Annual Independent Audits and Reporting Requirements Proposed Amendment to Part 363

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FDIC Financial Institution Letters › Annual Independent Audits and Reporting Requirements Proposed Amendment to Part 363

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This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules

Federal Register

44293

Vol. 70, No. 147

Tuesday, August 2, 2005

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 363

RIN 3064–AC91

Annual Independent Audits and

Reporting Requirements

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

SUMMARY: The FDIC is proposing to

amend its regulations concerning

annual independent audits and

reporting requirements, which

implement Section 36 of the Federal

Deposit Insurance Act (FDI Act). Section

36 and the FDIC’s implementing

regulations are generally intended to

facilitate early identification of

problems in financial management at

insured depository institutions with

total assets above a certain threshold

(currently $500 million) through annual

independent audits, assessments of the

effectiveness of internal control over

financial reporting and compliance with

designated laws and regulations, and

related reporting requirements. Section

36 also includes requirements for audit

committees at these insured depository

institutions. The FDIC’s amendments

would raise the asset size threshold

from $500 million to $1 billion for

internal control assessments by

management and external auditors and

for the members of the audit committee,

who must be outside directors, to be

independent of management. As

required by section 36, the FDIC has

consulted with the other Federal

banking agencies. These amendments

are proposed to take effect December 31,

2005.

DATES: Comments must be received on

or before September 16, 2005.

ADDRESSES: Interested parties are

invited to submit written comments to

the FDIC by any of the following

methods:

• Federal eRulemaking Portal: http://

www.regulations.gov

required by section 36, the FDIC has

consulted with the other Federal

banking agencies. These amendments

are proposed to take effect December 31,

2005.

DATES: Comments must be received on

or before September 16, 2005.

ADDRESSES: Interested parties are

invited to submit written comments to

the FDIC by any of the following

methods:

• Federal eRulemaking Portal: http://

www.regulations.gov. Follow the

instructions for submitting comments.

• Agency Web site: http://

www.fdic.gov/regulations/laws/federal/

propose.html. Follow the instructions

for submitting comments on the FDIC

Web site.

• E-mail: Comments@FDIC.gov.

Include RIN number in the subject line

of the message.

• Mail: Robert E. Feldman, Executive

Secretary, Attention: Comments, Federal

Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429.

• Hand Delivery/Courier: Guard

station at the rear of the 550 17th Street

building (located on F Street) on

business days between 7 a.m. and 5 p.m.

Instructions: All submissions received

must include the agency name and RIN

number for this rulemaking. All

comments received will be posted

without change to http://www.fdic.gov/

regulations/laws/federal/propose.html

including any personal information

provided. Comments may be inspected

and photocopied in the FDIC Public

Information Center, Room 100, 801 17th

Street, NW., Washington, DC, between 9

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

FOR FURTHER INFORMATION CONTACT:

Harrison E. Greene, Jr., Senior Policy

Analyst (Bank Accounting), Division of

Supervision and Consumer Protection,

at hgreene@fdic.gov or (202) 898–8905;

or Michelle Borzillo, Counsel,

Supervision and Legislation Section,

Legal Division, at mborzillo@fdic.gov or

Room 100, 801 17th

Street, NW., Washington, DC, between 9

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

FOR FURTHER INFORMATION CONTACT:

Harrison E. Greene, Jr., Senior Policy

Analyst (Bank Accounting), Division of

Supervision and Consumer Protection,

at hgreene@fdic.gov or (202) 898–8905;

or Michelle Borzillo, Counsel,

Supervision and Legislation Section,

Legal Division, at mborzillo@fdic.gov or

(202) 898–7400.

SUPPLEMENTARY INFORMATION:

A. Background

Section 112 of the Federal Deposit

Insurance Corporation Improvement Act

of 1991 (FDICIA) added Section 36,

‘‘Early Identification of Needed

Improvements in Financial

Management,’’ to the FDI Act (12 U.S.C.

1831m). Section 36 is generally

intended to facilitate early identification

of problems in financial management at

insured depository institutions above a

certain asset size threshold through

annual independent audits, assessments

of the effectiveness of internal control

over financial reporting and compliance

with designated laws and regulations,

and related requirements. Section 36

also includes requirements for audit

committees at these insured depository

institutions. Section 36 grants the FDIC

discretion to set the asset size threshold

for compliance with these statutory

requirements, but it states that the

threshold cannot be less than $150

million. Sections 36(d) and (f) also

obligate the FDIC to consult with the

other Federal banking agencies in

implementing these sections of the FDI

Act, and the FDIC has performed that

consultation requirement.

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 its fiscal

year (covered institution)

Act, and the FDIC has performed that

consultation requirement.

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 its fiscal

year (covered institution). Often referred

to as the ‘‘FDICIA reporting

requirements,’’ part 363 requires each

covered institution to submit to the

FDIC and other appropriate Federal and

state supervisory agencies an annual

report that includes audited financial

statements, a statement of management’s

responsibilities, assessments by

management of the effectiveness of

internal control over financial reporting

and compliance with designated laws

and regulations, and an auditor’s

attestation report on internal control

over financial reporting. In addition,

part 363 provides that each covered

institution must establish an

independent audit committee of its

board of directors comprised of outside

directors who are independent of

management of the institution. Part 363

also includes Guidelines and

Interpretations (Appendix A to part

363), which are intended to assist

institutions and independent public

accountants in understanding and

complying with section 36 and part 363.

A covered institution may satisfy the

audited financial statements

requirement of part 363 at the holding

company level. Subject to certain

conditions, the other requirements of

part 363 may be satisfied at the holding

company level. Members of the

independent audit committee of a

holding company may serve as the audit

committee of a subsidiary covered

institution provided they are otherwise

independent of the subsidiary’s

management and meet the other criteria

set forth in part 363

holding

company level. Subject to certain

conditions, the other requirements of

part 363 may be satisfied at the holding

company level. Members of the

independent audit committee of a

holding company may serve as the audit

committee of a subsidiary covered

institution provided they are otherwise

independent of the subsidiary’s

management and meet the other criteria

set forth in part 363.

When it adopted part 363 in 1993, the

FDIC stated that it was setting the asset

size threshold at $500 million rather

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Federal Register / Vol. 70, No. 147 / Tuesday, August 2, 2005 / Proposed Rules

1 See FDIC Financial Institution Letter (FIL) 86–

94, dated December 23, 1994. FIL–86–94 indicates

that financial statements prepared for regulatory

reporting purposes encompass the schedules

equivalent to the basic financial statements in an

institution’s appropriate regulatory report, e.g., the

bank Reports of Conditions and Income and the

Thrift Financial Report.

than the $150 million specified in

section 36 to mitigate the financial

burden of compliance with section 36

consistent with safety and soundness. In

selecting $500 million in total assets as

the size threshold, the FDIC noted that

approximately 1,000 of the then nearly

14,000 FDIC-insured institutions would

be subject to part 363. These covered

institutions held approximately 75

percent of the assets of insured

institutions at that time. By imposing

the audit, reporting, and audit

committee requirements of part 363 on

institutions with this percentage of the

industry’s assets, the FDIC intended to

ensure that the Congress’s objectives for

achieving sound financial management

at insured institutions when it enacted

section 36 would be focused on those

institutions posing the greatest risk to

the insurance funds administered by the

FDIC

e audit, reporting, and audit

committee requirements of part 363 on

institutions with this percentage of the

industry’s assets, the FDIC intended to

ensure that the Congress’s objectives for

achieving sound financial management

at insured institutions when it enacted

section 36 would be focused on those

institutions posing the greatest risk to

the insurance funds administered by the

FDIC. Today, due to consolidation in

the banking and thrift industry and the

effects of inflation, approximately 1,150

of the 8,900 insured institutions have

$500 million or more in total assets and

are therefore subject to part 363. These

covered institutions hold approximately

90 percent of the assets of insured

institutions.

B. Increasing the Asset Size Threshold

for Internal Control Assessments

An effective internal control structure

is critical to the safety and soundness of

each insured institution. Given its

importance, internal control is

evaluated as part of the supervision of

individual institutions and its adequacy

is a factor in the management rating

assigned to an institution. Furthermore,

in the audit of an institution’s financial

statements, the external auditor must

obtain an understanding of internal

control, including assessing control risk,

and must report certain matters

regarding internal control to the

institution’s audit committee.

An institution subject to part 363 has

the added requirement that its

management perform an assessment of

the internal control structure and

procedures for financial reporting and

that its external auditor examine, attest

to, and report on management’s

assertion concerning the institution’s

internal control over financial reporting

g internal control to the

institution’s audit committee.

An institution subject to part 363 has

the added requirement that its

management perform an assessment of

the internal control structure and

procedures for financial reporting and

that its external auditor examine, attest

to, and report on management’s

assertion concerning the institution’s

internal control over financial reporting.

For purposes of these internal control

provisions of part 363, the FDIC has

advised covered institutions that the

term ‘‘financial reporting’’ includes both

financial statements prepared in

accordance with generally accepted

accounting principles and those

prepared for regulatory reporting

purposes.1 Until year-end 2004, external

auditors performed their internal

control assessments in accordance with

an attestation standard issued by the

American Institute of Certified Public

Accountants (AICPA) known as ‘‘AT

501.’’

The Sarbanes-Oxley Act was enacted

into law on July 30, 2002. Section 404

of this Act imposes a requirement for

internal control assessments by the

management and external auditors of all

public companies that is similar to the

FDICIA requirement. The Securities and

Exchange Commission’s (SEC) rules

implementing these requirements took

effect at year-end 2004 for ‘‘accelerated

filers,’’ i.e., generally, public companies

whose common equity has an aggregate

market value of at least $75 million, but

they will not take effect until 2006 for

‘‘non-accelerated filers.’’ For the section

404 auditor attestations, the Public

Company Accounting Oversight Board’s

(PCAOB) Auditing Standard No. 2 (AS

2) applies. AS 2 replaces the AICPA’s

AT 501 internal control attestation

standard for public companies, but AS

2 does not apply to nonpublic

companies

market value of at least $75 million, but

they will not take effect until 2006 for

‘‘non-accelerated filers.’’ For the section

404 auditor attestations, the Public

Company Accounting Oversight Board’s

(PCAOB) Auditing Standard No. 2 (AS

2) applies. AS 2 replaces the AICPA’s

AT 501 internal control attestation

standard for public companies, but AS

2 does not apply to nonpublic

companies. The SEC’s section 404 rules

for management and the provisions of

AS 2 for section 404 audits of internal

control establish more robust

documentation and testing requirements

than those that have been applied by

covered institutions and their auditors

to satisfy the internal control reporting

requirements in part 363.

For internal control attestations of

nonpublic companies, the AICPA is

currently developing proposed revisions

to AT 501 that are expected to bring it

closer into line with the provisions of

AS 2. The revisions also are likely to

have the effect of requiring greater

documentation and testing of internal

control over financial reporting by an

institution’s management in order for

the auditor to perform his or her

attestation work.

As the environment has changed and

continues to change since the enactment

of the Sarbanes-Oxley Act, the FDIC has

observed that compliance with the audit

and reporting requirements of part 363

has and will continue to become more

burdensome and costly, particularly for

smaller nonpublic covered institutions.

Thus, the FDIC has reviewed the current

asset size threshold for compliance with

part 363 in light of the discretion

granted by Section 36 that permits the

FDIC to determine the appropriate size

threshold (at or above $150 million) at

which insured institutions should be

subject to the various provisions of

section 36. Based on this review, the

FDIC is proposing to amend part 363 to

increase the asset size threshold for

internal control assessments by

management and external auditors from

$500 million to $1 billion

ction 36 that permits the

FDIC to determine the appropriate size

threshold (at or above $150 million) at

which insured institutions should be

subject to the various provisions of

section 36. Based on this review, the

FDIC is proposing to amend part 363 to

increase the asset size threshold for

internal control assessments by

management and external auditors from

$500 million to $1 billion. Raising the

threshold to $1 billion would achieve

meaningful burden reduction without

sacrificing safety and soundness.

In reaching this decision, the FDIC

concluded that raising the $500 million

asset size threshold to $1 billion and

exempting all institutions below this

higher size level from all of the

reporting requirements of part 363

would not be consistent with the

objective of the underlying statute, i.e.,

early identification of needed

improvements in financial management.

In contrast, the FDIC believes that

relieving smaller covered institutions

from the burden of internal control

assessments, while retaining the

financial statement audit and other

reporting requirements for all

institutions with $500 million or more

in total assets, strikes an appropriate

balance in accomplishing this objective.

If the FDIC were to raise the size

threshold for internal control

assessments to $1 billion, about 600 of

the largest insured institutions with

approximately 86 percent of industry

assets would continue to be covered by

the internal control reporting

requirements of part 363. At the same

time, the managements of covered

institutions would remain responsible

for establishing and maintaining an

adequate internal control structure and

procedures for financial reporting, and

all institutions with $500 million or

more in total assets that are public

companies or subsidiaries of public

companies that they have considerable

flexibility in determining how best to

satisfy the internal control assessment

requirements in the SEC’s section 404

rules and the FDIC’s part 363. As

indicated in the preamble to the SEC’s

section 404 final rule release, the FDIC

(and the other Federal banking agencies)

agreed with the SEC that insured

depository institutions that are subject

to both part 363 (as well as holding

companies permitted under the holding

company exception in part 363 to file an

internal control report on behalf of their

insured depository institution

subsidiaries) and the SEC’s rules

implementing section 404 can choose

either of the following two options:

• They can prepare two separate

reports of management on the

institution’s or the holding company’s

internal control over financial reporting

to satisfy the FDIC’s part 363

requirements and the SEC’s section 404

requirements; or

• They can prepare a single report of

management on internal control over

financial reporting that satisfies both the

FDIC’s requirements and the SEC’s

requirements.2

For more complete information on

these two options, institutions (and

holding companies) should refer to

Section II.H.4. of the preamble to the

SEC’s Section 404 final rule release (68

FR 36648, June 18, 2003).

C. Composition of the Audit Committee

Currently, part 363 requires each

covered institution to establish an

independent audit committee of its

board of directors, comprised of outside

directors who are independent of

management of the institution

holding companies) should refer to

Section II.H.4. of the preamble to the

SEC’s Section 404 final rule release (68

FR 36648, June 18, 2003).

C. Composition of the Audit Committee

Currently, part 363 requires each

covered institution to establish an

independent audit committee of its

board of directors, comprised of outside

directors who are independent of

management of the institution. The

duties of the audit committee include

reviewing with management and the

institutions’ independent public

accountant the basis for the reports

included in the part 363 annual report

submitted to the FDIC and other

appropriate Federal and state

supervisory agencies. The FDIC’s

Guidelines to part 363 provide that, at

least annually, the board of directors of

a covered institution should determine

whether all existing and potential audit

committee members are ‘‘independent

of management of the institution.’’ The

guidelines also describe factors to

consider in making this determination.3

Section 36 provides that an

appropriate Federal banking agency may

grant a hardship exemption to a covered

institution that would permit its

independent audit committee to be

made up of less than all, but no fewer

than a majority of, outside directors who

are independent of management. To

grant the exemption, the agency must

find that the institution has encountered

hardships in retaining and recruiting a

sufficient number of competent outside

directors.

Notwithstanding this exemption

provision of section 36, the FDIC has

observed that a number of smaller

covered institutions, particularly those

with few shareholders that have

recently exceeded $500 million in total

assets and become subject to part 363,

have encountered difficulty in satisfying

the independent audit committee

requirement

ufficient number of competent outside

directors.

Notwithstanding this exemption

provision of section 36, the FDIC has

observed that a number of smaller

covered institutions, particularly those

with few shareholders that have

recently exceeded $500 million in total

assets and become subject to part 363,

have encountered difficulty in satisfying

the independent audit committee

requirement. To comply with this

requirement, these institutions must

identify and attract qualified

individuals in their communities who

would be willing to become a director

and audit committee member and who

would be independent of management.

To relieve this burden, but also

recognizing that the FDIC has long held

that individuals who serve as directors

of any insured depository institution

should be persons of independent

judgment, the FDIC is proposing to

amend part 363 to increase from $500

million to $1 billion the asset size

threshold for requiring audit committee

members to be independent of

management. Conforming changes

would be made to Guidelines 27–29 of

Appendix A to part 363. Each insured

depository institution with total assets

of $500 million or more but less than $1

billion would continue to be required to

have an audit committee comprised of

outside directors. Consistent with

Guideline 29 of Appendix A to part 363,

an outside director would be defined as

an individual who is not, and within the

preceding year has not been, an officer

or employee of the institution or any

affiliate of the institution.

This proposed amendment to the

audit committee requirements for

institutions with between $500 million

and $1 billion in total assets would

allow an outside director who is, for

example, a consultant or legal counsel

to the institution, a relative of an officer

or employee of the institution or its

affiliates, or the owner of 10 percent or

more of the stock of the institution to

serve as an audit committee member

the

audit committee requirements for

institutions with between $500 million

and $1 billion in total assets would

allow an outside director who is, for

example, a consultant or legal counsel

to the institution, a relative of an officer

or employee of the institution or its

affiliates, or the owner of 10 percent or

more of the stock of the institution to

serve as an audit committee member.

Nevertheless, the FDIC would encourage

each institution with between $500

million and $1 billion in assets to make

a reasonable good faith effort to

establish an audit committee of outside

directors who are independent of

management.

Accordingly, the FDIC is seeking

comments on the proposed amendment

to increase from $500 million to $1

billion the asset size threshold at which

members of a covered institution’s audit

committee must be outside directors

who are independent of management.

This amendment is proposed to take

effect December 31, 2005.

D. Technical Changes

The FDIC also proposes to make

certain technical changes to part 363 to

correct outdated titles, terms, and

references in the regulation and its

appendix.

E. Other Revisions

The FDIC has identified other aspects

of part 363 that may warrant revision in

light of changes in the industry and the

passage of the Sarbanes-Oxley Act.

However, the FDIC believes that

finalizing the amendments in this

proposal should take priority over other

possible revisions to part 363 in order

to reduce compliance burdens and

expenses for affected institutions in the

current year. The FDIC expects to

propose further revisions to part 363 as

soon as practicable.

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g the amendments in this

proposal should take priority over other

possible revisions to part 363 in order

to reduce compliance burdens and

expenses for affected institutions in the

current year. The FDIC expects to

propose further revisions to part 363 as

soon as practicable.

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Federal Register / Vol. 70, No. 147 / Tuesday, August 2, 2005 / Proposed Rules

Request for Comments

The FDIC welcomes comments on all

aspects of this proposal.

Solicitation of Comments on Use of

Plain Language

Section 722 of the Gramm-Leach-

Bliley Act, Pub. L. 106–102, sec. 722,

113 Stat. 1338, 1471 (Nov. 12, 1999),

requires the Federal banking agencies to

use plain language in all proposed and

final rules published after January 1,

2000. We invite your comments on how

to make this proposal easier to

understand. For example:

• Have we organized the material to

suit your needs? If not, how could this

material be better organized?

• Are the requirements in the

proposed regulation clearly stated? If

not, how could the regulation be more

clearly stated?

• Does the proposed regulation

contain language or jargon that is not

clear? If so, which language requires

clarification?

• Would a different format (grouping

and order of sections, use of headings,

paragraphing) make the regulation

easier to understand? If so, what

changes to the format would make the

regulation easier to understand?

• What else could we do to make the

regulation easier to understand?

Solicitation of Comments on Impact on

Community Banks

The FDIC seeks comments on the

impact of this proposal on community

banks. The FDIC recognizes that

community banks operate with more

limited resources than larger

institutions and may present a different

risk profile

would make the

regulation easier to understand?

• What else could we do to make the

regulation easier to understand?

Solicitation of Comments on Impact on

Community Banks

The FDIC seeks comments on the

impact of this proposal on community

banks. The FDIC recognizes that

community banks operate with more

limited resources than larger

institutions and may present a different

risk profile. Thus, the FDIC specifically

requests comments on the impact of the

proposal on community banks’ current

resources, including personnel, and

whether the goals of the proposed rule

could be achieved, for community

banks, through an alternative approach.

Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act (RFA)

requires that each Federal Agency either

certify that a proposed rule would not,

if adopted in final form, have a

significant economic impact on a

substantial number of small entities or

prepare an initial regulatory flexibility

analysis (IRFA) of the proposal and

publish the analysis for comment. See 5

U.S.C. 603, 605. The Small Business

Administration (SBA) defines small

banks as those with less than $150

million in assets. Because this rule

expressly exempts insured depository

institutions having assets of less than

$500 million, it is inapplicable to small

entities as defined by the SBA.

Therefore, it is certified that this

proposed rule would not have a

significant economic impact on a

substantial number of small entities.

Paperwork Reduction Act

This proposed rule would revise 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 (44 U.S.C.

3501 et seq). The primary revisions

increase the asset size threshold for

compliance with sections 363.2(b),

363.3(b), and 363.5(a). It is anticipated

that these changes will result in a

burden reduction for affected insured

institutions. Comments are invited on:

ved by the Office of

Management and Budget under control

number 3064–0113, pursuant to the

Paperwork Reduction Act (44 U.S.C.

3501 et seq). The primary revisions

increase the asset size threshold for

compliance with sections 363.2(b),

363.3(b), and 363.5(a). It is anticipated

that these changes will result in a

burden reduction for affected insured

institutions. Comments are invited on:

(a) Whether the collection of

information is necessary for the proper

performance of the FDIC’s functions,

including whether the information has

practical utility; (b) the accuracy of the

estimates of the burden of the

information collection; (c) ways to

enhance the quality, utility, and clarity

of the information to be collected; and

(d) ways to minimize the burden of the

information collection on respondents,

including through the use of automated

collection techniques or other forms of

information technology.

Comments should be addressed to

Steven F. Hanft, Paperwork Clearance

Officer, Room MB–3064, Federal

Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429,

with copies to Desk Officer Mark

Menchik, Office of Information and

Regulatory Affairs, Office of

Management and Budget, NEOB,

Washington, DC 20503.

The paperwork burden associated

with this rule was last reviewed in 2002.

At that time, the FDIC estimated the

burden to be 42,639 hours for FDIC-

supervised institutions. Since then, data

has become available to the FDIC that

indicates the 2002 estimate was too low.

Taking that information (including the

results of a burden study conducted by

a major trade association) into account,

the FDIC believes a more accurate

estimate for this collection of

information is 118,535 hours. If the

revisions in this proposed rule are

implemented, the resulting estimated

reporting burden for the collection of

information would be 65,612 hours, a 45

percent reduction (52,923 hours).

Number of Respondents: 5,243.

Total Annual Responses: 15,684

a major trade association) into account,

the FDIC believes a more accurate

estimate for this collection of

information is 118,535 hours. If the

revisions in this proposed rule are

implemented, the resulting estimated

reporting burden for the collection of

information would be 65,612 hours, a 45

percent reduction (52,923 hours).

Number of Respondents: 5,243.

Total Annual Responses: 15,684.

Total Annual Burden Hours: 65,612.

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)(2)(ii)(B) to read as

follows:

§ 363.1

Scope.

(b) * * *

(2) * * *

(ii) * * *

(B) Total assets of $5 billion or more

and a composite CAMELS rating of 1 or

3. Section 363.2 is amended by

revising paragraph (b)(2) and adding

paragraph (b)(3) to read as follows:

§ 363.2

Annual reporting requirements.

(b) * * *

(1) * * *

(2) An assessment by management of

the institution’s compliance with such

laws and regulations during such fiscal

year; and

(3) For an institution with total assets

of $1 billion or more at the beginning of

such fiscal year, an assessment by

management of the effectiveness of such

internal control structure and

procedures as of the end of such fiscal

year.

4. Section 363.3 is amended by

revising paragraph (b) to read as follows:

§ 363.3

Independent public accountant.

during such fiscal

year; and

(3) For an institution with total assets

of $1 billion or more at the beginning of

such fiscal year, an assessment by

management of the effectiveness of such

internal control structure and

procedures as of the end of such fiscal

year.

4. Section 363.3 is amended by

revising paragraph (b) to read as follows:

§ 363.3

Independent public accountant.

(b) Additional reports. For each

insured depository institution with total

assets of $1 billion or more at the

beginning of the institution’s fiscal year,

such independent public accountant

shall examine, attest to, and report

separately on, the assertion of

management concerning the

institution’s internal control structure

and procedures for financial reporting.

The attestation shall be made in

accordance with generally accepted

standards for attestation engagements.

5. Section 363.5 is amended by

revising paragraph (a) to read as follows:

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Federal Register / Vol. 70, No. 147 / Tuesday, August 2, 2005 / Proposed Rules

§ 363.5

Audit committees.

(a) Composition and duties. Each

insured depository institution shall

establish an audit committee of its board

of directors, the composition of which

complies with paragraphs (a)(1), (2), and

(3) of this section, and the duties of

which shall include reviewing with

management and the independent

public accountant the basis for the

reports issued under this part.

(1) Each insured depository

institution with total assets of $1 billion

or more as of the beginning of its fiscal

year shall establish an independent

audit committee of its board of

directors, the members of which shall be

outside directors who are independent

of management of the institution.

gement and the independent

public accountant the basis for the

reports issued under this part.

(1) Each insured depository

institution with total assets of $1 billion

or more as of the beginning of its fiscal

year shall establish an independent

audit committee of its board of

directors, the members of which shall be

outside directors who are independent

of management of the institution.

(2) Each insured depository

institution with total assets of $500

million or more but less than $1 billion

as of the beginning of its fiscal year shall

establish an audit committee of its board

of directors, the members of which shall

be outside directors.

(3) An outside director is a director

who is not, and within the preceding

fiscal year has not been, an officer or

employee of the institution or any

affiliate of the institution.

6. Appendix A to Part 363 is amended

as follows:

a. Footnote 2 Guideline 10 is

amended by adding ‘‘and Consumer

Protection Risk Management’’ after

‘‘FDIC’s Division of Supervision’’;

b. Guideline 16 is amended by

removing ‘‘Registration and Disclosure

Section’’ and adding in its place

‘‘Accounting and Securities Disclosure

Section’’;

c. Guideline 22 is amended by

revising the first sentence of paragraph

(a) to read as set forth below:

d. Guideline 27 is amended by

revising the second sentence to read as

set forth below;

e. Guideline 28 is amended by

revising paragraph (a) to read as set

forth below;

f. Guideline 29 is revised to read as

set forth below; and

g. The first sentence of Guideline 36

is revised to read as set forth below.

The revisions read as follows:

Appendix A to Part 363—Guidelines

and Interpretations

Filing and Notice Requirements (§ 363.4)

22. * * *

ad as

set forth below;

e. Guideline 28 is amended by

revising paragraph (a) to read as set

forth below;

f. Guideline 29 is revised to read as

set forth below; and

g. The first sentence of Guideline 36

is revised to read as set forth below.

The revisions read as follows:

Appendix A to Part 363—Guidelines

and Interpretations

Filing and Notice Requirements (§ 363.4)

22. * * *

(a) FDIC: Appropriate FDIC Regional or

Area Office (Supervision and Consumer

Protection), i.e., the FDIC regional or area

office in the FDIC region or area that is

responsible for monitoring the institution or,

in the case of a subsidiary institution of a

holding company, the consolidated company.

* * *

Audit Committees (§ 363.5)

27. * * * At least annually at an

institution with $1 billion or more in total

assets at the beginning of its fiscal year, the

board should determine whether all existing

and potential audit committee members are

‘‘independent of management of the

institution.’’ * * *

28. * * *

(a) Has previously been an officer of the

institution or any affiliate of the institution;

29. Lack of Independence. An outside

director should not be considered

independent of management if such director

owns or controls, or has owned or controlled

within the preceding fiscal year, assets

representing 10 percent or more of any

outstanding class of voting securities of the

institution.

Other

36. * * * The FDIC Board of Directors has

delegated to the Director of the FDIC’s

Division of Supervision and Consumer

Protection (DSC) authority to make and

publish in the Federal Register minor

technical amendments to the Guidelines in

this appendix in consultation with the other

appropriate Federal banking agencies, to

reflect the practical experience gained from

implementation of this part. * * *

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Dated at Washington, DC, this 19th day of

July, 2005.

Robert E

ish in the Federal Register minor

technical amendments to the Guidelines in

this appendix in consultation with the other

appropriate Federal banking agencies, to

reflect the practical experience gained from

implementation of this part. * * *

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

Dated at Washington, DC, this 19th day of

July, 2005.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 05–15109 Filed 8–1–05; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA–2005–21835; Directorate

Identifier 2005–CE–35–AD]

RIN 2120–AA64

Airworthiness Directives; Pilatus

Aircraft Ltd. Models PC–12 and PC–12/

45 Airplanes

AGENCY: Federal Aviation

Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: The FAA proposes to adopt a

new airworthiness directive (AD) for

certain Pilatus Aircraft Ltd. (Pilatus)

Models PC–12 and PC–12/45 airplanes.

This proposed AD would require you to

inspect the left and right main landing

gear (MLG) assemblies for any part

number (P/N) 532.10.12.077 bolts that

do not have white primed and painted

heads; and replace any bolt found with

new P/N 532.10.12.077F bolts in all

MLG assemblies. This proposed AD

results from mandatory continuing

airworthiness information (MCAI)

issued by the airworthiness authority for

Switzerland. We are issuing this

proposed AD to detect and correct any

P/N 532.10.12.077 bolts that do not have

white primed and painted heads, which

could result in corrosion of the bolt and

consequent failure of the bolt. This

failure could lead to MLG collapse

during airplane landing and take-off

operations with consequent loss of

airplane control.

DATES: We must receive any comments

on this proposed AD by August 31,

2005

sed AD to detect and correct any

P/N 532.10.12.077 bolts that do not have

white primed and painted heads, which

could result in corrosion of the bolt and

consequent failure of the bolt. This

failure could lead to MLG collapse

during airplane landing and take-off

operations with consequent loss of

airplane control.

DATES: We must receive any comments

on this proposed AD by August 31,

2005.

ADDRESSES: Use one of the following to

submit comments on this proposed AD:

• DOT Docket Web site: Go to

http://dms.dot.gov and follow the

instructions for sending your comments

electronically.

• Government-wide rulemaking Web

site: Go to http://www.regulations.gov

and follow the instructions for sending

your comments electronically.

• Mail: Docket Management Facility;

U.S. Department of Transportation, 400

Seventh Street, SW., Nassif Building,

Room PL–401, Washington, DC 20590–

001.

• Fax: 1–202–493–2251.

• Hand Delivery: Room PL–401 on

the plaza level of the Nassif Building,

400 Seventh Street, SW., Washington,

DC, between 9 a.m. and 5 p.m., Monday

through Friday, except Federal holidays.

To get the service information

identified in this proposed AD, contact

Pilatus Aircraft Ltd., Customer Liaison

Manager, CH–6371 Stans, Switzerland;

telephone: +41 41 619 6208; facsimile:

+41 41 619 7311; e-mail:

SupportPC12@pilatus-aircraft.com or

from Pilatus Business Aircraft Ltd.,

Product Support Department, 11755

Airport Way, Broomfield, Colorado

80021; telephone: (303) 465–9099;

facsimile: (303) 465–6040.

To view the comments to this

proposed AD, go to http://dms.dot.gov.

This is docket number FAA–2005–

21835; Directorate Identifier 2005–CE–

35–AD.

FOR FURTHER INFORMATION CONTACT:

Doug Rudolph, Aerospace Engineer,

FAA, Small Airplane Directorate, 901

Locust, Room 301, Kansas City,

Missouri 64106; telephone: (816) 329–

4059; facsimile: (816) 329–4090

303) 465–9099;

facsimile: (303) 465–6040.

To view the comments to this

proposed AD, go to http://dms.dot.gov.

This is docket number FAA–2005–

21835; Directorate Identifier 2005–CE–

35–AD.

FOR FURTHER INFORMATION CONTACT:

Doug Rudolph, Aerospace Engineer,

FAA, Small Airplane Directorate, 901

Locust, Room 301, Kansas City,

Missouri 64106; telephone: (816) 329–

4059; facsimile: (816) 329–4090.

SUPPLEMENTARY INFORMATION:

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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.