Three ‘guidance’ letters from FRB found to be rules, subject to review (and possible overturning) by Congress

Three “guidance” letters issued as long ago as 2011 are rules under the purposes of the Congressional Review Act (CRA) and thus are subject for consideration to be overturned by Congress, the congressional watchdog said in letters this week.

Two of the guidance letters deal with large bank supervision; the third focuses on model risk management.

In its own letters in response to requests from several Republican senators, the Government Accountability Office (GAO) said the Federal Reserve’s supervision and regulation letters SR 12-17, which provides a new framework for supervision of large financial institutions, and SR 14-8, which addresses actions banks should take for recovery planning to return to solid financial condition, are rules under CRA, which requires that they be submitted to Congress for review.

A third guidance letter, SR 11-7 on model risk management, also constitutes a rule under the CRA, the GAO said in a second letter.

The first two guidance letters were issued in 2012 and 2014, respectively; the third guidance letter was issued by the central bank in 2011.

The GAO said the Fed guidance issued in 2012 and 2013 meet the Administrative Procedure Act (APA) definition of a rule upon which CRA relies. The GAO said both are agency statements as both were issued by the Fed. Second, the guidance in both cases is of future effect, GAO said, as they provide new guidance to banks on actions they should take to increase their resiliency to prepare for future financial distress.

The GAO also found that none of three CRA exceptions apply to either guidance letters. That is: both are rules of general and not particular applicability; both deal with actions that banks – not Fed management or personnel – should take and are, therefore, not rules of agency management or personnel; and neither guidance letter constitutes rules of “agency organization, procedure, or practice that do not substantially affect the rights or obligations of non-agency parties.”

The third guidance letter, on model risk management, was found to hold similar qualities (and met no exceptions) and is thus subject to CRA.

The finding, GAO pointed out, means that the guidance letters – as rules – are subject to the requirement that they be submitted to both houses of Congress and GAO’s Comptroller General for review before they can take effect.

The Senate or House may choose to consider the rules under CRA – or not – within 60 legislative days. GAO said it conducted the review at the urging of Sens. David Perdue (R- Ga.), Kevin Cramer (R-N.D.) and Thom Tillis (R-N.C.).

Board of Governors of the Federal Reserve System—Applicability of the Congressional Review Act to Supervision and Regulation Letters