, the last two sentences and the

footnote to this Guideline would be

revised.

Guideline 10. Standards for Internal

Controls. The footnote to Guideline 10

includes a list of sources of information

on safeguarding of assets and standards

for internal controls for financial

reporting that may be considered for use

by institutions. The Addendum to the

COSO Report now contains information

regarding safeguarding of assets.

Therefore, a reference to this standard

would be added to the list in the

footnote, and Guideline 10 revised

appropriately.

In addition, the American Institute of

Certified Public Accountants (AICPA)

issued Statement on Auditing Standards

No. 55 (SAS 55), ‘‘Consideration of the

Internal Control Structure in a Financial

Statement Audit’’. SAS 55 has

superseded AICPA Statement on

Auditing Standards No. 30 (SAS 30),

‘‘Reporting on Internal Accounting

Control’’, which is currently listed as a

standard in the footnote to Guideline 10.

Therefore, SAS 30 would be deleted

from the footnote and replaced with

SAS 55.

Guideline 15. Peer Reviews—The

footnote to Guideline 15 includes the

names of the three peer and quality

review programs of the AICPA. Since

the AICPA is combining two of these

programs into a single peer review

program, the footnote to Guideline 15

would be amended to identify the two

acceptable peer review programs to

which an independent public

accountant performing audit and

attestation work may belong.

Guideline 24. Relief from Filing

Deadlines—The phrase referring to

section 36 of the FDI Act in the second

sentence of Guideline 24 would be

deleted since section 36 does not

provide authority to the FDIC to provide

relief to, or exempt institutions from,

provisions in the statute. This Guideline

has also been revised to make it more

readable.

Guideline 31. Holding Company

Audit Committees—The first sentence of

Guideline 31 would be amended to

clarify that a holding company audit

committee, on which subsidiary

institutions rely in order to comply with

this rule, must meet the requirements

for the audit committee of the largest

subsidiary institution.

The proposal would revise Guideline

31 because it has been widely

misunderstood. The first two sentences

of this Guideline apply to the situation

where an insured depository institution

subsidiary has $5 billion or more in

total assets, and a 3, 4, or 5 composite

CAMEL rating. Such a subsidiary must

have its own audit committee separate

from the audit committee of the holding

company. It was not clear that the third

sentence of Guideline 31 addressed the

situation where an insured depository

institution subsidiary has either less

than $5 billion in total assets, or $5

billion or more in total assets and a 1

or 2 composite CAMEL rating, and its

holding company performs services and

functions comparable to those required

by the statute. In the latter situation, an

institution may choose to rely on the

holding company’s audit committee.

The members of the audit committee of

the holding company are expected to

meet the membership requirements of

the largest subsidiary depository

institution and may perform the duties

of the audit committee for a subsidiary

institution without becoming directors

of the institution. This Guideline would

be amended to clarify its meaning.

Guideline 32. Duties—The second

sentence of Guideline 32 would be

amended to complete the citation to

certain sections of Part 363. The

sentence states that the duties of a

covered institution’s audit committee

should be appropriate to the size of the

institution and the complexity of its

operations, and should include

reviewing with management and the

independent public accountant the basis

for the reports issued under §§ 363.2 (a)

and (b) and 363.3 (a) and (b) of the rule.

At present, the citation refers only to

§ 363.2(b) of the rule.

C. Amendments to Schedule A to

Appendix A—Agreed Upon Procedures

for Determining Compliance with

Designated Laws

The agreed upon procedures in

Schedule A would be amended to

clarify the numbering system, make the

procedures consistent with amendments

to insider loan regulations, and adopt

suggestions of institutions and

accountants to make the performance of

the agreed upon procedures more

efficient and less burdensome.

Proposed formatting changes include

renumbering the paragraphs and adding

more subject titles. The procedures

applicable to insider extensions of

credit granted, insider extensions of

credit outstanding, aggregate insider

extensions of credit outstanding,

overdrafts, limitations on extensions of

credit to executive officers, and reports

on indebtedness to correspondent banks

would all be placed in separate
8586 Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules

subsections of the procedures for more

efficient performance of the procedures

and ease of reference. The amendments

to the Federal Reserve Board’s

Regulation O (12 CFR Part 215), the

federal rules governing insider loans,

necessitated citation changes.

The proposed revisions to the

procedures should make them less

burdensome for institutions and

accountants since they will permit the

use of the most recently completed

Reports of Condition and Income (Call

Report) or Thrift Financial Report (TFR)

available when the procedures are being

performed rather than requiring the use

of only the year-end Call Report or TFR.

The scope of the required reading of

board and committee minutes and

reports under the Securities Exchange

Act of 1934 (15 U.S.C. 78a) would also

be more clearly defined. Inadvertent

overdrafts in an aggregate amount of

$1,000 or less, which are exempt from

Regulation O proscriptions (See 12 CFR

215.4(e)), would no longer need to be

separately tracked by institutions, listed

when certain representations are made

by management, or tested by the

accountant. Where accountants were

expected to compare insider

transactions to transactions with

nonaffiliated persons, the comparison

period within which nonaffiliated

transactions can take place would be

expanded from four to eight weeks. In

addition, where no maximum number

transactions to which comparisons must

be made were previously included,

comparisons would now be limited to a

maximum of three. If no comparable

transactions exist, an alternative

procedure would be available to the

institution.

To ensure that some tests were

performed on each category of extension

of credit, including overdrafts and loans

from correspondent banks, accountants

would be requested to obtain three

separate samples. In accordance with

suggestions received for the procedures

covering extensions granted and

outstanding during the year, the

proposal would have accountants focus

the testing on a sample of insiders rather

than a sample of transactions.

Under the guidelines, an institution

may choose to have some of the testing

required in the agreed-upon procedures

performed by its internal auditor with

less testing performed by its

independent public accountant. When

the holding company exception set forth

in section 36(i) is used at a holding

company with more than one covered

subsidiary institution, the proposal

would extend to internal auditors the

same testing requirements that are now

applicable to independent public

accountants. This would eliminate the

existing requirement that internal

auditors perform the procedures on each

covered subsidiary every year. Thus, the

testing of samples from all covered

subsidiaries every two or three years

that has been required of independent

public accountants would now apply to

internal auditors, and a requirement that

the lead institution or a few very large

covered subsidiary institutions be

included every year has been added for

both accountants and internal auditors.

However, in response to the proposed

reduction in testing requirements

applicable to internal auditors, the FDIC

would increase the size of the sample

required to be tested by the independent

public accountant from 20 to 30 percent

of the transactions in the sample used

by the internal auditor. This change

would generally not result in any

increase in the number of transactions

tested by the independent public

accountant for reports on holding

companies with two or more covered

subsidiary institutions. Previously, the

internal auditor had to perform

procedures on a sample of transactions

from each covered subsidiary and the

independent public accountant had to

test a sample from the consolidated

holding company that was at least 20

percent of the size of the aggregate

samples used by the internal auditor.

Under the proposal, the internal auditor

may also select a sample on a

consolidated holding company basis (so

long as some transactions come from

each covered subsidiary institution at

least every two or three years), but the

accountant would have to test a sample

of transactions that was at least 30

percent of the size of the sample used

by the internal auditor. In most cases,

testing 30 percent of the number of

transactions in the one sample from the

consolidated entity used by the internal

auditor will consist of fewer

transactions to test than 20 percent of

the transactions included in the samples

aggregated from each covered

institution.

The changes and reformatting in the

procedures from the current rule to the

proposal are outlined in the table below:

Subject Old section I New section I

Insider Loans:

Designated Laws and Regulations ..................................................................................................... A.1 A.1

General Information ............................................................................................................................ A.2.a. A.2.a

Calculations ......................................................................................................................................... A.2.b A.4

Policies and Procedures ..................................................................................................................... A.2.c A.3

Insider Transactions ............................................................................................................................ A.2.d A.5

Loans to Correspondent Banks .......................................................................................................... A.2.d.(1) A.10

Aggregate Indebtedness ..................................................................................................................... A.2.d.(2)(a) A.2.b.(3)

A.2.d.(7)

A.8

Executive Officers ............................................................................................................................... A.2.d.(2)(b) & (c)

A.2.e.(ii)

Deleted

A.7

Insider Extensions of Credit ................................................................................................................ A.2.d.(2)(d) & (e)

A.2.d.(5) & (6)

A.5, A.6

Overdrafts ............................................................................................................................................ A.2.d.(3) A.9

Reports on Indebtedness to.

Correspondent Banks ......................................................................................................................... A.2.e. A.10

Dividend Restrictions:

Designated Laws and Regulations ..................................................................................................... B.1 B.1

General Information ............................................................................................................................ B.2 B.2

Policies and Procedures ..................................................................................................................... B.2.b B.3

Board Minutes ..................................................................................................................................... B.2.c B.4

Calculation of Undercapitalization ....................................................................................................... B.2.d B.5

Dividends Declared by Banks ............................................................................................................. B.2.e B.6

Dividends Declared by Savings Associations ..................................................................................... B.2.f B.7
Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules 8587

Subject Old section I New section I

Subject Old section II New section II

Procedures for the Independent Public Accountant:

Designated Laws and Regulations ..................................................................................................... A. & B.1 A. & B.1

Internal Auditor’s Workpapers ............................................................................................................. B.2 B.2

Testing ................................................................................................................................................. C. B.3

Reports Concerning Holding Companies ........................................................................................... D. B.4

D. Timing and Effective Date

Since the vast majority of covered

institutions have fiscal years that

coincide with the calendar year, they

will be or are in the process of preparing

the annual reports and having the

agreed-upon procedures performed. In

order to make this process less

burdensome for institutions and their

accountants, the FDIC will raise no

objection if an institution chooses to

follow immediately the provisions of

this proposal for any fiscal year that

ends prior to such time as any final

amendment is adopted. However, if an

institution chooses to follow these

provisions and procedures, it must do

so for both of the Designated Laws.

III. Regulatory Flexibility Act

The rule expressly exempts insured

depository institutions having assets of

less than $500 million, and, for that

reason, is inapplicable to small entities.

Therefore, pursuant to section 605(b) of

the Regulatory Flexibility Act (Pub. L.

96–354, 5 U.S.C. 601 et seq.), the FDIC

Board of Directors certifies that the rule

would not have a significant impact on

a substantial number of small entities.

IV. Paperwork Reduction Act

The proposed rule would reduce the

burden in a collection of information

that has been reviewed and approved by

the Office of Management and Budget

under control number 3064–0113,

pursuant to the Paperwork Reduction

Act of 1980 (44 U.S.C. 3501 et seq.). The

currently approved burden for this

collection is 76,330 hours per year. Of

the reports filed during the first year of

implementation of Part 363, nearly half

(500) were submitted using the holding

company exception. However,

institutions generally reported that the

time expended was greater than had

been previously estimated. For this

reason, the hours per response

estimated is nearly double the previous

estimate.

The amended provisions of RCDRIA

permit additional use of the holding

company exception. Additional burden

reduction is expected from the

reformatted and streamlined specific

procedures in Schedule A to Appendix

A to Part 363. It is expected that the

proposal would reduce the currently

approved burden by 18,360 hours, to an

industry-wide total of 57,970 hours per

year.

The total estimated reporting burden

for the collection under Part 363 as it is

proposed to be amended would be:

Number of Respondents: 450.

Number of Responses Per

Respondent: 3.19.

Total Annual Responses: 1,435.5.

Hours per Response: 40.38.

Total Annual Burden Hours: 57,970.

The proposed changes to this

collection of information have been

submitted to OMB for review and

approval pursuant to the Paperwork

Reduction Act. Comments on the

accuracy of the burden estimate, and

suggestions for reducing the burden,

should be directed to the Office of

Management and Budget, Paperwork

Reduction Project 3064–0113,

Washington, D.C. 20503, with copies of

such comments to Steven F. Hanft,

Office of the Executive Secretary, Room

F–400, 550 17th St. N.W., Washington,

D.C. 20429.

List of Subjects in 12 CFR Part 363

Accounting, Administrative practice

and procedure, Banks, Banking,

Reporting and recordkeeping

requirements.

For the reasons set forth in the

preamble, the Board of Directors of the

FDIC proposes to amend part 363 of title

12, chapter III, of the Code of Federal

Regulations as follows:

PART 363—ANNUAL INDEPENDENT

AUDITS AND REPORTING

REQUIREMENTS

1. The authority citation for part 363

continues to read as follows:

Authority: 12 U.S.C. 1831m.

2. Section 363.1 is amended by

revising paragraph (b) to read as follows:

§ 363.1 Scope.

* * * * *

(b) Compliance by subsidiaries of

holding companies. (1) The audited

financial statements requirement of

§ 363.2(a) may be satisfied for an

insured depository institution that is a

subsidiary of a holding company by

audited financial statements of the

consolidated holding company.

(2) The other requirements of this part

for an insured depository institution

that is a subsidiary of a holding

company may be satisfied by the

holding company if:

(i) The services and functions

comparable to those required of the

insured depository institution by this

part are provided at the holding

company level; and

(ii) Either the insured depository

institution has total assets as of the

beginning of such fiscal year of:

(A) Less than $5 billion; or

(B) $5 billion or more and a composite

CAMEL rating of 1 or 2.

(3) The appropriate federal banking

agency may suspend the exception in

paragraph (b)(2) of this section regarding

any institution with total assets in

excess of $9 billion for any period of

time during which the appropriate

federal banking agency determines that

the institution’s exemption would create

a significant risk to the affected deposit

insurance fund.

3. Section 363.4 is amended by

revising paragraph (b) to read as follows:

§ 363.4 Filing and notice requirements.

* * * * *

(b) Public availability. The annual

report in paragraph (a)(1) of this section

shall be available for public inspection.

* * * * *

4. Section 363.5 is amended by

revising paragraph (b) to read as follows:

§ 363.5 Audit committees.

* * * * *

(b) Committees of large institutions.

The audit committee of any insured

depository institution that has total

assets of more than § 3 billion, measured

as of the beginning of each fiscal year,

shall include members with banking or

related financial management expertise,

have access to its own outside counsel,

and not include any large customers of

the institution. If a large institution is a

subsidiary of a holding company and

relies on the audit committee of the

holding company to comply with this

part, the holding company audit

committee shall not include any

members who are large customers of the

subsidiary institution.
8588 Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules

1 It is management’s responsibility to establish

policies concerning underwriting and asset

management and to make credit decisions. The

auditor’s role is to test compliance with

management’s policies relating to financial

reporting.

2 In considering what information is needed on

safeguarding of assets and standards for internal

controls, management may review guidelines

provided by its primary federal regulator; the

Federal Financial Institutions Examination

Council’s ‘‘Supervisory Policy Statement on

Securities Activities’’; the FDIC’s ‘‘Statement of

Policy Providing Guidance on External Auditing

Procedures for State Nonmember Banks’’ (Jan. 16,

1990), ‘‘Statement of Policy Regarding Independent

External Auditing Programs of State Nonmember

Banks’’ (Nov. 16, 1988), and Division of

Supervision Manual of Examination Policies; the

Federal Reserve Board’s Commercial Bank

Examination Manual and other relevant regulations;

the Office of Thrift Supervision’s Thrift Activities

Handbook; the Comptroller of the Currency’s

Handbook for National Bank Examiners; standards

published by professional accounting organizations,

such as the American Institute of Certified Public

Accountant’s (AICPA) Statement on Auditing

Standards No. 55, ‘‘Consideration of the Internal

Control Structure in a Financial Statement Audit’’;

the Committee of Sponsoring Organizations (COSO)

of the Treadway Commission’s Internal Control—

Integrated Framework, including its addendum on

safeguarding of assets; and other internal control

standards published by the AICPA, other

accounting or auditing professional associations,

and financial institution trade associations.

3These would include standards for Performing

and Reporting on Peer Reviews, codified in the SEC

Practice Section Reference Manual, and Standards

for Performing and Reporting on Peer Reviews,

contained in Volume 2 of the AICPA’s Professional

Standards.

5. Appendix A to Part 363 is amended

by revising guidelines 4(c), 9, footnote 2

in guideline 10, footnote 3 in guideline

15(b), 24, 31, and the introductory

paragraph of guideline 32 and footnotes

2 and 3 to read as follows:

Appendix A to Part 363—Guidelines and

Interpretations

* * * * *

4. Comparable Services and Functions.

* * * (c) Prepares and submits the

management assessments of the effectiveness

of the internal control structure and

procedures for financial reporting (internal

controls), and compliance with the

Designated Laws defined in guideline 12 that

are based on information concerning the

activities and operations of those subsidiary

institutions within the scope of the rule.

* * * * *

9. Safeguarding of Assets. ‘‘Safeguarding of

assets’’, as the term relates to internal control

policies and procedures regarding financial

reporting, and which has precedent in

accounting literature, should be addressed in

the management report and the independent

public accountant’s attestation discussed in

guideline 18. Testing the existence of and

compliance with internal controls on the

management of assets, including loan

underwriting and documentation, represents

a reasonable implementation of section 36.

Management therefore should include such

internal controls as part of its assertion in the

management report. The accountant’s

attestation to management’s assertion

concerning the effectiveness of internal

controls for financial reporting should also

include safeguarding of assets against

unauthorized acquisition, use or disposition.1

10. * * * 2

* * * * *

15. * * *

(b) * * * 3 * * *

* * * * *

24. Relief from Filing Deadlines. Although

the reasonable deadlines for filings and other

notices established by this part are specified,

some institutions may occasionally be

confronted with extraordinary circumstances

beyond their reasonable control that may

justify extensions of a deadline. In that event,

upon written application from an insured

depository institution, setting forth the

reasons for a requested extension, the FDIC

or appropriate federal banking agency may,

for good cause shown, extend a deadline in

this part for a period not to exceed 30 days.

* * * * *

31. Holding Company Audit Committees.

When an insured depository institution

subsidiary fails to meet the requirements for

the holding company exception in

§ 363.1(b)(2) or maintains its own separate

audit committee to satisfy the requirements

of this part, members of the independent

audit committee of the holding company may

serve as the audit committee of the

subsidiary institution if they are otherwise

independent of management of the

subsidiary, and, if applicable, meet any other

requirements for a large subsidiary

institution covered by this part. However,

this would not permit officers or employees

of the holding company to serve on the audit

committee of its subsidiary institutions.

When the subsidiary institution satisfies the

requirements for the holding company

exception in § 363.1(b)(2), members of the

audit committee of the holding company

should meet all the membership

requirements applicable to the largest

subsidiary depository institution and may

perform all the duties of the audit committee

of a subsidiary institution, even though such

holding company directors are not directors

of the institution.

32. Duties. The audit committee should

perform all duties determined by the

institution’s board of directors. The duties

should be appropriate to the size of the

institution and the complexity of its

operations, and include reviewing with

management and the independent public

accountant the basis for the reports issued

under §§ 363.2 (a) and (b) and 363.3(a) and

(b) of the rule. Appropriate additional duties

could include:

* * * * *

6. Schedule A to Appendix A to Part

363 is revised to read as follows:

Schedule A to Appendix A—Agreed Upon

Procedures for Determining Compliance With

Designated Laws

i. Schedule A is attached to the Guidelines

and Interpretations issued by the FDIC as an

appendix to this part 363 adopted to

implement section 36 of the FDI Act.

ii. The Agreed Upon Procedures set forth

in this schedule are referred to in guideline

19. They should be followed by the

institution’s independent public accountant

(or, with respect to the procedures set forth

in section I of this schedule, by the

institution’s internal auditor if the

accountant is to perform the procedures set

forth in section II of this schedule) in order

to permit the accountant to report on the

extent of compliance with the Designated

Laws (defined in guideline 12) as required by

section 36(e) (1) and (2).

iii. Additional guidance concerning the

role of the institution, its internal auditor,

and its independent public accountant in

assessing the institution’s compliance with

the Designated Laws is set forth in the

Guidelines. All terms not defined in this

schedule have the meanings given them in

this part 363, the Guidelines, and

professional accounting and auditing

literature.

Section I—Procedures for Individual

Institutions

The following procedures should be

performed by the institution’s independent

public accountant in accordance with

generally accepted standards for attestation

engagements, or by the institution’s internal

auditor if the procedures set forth in section

II of this schedule are to be performed by the

independent public accountant. To the extent

permitted by § 363.1(b), these procedures

may be performed on a holding company

basis rather than at each covered subsidiary

insured depository institution. (See section

II.B.3. for information concerning testing by

the independent public accountant when the

institution’s internal auditor is performing

the procedures in Section I.)

A. Loans to Insiders.

1. Designated Laws. The following federal

laws and regulations (Designated Insider

Laws), to the extent that they are applicable

to the institution, should be read:

a. Laws: 12 U.S.C. 375, 375a, 375b, 376,

1468(b), 1828(j)(2), 1828(j)(3)(B), and 1972;

and

b. Regulations: 12 CFR 23.5, 31, 215, 337.3,

349.3, and 563.43.

2. General.

a. Information. Obtain from management of

the institution, the following information for

the institution’s fiscal year:

(1) Management’s assessment of

compliance with the Designated Insider

Laws;

(2) All minutes (including minutes drafted,

but not approved) of the meetings of the

board and committees of the board which

have been delegated authority pertaining to

insider lending;

(3) Reports of examination, supervisory

agreements, and enforcement actions issued

by the institution’s primary federal and state

regulators, if applicable;

(4) The annual survey which identifies all

insiders of the institution (i.e., directors,

executive officers, and principal

shareholders, and includes their related

interests) and/or other records maintained for

insiders of the institution’s affiliates

(pursuant to 12 CFR 215.8(c));

(5) All Forms 10–K, 10–Q, and 8–K and

proxy statements filed with the SEC and
Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules 8589

1Overdrafts of an executive officer or director in

an aggregate amount of $1,000 or less need not be

included on this list if management provides a

written representation that policies and procedures

are in effect to report as extensions of credit all

overdrafts that do not meet the criteria listed in

paragraph 9.a.(2) of this section concerning

overdrafts in an aggregate amount of $1,000 or less.

comparable documents filed with the FDIC,

Federal Reserve Board, OCC, or OTS under

the Securities Exchange Act of 1934

containing information pertaining to insider

lending;

(6) A list of loans, including all overdrafts

of executive officers and directors,1 and other

extensions of credit to insiders (including

their related interests) outstanding at any

time during the fiscal year (and which

identifies those extensions granted during the

year) as well as the amounts outstanding of

such extensions of credit as of the date of the

most recently completed Call Report or TFR

(Insider Extensions List); and

(7) Management’s written representation

concerning the completeness of:

(a) Its records concerning insider loans and

extensions of credit; and

(b) The Insider Extensions List.

b. Procedures:

(1) Read the foregoing information.

(2) If the institution has excluded any

officers or directors from being considered

executive officers for purposes of paragraph

2.a.(4) of this section, ascertain that any such

exclusions have been approved by resolution

of the board or the bylaws of the bank or

company.

(3) Trace and agree each insider loan and

other extension of credit disclosed in the

documents listed in paragraphs 2.a. (2)

through (5) of this section to see that it is

included on the Insider Extensions List.

3. Policies and Procedures.

a. Information. Obtain the institution’s

written policies and procedures concerning

its compliance with the Designated Insider

Laws, including any written ‘‘Code of Ethics’’

or ‘‘Conflict of Interest’’ policy statements. If

the institution has no written policies and

procedures, obtain a narrative from

management that describes the methods for

complying with such laws and regulations,

and includes provisions similar to those

listed in paragraph A.3.b of this section.

b. Procedures. Ascertain that the policies

and procedures include, or incorporate by

reference, provisions consistent with the

Designated Insider Laws for:

(1) Defining terms;

(2) Restricting loans to insiders;

(3) Maintaining records of insider loans;

(4) Requiring reports and/or disclosures by

the institution and by executive officers,

directors, and principal shareholders (and

their related interests);

(5) Disseminating policy information;

(6) Revising policies to reflect subsequent

changes in the law and regulations;

(7) Educating employees about the legal

requirements and management’s related

policies and procedures;

(8) Prior approval of the board of directors;

and

(9) Reporting insider loans to regulatory

agencies on the institution’s Call Report or

TFR.

4. Calculations of Lending Limits.

a. Information. Obtain management’s

calculation of the following items as of the

date of the institution’s most recently

completed Call Report or TFR and as of a Call

Report or TFR date six or nine months

earlier:

(1) The institution’s unimpaired capital

and surplus (the legal lending limit for all

insiders);

(2) The greater of 5 percent of the

institution’s unimpaired capital and surplus

or $25,000; and

(3) The institution’s individual lending

limit (12 CFR 215.4(c)).

b. Procedures. Recalculate the amounts in

paragraph 4.a. of this section for

mathematical accuracy, and trace the

amounts used in management’s calculations

to the most recently completed Call Report or

TFR.

5. Insider Extensions of Credit Granted.

a. Information. Obtain management’s

written representations regarding whether

the terms and creditworthiness of insider

extensions of credit granted during the fiscal

year are comparable to those that would have

been available to unaffiliated third parties.

b. Procedures. Select a sample of insiders

who were granted or had outstanding

extensions of credit during the fiscal year

from the Insider Extensions List. For each

extension of credit granted during the fiscal

year to each insider in the sample selected:

(1) If a credit granted during the year

(aggregated with all other extensions of credit

to that person and all related interests of that

person) exceeds the lesser of the amounts

calculated in paragraph 4.a.(2) of this section

on either of the dates used in paragraph 4.a.

of this section or $500,000, read the minutes

of the meetings of the board of directors and

determine whether the minutes indicate that:

(a) The credit was approved in advance by

the board; and

(b) The insider abstained from

participating directly or indirectly in voting

on the transactions;

(2) Obtain management’s calculation of the

institution’s individual lending limit for

insiders pursuant to 12 CFR 215.4(c) as of the

date when the extension of credit was

granted and ascertain whether the amount of

the extension of credit being granted to the

insider, when combined with all other

extensions of credit to that insider, exceeds

such limit;

(3) Based on the types of extensions of

credit granted during the fiscal year in the

sample selected, select a sample of three (or

such smaller number that exists) for each

similar type of extension of credit to persons

who are not insiders or employees of the

institution or its affiliates that were granted

within four weeks before or after the granting

of the insider extension of credit:

(a) Compare the terms of the transactions

with the persons not affiliated with the

institution to those with the insiders, and

note in the findings any material differences

in the terms favorable to the insiders

compared to the terms of the transactions

with persons not affiliated with the

institution or its affiliates;

(b) Alternatively, if no comparable

transactions with persons who are not

insiders exist within the time period

specified in paragraph 5.b.(3) of this section,

compare the terms of the insider transaction

to approved policies delineating the interest

rate and other terms and conditions in effect

for similar extensions of credit to unaffiliated

persons. Note in the findings any material

differences in the terms favorable to the

insiders compared to the terms of the

approved policies for an extension of credit

to persons not affiliated with the institution

or its affiliates;

(4) For each extension of credit granted to

each executive officer in the sample selected

in paragraph 5.b. of this section, ascertain

that each credit was:

(a) Preceded by submission of financial

statements;

(b) Approved by, or promptly reported to,

the board of directors, as appropriate; and

(c) Made subject to the written condition,

as specified in the note or other evidence of

indebtedness, that the extension of credit

will become, at the option of the institution,

due and payable at any time that the

executive officer is indebted to other insured

institutions in an aggregate amount greater

than the executive officer would be able to

borrow from the institution.

6. Insider Extensions of Credit

Outstanding.

a. Information. Use the sample of insiders

selected in paragraph 5.b. of this section.

b. Procedure. Trace and agree amounts

outstanding from insiders in the sample to

the supporting documents, as applicable, for

the line item aggregating indebtedness of all

insiders on the institution’s most recently

completed Call Report or TFR.

7. Limitation on Extensions of Credit to

Executive Officers.

a. Information. From the sample selected

in paragraph 5.b. of this section, select the

executive officers who were granted

extensions of credit during the year.

b. Procedures.

(1) For each executive officer selected,

obtain management’s calculation as of the

two dates used in paragraph 4.a. of this

section of:

(a) The aggregate amount of extensions of

credit to the executive officer; and

(b) 2.5 percent of the institution’s

unimpaired capital and surplus.

(2) Ascertain whether, and report as an

exception if, the aggregate amount of the

extensions of credit to the executive officer

exceeds the greater of $25,000 or 2.5 percent

of the institution’s unimpaired capital and

surplus, but in no event more than $100,000.

The aggregate amount should exclude the

types of extensions of credit set forth in 12

CFR 215.5(c)(1) through (3).

(3) Recalculate management’s

computations for mathematical accuracy and

trace amounts used in management’s

computations to the institution’s most

recently completed Call Report or TFR.

(4) If the credit extended is a real estate

loan, obtain documentation for the credit and

note whether such documentation contains

representations that:

(a) The purpose of the credit is for the

purchase, construction, maintenance, or

improvement of the executive officer’s

residence;
8590 Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules

(b) The credit is secured by a first lien on

the residence; and

(c) The executive officer owns or expects

to own the residence after the extension of

credit.

8. Aggregate Insider Extensions of Credit

Outstanding.

a. Information. Obtain management’s

calculation of the aggregate extensions of

credit to executive officers, directors, and

principal shareholders of the institution and

to their related interests as of the two dates

selected in paragraph 4.a. of this section.

b. Procedures. Recalculate the amounts

obtained in paragraph 8.a. of this section for

mathematical accuracy.

(1) Compare this total with 100 percent of

the institution’s unimpaired capital and

surplus calculated in paragraph 4.a.(1) of this

section.

(2) Report any amount by which the

aggregate extensions of credit exceed 100

percent of the institution’s capital and

surplus as an exception in the findings.

9. Overdrafts.

a. Information. Select a sample of insiders

from the Insider Extensions List who had

overdrafts outstanding during the fiscal year.

(1) Obtain a written history of the insider’s

overdrafts for the year and management’s

written representation concerning the

completeness of that history.

(2) For overdrafts of an executive officer or

director in an aggregate amount of $1,000 or

less included in the sample, obtain

management’s written representation that:

(a) It believes the overdrafts were

inadvertent;

(b) The account was overdrawn in each

case for no more than 5 business days; and

(c) The institution charged the executive

officer or director the same fee that it would

charge any other customer in similar

circumstances.

b. Procedures. For each overdraft by an

insider in the sample selected in paragraph

9.a. of this section:

(1) Inquire whether cash items for the

insider were being held by the institution

during the time that the overdraft was

outstanding to prevent additional overdrafts;

(2) Trace and agree subsequent payment by

the insider of the insider’s overdrafts to

records of the account at the institution; and

(3) For overdrafts of executive officers and

directors included in the sample that were

paid by the institution for the executive

officer and director from an account at the

institution:

(a) Trace and agree to a written, preauthorized, interest-bearing extension of

credit plan that specifies a method of

repayment; or

(b) Trace and agree to a written, preauthorized transfer of funds from another

account of the insider at the institution.

10. Reports on Indebtedness to

Correspondent Banks.

a. Information. Obtain from management:

(1) A list of executive officers and principal

shareholders and related interests thereof

that filed reports of indebtedness to a

correspondent bank. This list should be

prepared as of the calendar year for which

the management assessment and

independent public accountant’s attestation

are being filed. If the institution is not on a

calendar year fiscal year, the list should be

prepared as of the end of the calendar year

during its fiscal year.

(2) Its written representation concerning

the completeness of the list for paragraph

10.a.(1) of this section and its written

representation that all executive officers and

principal shareholders have been notified of

the reporting requirements for the calendar

year in paragraph 10.a.(1) of this section

relative to borrowings from correspondent

banks by executive officers and principal

shareholders and their related interests.

(3) Its representation concerning the

amount each executive officer would have

been able to borrow from the reporting

institution.

b. Procedures. Select a sample of executive

officers, principal shareholders, and related

interests thereof from the list obtained in

paragraph 10.a.(1) of this section.

(1) Ascertain that each executive officer

and principal shareholder (or related interest

thereof) included in the sample reported to

the board of directors (on or before the

January 31 following the calendar year in

paragraph 10.a.(1)), indebtedness to

correspondent banks and that such report

states:

(a) The maximum amount of indebtedness

during that calendar year;

(b) The amount of indebtedness

outstanding 10 days prior to report filing; and

(c) A description of the loan terms and

conditions, including the rate or range of

interest rates, original amount and date,

maturity date, payment terms, security, and

any unusual terms or conditions.

(2) If any executive officer’s extensions of

credit from all correspondent banks from the

list obtained in paragraph 10.a.(1) of this

section exceed the total amount that

management represents that the executive

officer would have been able to borrow from

the reporting institution during the fiscal

year, note whether a report pursuant to 12

CFR 215.9 was made to the board of directors

of the officer’s institution within 10 days of

the date the indebtedness reached such a

level.

B. Dividend Restrictions. If the institution

has declared any dividends during the fiscal

year, the following procedures should be

performed for each dividend declared. (These

procedures are not applicable to mutual

institutions and insured branches of foreign

banks.)

1. Designated Laws. The following federal

laws and regulations (Designated Dividend

Laws), to the extent that they are applicable

to the institution (see paragraph 2 below),

should be read:

a. Laws: 12 U.S.C. 56, 60, 1467(a)(f), 1831o;

and

b. Regulations: 12 CFR 5.61, 5.62, 6,

7.6120, 19, 208.19, 208.30, 263, 325.105,

563.134, and 565.

2. General. Although the information

requirements and procedures in paragraphs

2. through 5. of this section are applicable to

all institutions, paragraphs 6. and 7. of this

section were designed to be applicable to

national banks and federally-chartered

savings associations. However, if the

institution is state chartered, and the state

has dividend restrictions substantially

identical to those for national banks and

federally-chartered savings associations, the

requirements in paragraphs 6. and 7. of this

section for information and procedures to be

performed should be applied to the state

bank or savings association.

a. Information. Obtain from management of

the institution the following information for

the institution’s most recent fiscal year:

(1) Its assessment of the institution’s

compliance with the Designated Dividend

Laws and any applicable state laws and

regulations cited in its assessment.

(2) A copy of any supervisory agreements

with, orders by, or resolutions of any

regulatory agency (including a description of

the nature of any such agreements, orders, or

resolutions) containing restrictions on

dividend payments by the institution.

(3) Its written representation whether

dividends declared comply with any

restrictions on dividend payments under any

supervisory agreements with, orders by, or

resolutions of any regulatory agency

(including a description of the nature of any

such agreements, orders, or resolutions).

b. Procedures.

(1) Read the foregoing information.

(2) If any restrictions on dividend

payments exist in any documents obtained in

paragraph 2.a.(2) of this section, test and

agree dividends declared with any such

quantitative restrictions.

3. Policies and Procedures.

a. Information. Obtain the institution’s

written policies and procedures concerning

its compliance with the Designated Dividend

Laws. If the institution has no written

policies and procedures, obtain from the

institution a narrative that describes the

institution’s methods for complying with the

Designated Dividend Laws, and includes

provisions similar to those below.

b. Procedures: Ascertain whether the

policies and procedures include, or

incorporate by reference, provisions which

are consistent with the Designated Dividend

Laws. These would include capital limitation

tests, including section 38 of the Federal

Deposit Insurance Act (12 U.S.C. 1831o),

earnings limitation tests, transfers from

surplus to undivided profits, and restrictions

imposed under any supervisory agreements,

resolutions, or orders of any federal or state

bank regulatory agency. In addition, for

savings associations, this would include

prior notification to the OTS.

4. Board Minutes.

a. Information. Obtain the minutes of the

meetings of the board of directors for the

most recent fiscal year to ascertain whether

dividends (either paid or unpaid) have been

declared.

b. Procedures. Trace and agree total

dividend amounts to the general ledger

records and the institution’s most recently

completed Call Report or TFR.

5. Calculation of Undercapitalization.

a. Information. Obtain management’s

computation of the amount at which

declaration of a dividend would cause the

institution to be undercapitalized as of each

date on which a dividend was declared

during the fiscal year.

b. Procedures: Recalculate management’s

computation (for mathematical accuracy) and
Federal Register / Vol. 60, No. 31 / Wednesday, February 15, 1995 / Proposed Rules 8591

2Since this summary supplements the

independent public accountant’s attestation on the

Designated Laws, the FDIC has determined that the

summary is exempt from public disclosure

consistent with the guidance in Guideline 18 in

Appendix A to this part 363.

compare management’s calculations to the

amount of any dividend declared to

determine whether it exceeded the amount.

6. Dividends Declared by Banks.

a. Information. Obtain the computations by

the management of each national and state

member bank concerning the bank’s

compliance with 12 U.S.C. 56, ‘‘Capital

Limitation Test’’, 12 U.S.C. 60, ‘‘The Earnings

Limitation Test’’, and transfers from surplus

to undivided profits after declaration of the

dividends referenced in paragraph 4.a. of this

section. In a state with substantially similar

laws, obtain the corresponding computations

by the management of each state nonmember

bank.

b. Procedures. Recalculate management’s

computations (for mathematical accuracy)

and compare management’s calculations to

the standards defined in the tests set forth in

paragraph 6.a. of this section to ascertain

whether the dividends declared fall within

the permissible levels under these standards.

If dividends are not permissible in the

amounts declared under such standards,

ascertain whether the dividends were

declared with the approval of the appropriate

federal banking agency or under any other

exception to the standards. If not, report the

findings.

7. Dividends Declared by Savings

Associations.

a. Information. Obtain management’s

documentation of the OTS determination

whether the institution is a Tier 1, Tier 2, or

Tier 3 savings association and management’s

computations of its capital ratio after

declarations of dividends under the Tier

determined by the OTS. For dividends

declared, obtain copies of the savings

association’s notifications to the OTS to

ascertain whether notifications were made at

least 30 days before payment of any

dividends.

b. Procedures: Recalculate management’s

computations (for mathematical accuracy)

and trace amounts used by management in its

calculations to the institution’s TFRs.

Section II—Procedures for the Independent

Public Accountant

If the internal auditor has performed the

procedures set forth in section I for either or

both Designated Laws, the following

procedures may be performed by the

independent public accountant for the

appropriate designated law(s) if neither the

FDIC nor the appropriate federal banking

agency has objected in writing. The report of

procedures performed and list of exceptions

found by the internal auditor, identifying the

institution with respect to which any

exception was found, should be submitted to

the audit committee of the board of directors.

Management should file a summary of the

internal auditor’s significant findings and

management’s response to those findings

with the FDIC at the same time as the

independent public accountant’s attestation

report is filed.2

A. Review of Designated Laws. Read either

or both of the Designated Insider Laws and

Designated Dividend Laws applicable to the

institution, as appropriate to the engagement.

B. Information and Procedures. Perform

the procedures indicated as follows:

1. Designated Laws. Read Section I of this

schedule. Obtain management’s assessment

contained in its management report on the

institution’s or holding company’s

compliance with the Designated Laws for the

fiscal year.

2. Internal Auditor’s Workpapers.

a. Information. If an internal auditor

performed the procedures in Section I, obtain

the internal auditor’s workpapers

documenting the performance of those

procedures on the institution and the chief

internal auditor’s written representation that:

(1) The internal auditor or audit staff, if

applicable, performed the procedures listed

in section I on the institution;

(2) The internal auditor tested a sufficient

number of transactions governed by the

Designated Laws so that the testing was

representative of the institution’s volume of

transactions;

(3) The workpapers accurately reflect the

work performed by the internal auditor and,

if applicable, the internal audit staff;

(4) The workpapers obtained are complete;

and

(5) The internal auditor’s report, which

describes the procedures performed for the

fiscal year as well as the internal auditor’s

findings and exceptions noted, has been

presented to the institution’s audit

committee.

b. Procedures.

(1) Compare the workpapers to the

procedures that are required to be performed

under section I. Report as an exception any

procedures not documented and any

procedures for which the sample size is not

sufficient.

(2) Compare the exceptions and errors

listed by the internal auditor in its report to

the audit committee to those found in the

workpapers, and report as an exception any

exception or error found in the internal

auditor’s workpapers and not listed in the

internal auditor’s list of exceptions.

3. Testing. a. The independent public

accountant should perform the procedures

listed in Section I on representative samples

of the insiders and/or transactions of the

institution to which the Designated Law

applies. If the institution’s internal auditor is

performing the procedures in Section I, the

samples tested by the independent public

accountant should be at least 30 percent of

the size of the samples tested by the internal

auditor although samples selected by the

accountant should be from the population at

large. However, if there are so few

transactions in any area that the internal

auditor cannot use sampling, but must test all

transactions, the independent public

accountant should also test all transactions.

b. If the testing is being performed on a

holding company with more than one

subsidiary institution that is subject to this

part 363 (covered subsidiary), the samples

tested should include a combination of

insiders and transactions from each covered

subsidiary with total assets (after deductions

of intercompany amounts that would be

eliminated in consolidation) in excess of 25

percent of the holding company’s total assets

every fiscal year. Samples should be tested

for each smaller covered subsidiary at least

every other fiscal year unless the holding

company has more than eight covered

subsidiaries, in which case the samples to be

tested for each Designated Law should be

drawn from each smaller covered subsidiary

at least every third fiscal year.

4. Reports Concerning Holding Companies.

Only one report of any exceptions noted from

application of the procedures in section II

performed by the independent public

accountant should be filed as required by

guideline 3 in Appendix A to this part 363,

but the report should identify, for each

exception or error noted, the identity of the

covered subsidiary to which it relates.

By order of the Board of Directors.

Dated at Washington, D.C. this 31st day of

January, 1995.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95–3176 Filed 2–14–95; 8:45 am]

BILLING CODE 6174–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 94–NM–251–AD]

Airworthiness Directives; Boeing

Model 747–400 Series Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

supersedure of an existing airworthiness

directive (AD), applicable to certain

Boeing Model 747–400 series airplanes,

that currently requires a revision to the

input wiring for the flap control unit.

This action would require a new

systems test for the wiring of the trailing

edge flap. The proposal would also

expand the applicability of the existing

AD to include additional airplanes. This

proposal is prompted by a report

indicating that a wiring error was not

detected by the system test required by

the existing AD. The actions specified

by the proposed AD are intended to

prevent the possibility of an all-flaps-up

landing due to the loss of control of all

flap operations.

DATES: Comments must be received by

April 10, 1995.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), Transport

Airplane Directorate, ANM–103,