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Legal entity reporting: Common challenges and banking industry practices
Optimizing your legal entity regulatory reporting process
Like financial regulatory reporting, ambiguity around ownership and accountability of reporting legal entity data have emerged as a common challenge across organizations. Large banking organizations—both US and non-US headquartered—with global operations face unique challenges in maintaining a centralized and robust framework to collect legal entity data consistently and timely to produce accurate reports.
June 4, 2018 | Financial services
Background for legal entity reporting
Depending upon the legal entity structure and headquarters of a parent bank, several different reporting forms are used to identify legal entities and associated information, including their purpose and type of legal form. This information is used for monitoring compliance with laws and regulations including by the Federal Reserve Board of Governors (“Federal Reserve”): The Dodd-Frank Act, the Sarbanes-Oxley Act, the Gramm-Leach-Bliley Act, Regulation Y (Bank Holding Companies and Change in Bank Control), Regulation YY (Enhanced Prudential Standards), and Regulation QQ (Resolution Plans). This information is also an important component in regulators determining an institution’s level of complexity.
As events occur that affect a firm’s organizational structure, a report is filed to record the event-driven (FR Y-10, Report of Changes in Organizational Structure). Annually, the end of the parent company fiscal year, a report is submitted that includes an organization chart and information concerning shareholders and public financial statements (FR Y-6, Annual Report of Holding Companies1, and
These are foundational regulatory reports that impact activities in regulatory compliance, reporting, and disclosure. The information on these data collections
Challenges and risks
Traditionally, the responsibility for banking structure data resided outside the corporate finance function and resided mainly in Legal and the Corporate Secretary (or equivalent office). This was effective when most of the reporting was related to corporate actions (e.g., mergers, and entity formations). However, the growth of the information collected on the banking structure now requires information to be sourced from different business units and functions throughout a firm.
Since most of the reporting requirements are based on Federal Reserve regulations—specifically Regulation K (International Banking Operations)3 and Regulation Y (Bank Holding Companies and Change in Bank Control)4—this requires data owners to have a knowledge of technical legal knowledge of these regulations. The need for deep technical knowledge and the increased regulatory expectations for data quality are both trends driving the responsibility for banking structure reports to shift closer to financial reporting. This enables institutions to leverage existing policies and quality assurance procedures for financial reporting to the banking structure data.
Many large institutions are now beginning to focus on to implementing a robust, well-controlled process around the production of these reports to remediate the following issues:
- Failure to file reports timely: The FR Y-10 report is required to be filed within 30 days of a reportable event. This issue is typically due to lack of timely communication or notification within the institutions regarding
changein entity structure, or lack of robust report preparation processes, which lead to late reporting.
- Incomplete reporting: In this case, the reporting institution does not file all the required reports or does not include all the required information
- Inaccurate reporting: Information included on the reports may not be accurate (e.g., incorrect event type, incorrect activity codes, and incorrect ownership percent.)
Incomplete or inaccurate structure reporting of the
A key factor that leads to poor data quality is determining “reportable entities.” Most firms can easily identify entities that are consolidated in financial statements. However, the
Poor data quality on the banking structures
Industry practices and insights
For legal entity reporting (as part of the overall framework for regulatory reporting), institutions that have invested in improving their underlying data and supporting governance frameworks have seen a noticeable improvement. We have identified some of the common industry trends that can be an effective tool in enhancing reporting quality.
As we previously discussed in our POV on the maturity of regulatory reporting at banking organizations, regulators expect all regulatory reporting—including structure reporting—to be governed by a comprehensive framework with clearly identified roles and responsibilities and standards for compliance, including monitoring and escalation. Including structure reporting into the overall regulatory reporting governance framework can help with consistency of reporting and better alignment between reporting teams. An important step in a functioning governance structure is implementing an effective accountability policy. By doing so, data owners are identified and are responsible for the quality of the information they own. The banking structure data should align with the financial reporting accountability policy.
As part of accountability frameworks, a well-designed training program should exist for the report preparation staff and individuals contributing to
The banking structure data can require hundreds, if not thousands, of annual filings. Without
A comprehensive controls framework is at the foundation of regulatory reporting. Institutions are implementing controls around legal entity/structure reporting with a focus on the end-to-end reporting flow, from the area that initiates entity changes, through the systems of record, to the reporting unit responsible for filing the reports, along with reconciliation between these various reports and compliance systems. There should be a close connectivity in outlining Legal, Finance, and Compliance’s roles in advising, production, monitoring, and testing.
One of the challenges with legal entity reporting
An important aspect of controls with legal entity information is building business rules that validate the attributes for all reporting items. This can be done by understanding the requirements of Regulation K, W, Y, QQ, and YY and the definitions and relationships between reports, line items, and schedule of the
Institutions are expected to have effective data governance and data management capabilities for legal entity reporting as the framework that is in place for financial and risk data. The framework components would typically include the same documentation, control, accountability, reconciliation, and issue/escalation reporting and tracking standards for legal entity reporting as it does for financial and risk data. Similarly, legal entity reporting should be part of the firm-wide data quality and integrity programs, inclusive of the business lines that are responsible for originating legal entity activities and changes. This may include formalizing and defining data elements impacting the
The Merger, Domestic Branch, Foreign Branch Schedule, and US Branch and Agency schedules capture the characteristics of events and of the reportable entity. In these schedules, careful attention should be given to the dates used since these dates will determine when certain regulatory reports will be required.
The last two schedules the 4K and Large Merchant Banking Schedule are used to monitor compliance with
Legal entity management
Many firms have commenced legal entity rationalization efforts that have included reviews for each legal entity and classifying its purpose, status, and potential for streamlining. This process is the result of firms realizing that:
- Banking organizations with multiple intermediate holding companies and special purpose entities contribute to complexity in legal entity structure and can complicate the resolution planning process;
- The cost of administrative support and reporting requirements of the enterprise can potentially be reduced with a streamlined legal entity structure; and
- There is a significant risk for booking errors through the booking structure across and between entities on an intercompany basis.
Legal entity reporting is a useful tool in understanding current entity (organization) structure and the purpose of each entity, and together with other internal/management reporting provide a starting point for the legal entity analysis that has been enriched for resolution planning purposes. Balancing the business structure and activities of the enterprise across its geographical footprint presents new challenges when reconciling against the legal entity rationalization requirements for resolution planning. The focus is beyond the typical organizational structure challenges of the relevance of all the entities and where business is being conducted day to day. Banks have to focus on the resiliency and resolution of those entities from
5 The definition of “financial holding company” under the Bank Holding Company Act is available here.
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