Guidance and Regulation — What’s the Big Difference?

Guidance and Regulation — What’s the Big Difference?

When it comes to regulatory compliance, businesses have to contend with local, federal, and state laws. There are also guidance, advisories, policy statements, and directives from agencies ranging from the Internal Revenue Service to the New Jersey Department of Labor.

On the federal level, agency “guidance” has come under fire for supplanting the regulatory rulemaking process and essentially taking on a life of its own. In practice, guidance is intended to clarify an existing regulation. Therefore, it is not subject to the notice and comment requirements of the Administrative Procedures Act. However, critics contend that agencies sometimes use guidance to extend or amend regulations without going through the formal process.

In response to criticism, several federal financial regulators recently issued a statement “clarifying the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.” The agencies include the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency.  Such supervisory guidance often takes the form of interagency statements, advisories, bulletins, policy statements, and questions and answers to the supervised institutions.

Interagency Statement Clarifying the Role of Supervisory Guidance

In their Interagency Statement Clarifying the Role of Supervisory Guidance, the agencies aim to explain the role of supervisory guidance and distinguish it from laws and regulations. Most notably, they confirm that supervisory guidance does not have the force and effect of law.

“Unlike a law or regulation, the supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance,” the agencies state.  “Rather, supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.”

At the same time, the agencies also highlight that guidance can boost compliance efforts. “Supervisory guidance often provides examples of practices that the agencies generally consider consistent with safety-and-soundness standards or other applicable laws and regulations, including those designed to protect consumers,” the statement reads. “Supervised institutions at times request supervisory guidance, and such guidance is important to provide insight to industry, as well as supervisory staff, in a transparent way that helps to ensure consistency in the supervisory approach.”

To implement this concept, the agencies plan to adopt the following policies and practices with respect to supervisory guidance:

• The agencies will limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance. Where numerical thresholds are utilized, the agencies intend to clarify that the thresholds do not suggest requirements. Furthermore, the agencies will continue to use numerical thresholds to tailor the applicability of supervisory guidance or programs to supervised institutions, and as required by statute.
• Examiners will not criticize a supervised financial institution for a “violation” of supervisory guidance. Instead, any citations will be based on violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions. During examinations and other supervisory activities, examiners may identify unsafe or unsound practices or other deficiencies in risk management, including areas which do not constitute violations of law or regulation. Examiners may reference supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.
• The agencies may continue to seek public comment on supervisory guidance, but seeking such public comment will not mean that the guidance is intended to be a regulation or have the force and effect of law. The comment process may assist the agencies in augmenting their understanding of an issue, assembling information on institutions’ risk management practices, or seeking ways to achieve a supervisory objective most effectively and with the least burden on institutions.
• The agencies will attempt to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances in the future.
• The agencies will continue efforts to make the role of supervisory guidance clear in their communications to examiners and to supervised financial institutions, and encourage supervised institutions to discuss the questions with their appropriate agency contact.

Key Takeaways for Regulated Entities

For businesses under the oversight of the five agencies, the statement is good news as it suggests that supervisory guidance will be used as a compliance tool rather than as a sword to bring enforcement actions. To discuss how your business’ compliance efforts may be impacted, we encourage you to contact one of Scarinci Hollenbeck’s experienced business attorneys.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Robert A. Marsico, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.