Proposed Guidance on Supervisory Expectation for Boards of Directors, 37219-37227 [2017-16735]
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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 https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
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SUMMARY:
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• 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
https://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
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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.
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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.
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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.
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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.
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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?
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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
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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).
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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).
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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
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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.’’
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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
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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,
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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).
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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.
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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
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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: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/apps/
foia/proposedregs.aspx.
• Federal eRulemaking Portal: https://
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 https://
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: https://
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]
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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 https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://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 https://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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
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\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).
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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\
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\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.
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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.
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\11\ See Del. Code Ann. tit. 8 (2016).
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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.
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\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.
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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.
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\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.
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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
