Proposed Guidance on Supervisory Expectation for Boards of Directors, 37219-37227 [2017-16735]

Download as PDF Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices Trust DTD 10/11/98, Charles A. Hapke and Wendy C. Stewart, Trustees, all of Sunset Hills, Missouri, as members of a family control group, to retain voting shares of BancStar, Inc., St. Louis, Missouri, and thereby retain shares of Bank Star, Pacific, Missouri. Board of Governors of the Federal Reserve System, August 3, 2017. Yao-Chin Chao, Assistant Secretary of the Board. [FR Doc. 2017–16712 Filed 8–8–17; 8:45 am] BILLING CODE 6210–01–P FEDERAL RESERVE SYSTEM [Docket No. OP–1570] Proposed Guidance on Supervisory Expectation for Boards of Directors Board of Governors of the Federal Reserve System (Board). ACTION: Notice. AGENCY: The Board invites comment on a proposal addressing supervisory expectations for the boards of directors of bank holding companies, savings and loan holding companies, state member banks, U.S. branches and agencies of foreign banking organizations, and systemically important nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve. For the largest domestic bank and savings and loan holding companies and systemically important nonbank financial companies, the proposal would establish principles regarding effective boards of directors focused on the performance of a board’s core responsibilities. The proposal would also better distinguish between the roles and responsibilities of an institution’s board of directors and those of senior management. For domestic bank and savings and loan holding companies, the proposal also would eliminate or revise supervisory expectations contained in certain existing Federal Reserve Supervision and Regulation letters, which would be aligned with existing or proposed guidance for boards depending on the size of the firm. DATES: Comments must be received no later than October 10, 2017. ADDRESSES: Interested parties are invited to submit written comments by following the instructions for submitting comments at http:// www.federalreserve.gov/generalinfo/ foia/ProposedRegs.cfm. • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. sradovich on DSK3GMQ082PROD with NOTICES SUMMARY: VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 • Email: regs.comments@ federalreserve.gov. Include the docket number in the subject line of the message. • Fax: (202) 452–3819 or (202) 452– 3102. • Mail: Address to Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. All public comments will be made available on the Board’s Web site at http://www.federalreserve.gov/ generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room 3515, 1801 K Street NW. (between 18th and 19th Street NW.), Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays. FOR FURTHER INFORMATION CONTACT: Michael Hsu, Associate Director, (202) 912–4330, Michael Solomon, Associate Director, (202) 452–3502, Richard Naylor, Associate Director, (202) 728– 5854, Division of Supervision and Regulation; Ben McDonough, Assistant General Counsel, (202) 452–2036, Scott Tkacz, Senior Counsel, (202) 452–2744, Keisha Patrick, Senior Counsel, (202) 452–3559, or Chris Callanan, Senior Attorney, (202) 452–3594, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunications Device for the Deaf (TDD) users may contact (202) 263– 4869. SUPPLEMENTARY INFORMATION: The Board invites comment on a proposal addressing supervisory expectations on boards of directors (boards or boards of directors). The proposal has been informed by a multi-year review by the Federal Reserve of practices of boards of directors, particularly at the largest banking organizations. The review assessed, among other things, the factors that make boards effective, the challenges boards face, and how boards influence the safety and soundness of their firms and promote compliance with laws and regulations. The Federal Reserve also reviewed expectations contained in Board supervisory guidance. This notice and the guidance proposed herein constitute the results of the review. Among other things, the results of the review and discussions with independent directors suggest that supervisory expectations for boards of PO 00000 Frm 00031 Fmt 4703 Sfmt 4703 37219 directors and senior management have become increasingly difficult to distinguish. Greater clarity regarding these supervisory expectations could improve corporate governance overall, increase efficiency, support greater accountability, and promote compliance with laws and regulations. The results of the review also suggest that boards often devote a significant amount of time satisfying supervisory expectations that do not directly relate to the board’s core responsibilities, which include guiding the development of the firm’s strategy and the types and levels of risk it is willing to take (also referred to as risk tolerance), overseeing senior management and holding them accountable for effective risk management and compliance among other responsibilities, supporting the stature and independence of the firm’s independent risk management and internal audit functions, and adopting effective governance practices. Boards completing such non-core tasks may do so at the expense of sufficiently focusing on their core responsibilities, which when exercised effectively promote the safety and soundness of the firm. Finally, the results of the review suggest that boards of large financial institutions face significant information flow challenges, especially in preparing for and participating in board meetings. Absent actively managing its information flow, boards can be overwhelmed by the quantity and complexity of information they receive. Although boards have oversight responsibilities over senior management, they are inherently disadvantaged given their dependence on senior management for the quality and availability of information. The Board invites comment on a proposal consisting of three parts that are each intended to refocus supervisory expectations for boards on a board’s core responsibilities. The first part includes proposed supervisory guidance addressing effective boards of directors (proposed BE guidance), which would apply to all bank and savings and loan holding companies with total consolidated assets of $50 billion or more, and to systemically important nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve.1 The proposed BE guidance would clarify supervisory expectations for boards as distinct from 1 The proposed BE guidance would not apply to U.S. intermediate holding companies (IHCs) of foreign banking organizations (FBOs) established pursuant to Regulation YY. The Board anticipates proposing guidance on board effectiveness for IHCs at a later date. E:\FR\FM\09AUN1.SGM 09AUN1 37220 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES expectations for senior management, and identifies five key attributes of effective boards of directors that the Board would use when assessing a firm’s board of directors. The proposed BE guidance would be used in connection with the supervisory assessment of board effectiveness under the proposed Large Financial Institution (LFI) rating system, which the Federal Reserve is issuing for public comment concurrently with this proposal. The proposed LFI rating system would apply to all bank holding companies with total consolidated assets of $50 billion or more; all non-insurance, noncommercial savings and loan holding companies with total consolidated assets of $50 billion or more; and U.S. intermediate holding companies of foreign banking organizations established pursuant to the Federal Reserve’s Regulation YY. The proposed LFI rating system consists of three components, each of which would be assigned a rating: Governance and Controls, Capital Planning and Positions, and Liquidity Risk Management and Positions. The Governance and Controls component rating would evaluate the effectiveness of a firm’s (i) board of directors, (ii) management of core business lines and independent risk management and controls,2 and (iii) recovery planning (only for domestic bank holding companies subject to the Federal Reserve’s Large Institution Supervision Coordinating Committee (LISCC) supervisory framework).3 The second part of the proposal would refocus supervisory guidance found in existing Supervision and Regulation (SR) letters for boards of directors of bank and savings and loan holding companies of all sizes. This proposal would revise certain supervisory expectations for boards to ensure they are aligned with the Federal Reserve’s supervisory framework, and would eliminate redundant, outdated, or irrelevant supervisory expectations. The Board also plans to review guidance that has been adopted on an interagency basis and requirements established by rule concerning boards of directors and would consider modifications in those areas at a later date. 2 The Federal Reserve also plans to separately release additional proposed guidance seeking comment on supervisory expectations relating to a firm’s management of core business lines and independent risk management and controls. The release describing the proposed LFI rating system includes a summary of that planned guidance. 3 See SR letter 14–8, ‘‘Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies,’’ at https://www.federalreserve.gov/ supervisionreg/srletters/sr1408.htm. VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 The third part of the proposal includes proposed supervisory guidance that would replace Federal Reserve SR letter 13–13/CA letter 13–10.4 The proposed guidance would facilitate the execution of boards’ core responsibilities by clarifying expectations for communicating supervisory findings to an institution’s board of directors and senior management. The proposed guidance would indicate that the Federal Reserve expects to direct most Matters Requiring Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs) to senior management for corrective action. MRIAs and MRAs would only be directed to the board for corrective action when the board needs to address its corporate governance responsibilities or when senior management fails to take appropriate remedial action. The board would remain responsible for holding senior management accountable for remediating supervisory findings. This proposed guidance would apply to all financial institutions supervised by the Federal Reserve. Although the proposal would not address all existing supervisory expectations for boards of directors, the Board intends to continue reviewing existing supervisory expectations for boards of directors. I. Proposed Board Effectiveness (BE) Guidance The proposed BE guidance better distinguishes the supervisory expectations for boards from those of senior management, and describes effective boards as those which: (1) Set clear, aligned, and consistent direction regarding the firm’s strategy and risk tolerance, (2) actively manage information flow and board discussions, (3) hold senior management accountable, (4) support the independence and stature of independent risk management 5 and internal audit, and (5) maintain a capable board composition and governance structure. These five attributes support safety and soundness and would provide the framework with which the Federal Reserve proposes to assess a firm’s board of directors under the proposed LFI rating system. Assessing the effectiveness of a board of directors using these attributes reflects the view that applying standardized expectations 4 See SR letter 13–13/CA letter 13–10, ‘‘Supervisory Considerations for the Communication of Supervisory Findings,’’ at https://www.federalreserve.gov/supervisionreg/ srletters/sr1313.htm. 5 Independent risk management includes compliance. PO 00000 Frm 00032 Fmt 4703 Sfmt 4703 for boards of directors fails to take into account differences in firms’ activities, risk profiles, and complexity, and potentially prevents a board from achieving maximum effectiveness in meeting its core responsibilities. In assessing a board’s effectiveness, supervisors rely on various sources of information, including firm-provided materials and examinations. As noted in the proposed BE guidance, a board of directors may also provide to supervisors a self-assessment of its effectiveness, for example, relative to the five attributes, which the Federal Reserve would take into consideration in its evaluation. The proposed BE guidance does not prescribe how such a self-assessment should be conducted or documented. II. Rescinding or Revising Existing Federal Reserve Expectations for Boards of Directors The Federal Reserve is conducting a comprehensive review of all existing supervisory expectations and regulatory requirements relating to boards of directors of bank and savings and loan holding companies of all sizes. The purpose of the review is to identify supervisory expectations for boards of directors which do not relate to their core responsibilities or are not aligned with the Federal Reserve’s supervisory framework. The Federal Reserve believes that revising or eliminating unnecessary, redundant, or outdated expectations, as appropriate, will allow boards to focus more of their time and resources on fulfilling their core responsibilities. The Federal Reserve is conducting this review in two phases. The first phase is focused on reviewing supervisory expectations of boards set forth in existing SR letters that communicate Board guidance. The preliminary results of the first phase are discussed in more detail below. The second phase of the review is focused on requirements and supervisory expectations set forth in Board regulations or in various forms of interagency guidance. Revising Board regulations generally will take more time to complete, and revisions to interagency guidance require consultation and collaboration with other federal banking agencies. The Board’s proposed changes to supervisory expectations for the second phase would be released for notice and comment at a later date.6 6 The Federal Reserve would make conforming changes to existing examination manuals, examination procedures, and training materials as supervisory expectations evolve over time. E:\FR\FM\09AUN1.SGM 09AUN1 37221 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices In the first phase of the review, the Board preliminarily identified 27 SR letters for potential elimination or revision, which collectively include more than 170 supervisory expectations for holding company boards. These SR letters are listed in Table A, ‘‘SR letters in Which Guidance on the Roles and Responsibilities for Boards of Directors of Holding Companies Would Be Rescinded or Revised.’’ For SR letters on this list that have other supervisory expectations unrelated to boards of directors that remain relevant, only the specific portions of the guidance relating to boards of directors would be revised, and the other portions of the letter would generally be left unchanged. SR letters which are outdated or no longer relevant would be rescinded in their entirety. Existing supervisory expectations would be eliminated or revised for (1) domestic bank and savings and loan holding companies (including insurance and commercial savings and loan holding companies) with total consolidated assets of $50 billion or more (‘‘larger firms’’) and (2) domestic bank and savings and loan holding companies (including insurance and commercial savings and loan holding companies) with total consolidated assets of less than $50 billion (‘‘smaller firms’’). For larger firms, supervisory expectations for boards would be revised to align with the attributes of effective boards outlined in the proposed BE guidance. For smaller firms, supervisory expectations would be revised to align with the supervisory expectations set forth in SR letter 16–11, ‘‘Supervisory Guidance for Assessing Risk Management at Supervised Institutions with Total Consolidated Assets Less than $50 Billion’’ (SR 16– 11), which applies to all Federal Reserve-supervised institutions with total consolidated assets of less than $50 billion. SR 16–11 includes the Federal Reserve’s supervisory expectations for the roles and responsibilities of the board of directors for an institution’s risk management, such as approving the institution’s overall business strategies and significant policies; understanding the risks the institution faces and having access to information to identify the size and significance of the risks; providing guidance regarding the level of acceptable risk exposures to the institution; and overseeing senior management’s implementation of the board-approved business strategies and risk limits. SR letters could be revised in several ways, including deleting portions of an SR letter that would include duplicative expectations to those contained in the proposed BE guidance or SR 16–11, or which otherwise are no longer relevant; modifying specific portions of an SR letter to more clearly delineate the roles and responsibilities of boards from those of senior management; or making general adjustments to an SR letter so that it is aligned and consistent with the proposed BE guidance or SR 16–11. For example, when an existing supervisory expectation ascribes the same roles and responsibilities to both the ‘‘board and senior management,’’ the Board would, in most cases, revise that expectation to refer only to senior management. Although it represents only the first portion of its review, the Board believes the proposal would result in several changes in supervisory expectations for holding company boards of directors. For instance: • Replacing the original guidance with SR 13–13 would clarify a board’s roles and responsibilities in the supervisory process and more efficiently allocate its time and resources; • Revising supervisory expectations for boards included in existing SR letters such as SR letter 00–9, ‘‘Supervisory Guidance on Equity Investment and Merchant Banking Activities,’’ would eliminate expectations on boards relating to managing a firm’s day-to-day operations, a role which is better suited to senior management; • Revising supervisory guidance which does not clearly distinguish a board’s roles and responsibilities from those of senior management would eliminate uncertainty, which can lead to boards unnecessarily addressing matters that are better suited for senior management, and would support the board’s core responsibility of holding senior management accountable; • Emphasizing their responsibility to review and approve only significant firm-wide policies would reduce the need for boards to devote significant amounts of time considering policies of lesser importance; and • Eliminating redundant, unnecessary, and outdated supervisory expectations would provide more flexibility to adopt effective governance practices. TABLE A—SR LETTERS IN WHICH GUIDANCE ON THE ROLES AND RESPONSIBILITIES FOR BOARDS OF DIRECTORS OF HOLDING COMPANIES WOULD BE RESCINDED OR REVISED Would expectations for boards of directors of holding companies with $50 billion or more in total consolidated assets be rescinded or revised? Would expectations for boards of directors of holding companies with less than $50 billion in total consolidated assets be rescinded or revised? sradovich on DSK3GMQ082PROD with NOTICES SR/CA letter No. Title SR 16–17 ............... Supervisory Expectations for Risk Management of Reserve-Based Energy Lending Risk. Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies Guidance on Managing Outsourcing Risk ......................................................................... Yes ................. N/A. 1 Yes ................. Yes ................. N/A. 2 Yes. Supervisory Considerations for the Communication of Supervisory Findings ................... Yes ................. Yes. Consolidated Supervision Framework for Large Institutions ............................................. Yes ................. N/A. 2 SR 14–8 ................. SR 13–19/CA 13– 21. SR 13–13/CA 13– 10. SR 12–17/CA 12– 14. VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 PO 00000 Frm 00033 Fmt 4703 Sfmt 4703 E:\FR\FM\09AUN1.SGM 09AUN1 37222 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices TABLE A—SR LETTERS IN WHICH GUIDANCE ON THE ROLES AND RESPONSIBILITIES FOR BOARDS OF DIRECTORS OF HOLDING COMPANIES WOULD BE RESCINDED OR REVISED—Continued Would expectations for boards of directors of holding companies with $50 billion or more in total consolidated assets be rescinded or revised? SR/CA letter No. Title SR 11–15 ............... SR 11–14 ............... SR 09–4 ................. Disposal of Problem Assets through Exchanges ............................................................... Supervisory Expectations for Risk Management of Agricultural Credit Risk ..................... Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions, and Stock Purchases at BHCs. Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organization. Compliance Risk Management Programs and Oversight at Large Banking Organizations with Complex Compliance Profiles. Supervisory guidance relating to a change to permissible securities activities of state member banks. Supervisory Guidance on Complex Wholesale Borrowings .............................................. Supervisory Guidance on Equity Investment and Merchant Banking Activities ................ Supervisory Guidance Regarding the Investment of Fiduciary Assets in Mutual Funds and Potential Conflicts of Interest. Sound Credit Risk Management and the Use of Internal Credit Risk Ratings at Large Banking Organizations. Lending Standards for Commercial Loans ......................................................................... Assessment of Information Technology in the Risk-Focused Frameworks for the Supervision of Community Banks and Large Complex Banking Organizations. Risk-Focused Framework for the Supervision of Community Banks ................................ Risk-Focused Framework for Supervision of Large Complex Institutions ......................... Risk Management and Capital Adequacy of Exposures Arising from Secondary Market Credit Activities. Conversion of Common Trust Funds to Mutual Funds ...................................................... Risk-Focused Fiduciary Examinations ............................................................................... Rating the Adequacy of Risk Management Processes and Internal Controls at State Member Banks and Bank Holding Companies. Investment Adviser Activities .............................................................................................. Examining Risk Management and Internal Controls for Trading Activities of Banking Organizations. Policy Statement on the Use of ‘‘Points’’ in settling foreign exchange contracts .............. Implementation of Examination Guidelines for the Review of Asset Securitization Activities. SR 08–9/CA 08–12 SR 08–8/CA 08–11 SR 01–13 ............... SR 01–8 ................. SR 00–9 ................. SR 99–7 ................. SR 98–25 ............... SR 98–18 ............... SR 98–9 ................. SR 97–25 ............... SR 97–24 ............... SR 97–21 ............... SR 97–3 ................. SR 96–10 ............... SR 95–51 ............... SR 94–53 ............... SR 93–69 ............... SR 90–22 ............... SR 90–16 ............... Would expectations for boards of directors of holding companies with less than $50 billion in total consolidated assets be rescinded or revised? Yes ................. Yes ................. N/A 3 ............... Yes. Yes. Yes. N/A 3 ............... Yes. Yes ................. N/A. 2 Yes ................. Yes. Yes ................. Yes ................. Yes ................. Yes. Yes. Yes. Yes ................. Yes. Yes ................. Yes ................. Yes. Yes. N/A 4 ............... Yes ................. Yes ................. Yes. Yes. Yes. Yes ................. Yes ................. Yes ................. Yes. Yes. N/A. 5 Yes ................. Yes ................. Yes. Yes. Yes ................. Yes ................. Yes. Yes. sradovich on DSK3GMQ082PROD with NOTICES 1 Prior to the issuance of SR 16–17, expectations for boards at domestic bank holding companies and savings and loan holding companies (including insurance and commercial savings and loan holding companies) with less than $50 billion in total consolidated assets contained therein were aligned with expectations for boards in SR 16–11. 2 SR 14–8, SR/CA 12–17/12–14, and SR/CA 08–8/08–11 are not applicable to domestic bank holding companies and savings and loan holding companies (including insurance and commercial savings and loan holding companies) with less than $50 billion in total consolidated assets. 3 For domestic bank holding companies and savings and loan holding companies (including insurance and commercial savings and loan holding companies) with $50 billion or more in total consolidated assets, SR 09–4 and SR/CA 08–9/08–12 have been superseded by SR 15–18 and SR 15–19 and SR 12–17/CA 12–14, respectively. 4 SR 97–25 is not applicable to domestic bank holding companies with $50 billion or more in total consolidated assets. 5 For domestic bank holding companies with less than $50 billion in total consolidated assets, SR 95–51 has been superseded by SR 16–11. III. Revising SR Letter 13–13/CA 13–10, ‘‘Supervisory Considerations for the Communication of Supervisory Findings’’ The Board is also proposing to clarify expectations regarding the communication of supervisory findings set forth in SR letter 13–13/CA letter 13–10, ‘‘Supervisory Considerations for the Communication of Supervisory VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 Findings.’’ SR 13–13 currently establishes an expectation that all supervisory findings, referred to as Matters Requiring Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs), would be presented to the board of directors so that the board may ensure that senior management devotes appropriate attention to addressing these matters. This approach has in many cases led PO 00000 Frm 00034 Fmt 4703 Sfmt 4703 boards of directors to believe they should become directly involved in addressing the MRIA or MRA. The proposed guidance, like the existing guidance, would apply to all Federal Reserve-supervised institutions,7 and would clarify the 7 ‘‘Federal Reserve-supervised institutions’’ includes bank holding companies, savings and loan holding companies, state member banks, U.S. branches and agencies of foreign banking E:\FR\FM\09AUN1.SGM 09AUN1 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices process that Federal Reserve examiners and supervisory staff should follow in communicating supervisory findings to an institution’s board of directors and senior management. The proposed guidance would indicate that Federal Reserve examiners and supervisory staff would direct most MRIAs and MRAs to senior management for corrective action. MRIAs or MRAs would only be directed to the board for corrective action when the board needs to address its corporate governance responsibilities or when senior management fails to take appropriate remedial action. Boards of directors would remain responsible for holding senior management accountable for remediating supervisory findings. sradovich on DSK3GMQ082PROD with NOTICES Request for Comments The Board invites comment on all aspects of the proposal, including responses to the following questions: (1) The Federal Reserve is considering applying the proposed BE guidance to U.S. intermediate holding companies of foreign banking organizations. How should the proposed BE guidance and refocusing of existing supervisory guidance be adapted to apply to boards of the U.S. intermediate holding companies of foreign banking organizations and state member banks? (2) What other attributes of effective boards should the Board assess? (3) Should boards of firms subject to the proposed BE guidance be required to perform a self-assessment of their effectiveness and provide the results of that self-assessment to the Board? If so, what requirements should apply to how the board performs the self-assessment? Should such self-assessments be used as the primary basis for supervisory evaluations of board effectiveness? (4) Would any parts of this proposal conflict with effective governance of insurance and commercial savings and loan holding companies? If so, what adjustments to the proposal would be warranted? (5) Is the proposed guidance on the communication of supervisory findings clear with respect to the division of responsibilities between the board and senior management? (6) What Federal Reserve supervisory expectations for boards are not included in Table A, yet interfere with a board’s ability to focus on its core responsibilities and should be included in the proposal? Should such expectations be rescinded or revised? If revised, how? organizations, and systemically important nonbank financial companies designated by FSOC for supervision by the Federal Reserve. VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 III. Administrative Law Matters A. Paperwork Reduction Act Analysis In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501– 3521) (PRA), the Federal Reserve may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid Office of Management and Budget (OMB) control number. The Federal Reserve reviewed the proposed supervisory guidance under the authority delegated to the Federal Reserve by OMB. The proposed supervisory guidance contains a collection of information subject to the PRA. The reporting requirement is found in the proposed BE guidance. The proposed BE guidance provides that a board of directors may provide to supervisors a self-assessment of its effectiveness, which the Federal Reserve would take into consideration in its evaluation of the effectiveness of the board of directors. The Federal Reserve is not prescribing how such a self-assessment should be conducted or documented. This information would assist supervisors in evaluating board effectiveness. Comments are invited on: a. Whether the collections of information are necessary for the proper performance of the Federal Reserve’s functions, including whether the information has practical utility; b. The accuracy or the estimate of the burden of the information collections, including the validity of the methodology and assumptions used; c. Ways to enhance the quality, utility, and clarity of the information to be collected; d. Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information. All comments will become a matter of public record. Comments on aspects of this notice that may affect reporting, recordkeeping, or disclosure requirements and burden estimates should be sent to: Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. A copy of the comments may also be submitted to the OMB desk officer by mail to U.S. Office of Management and Budget, 725 17th Street NW., #10235, Washington, DC 20503 or by facsimile to (202) 395–5806, Attention, Agency Desk Officer. PO 00000 Frm 00035 Fmt 4703 Sfmt 4703 37223 Report title: Board Effectiveness Guidance. Agency form number: FR 4204. OMB control number: 7100–NEW. Frequency: Annual. Respondents: Domestic bank and savings and loan holding companies with total consolidated assets of $50 billion or more (excluding intermediate holding companies of foreign banking organizations established pursuant to the Federal Reserve’s Regulation YY), and systemically important nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve. Legal authorization and confidentiality: This information collection is voluntary, and allows the board of directors of an affected financial institution to submit to Federal Reserve supervisors a self-assessment of its effectiveness, which supervisors would take into consideration in their evaluation of the effectiveness of the board of directors. The Board has determined that the collection of information is authorized by section 5(c) of the Bank Holding Company Act (12 U.S.C. 1844(c)); section 10(b) of the Homeowners’ Loan Act (12 U.S.C. 1467a(b)(4), section 113 of the DoddFrank Act (12 U.S.C. 5323). The information contained in the selfassessment would be considered confidential pursuant to exemption 8 of FOIA (5 U.S.C. 552(b)(8)), as it relates to examination reports prepared by supervisors. Estimated number of respondents: 40. Estimated average time per respondent: 1,000 hours for initial implementation, 800 hours for subsequent years. This has been calculated based on an estimate of five (5) individuals each working for four (4) weeks to prepare this information collection. Estimated total annual burden hours: 40,000 hours for initial implementation; 32,000 hours for subsequent years. Regulatory Flexibility Analysis B. Regulatory Flexibility Act The Federal Reserve is providing an initial regulatory flexibility analysis with respect to this proposal. While the proposal is not being adopted as a rule, the Federal Reserve has considered the potential impact of the proposal on small banking organizations using considerations that would apply if the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA) were applicable. For the reason discussed in the SUPPLEMENTARY INFORMATION section above, the proposal is intended to refocus the Federal Reserve’s supervisory expectations for E:\FR\FM\09AUN1.SGM 09AUN1 sradovich on DSK3GMQ082PROD with NOTICES 37224 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices boards of directors on their core responsibilities. The proposal should not increase, and in fact may slightly reduce, the amount of burden imposed on small banking organizations. Under regulations issued by the Small Business Administration, a small banking organization includes a depository institution, bank holding company, or savings and loan holding company with total assets of $550 million or less, as measured by the institution’s average assets reported on its four quarterly financial statements for the preceding year (collectively, small banking organizations).8 It is estimated that as of June 1, 2017, there are 3,539 small banking organizations that would be subject to this proposal. If adopted in final form, only certain sections of the proposal would apply to small banking organizations, and the Federal Reserve believes that the proposal would not impose any new burden on small banking organizations. The proposed BE guidance would not apply to or impact small banking organizations as it is intended for the largest financial institutions and would only apply to domestic depository institution holding companies with total consolidated assets of $50 billion or more. The rescission and revision of existing SR letters would not increase, and in fact may reduce, the amount of burden on small bank holding companies and savings and loan holding companies with $550 million or less in total consolidated assets. This is because the proposed rescission and revision would reduce the overall number of supervisory expectations to which their boards are subject, including reporting, recordkeeping, and other compliance requirements associated with these expectations. Finally, the proposed guidance concerning the communication of supervisory findings, which would also apply to financial institutions supervised by the Federal Reserve including small banking organizations, would not increase the amount of burden on small banking organizations because it clarifies the process for communicating supervisory findings to an institution’s board of directors and senior management. There are no significant alternatives to the proposal that would have less economic impact on small banking organizations, and as noted above, the proposal would not increase the amount of burden on small banking 8 See 13 CFR 121.201. Effective July 14, 2014, the Small Business Administration revised the size standards for banking organizations to $550 million in assets from $500 million in assets. 79 FR 33647 (June 12, 2014). VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 organizations, and may result in a slight reduction in burden. As discussed above, the projected reporting, recordkeeping, and other compliance requirements of the proposal will not increase burden on small banking organizations. The Federal Reserve does not believe that the proposal duplicates, overlaps, or conflicts with any Federal rules. In light of the foregoing, the Federal Reserve does not believe that the proposal, if adopted in final form, would have a significant economic impact on a substantial number of small entities. Nonetheless, the Board seeks comment on whether the proposal would impose undue burdens on, or have unintended consequences for, small entities, and whether there are ways such potential burdens or consequences could be minimized in a manner consistent with the purpose of the proposal. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period. Text for the Proposed Supervisory Guidance on Board of Directors’ Effectiveness for Domestic Bank and Savings and Loan Holding Companies With Total Consolidated Assets of $50 Billion or More (Excluding Intermediate Holding Companies of Foreign Banking Organizations Established Pursuant to the Federal Reserve’s Regulation YY), and Systemically Important Nonbank Financial Companies Designated by the Financial Stability Oversight Council for Supervision by the Federal Reserve The Federal Reserve is issuing this letter to provide additional guidance on key attributes of effective boards of directors (also referred to as a firm’s ‘‘board’’).9 An effective board of directors is central to maintaining the safety and soundness and continued resiliency of a firm’s consolidated operations.10 In developing this guidance, the Federal Reserve considered other statutory and regulatory authorities which impose requirements and expectations concerning the roles, responsibilities, and expectations of a firm’s board of directors. For example, the Federal Reserve reviewed applicable Delaware law,11 rules promulgated by the U.S. Securities and Exchange Commission (‘‘SEC’’), and listing requirements implemented by the New York Stock Exchange (‘‘NYSE’’) and the NASDAQ Stock Market (‘‘NASDAQ’’). This proposal does not supersede or replace any applicable legal, 9 ‘‘Board’’ or ‘‘board of directors’’ also refers to committees of the board of directors, as appropriate. 10 As used here, ‘‘resiliency’’ is defined as maintaining effective governance and controls, including effective capital and liquidity governance and planning processes and sufficient capital and liquidity, to provide for the firm’s continuity, and promote compliance with laws and regulations, including those related to consumer protection, through a range of conditions. 11 See Del. Code Ann. tit. 8 (2016). PO 00000 Frm 00036 Fmt 4703 Sfmt 4703 regulatory, or listing requirements to which firms may currently be subject in the United States, and nothing herein is believed to conflict with such requirements. In assessing board effectiveness, supervisors rely on various sources of information, including firm-provided materials and examinations. A board of directors also may provide to supervisors a self-assessment of its effectiveness, for example, relative to the five attributes, which the Federal Reserve would take into consideration in its evaluation. The Federal Reserve is not prescribing how such a selfassessment should be conducted or documented. Attributes of Effective Boards of Directors A board is most effective when directors focus on establishing a firm-wide corporate strategy and setting the types and levels of risk it is willing to take (also referred to as risk tolerance), making certain that senior management effectively carries out that strategy within the established risk tolerances, and holding management accountable for its actions, including effective risk management and compliance. This guidance focuses on five key attributes of an effective board rather than on processoriented supervisory expectations that do not directly relate to the board’s core responsibilities. A. Set Clear, Aligned, and Consistent Direction An effective board of directors guides the development of and approves the firm’s strategy and sets the types and levels of risk it is willing to take. The strategy and tolerance of risk should be clear and aligned, and should also include a long-term perspective on risks and rewards that is consistent with the capacity of the firm’s risk management framework. A clear strategy includes sufficient detail to enable senior management 12 to identify the firm’s strategic objectives; to create an effective management structure, implementation strategies, plans and budgets for each business line; 13 and to establish effective audit, compliance and risk management and control functions. A clear strategy also allows senior management to discern which opportunities the firm should pursue or avoid and determine the resources and controls necessary to implement the strategy. A clear risk tolerance includes sufficient detail to enable the firm’s Chief Risk Officer (CRO) and its independent risk management function 14 to set firm-wide risk limits.15 Risk 12 The term ‘‘senior management’’ refers to the core group of individuals directly accountable to the board of directors for the sound and prudent day-to-day management of the firm. 13 A ‘‘business line’’ is a defined unit or function of a financial institution, including associated operations and support that provides related products or services to meet the firm’s business needs and those of its customers. 14 An ‘‘independent risk management function’’ is responsible for identifying, measuring, aggregating, and reporting risks in a comprehensive and independent manner. 15 The term ‘‘risk limits’’ refers to thresholds that constrain risk-taking so that the level and type of E:\FR\FM\09AUN1.SGM 09AUN1 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES limits should be set in aggregate by concentration and risk type, as well as at more granular levels as appropriate. A clear risk tolerance also allows senior management to establish risk management expectations and monitor risk-taking for the level and types of risks assumed by the firm. A firm’s strategy and risk tolerance are aligned when they are consistent, developed, considered, and approved together. For instance, the firm’s strategy should clearly articulate objectives consistent with the firm’s risk tolerance, and the risk tolerance should clearly specify the aggregate level and types of risks the board is willing to assume to achieve the firm’s strategic objectives. An effective board considers the capacity of the firm’s risk management framework when approving the firm’s strategy and risk tolerance. This practice helps ensure that strategic plans are commensurate with the firm’s ability to identify and manage its risk. For example, if a strategy calls for expansion into a new line of business or a new jurisdiction, the board should consider the increased level of risk or expanded control requirements for consistency with the risk management framework. The same evaluation could also be conducted on a regular basis to assess growth strategies within current businesses and products. An effective board assesses whether the firm’s significant policies, programs, and plans are consistent with the firm’s strategy, risk tolerance, and risk management capacity prior to approving them. Significant policies, programs, and plans include the firm’s capital plan,16 recovery and resolution plans,17 audit plan,18 enterprise-wide risk management policies,19 liquidity risk management policies,20 compliance risk management program,21 and incentive compensation and performance management programs. The policies, programs, and plans should contain sufficient clarity and risks assumed remains aligned with the firm-wide risk tolerance. 16 12 CFR 225.8(e)(iii); 12 CFR 252.47(a); SR letter 15–19, ‘‘Federal Reserve Supervisory Assessment of Capital Planning and Positions for Large and Noncomplex Firms;’’ SR letter 15–18, ‘‘Federal Reserve Supervisory Assessment of Capital Planning and Positions for LISCC Firms and Large and Complex Firms;’’ and Federal Reserve paper on Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice (Federal Reserve Board press release issued on August 19, 2013). 17 12 CFR part 243; SR letter 14–8, ‘‘Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies;’’ and SR letter 14–1, ‘‘Heightened Supervisory Expectations for Recovery and Resolution Preparedness for Certain Large Bank Holding Companies—Supplemental Guidance on Consolidated Supervision Framework for Large Financial Institutions (SR letter 12–17/CA letter 12– 14).’’ 18 SR letter 13–1/CA letter 13–1, ‘‘Supplemental Policy Statement on the Internal Audit Function and Its Outsourcing,’’ and SR letter 03–5, ‘‘Amended Interagency Guidance on the Internal Audit Function and its Outsourcing.’’ 19 12 CFR 252.33. 20 12 CFR 252.34(a). 21 SR letter 08–8/CA letter 08–11, ‘‘Compliance Risk Management Programs and Oversight at Large Banking Organizations with Complex Compliance Profiles.’’ VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 allocation of responsibilities so the board can evaluate whether senior management is executing the firm’s strategic plan, as approved by the board. B. Actively Manage Information Flow and Board Discussions An effective board of directors actively manages its information flow and its deliberations, so that the board can make sound, well-informed decisions in a manner that meaningfully takes into account risks and opportunities. For instance, an effective board directs senior management to provide information that is timely and accurate with the appropriate level of detail and context to enable the board to make sound, wellinformed decisions. An effective board also has practices and processes in place to evaluate information flows and engage senior management on improvements. Directors of an effective board may seek information about the firm and its activities, risk profile, talent, and incentives outside routine board and committee meetings, including through special sessions of the board, outreach to staff other than the Chief Executive Officer (CEO) and his or her direct reports, discussions with senior supervisors, and training on specialized topics. Directors of an effective board take an active role in setting board meeting agendas such that the content, organization, and time allocated to each topic allows the board to discuss strategic tradeoffs and to make sound, well-informed decisions. For example, the agenda is set such that the board has the opportunity to discuss a plan to strategically grow a new business simultaneously, or in connection, with a discussion of risk management capabilities of the new business and of internal audit’s perspective on relevant controls. C. Hold Senior Management Accountable An effective board of directors holds senior management accountable for implementing the firm’s strategy and risk tolerance and maintaining the firm’s risk management and control framework. An effective board of directors also evaluates the performance and compensation of senior management. To facilitate accountability, an effective board actively engages senior management. For instance, in board meetings, active engagement may be supported by structuring sufficient time to facilitate frank discussion and debate of information presented, encouraging diverse views, considering whether and how senior management’s assessments and recommendations support the approved strategy and risk tolerance, challenging senior management’s assessments and recommendations when warranted, and identifying potential gaps or weaknesses in senior management’s assessments and recommendations. An effective board engages in robust and active inquiry into, among other things, drivers, indicators, and trends related to current and emerging risks; adherence to the board-approved strategy and risk tolerance for relevant lines of business; material or persistent deficiencies in risk management and control practices; and the development PO 00000 Frm 00037 Fmt 4703 Sfmt 4703 37225 and implementation of performance management and compensation programs that encourage prudent risk-taking behaviors and business practices, which emphasize the importance of compliance with laws and regulations, including consumer protection.22 An effective board has independent directors who are sufficiently empowered to serve as a check on senior management. For example, such empowerment may derive from the election of a lead independent director with the authority to set agendas of board meetings or to call board meetings with or without the CEO and board chairman present. An effective board establishes and approves clear financial and nonfinancial performance objectives for the CEO, CRO, and Chief Audit Executive (CAE), and, as appropriate, for other members of senior management. These performance objectives are aligned with the firm’s strategy and risk tolerance. In addition, each member of senior management’s total compensation should be informed by the board’s evaluation of the individual’s performance against the performance objectives. Performance objectives enable the board to hold senior management accountable. An effective board approves and periodically reassesses succession plans for the CEO, and as needed, the CRO and CAE.23 Succession plans for other members of senior management, such as the chief financial officer (CFO), may be warranted. D. Support the Independence and Stature of Independent Risk Management and Internal Audit An effective board of directors, through its risk and audit committees, supports the stature and independence of the firm’s independent risk management and internal audit functions. Active engagement by directors on the board’s risk committee 24 and audit committee 25 entails a director’s inquiry 22 Hereinafter, when reference is made to ‘‘compliance with laws and regulations’’ in this guidance, this includes laws and regulations related to banking and consumer protection. 23 This may extend beyond requirements to which firms may be subject under other statutory and regulatory authorities. For example, the NYSE requires formalized succession planning for the CEO only. See NYSE Listed Company Manual, section 303A.09. 24 The risk committee is responsible for the firm’s global risk management policies and oversight of the firm’s global risk management framework. Bank holding companies with $50 billion or more in total consolidated assets must maintain a risk committee pursuant to the enhanced prudential standards in the Board’s Regulation YY. 12 CFR 252.33(a). Nonbank financial companies supervised by the Federal Reserve are required to establish a risk committee pursuant to section 165 of the DoddFrank Act. 12 U.S.C. 5365(h)(1). SLHCs subject to this guidance should maintain a risk committee which meets the supervisory expectations discussed herein in order to enhance its safety and soundness. 25 See SR letter 13–1/CA letter 13–1. Firms that are publicly-traded are subject to the audit committee requirements contained in the U.S. Securities and Exchange Commission’s Rule 10A– 3 (‘‘Rule 10A–3’’) under the Exchange Act of 1934, E:\FR\FM\09AUN1.SGM Continued 09AUN1 37226 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES into, among other things, material or persistent breaches of risk appetite and risk limits, timely remediation of material or persistent internal audit and supervisory findings, and the appropriateness of the annual audit plan. An effective risk committee supports the stature and independence of the independent risk management function, including compliance, by communicating directly with the CRO on material risk management issues; reviewing independent risk management’s budget, staffing, and systems; providing independent risk management with direct and unrestricted access to the risk committee; and directing the appropriate inclusion of representatives of the independent risk management function on senior managementlevel committees; and can effect changes that align with the firm’s strategy and risk tolerance after reviewing the risk management framework relative to the firm’s structure, risk profile, complexity, activities, and size.26 An effective audit committee supports the stature and independence of internal audit by meeting directly with the CAE regarding the internal audit function, organizational concerns, and industry concerns; supporting internal audit’s budget, staffing, and system relative to the firm’s asset size and complexity and the pace of technological and other changes; and reviewing the status of actions recommended by internal audit and external auditors to remediate and resolve material or persistent deficiencies identified by internal audit and findings identified by supervisors. An effective board can identify specific instances or decisions where the independence and stature—or lack thereof— of the independent risk management and internal audit have materially impacted business deliberations, decisions, practices, and/or the firm’s strategy. E. Maintain a Capable Board Composition and Governance Structure An effective board has a composition, governance structure, and established practices that support governing the firm in light of its asset size, complexity, scope of operations, risk profile, and other changes that occur over time. An effective board is composed of directors with a diversity of skills, knowledge, experience, and perspectives. To support a diverse composition, an effective board establishes a process for identifying and selecting director nominees which would consider, for example, a potential nominee’s expertise, availability, integrity, and potential conflicts of interest. An effective board has a governance structure, for example, committees and management-to-committee reporting lines, which is capable of overseeing and addressing issues arising from the firm’s asset size, scope of operations, activities, risk profile, and resolvability. An effective board in addition to any requirements imposed by the applicable stock exchange on which the firm is listed. See, for example, NYSE Listed Company Manual, sections 303A.06 and 303A.07, and NASDAQ Stock Market Rules, section 5605(c). 26 See, for example, 12 CFR 252.33(a)(3). VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 also has the capacity to engage third-party advisors and consultants, when appropriate, in order to supplement the board’s knowledge, expertise, and experience, and to support the board in making sound, wellinformed decisions. An effective board assesses its strengths and weaknesses, including the performance of the board committees, particularly the risk, audit, and other key committees. An effective board adapts its structure and practices to address identified weaknesses or deficiencies, and as the firm’s asset size, scope of operations, risk profile, and other characteristics change over time. Text for the Proposed Guidance on the Communication of Supervisory Findings In response to questions from supervised institutions, the Federal Reserve is issuing this revised guidance 27 to clarify supervisory communications to institutions concerning examination and inspection findings requiring corrective actions.28 This guidance explains the process that Federal Reserve examiners and supervisory staff will follow in communicating supervisory findings to an institution’s board of directors and senior management. This revised guidance, like the existing guidance, would apply to all Federal Reserve-supervised institutions.29 In general, Federal Reserve examiners and supervisory staff will direct most supervisory findings to senior management for corrective action. These supervisory findings are referred to as Matters Requiring Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs) that are included in examination and inspection reports, targeted and horizontal reviews, or any other supervisory communication that Federal Reserve examiners and supervisory staff send to a supervised institution. The key distinction between MRIAs and MRAs is the nature and severity of supervisory findings requiring corrective action, as well as the immediacy with which a supervised institution must take corrective actions or mitigate the risk with compensating controls. Matters Requiring Immediate Attention MRIAs arising from an examination, inspection, or any other supervisory activity are matters of significant importance and urgency that the Federal Reserve requires a supervised institution to address immediately and include: (1) Matters that have the potential to pose significant risk to the safety and soundness of the institution; (2) matters that represent significant noncompliance with applicable laws or regulations; (3) repeat criticisms that have 27 With the issuance of this SR/CA letter, SR letter 13–13/CA letter 13–10, ‘‘Supervisory Considerations for the Communication of Supervisory Findings,’’ is superseded. 28 Nothing in this letter is intended to limit in any way the legal and regulatory responsibilities of an institution’s board of directors to oversee the institution. 29 Federal Reserve-supervised institutions includes bank holding companies, savings and loan holding companies, state member banks, U.S. branches and agencies of foreign banking organizations, and systemically important nonbank financial companies designated by FSOC for supervision by the Federal Reserve. PO 00000 Frm 00038 Fmt 4703 Sfmt 4703 escalated in importance due to insufficient attention or inaction by the institution; and (4) matters that have the potential to cause significant consumer harm. An MRIA will remain an open issue until resolution by the institution and written confirmation from examiners to the institution that the corrective action resolves the matter. The expected timeframe for a supervised institution to take corrective action or mitigate the risk with compensating controls for MRIAs is generally shorter than for MRAs, and may be ‘‘immediate,’’ in the case of heightened safety-and-soundness or consumer compliance risk. For MRIAs that are necessary to preserve or restore the viability of an institution, the timeframe will take into account any potential for losses to the Federal Deposit Insurance Corporation’s Deposit Insurance Fund, including the possibility that a delay in action will increase the potential for loss or the cost of resolution. Matters Requiring Attention (MRAs) MRAs constitute matters that are important and that the Federal Reserve is expecting a supervised institution to address over a reasonable period of time, but the timing need not be ‘‘immediate.’’ While issues giving rise to MRAs must be addressed to ensure the institution operates in a safe-andsound and compliant manner, the threat to safety and soundness is less immediate than with issues giving rise to MRIAs. Likewise, consumer compliance concerns that require less immediate resolution are communicated as an MRA. An MRA typically will remain an open issue until resolution by the institution and written confirmation from examiners to the institution that the corrective action resolves the matter. If an institution does not adequately address an MRA in a timely manner, examiners may elevate an MRA to an MRIA. Similarly, a change in circumstances, environment, or strategy can also lead to an MRA becoming an MRIA. Communications and Corrective Actions Federal Reserve examiners and supervisory staff communicate MRIAs and MRAs in writing, for instance through examination or inspection reports. Because senior management is responsible for the institution’s day-to-day operations, Federal Reserve examiners and supervisory staff would typically direct senior management to take corrective action to address MRIAs and MRAs. Whereas, as the institution’s board of directors is still responsible for establishing policies that direct senior management how to manage the MRIAs and MRAs and when to escalate them to the board, it follows that it will be the responsibility of senior management to keep the institution’s board of directors apprised of its progress and efforts to remediate MRIAs and MRAs consistent with these escalation policies. Federal Reserve examiners and supervisory staff are expected to provide sufficient clarity in the MRIA or MRA for senior management to understand supervisory expectations for corrective action and the timeline for taking such action. Highly technical subcomponents of recommendations may be provided to management separately from the examination or inspection report (for example, listing of E:\FR\FM\09AUN1.SGM 09AUN1 Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices specific cases in which a banking organization’s transactions were completed outside of policy requirements or a listing of specific deficiencies in technical modelling practices or data management requirements), but this would be noted within the MRIA or MRA in the examination or inspection report. Communications to supervised institutions about MRIAs and MRAs would specify a timeframe within which the corrective action is expected to be completed. The timeframe, at least initially, may require estimation because the institution may first need to complete preliminary planning to establish the timeframe for initiating and completing the corrective action. The timeframes for MRAs are likely to become more precise over time as planning evolves and circumstances make the completion of the MRAs more urgent. Matters Referred to the Board of Directors Where significant weaknesses in an institution’s board governance structure and practices are identified, Federal Reserve examiners and supervisory staff would direct such matters to the institution’s board for corrective action in the first instance.30 Such weaknesses could include instances where the board does not provide effective oversight of senior management or fails to hold senior management accountable for fulfilling its responsibilities. In addition, when senior management fails to take or ensure appropriate action is taken to correct material deficiencies or weaknesses, Federal Reserve examiners and supervisory staff would escalate such matters to an institution’s board of directors or an executive-level committee of the board.31 * * * * * By order of the Board of Governors of the Federal Reserve System, August 3, 2017. Margaret McCloskey Shanks, Deputy Secretary of the Board. [FR Doc. 2017–16735 Filed 8–8–17; 8:45 am] BILLING CODE 6210–01–P FEDERAL RESERVE SYSTEM Proposed Agency Information Collection Activities; Comment Request Board of Governors of the Federal Reserve System. sradovich on DSK3GMQ082PROD with NOTICES AGENCY: 30 For foreign banking organizations (FBOs) that do not have a U.S. domiciled board of directors, Federal Reserve examiners and supervisory staff would generally direct the supervisory finding to the senior U.S. manager responsible for the FBO’s U.S. operations. However, examiners have the discretion to direct to the FBO’s global board of directors those supervisory findings that concern weaknesses in the FBO’s governance structure over its U.S. operations or to address excessive risks in its U.S. business strategies that have or may have negative ramifications to safety and soundness. 31 Escalation of a matter to the board of directors or an executive-level committee of the board is not a precondition to the Federal Reserve System’s initiation of an enforcement action against the institution or its directors for failure to address an MRIA or MRA. VerDate Sep<11>2014 17:00 Aug 08, 2017 Jkt 241001 ACTION: Notice, request for comment. The Board of Governors of the Federal Reserve System (Board) invites comment on a proposal to implement the voluntary Survey of Household Economics and Decisionmaking (FR 3077; OMB No. 7100–NEW). On June 15, 1984, the Office of Management and Budget (OMB) delegated to the Board authority under the Paperwork Reduction Act (PRA) to approve of and assign OMB control numbers to collection of information requests and requirements conducted or sponsored by the Board. In exercising this delegated authority, the Board is directed to take every reasonable step to solicit comment. In determining whether to approve a collection of information, the Board will consider all comments received from the public and other agencies. DATES: Comments must be submitted on or before October 10, 2017. ADDRESSES: You may submit comments, identified by FR 3077, by any of the following methods: • Agency Web site: http:// www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/apps/ foia/proposedregs.aspx. • Federal eRulemaking Portal: http:// www.regulations.gov. Follow the instructions for submitting comments. • Email: regs.comments@ federalreserve.gov. Include OMB number in the subject line of the message. • FAX: (202) 452–3819 or (202) 452– 3102. • Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551. All public comments are available from the Board’s Web site at http:// www.federalreserve.gov/apps/foia/ proposedregs.aspx as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room 3515, 1801 K Street (between 18th and 19th Streets NW.,) Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays. Additionally, commenters may send a copy of their comments to the OMB Desk Officer—Shagufta Ahmed—Office of Information and Regulatory Affairs, Office of Management and Budget, New Executive Office Building, Room 10235, 725 17th Street NW., Washington, DC 20503 or by fax to (202) 395–6974. SUMMARY: PO 00000 Frm 00039 Fmt 4703 Sfmt 4703 37227 A copy of the PRA OMB submission, including the proposed reporting form and instructions, supporting statement, and other documentation will be placed into OMB’s public docket files, once approved. These documents will also be made available on the Federal Reserve Board’s public Web site at: http:// www.federalreserve.gov/apps/ reportforms/review.aspx or may be requested from the agency clearance officer, whose name appears below. Federal Reserve Board Clearance Officer—Nuha Elmaghrabi—Office of the Chief Data Officer, Board of Governors of the Federal Reserve System, Washington, DC 20551 (202) 452–3829. Telecommunications Device for the Deaf (TDD) users may contact (202) 263–4869, Board of Governors of the Federal Reserve System, Washington, DC, 20551. SUPPLEMENTARY INFORMATION: FOR FURTHER INFORMATION CONTACT: Request for Comment on Information Collection Proposal The Board invites public comment on the following information collection, which is being reviewed under authority delegated by the OMB under the PRA. Comments are invited on the following: a. Whether the proposed collection of information is necessary for the proper performance of the Federal Reserve’s functions; including whether the information has practical utility; b. The accuracy of the Federal Reserve’s estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used; c. Ways to enhance the quality, utility, and clarity of the information to be collected; d. Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and e. Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information. At the end of the comment period, the comments and recommendations received will be analyzed to determine the extent to which the Federal Reserve should modify the proposed revisions prior to giving final approval. Proposal To Approve Under OMB Delegated Authority the Implementation of the Following Report Report title: Survey of Household Economics and Decisionmaking. Agency form number: FR 3077. E:\FR\FM\09AUN1.SGM 09AUN1

Agencies

[Federal Register Volume 82, Number 152 (Wednesday, August 9, 2017)]
[Notices]
[Pages 37219-37227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16735]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1570]


Proposed Guidance on Supervisory Expectation for Boards of 
Directors

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Notice.

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SUMMARY: The Board invites comment on a proposal addressing supervisory 
expectations for the boards of directors of bank holding companies, 
savings and loan holding companies, state member banks, U.S. branches 
and agencies of foreign banking organizations, and systemically 
important nonbank financial companies designated by the Financial 
Stability Oversight Council for supervision by the Federal Reserve. For 
the largest domestic bank and savings and loan holding companies and 
systemically important nonbank financial companies, the proposal would 
establish principles regarding effective boards of directors focused on 
the performance of a board's core responsibilities. The proposal would 
also better distinguish between the roles and responsibilities of an 
institution's board of directors and those of senior management. For 
domestic bank and savings and loan holding companies, the proposal also 
would eliminate or revise supervisory expectations contained in certain 
existing Federal Reserve Supervision and Regulation letters, which 
would be aligned with existing or proposed guidance for boards 
depending on the size of the firm.

DATES: Comments must be received no later than October 10, 2017.

ADDRESSES: Interested parties are invited to submit written comments by 
following the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Ann E. Misback, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
3515, 1801 K Street NW. (between 18th and 19th Street NW.), Washington, 
DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Michael Hsu, Associate Director, (202) 
912-4330, Michael Solomon, Associate Director, (202) 452-3502, Richard 
Naylor, Associate Director, (202) 728-5854, Division of Supervision and 
Regulation; Ben McDonough, Assistant General Counsel, (202) 452-2036, 
Scott Tkacz, Senior Counsel, (202) 452-2744, Keisha Patrick, Senior 
Counsel, (202) 452-3559, or Chris Callanan, Senior Attorney, (202) 452-
3594, Legal Division, Board of Governors of the Federal Reserve System, 
20th and C Streets NW., Washington, DC 20551. For the hearing impaired 
only, Telecommunications Device for the Deaf (TDD) users may contact 
(202) 263-4869.

SUPPLEMENTARY INFORMATION: The Board invites comment on a proposal 
addressing supervisory expectations on boards of directors (boards or 
boards of directors). The proposal has been informed by a multi-year 
review by the Federal Reserve of practices of boards of directors, 
particularly at the largest banking organizations. The review assessed, 
among other things, the factors that make boards effective, the 
challenges boards face, and how boards influence the safety and 
soundness of their firms and promote compliance with laws and 
regulations. The Federal Reserve also reviewed expectations contained 
in Board supervisory guidance. This notice and the guidance proposed 
herein constitute the results of the review.
    Among other things, the results of the review and discussions with 
independent directors suggest that supervisory expectations for boards 
of directors and senior management have become increasingly difficult 
to distinguish. Greater clarity regarding these supervisory 
expectations could improve corporate governance overall, increase 
efficiency, support greater accountability, and promote compliance with 
laws and regulations. The results of the review also suggest that 
boards often devote a significant amount of time satisfying supervisory 
expectations that do not directly relate to the board's core 
responsibilities, which include guiding the development of the firm's 
strategy and the types and levels of risk it is willing to take (also 
referred to as risk tolerance), overseeing senior management and 
holding them accountable for effective risk management and compliance 
among other responsibilities, supporting the stature and independence 
of the firm's independent risk management and internal audit functions, 
and adopting effective governance practices. Boards completing such 
non-core tasks may do so at the expense of sufficiently focusing on 
their core responsibilities, which when exercised effectively promote 
the safety and soundness of the firm. Finally, the results of the 
review suggest that boards of large financial institutions face 
significant information flow challenges, especially in preparing for 
and participating in board meetings. Absent actively managing its 
information flow, boards can be overwhelmed by the quantity and 
complexity of information they receive. Although boards have oversight 
responsibilities over senior management, they are inherently 
disadvantaged given their dependence on senior management for the 
quality and availability of information.
    The Board invites comment on a proposal consisting of three parts 
that are each intended to refocus supervisory expectations for boards 
on a board's core responsibilities. The first part includes proposed 
supervisory guidance addressing effective boards of directors (proposed 
BE guidance), which would apply to all bank and savings and loan 
holding companies with total consolidated assets of $50 billion or 
more, and to systemically important nonbank financial companies 
designated by the Financial Stability Oversight Council for supervision 
by the Federal Reserve.\1\ The proposed BE guidance would clarify 
supervisory expectations for boards as distinct from

[[Page 37220]]

expectations for senior management, and identifies five key attributes 
of effective boards of directors that the Board would use when 
assessing a firm's board of directors.
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    \1\ The proposed BE guidance would not apply to U.S. 
intermediate holding companies (IHCs) of foreign banking 
organizations (FBOs) established pursuant to Regulation YY. The 
Board anticipates proposing guidance on board effectiveness for IHCs 
at a later date.
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    The proposed BE guidance would be used in connection with the 
supervisory assessment of board effectiveness under the proposed Large 
Financial Institution (LFI) rating system, which the Federal Reserve is 
issuing for public comment concurrently with this proposal. The 
proposed LFI rating system would apply to all bank holding companies 
with total consolidated assets of $50 billion or more; all non-
insurance, non-commercial savings and loan holding companies with total 
consolidated assets of $50 billion or more; and U.S. intermediate 
holding companies of foreign banking organizations established pursuant 
to the Federal Reserve's Regulation YY. The proposed LFI rating system 
consists of three components, each of which would be assigned a rating: 
Governance and Controls, Capital Planning and Positions, and Liquidity 
Risk Management and Positions. The Governance and Controls component 
rating would evaluate the effectiveness of a firm's (i) board of 
directors, (ii) management of core business lines and independent risk 
management and controls,\2\ and (iii) recovery planning (only for 
domestic bank holding companies subject to the Federal Reserve's Large 
Institution Supervision Coordinating Committee (LISCC) supervisory 
framework).\3\
---------------------------------------------------------------------------

    \2\ The Federal Reserve also plans to separately release 
additional proposed guidance seeking comment on supervisory 
expectations relating to a firm's management of core business lines 
and independent risk management and controls. The release describing 
the proposed LFI rating system includes a summary of that planned 
guidance.
    \3\ See SR letter 14-8, ``Consolidated Recovery Planning for 
Certain Large Domestic Bank Holding Companies,'' at https://www.federalreserve.gov/supervisionreg/srletters/sr1408.htm.
---------------------------------------------------------------------------

    The second part of the proposal would refocus supervisory guidance 
found in existing Supervision and Regulation (SR) letters for boards of 
directors of bank and savings and loan holding companies of all sizes. 
This proposal would revise certain supervisory expectations for boards 
to ensure they are aligned with the Federal Reserve's supervisory 
framework, and would eliminate redundant, outdated, or irrelevant 
supervisory expectations. The Board also plans to review guidance that 
has been adopted on an interagency basis and requirements established 
by rule concerning boards of directors and would consider modifications 
in those areas at a later date.
    The third part of the proposal includes proposed supervisory 
guidance that would replace Federal Reserve SR letter 13-13/CA letter 
13-10.\4\ The proposed guidance would facilitate the execution of 
boards' core responsibilities by clarifying expectations for 
communicating supervisory findings to an institution's board of 
directors and senior management. The proposed guidance would indicate 
that the Federal Reserve expects to direct most Matters Requiring 
Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs) to 
senior management for corrective action. MRIAs and MRAs would only be 
directed to the board for corrective action when the board needs to 
address its corporate governance responsibilities or when senior 
management fails to take appropriate remedial action. The board would 
remain responsible for holding senior management accountable for 
remediating supervisory findings. This proposed guidance would apply to 
all financial institutions supervised by the Federal Reserve.
---------------------------------------------------------------------------

    \4\ See SR letter 13-13/CA letter 13-10, ``Supervisory 
Considerations for the Communication of Supervisory Findings,'' at 
https://www.federalreserve.gov/supervisionreg/srletters/sr1313.htm.
---------------------------------------------------------------------------

    Although the proposal would not address all existing supervisory 
expectations for boards of directors, the Board intends to continue 
reviewing existing supervisory expectations for boards of directors.

I. Proposed Board Effectiveness (BE) Guidance

    The proposed BE guidance better distinguishes the supervisory 
expectations for boards from those of senior management, and describes 
effective boards as those which: (1) Set clear, aligned, and consistent 
direction regarding the firm's strategy and risk tolerance, (2) 
actively manage information flow and board discussions, (3) hold senior 
management accountable, (4) support the independence and stature of 
independent risk management \5\ and internal audit, and (5) maintain a 
capable board composition and governance structure.
---------------------------------------------------------------------------

    \5\ Independent risk management includes compliance.
---------------------------------------------------------------------------

    These five attributes support safety and soundness and would 
provide the framework with which the Federal Reserve proposes to assess 
a firm's board of directors under the proposed LFI rating system. 
Assessing the effectiveness of a board of directors using these 
attributes reflects the view that applying standardized expectations 
for boards of directors fails to take into account differences in 
firms' activities, risk profiles, and complexity, and potentially 
prevents a board from achieving maximum effectiveness in meeting its 
core responsibilities.
    In assessing a board's effectiveness, supervisors rely on various 
sources of information, including firm-provided materials and 
examinations. As noted in the proposed BE guidance, a board of 
directors may also provide to supervisors a self-assessment of its 
effectiveness, for example, relative to the five attributes, which the 
Federal Reserve would take into consideration in its evaluation. The 
proposed BE guidance does not prescribe how such a self-assessment 
should be conducted or documented.

II. Rescinding or Revising Existing Federal Reserve Expectations for 
Boards of Directors

    The Federal Reserve is conducting a comprehensive review of all 
existing supervisory expectations and regulatory requirements relating 
to boards of directors of bank and savings and loan holding companies 
of all sizes. The purpose of the review is to identify supervisory 
expectations for boards of directors which do not relate to their core 
responsibilities or are not aligned with the Federal Reserve's 
supervisory framework. The Federal Reserve believes that revising or 
eliminating unnecessary, redundant, or outdated expectations, as 
appropriate, will allow boards to focus more of their time and 
resources on fulfilling their core responsibilities.
    The Federal Reserve is conducting this review in two phases. The 
first phase is focused on reviewing supervisory expectations of boards 
set forth in existing SR letters that communicate Board guidance. The 
preliminary results of the first phase are discussed in more detail 
below. The second phase of the review is focused on requirements and 
supervisory expectations set forth in Board regulations or in various 
forms of interagency guidance. Revising Board regulations generally 
will take more time to complete, and revisions to interagency guidance 
require consultation and collaboration with other federal banking 
agencies. The Board's proposed changes to supervisory expectations for 
the second phase would be released for notice and comment at a later 
date.\6\
---------------------------------------------------------------------------

    \6\ The Federal Reserve would make conforming changes to 
existing examination manuals, examination procedures, and training 
materials as supervisory expectations evolve over time.

---------------------------------------------------------------------------

[[Page 37221]]

    In the first phase of the review, the Board preliminarily 
identified 27 SR letters for potential elimination or revision, which 
collectively include more than 170 supervisory expectations for holding 
company boards. These SR letters are listed in Table A, ``SR letters in 
Which Guidance on the Roles and Responsibilities for Boards of 
Directors of Holding Companies Would Be Rescinded or Revised.'' For SR 
letters on this list that have other supervisory expectations unrelated 
to boards of directors that remain relevant, only the specific portions 
of the guidance relating to boards of directors would be revised, and 
the other portions of the letter would generally be left unchanged. SR 
letters which are outdated or no longer relevant would be rescinded in 
their entirety.
    Existing supervisory expectations would be eliminated or revised 
for (1) domestic bank and savings and loan holding companies (including 
insurance and commercial savings and loan holding companies) with total 
consolidated assets of $50 billion or more (``larger firms'') and (2) 
domestic bank and savings and loan holding companies (including 
insurance and commercial savings and loan holding companies) with total 
consolidated assets of less than $50 billion (``smaller firms''). For 
larger firms, supervisory expectations for boards would be revised to 
align with the attributes of effective boards outlined in the proposed 
BE guidance. For smaller firms, supervisory expectations would be 
revised to align with the supervisory expectations set forth in SR 
letter 16-11, ``Supervisory Guidance for Assessing Risk Management at 
Supervised Institutions with Total Consolidated Assets Less than $50 
Billion'' (SR 16-11), which applies to all Federal Reserve-supervised 
institutions with total consolidated assets of less than $50 billion. 
SR 16-11 includes the Federal Reserve's supervisory expectations for 
the roles and responsibilities of the board of directors for an 
institution's risk management, such as approving the institution's 
overall business strategies and significant policies; understanding the 
risks the institution faces and having access to information to 
identify the size and significance of the risks; providing guidance 
regarding the level of acceptable risk exposures to the institution; 
and overseeing senior management's implementation of the board-approved 
business strategies and risk limits.
    SR letters could be revised in several ways, including deleting 
portions of an SR letter that would include duplicative expectations to 
those contained in the proposed BE guidance or SR 16-11, or which 
otherwise are no longer relevant; modifying specific portions of an SR 
letter to more clearly delineate the roles and responsibilities of 
boards from those of senior management; or making general adjustments 
to an SR letter so that it is aligned and consistent with the proposed 
BE guidance or SR 16-11. For example, when an existing supervisory 
expectation ascribes the same roles and responsibilities to both the 
``board and senior management,'' the Board would, in most cases, revise 
that expectation to refer only to senior management.
    Although it represents only the first portion of its review, the 
Board believes the proposal would result in several changes in 
supervisory expectations for holding company boards of directors. For 
instance:
     Replacing the original guidance with SR 13-13 would 
clarify a board's roles and responsibilities in the supervisory process 
and more efficiently allocate its time and resources;
     Revising supervisory expectations for boards included in 
existing SR letters such as SR letter 00-9, ``Supervisory Guidance on 
Equity Investment and Merchant Banking Activities,'' would eliminate 
expectations on boards relating to managing a firm's day-to-day 
operations, a role which is better suited to senior management;
     Revising supervisory guidance which does not clearly 
distinguish a board's roles and responsibilities from those of senior 
management would eliminate uncertainty, which can lead to boards 
unnecessarily addressing matters that are better suited for senior 
management, and would support the board's core responsibility of 
holding senior management accountable;
     Emphasizing their responsibility to review and approve 
only significant firm-wide policies would reduce the need for boards to 
devote significant amounts of time considering policies of lesser 
importance; and
     Eliminating redundant, unnecessary, and outdated 
supervisory expectations would provide more flexibility to adopt 
effective governance practices.

   Table A--SR Letters in Which Guidance on the Roles and Responsibilities for Boards of Directors of Holding
                                     Companies Would Be Rescinded or Revised
----------------------------------------------------------------------------------------------------------------
                                                               Would  expectations for   Would  expectations for
                                                               boards of  directors of   boards of  directors of
                                                               holding  companies with   holding  companies with
        SR/CA letter No.                    Title              $50 billion or more in   less than $50 billion in
                                                                 total  consolidated       total  consolidated
                                                               assets be  rescinded or   assets be  rescinded or
                                                                      revised?                  revised?
----------------------------------------------------------------------------------------------------------------
SR 16-17.......................  Supervisory Expectations     Yes.....................  N/A. 1
                                  for Risk Management of
                                  Reserve-Based Energy
                                  Lending Risk.
SR 14-8........................  Consolidated Recovery        Yes.....................  N/A. 2
                                  Planning for Certain Large
                                  Domestic Bank Holding
                                  Companies.
SR 13-19/CA 13-21..............  Guidance on Managing         Yes.....................  Yes.
                                  Outsourcing Risk.
SR 13-13/CA 13-10..............  Supervisory Considerations   Yes.....................  Yes.
                                  for the Communication of
                                  Supervisory Findings.
SR 12-17/CA 12-14..............  Consolidated Supervision     Yes.....................  N/A. \2\
                                  Framework for Large
                                  Institutions.

[[Page 37222]]

 
SR 11-15.......................  Disposal of Problem Assets   Yes.....................  Yes.
                                  through Exchanges.
SR 11-14.......................  Supervisory Expectations     Yes.....................  Yes.
                                  for Risk Management of
                                  Agricultural Credit Risk.
SR 09-4........................  Applying Supervisory         N/A 3...................  Yes.
                                  Guidance and Regulations
                                  on the Payment of
                                  Dividends, Stock
                                  Redemptions, and Stock
                                  Purchases at BHCs.
SR 08-9/CA 08-12...............  Consolidated Supervision of  N/A 3...................  Yes.
                                  Bank Holding Companies and
                                  the Combined U.S.
                                  Operations of Foreign
                                  Banking Organization.
SR 08-8/CA 08-11...............  Compliance Risk Management   Yes.....................  N/A. 2
                                  Programs and Oversight at
                                  Large Banking
                                  Organizations with Complex
                                  Compliance Profiles.
SR 01-13.......................  Supervisory guidance         Yes.....................  Yes.
                                  relating to a change to
                                  permissible securities
                                  activities of state member
                                  banks.
SR 01-8........................  Supervisory Guidance on      Yes.....................  Yes.
                                  Complex Wholesale
                                  Borrowings.
SR 00-9........................  Supervisory Guidance on      Yes.....................  Yes.
                                  Equity Investment and
                                  Merchant Banking
                                  Activities.
SR 99-7........................  Supervisory Guidance         Yes.....................  Yes.
                                  Regarding the Investment
                                  of Fiduciary Assets in
                                  Mutual Funds and Potential
                                  Conflicts of Interest.
SR 98-25.......................  Sound Credit Risk            Yes.....................  Yes.
                                  Management and the Use of
                                  Internal Credit Risk
                                  Ratings at Large Banking
                                  Organizations.
SR 98-18.......................  Lending Standards for        Yes.....................  Yes.
                                  Commercial Loans.
SR 98-9........................  Assessment of Information    Yes.....................  Yes.
                                  Technology in the Risk-
                                  Focused Frameworks for the
                                  Supervision of Community
                                  Banks and Large Complex
                                  Banking Organizations.
SR 97-25.......................  Risk-Focused Framework for   N/A 4...................  Yes.
                                  the Supervision of
                                  Community Banks.
SR 97-24.......................  Risk-Focused Framework for   Yes.....................  Yes.
                                  Supervision of Large
                                  Complex Institutions.
SR 97-21.......................  Risk Management and Capital  Yes.....................  Yes.
                                  Adequacy of Exposures
                                  Arising from Secondary
                                  Market Credit Activities.
SR 97-3........................  Conversion of Common Trust   Yes.....................  Yes.
                                  Funds to Mutual Funds.
SR 96-10.......................  Risk-Focused Fiduciary       Yes.....................  Yes.
                                  Examinations.
SR 95-51.......................  Rating the Adequacy of Risk  Yes.....................  N/A. 5
                                  Management Processes and
                                  Internal Controls at State
                                  Member Banks and Bank
                                  Holding Companies.
SR 94-53.......................  Investment Adviser           Yes.....................  Yes.
                                  Activities.
SR 93-69.......................  Examining Risk Management    Yes.....................  Yes.
                                  and Internal Controls for
                                  Trading Activities of
                                  Banking Organizations.
SR 90-22.......................  Policy Statement on the Use  Yes.....................  Yes.
                                  of ``Points'' in settling
                                  foreign exchange contracts.
SR 90-16.......................  Implementation of            Yes.....................  Yes.
                                  Examination Guidelines for
                                  the Review of Asset
                                  Securitization Activities.
----------------------------------------------------------------------------------------------------------------
1 Prior to the issuance of SR 16-17, expectations for boards at domestic bank holding companies and savings and
  loan holding companies (including insurance and commercial savings and loan holding companies) with less than
  $50 billion in total consolidated assets contained therein were aligned with expectations for boards in SR 16-
  11.
2 SR 14-8, SR/CA 12-17/12-14, and SR/CA 08-8/08-11 are not applicable to domestic bank holding companies and
  savings and loan holding companies (including insurance and commercial savings and loan holding companies)
  with less than $50 billion in total consolidated assets.
3 For domestic bank holding companies and savings and loan holding companies (including insurance and commercial
  savings and loan holding companies) with $50 billion or more in total consolidated assets, SR 09-4 and SR/CA
  08-9/08-12 have been superseded by SR 15-18 and SR 15-19 and SR 12-17/CA 12-14, respectively.
4 SR 97-25 is not applicable to domestic bank holding companies with $50 billion or more in total consolidated
  assets.
5 For domestic bank holding companies with less than $50 billion in total consolidated assets, SR 95-51 has been
  superseded by SR 16-11.

III. Revising SR Letter 13-13/CA 13-10, ``Supervisory Considerations 
for the Communication of Supervisory Findings''

    The Board is also proposing to clarify expectations regarding the 
communication of supervisory findings set forth in SR letter 13-13/CA 
letter 13-10, ``Supervisory Considerations for the Communication of 
Supervisory Findings.'' SR 13-13 currently establishes an expectation 
that all supervisory findings, referred to as Matters Requiring 
Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs), 
would be presented to the board of directors so that the board may 
ensure that senior management devotes appropriate attention to 
addressing these matters. This approach has in many cases led boards of 
directors to believe they should become directly involved in addressing 
the MRIA or MRA.
    The proposed guidance, like the existing guidance, would apply to 
all Federal Reserve-supervised institutions,\7\ and would clarify the

[[Page 37223]]

process that Federal Reserve examiners and supervisory staff should 
follow in communicating supervisory findings to an institution's board 
of directors and senior management. The proposed guidance would 
indicate that Federal Reserve examiners and supervisory staff would 
direct most MRIAs and MRAs to senior management for corrective action. 
MRIAs or MRAs would only be directed to the board for corrective action 
when the board needs to address its corporate governance 
responsibilities or when senior management fails to take appropriate 
remedial action. Boards of directors would remain responsible for 
holding senior management accountable for remediating supervisory 
findings.
---------------------------------------------------------------------------

    \7\ ``Federal Reserve-supervised institutions'' includes bank 
holding companies, savings and loan holding companies, state member 
banks, U.S. branches and agencies of foreign banking organizations, 
and systemically important nonbank financial companies designated by 
FSOC for supervision by the Federal Reserve.
---------------------------------------------------------------------------

Request for Comments

    The Board invites comment on all aspects of the proposal, including 
responses to the following questions:
    (1) The Federal Reserve is considering applying the proposed BE 
guidance to U.S. intermediate holding companies of foreign banking 
organizations. How should the proposed BE guidance and refocusing of 
existing supervisory guidance be adapted to apply to boards of the U.S. 
intermediate holding companies of foreign banking organizations and 
state member banks?
    (2) What other attributes of effective boards should the Board 
assess?
    (3) Should boards of firms subject to the proposed BE guidance be 
required to perform a self-assessment of their effectiveness and 
provide the results of that self-assessment to the Board? If so, what 
requirements should apply to how the board performs the self-
assessment? Should such self-assessments be used as the primary basis 
for supervisory evaluations of board effectiveness?
    (4) Would any parts of this proposal conflict with effective 
governance of insurance and commercial savings and loan holding 
companies? If so, what adjustments to the proposal would be warranted?
    (5) Is the proposed guidance on the communication of supervisory 
findings clear with respect to the division of responsibilities between 
the board and senior management?
    (6) What Federal Reserve supervisory expectations for boards are 
not included in Table A, yet interfere with a board's ability to focus 
on its core responsibilities and should be included in the proposal? 
Should such expectations be rescinded or revised? If revised, how?

III. Administrative Law Matters

A. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3521) (PRA), the Federal Reserve may not conduct or sponsor, and a 
respondent is not required to respond to, an information collection 
unless it displays a currently valid Office of Management and Budget 
(OMB) control number. The Federal Reserve reviewed the proposed 
supervisory guidance under the authority delegated to the Federal 
Reserve by OMB.
    The proposed supervisory guidance contains a collection of 
information subject to the PRA. The reporting requirement is found in 
the proposed BE guidance. The proposed BE guidance provides that a 
board of directors may provide to supervisors a self-assessment of its 
effectiveness, which the Federal Reserve would take into consideration 
in its evaluation of the effectiveness of the board of directors. The 
Federal Reserve is not prescribing how such a self-assessment should be 
conducted or documented. This information would assist supervisors in 
evaluating board effectiveness.
    Comments are invited on:
    a. Whether the collections of information are necessary for the 
proper performance of the Federal Reserve's functions, including 
whether the information has practical utility;
    b. The accuracy or the estimate of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    c. Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    d. Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    e. Estimates of capital or startup costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates should be sent to: 
Secretary, Board of Governors of the Federal Reserve System, 20th and C 
Streets NW., Washington, DC 20551. A copy of the comments may also be 
submitted to the OMB desk officer by mail to U.S. Office of Management 
and Budget, 725 17th Street NW., #10235, Washington, DC 20503 or by 
facsimile to (202) 395-5806, Attention, Agency Desk Officer.
    Report title: Board Effectiveness Guidance.
    Agency form number: FR 4204.
    OMB control number: 7100-NEW.
    Frequency: Annual.
    Respondents: Domestic bank and savings and loan holding companies 
with total consolidated assets of $50 billion or more (excluding 
intermediate holding companies of foreign banking organizations 
established pursuant to the Federal Reserve's Regulation YY), and 
systemically important nonbank financial companies designated by the 
Financial Stability Oversight Council for supervision by the Federal 
Reserve.
    Legal authorization and confidentiality: This information 
collection is voluntary, and allows the board of directors of an 
affected financial institution to submit to Federal Reserve supervisors 
a self-assessment of its effectiveness, which supervisors would take 
into consideration in their evaluation of the effectiveness of the 
board of directors. The Board has determined that the collection of 
information is authorized by section 5(c) of the Bank Holding Company 
Act (12 U.S.C. 1844(c)); section 10(b) of the Homeowners' Loan Act (12 
U.S.C. 1467a(b)(4), section 113 of the Dodd-Frank Act (12 U.S.C. 5323). 
The information contained in the self-assessment would be considered 
confidential pursuant to exemption 8 of FOIA (5 U.S.C. 552(b)(8)), as 
it relates to examination reports prepared by supervisors.
    Estimated number of respondents: 40.
    Estimated average time per respondent: 1,000 hours for initial 
implementation, 800 hours for subsequent years. This has been 
calculated based on an estimate of five (5) individuals each working 
for four (4) weeks to prepare this information collection.
    Estimated total annual burden hours: 40,000 hours for initial 
implementation; 32,000 hours for subsequent years.
Regulatory Flexibility Analysis

B. Regulatory Flexibility Act

    The Federal Reserve is providing an initial regulatory flexibility 
analysis with respect to this proposal. While the proposal is not being 
adopted as a rule, the Federal Reserve has considered the potential 
impact of the proposal on small banking organizations using 
considerations that would apply if the Regulatory Flexibility Act, 5 
U.S.C. 601 et seq. (RFA) were applicable. For the reason discussed in 
the Supplementary Information section above, the proposal is intended 
to refocus the Federal Reserve's supervisory expectations for

[[Page 37224]]

boards of directors on their core responsibilities. The proposal should 
not increase, and in fact may slightly reduce, the amount of burden 
imposed on small banking organizations.
    Under regulations issued by the Small Business Administration, a 
small banking organization includes a depository institution, bank 
holding company, or savings and loan holding company with total assets 
of $550 million or less, as measured by the institution's average 
assets reported on its four quarterly financial statements for the 
preceding year (collectively, small banking organizations).\8\ It is 
estimated that as of June 1, 2017, there are 3,539 small banking 
organizations that would be subject to this proposal.
---------------------------------------------------------------------------

    \8\ See 13 CFR 121.201. Effective July 14, 2014, the Small 
Business Administration revised the size standards for banking 
organizations to $550 million in assets from $500 million in assets. 
79 FR 33647 (June 12, 2014).
---------------------------------------------------------------------------

    If adopted in final form, only certain sections of the proposal 
would apply to small banking organizations, and the Federal Reserve 
believes that the proposal would not impose any new burden on small 
banking organizations. The proposed BE guidance would not apply to or 
impact small banking organizations as it is intended for the largest 
financial institutions and would only apply to domestic depository 
institution holding companies with total consolidated assets of $50 
billion or more. The rescission and revision of existing SR letters 
would not increase, and in fact may reduce, the amount of burden on 
small bank holding companies and savings and loan holding companies 
with $550 million or less in total consolidated assets. This is because 
the proposed rescission and revision would reduce the overall number of 
supervisory expectations to which their boards are subject, including 
reporting, recordkeeping, and other compliance requirements associated 
with these expectations. Finally, the proposed guidance concerning the 
communication of supervisory findings, which would also apply to 
financial institutions supervised by the Federal Reserve including 
small banking organizations, would not increase the amount of burden on 
small banking organizations because it clarifies the process for 
communicating supervisory findings to an institution's board of 
directors and senior management.
    There are no significant alternatives to the proposal that would 
have less economic impact on small banking organizations, and as noted 
above, the proposal would not increase the amount of burden on small 
banking organizations, and may result in a slight reduction in burden. 
As discussed above, the projected reporting, recordkeeping, and other 
compliance requirements of the proposal will not increase burden on 
small banking organizations. The Federal Reserve does not believe that 
the proposal duplicates, overlaps, or conflicts with any Federal rules. 
In light of the foregoing, the Federal Reserve does not believe that 
the proposal, if adopted in final form, would have a significant 
economic impact on a substantial number of small entities. Nonetheless, 
the Board seeks comment on whether the proposal would impose undue 
burdens on, or have unintended consequences for, small entities, and 
whether there are ways such potential burdens or consequences could be 
minimized in a manner consistent with the purpose of the proposal. A 
final regulatory flexibility analysis will be conducted after 
consideration of comments received during the public comment period.

Text for the Proposed Supervisory Guidance on Board of Directors' 
Effectiveness for Domestic Bank and Savings and Loan Holding Companies 
With Total Consolidated Assets of $50 Billion or More (Excluding 
Intermediate Holding Companies of Foreign Banking Organizations 
Established Pursuant to the Federal Reserve's Regulation YY), and 
Systemically Important Nonbank Financial Companies Designated by the 
Financial Stability Oversight Council for Supervision by the Federal 
Reserve

    The Federal Reserve is issuing this letter to provide additional 
guidance on key attributes of effective boards of directors (also 
referred to as a firm's ``board'').\9\ An effective board of 
directors is central to maintaining the safety and soundness and 
continued resiliency of a firm's consolidated operations.\10\
---------------------------------------------------------------------------

    \9\ ``Board'' or ``board of directors'' also refers to 
committees of the board of directors, as appropriate.
    \10\ As used here, ``resiliency'' is defined as maintaining 
effective governance and controls, including effective capital and 
liquidity governance and planning processes and sufficient capital 
and liquidity, to provide for the firm's continuity, and promote 
compliance with laws and regulations, including those related to 
consumer protection, through a range of conditions.
---------------------------------------------------------------------------

    In developing this guidance, the Federal Reserve considered 
other statutory and regulatory authorities which impose requirements 
and expectations concerning the roles, responsibilities, and 
expectations of a firm's board of directors. For example, the 
Federal Reserve reviewed applicable Delaware law,\11\ rules 
promulgated by the U.S. Securities and Exchange Commission 
(``SEC''), and listing requirements implemented by the New York 
Stock Exchange (``NYSE'') and the NASDAQ Stock Market (``NASDAQ''). 
This proposal does not supersede or replace any applicable legal, 
regulatory, or listing requirements to which firms may currently be 
subject in the United States, and nothing herein is believed to 
conflict with such requirements.
---------------------------------------------------------------------------

    \11\ See Del. Code Ann. tit. 8 (2016).
---------------------------------------------------------------------------

    In assessing board effectiveness, supervisors rely on various 
sources of information, including firm-provided materials and 
examinations. A board of directors also may provide to supervisors a 
self-assessment of its effectiveness, for example, relative to the 
five attributes, which the Federal Reserve would take into 
consideration in its evaluation. The Federal Reserve is not 
prescribing how such a self-assessment should be conducted or 
documented.

Attributes of Effective Boards of Directors

    A board is most effective when directors focus on establishing a 
firm-wide corporate strategy and setting the types and levels of 
risk it is willing to take (also referred to as risk tolerance), 
making certain that senior management effectively carries out that 
strategy within the established risk tolerances, and holding 
management accountable for its actions, including effective risk 
management and compliance. This guidance focuses on five key 
attributes of an effective board rather than on process-oriented 
supervisory expectations that do not directly relate to the board's 
core responsibilities.

A. Set Clear, Aligned, and Consistent Direction

    An effective board of directors guides the development of and 
approves the firm's strategy and sets the types and levels of risk 
it is willing to take. The strategy and tolerance of risk should be 
clear and aligned, and should also include a long-term perspective 
on risks and rewards that is consistent with the capacity of the 
firm's risk management framework.
    A clear strategy includes sufficient detail to enable senior 
management \12\ to identify the firm's strategic objectives; to 
create an effective management structure, implementation strategies, 
plans and budgets for each business line; \13\ and to establish 
effective audit, compliance and risk management and control 
functions. A clear strategy also allows senior management to discern 
which opportunities the firm should pursue or avoid and determine 
the resources and controls necessary to implement the strategy.
---------------------------------------------------------------------------

    \12\ The term ``senior management'' refers to the core group of 
individuals directly accountable to the board of directors for the 
sound and prudent day-to-day management of the firm.
    \13\ A ``business line'' is a defined unit or function of a 
financial institution, including associated operations and support 
that provides related products or services to meet the firm's 
business needs and those of its customers.
---------------------------------------------------------------------------

    A clear risk tolerance includes sufficient detail to enable the 
firm's Chief Risk Officer (CRO) and its independent risk management 
function \14\ to set firm-wide risk limits.\15\ Risk

[[Page 37225]]

limits should be set in aggregate by concentration and risk type, as 
well as at more granular levels as appropriate. A clear risk 
tolerance also allows senior management to establish risk management 
expectations and monitor risk-taking for the level and types of 
risks assumed by the firm.
---------------------------------------------------------------------------

    \14\ An ``independent risk management function'' is responsible 
for identifying, measuring, aggregating, and reporting risks in a 
comprehensive and independent manner.
    \15\ The term ``risk limits'' refers to thresholds that 
constrain risk-taking so that the level and type of risks assumed 
remains aligned with the firm-wide risk tolerance.
---------------------------------------------------------------------------

    A firm's strategy and risk tolerance are aligned when they are 
consistent, developed, considered, and approved together. For 
instance, the firm's strategy should clearly articulate objectives 
consistent with the firm's risk tolerance, and the risk tolerance 
should clearly specify the aggregate level and types of risks the 
board is willing to assume to achieve the firm's strategic 
objectives.
    An effective board considers the capacity of the firm's risk 
management framework when approving the firm's strategy and risk 
tolerance. This practice helps ensure that strategic plans are 
commensurate with the firm's ability to identify and manage its 
risk. For example, if a strategy calls for expansion into a new line 
of business or a new jurisdiction, the board should consider the 
increased level of risk or expanded control requirements for 
consistency with the risk management framework. The same evaluation 
could also be conducted on a regular basis to assess growth 
strategies within current businesses and products.
    An effective board assesses whether the firm's significant 
policies, programs, and plans are consistent with the firm's 
strategy, risk tolerance, and risk management capacity prior to 
approving them. Significant policies, programs, and plans include 
the firm's capital plan,\16\ recovery and resolution plans,\17\ 
audit plan,\18\ enterprise-wide risk management policies,\19\ 
liquidity risk management policies,\20\ compliance risk management 
program,\21\ and incentive compensation and performance management 
programs. The policies, programs, and plans should contain 
sufficient clarity and allocation of responsibilities so the board 
can evaluate whether senior management is executing the firm's 
strategic plan, as approved by the board.
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    \16\ 12 CFR 225.8(e)(iii); 12 CFR 252.47(a); SR letter 15-19, 
``Federal Reserve Supervisory Assessment of Capital Planning and 
Positions for Large and Noncomplex Firms;'' SR letter 15-18, 
``Federal Reserve Supervisory Assessment of Capital Planning and 
Positions for LISCC Firms and Large and Complex Firms;'' and Federal 
Reserve paper on Capital Planning at Large Bank Holding Companies: 
Supervisory Expectations and Range of Current Practice (Federal 
Reserve Board press release issued on August 19, 2013).
    \17\ 12 CFR part 243; SR letter 14-8, ``Consolidated Recovery 
Planning for Certain Large Domestic Bank Holding Companies;'' and SR 
letter 14-1, ``Heightened Supervisory Expectations for Recovery and 
Resolution Preparedness for Certain Large Bank Holding Companies--
Supplemental Guidance on Consolidated Supervision Framework for 
Large Financial Institutions (SR letter 12-17/CA letter 12-14).''
    \18\ SR letter 13-1/CA letter 13-1, ``Supplemental Policy 
Statement on the Internal Audit Function and Its Outsourcing,'' and 
SR letter 03-5, ``Amended Interagency Guidance on the Internal Audit 
Function and its Outsourcing.''
    \19\ 12 CFR 252.33.
    \20\ 12 CFR 252.34(a).
    \21\ SR letter 08-8/CA letter 08-11, ``Compliance Risk 
Management Programs and Oversight at Large Banking Organizations 
with Complex Compliance Profiles.''
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B. Actively Manage Information Flow and Board Discussions

    An effective board of directors actively manages its information 
flow and its deliberations, so that the board can make sound, well-
informed decisions in a manner that meaningfully takes into account 
risks and opportunities.
    For instance, an effective board directs senior management to 
provide information that is timely and accurate with the appropriate 
level of detail and context to enable the board to make sound, well-
informed decisions. An effective board also has practices and 
processes in place to evaluate information flows and engage senior 
management on improvements.
    Directors of an effective board may seek information about the 
firm and its activities, risk profile, talent, and incentives 
outside routine board and committee meetings, including through 
special sessions of the board, outreach to staff other than the 
Chief Executive Officer (CEO) and his or her direct reports, 
discussions with senior supervisors, and training on specialized 
topics.
    Directors of an effective board take an active role in setting 
board meeting agendas such that the content, organization, and time 
allocated to each topic allows the board to discuss strategic 
tradeoffs and to make sound, well-informed decisions. For example, 
the agenda is set such that the board has the opportunity to discuss 
a plan to strategically grow a new business simultaneously, or in 
connection, with a discussion of risk management capabilities of the 
new business and of internal audit's perspective on relevant 
controls.

C. Hold Senior Management Accountable

    An effective board of directors holds senior management 
accountable for implementing the firm's strategy and risk tolerance 
and maintaining the firm's risk management and control framework. An 
effective board of directors also evaluates the performance and 
compensation of senior management.
    To facilitate accountability, an effective board actively 
engages senior management. For instance, in board meetings, active 
engagement may be supported by structuring sufficient time to 
facilitate frank discussion and debate of information presented, 
encouraging diverse views, considering whether and how senior 
management's assessments and recommendations support the approved 
strategy and risk tolerance, challenging senior management's 
assessments and recommendations when warranted, and identifying 
potential gaps or weaknesses in senior management's assessments and 
recommendations.
    An effective board engages in robust and active inquiry into, 
among other things, drivers, indicators, and trends related to 
current and emerging risks; adherence to the board-approved strategy 
and risk tolerance for relevant lines of business; material or 
persistent deficiencies in risk management and control practices; 
and the development and implementation of performance management and 
compensation programs that encourage prudent risk-taking behaviors 
and business practices, which emphasize the importance of compliance 
with laws and regulations, including consumer protection.\22\
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    \22\ Hereinafter, when reference is made to ``compliance with 
laws and regulations'' in this guidance, this includes laws and 
regulations related to banking and consumer protection.
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    An effective board has independent directors who are 
sufficiently empowered to serve as a check on senior management. For 
example, such empowerment may derive from the election of a lead 
independent director with the authority to set agendas of board 
meetings or to call board meetings with or without the CEO and board 
chairman present.
    An effective board establishes and approves clear financial and 
nonfinancial performance objectives for the CEO, CRO, and Chief 
Audit Executive (CAE), and, as appropriate, for other members of 
senior management. These performance objectives are aligned with the 
firm's strategy and risk tolerance. In addition, each member of 
senior management's total compensation should be informed by the 
board's evaluation of the individual's performance against the 
performance objectives. Performance objectives enable the board to 
hold senior management accountable.
    An effective board approves and periodically reassesses 
succession plans for the CEO, and as needed, the CRO and CAE.\23\ 
Succession plans for other members of senior management, such as the 
chief financial officer (CFO), may be warranted.
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    \23\ This may extend beyond requirements to which firms may be 
subject under other statutory and regulatory authorities. For 
example, the NYSE requires formalized succession planning for the 
CEO only. See NYSE Listed Company Manual, section 303A.09.
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D. Support the Independence and Stature of Independent Risk 
Management and Internal Audit

    An effective board of directors, through its risk and audit 
committees, supports the stature and independence of the firm's 
independent risk management and internal audit functions. Active 
engagement by directors on the board's risk committee \24\ and audit 
committee \25\ entails a director's inquiry

[[Page 37226]]

into, among other things, material or persistent breaches of risk 
appetite and risk limits, timely remediation of material or 
persistent internal audit and supervisory findings, and the 
appropriateness of the annual audit plan.
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    \24\ The risk committee is responsible for the firm's global 
risk management policies and oversight of the firm's global risk 
management framework. Bank holding companies with $50 billion or 
more in total consolidated assets must maintain a risk committee 
pursuant to the enhanced prudential standards in the Board's 
Regulation YY. 12 CFR 252.33(a). Nonbank financial companies 
supervised by the Federal Reserve are required to establish a risk 
committee pursuant to section 165 of the Dodd-Frank Act. 12 U.S.C. 
5365(h)(1). SLHCs subject to this guidance should maintain a risk 
committee which meets the supervisory expectations discussed herein 
in order to enhance its safety and soundness.
    \25\ See SR letter 13-1/CA letter 13-1. Firms that are publicly-
traded are subject to the audit committee requirements contained in 
the U.S. Securities and Exchange Commission's Rule 10A-3 (``Rule 
10A-3'') under the Exchange Act of 1934, in addition to any 
requirements imposed by the applicable stock exchange on which the 
firm is listed. See, for example, NYSE Listed Company Manual, 
sections 303A.06 and 303A.07, and NASDAQ Stock Market Rules, section 
5605(c).
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    An effective risk committee supports the stature and 
independence of the independent risk management function, including 
compliance, by communicating directly with the CRO on material risk 
management issues; reviewing independent risk management's budget, 
staffing, and systems; providing independent risk management with 
direct and unrestricted access to the risk committee; and directing 
the appropriate inclusion of representatives of the independent risk 
management function on senior management-level committees; and can 
effect changes that align with the firm's strategy and risk 
tolerance after reviewing the risk management framework relative to 
the firm's structure, risk profile, complexity, activities, and 
size.\26\
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    \26\ See, for example, 12 CFR 252.33(a)(3).
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    An effective audit committee supports the stature and 
independence of internal audit by meeting directly with the CAE 
regarding the internal audit function, organizational concerns, and 
industry concerns; supporting internal audit's budget, staffing, and 
system relative to the firm's asset size and complexity and the pace 
of technological and other changes; and reviewing the status of 
actions recommended by internal audit and external auditors to 
remediate and resolve material or persistent deficiencies identified 
by internal audit and findings identified by supervisors.
    An effective board can identify specific instances or decisions 
where the independence and stature--or lack thereof--of the 
independent risk management and internal audit have materially 
impacted business deliberations, decisions, practices, and/or the 
firm's strategy.

E. Maintain a Capable Board Composition and Governance Structure

    An effective board has a composition, governance structure, and 
established practices that support governing the firm in light of 
its asset size, complexity, scope of operations, risk profile, and 
other changes that occur over time.
    An effective board is composed of directors with a diversity of 
skills, knowledge, experience, and perspectives. To support a 
diverse composition, an effective board establishes a process for 
identifying and selecting director nominees which would consider, 
for example, a potential nominee's expertise, availability, 
integrity, and potential conflicts of interest.
    An effective board has a governance structure, for example, 
committees and management-to-committee reporting lines, which is 
capable of overseeing and addressing issues arising from the firm's 
asset size, scope of operations, activities, risk profile, and 
resolvability. An effective board also has the capacity to engage 
third-party advisors and consultants, when appropriate, in order to 
supplement the board's knowledge, expertise, and experience, and to 
support the board in making sound, well-informed decisions.
    An effective board assesses its strengths and weaknesses, 
including the performance of the board committees, particularly the 
risk, audit, and other key committees. An effective board adapts its 
structure and practices to address identified weaknesses or 
deficiencies, and as the firm's asset size, scope of operations, 
risk profile, and other characteristics change over time.

Text for the Proposed Guidance on the Communication of Supervisory 
Findings

    In response to questions from supervised institutions, the 
Federal Reserve is issuing this revised guidance \27\ to clarify 
supervisory communications to institutions concerning examination 
and inspection findings requiring corrective actions.\28\ This 
guidance explains the process that Federal Reserve examiners and 
supervisory staff will follow in communicating supervisory findings 
to an institution's board of directors and senior management. This 
revised guidance, like the existing guidance, would apply to all 
Federal Reserve-supervised institutions.\29\ In general, Federal 
Reserve examiners and supervisory staff will direct most supervisory 
findings to senior management for corrective action.
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    \27\ With the issuance of this SR/CA letter, SR letter 13-13/CA 
letter 13-10, ``Supervisory Considerations for the Communication of 
Supervisory Findings,'' is superseded.
    \28\ Nothing in this letter is intended to limit in any way the 
legal and regulatory responsibilities of an institution's board of 
directors to oversee the institution.
    \29\ Federal Reserve-supervised institutions includes bank 
holding companies, savings and loan holding companies, state member 
banks, U.S. branches and agencies of foreign banking organizations, 
and systemically important nonbank financial companies designated by 
FSOC for supervision by the Federal Reserve.
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    These supervisory findings are referred to as Matters Requiring 
Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs) 
that are included in examination and inspection reports, targeted 
and horizontal reviews, or any other supervisory communication that 
Federal Reserve examiners and supervisory staff send to a supervised 
institution. The key distinction between MRIAs and MRAs is the 
nature and severity of supervisory findings requiring corrective 
action, as well as the immediacy with which a supervised institution 
must take corrective actions or mitigate the risk with compensating 
controls.

Matters Requiring Immediate Attention

    MRIAs arising from an examination, inspection, or any other 
supervisory activity are matters of significant importance and 
urgency that the Federal Reserve requires a supervised institution 
to address immediately and include: (1) Matters that have the 
potential to pose significant risk to the safety and soundness of 
the institution; (2) matters that represent significant 
noncompliance with applicable laws or regulations; (3) repeat 
criticisms that have escalated in importance due to insufficient 
attention or inaction by the institution; and (4) matters that have 
the potential to cause significant consumer harm. An MRIA will 
remain an open issue until resolution by the institution and written 
confirmation from examiners to the institution that the corrective 
action resolves the matter.
    The expected timeframe for a supervised institution to take 
corrective action or mitigate the risk with compensating controls 
for MRIAs is generally shorter than for MRAs, and may be 
``immediate,'' in the case of heightened safety-and-soundness or 
consumer compliance risk. For MRIAs that are necessary to preserve 
or restore the viability of an institution, the timeframe will take 
into account any potential for losses to the Federal Deposit 
Insurance Corporation's Deposit Insurance Fund, including the 
possibility that a delay in action will increase the potential for 
loss or the cost of resolution.

Matters Requiring Attention (MRAs)

    MRAs constitute matters that are important and that the Federal 
Reserve is expecting a supervised institution to address over a 
reasonable period of time, but the timing need not be ``immediate.'' 
While issues giving rise to MRAs must be addressed to ensure the 
institution operates in a safe-and-sound and compliant manner, the 
threat to safety and soundness is less immediate than with issues 
giving rise to MRIAs. Likewise, consumer compliance concerns that 
require less immediate resolution are communicated as an MRA. An MRA 
typically will remain an open issue until resolution by the 
institution and written confirmation from examiners to the 
institution that the corrective action resolves the matter. If an 
institution does not adequately address an MRA in a timely manner, 
examiners may elevate an MRA to an MRIA. Similarly, a change in 
circumstances, environment, or strategy can also lead to an MRA 
becoming an MRIA.

Communications and Corrective Actions

    Federal Reserve examiners and supervisory staff communicate 
MRIAs and MRAs in writing, for instance through examination or 
inspection reports. Because senior management is responsible for the 
institution's day-to-day operations, Federal Reserve examiners and 
supervisory staff would typically direct senior management to take 
corrective action to address MRIAs and MRAs. Whereas, as the 
institution's board of directors is still responsible for 
establishing policies that direct senior management how to manage 
the MRIAs and MRAs and when to escalate them to the board, it 
follows that it will be the responsibility of senior management to 
keep the institution's board of directors apprised of its progress 
and efforts to remediate MRIAs and MRAs consistent with these 
escalation policies.
    Federal Reserve examiners and supervisory staff are expected to 
provide sufficient clarity in the MRIA or MRA for senior management 
to understand supervisory expectations for corrective action and the 
timeline for taking such action. Highly technical subcomponents of 
recommendations may be provided to management separately from the 
examination or inspection report (for example, listing of

[[Page 37227]]

specific cases in which a banking organization's transactions were 
completed outside of policy requirements or a listing of specific 
deficiencies in technical modelling practices or data management 
requirements), but this would be noted within the MRIA or MRA in the 
examination or inspection report. Communications to supervised 
institutions about MRIAs and MRAs would specify a timeframe within 
which the corrective action is expected to be completed. The 
timeframe, at least initially, may require estimation because the 
institution may first need to complete preliminary planning to 
establish the timeframe for initiating and completing the corrective 
action. The timeframes for MRAs are likely to become more precise 
over time as planning evolves and circumstances make the completion 
of the MRAs more urgent.

Matters Referred to the Board of Directors

    Where significant weaknesses in an institution's board 
governance structure and practices are identified, Federal Reserve 
examiners and supervisory staff would direct such matters to the 
institution's board for corrective action in the first instance.\30\ 
Such weaknesses could include instances where the board does not 
provide effective oversight of senior management or fails to hold 
senior management accountable for fulfilling its responsibilities.
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    \30\ For foreign banking organizations (FBOs) that do not have a 
U.S. domiciled board of directors, Federal Reserve examiners and 
supervisory staff would generally direct the supervisory finding to 
the senior U.S. manager responsible for the FBO's U.S. operations. 
However, examiners have the discretion to direct to the FBO's global 
board of directors those supervisory findings that concern 
weaknesses in the FBO's governance structure over its U.S. 
operations or to address excessive risks in its U.S. business 
strategies that have or may have negative ramifications to safety 
and soundness.
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    In addition, when senior management fails to take or ensure 
appropriate action is taken to correct material deficiencies or 
weaknesses, Federal Reserve examiners and supervisory staff would 
escalate such matters to an institution's board of directors or an 
executive-level committee of the board.\31\
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    \31\ Escalation of a matter to the board of directors or an 
executive-level committee of the board is not a precondition to the 
Federal Reserve System's initiation of an enforcement action against 
the institution or its directors for failure to address an MRIA or 
MRA.
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* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, August 3, 2017.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2017-16735 Filed 8-8-17; 8:45 am]
 BILLING CODE 6210-01-P