On July 13, the FHFA issued a proposed rule amending its Suspended Counterparty Program (SCP) regulation to remove the term “reputational harm.” The agency stated that the change would eliminate redundancy and confirm that its supervision of counterparty risk is based on material and measurable risks. Under the current SCP regulation, the FHFA may issue a proposed or final suspension order against a counterparty when it engages in defined “covered misconduct” and that misconduct is of a type that would likely cause “significant financial or reputational harm” to a regulated entity or otherwise threaten the entity’s safe and sound operation. The FHFA stated that its experience implementing the regulation has shown that the “reputational harm” prong is unnecessary because all covered misconduct inherently carries a risk of financial harm or a threat to safety and soundness, and that removing the term would not allow counterparties who committed covered misconduct to avoid suspension. The FHFA further stated that including “reputational harm” as a basis for regulatory action increases subjectivity and uncertainty, and may divert agency resources from more salient risks without adding material supervisory value.

The FHFA noted that the proposed removal would align its regulation with actions taken by other financial regulators, citing the OCC’s and FDIC’s NPRM — which, as previously covered by InfoBytes, was finalized in April — to codify the removal of reputation risk from their supervisory programs and prohibit those agencies from taking adverse action against an institution or its employees based on reputation risk (previously covered by InfoBytes here). Under the proposed rule, the FHFA would remove the term “or reputational,” so that the standard would refer only to significant financial harm or a threat to safe and sound operation, and would make a parallel amendment to regulations governing requests for reconsideration of a suspension order. Comments on the proposed rule are due by August 12.