The Board of Governors of the Federal Reserve System requested public comment on a proposal intended to enhance the effectiveness of boards of directors, refocusing the regulator’s supervisory expectations of boards.
Expressing concern that boards of directors are devoting a significant amount of time to satisfying supervisory expectations that do not directly relate to the board’s core responsibilities and that boards are increasingly difficult to distinguish from senior management, the Federal Reserve published a three-part proposal.
First, the regulator identified the attributes of effective boards of directors. This guidance would apply to all bank and savings and loan holding companies with total consolidated assets of $50 billion or more, as well as to systemically important nonbank financial companies designed by the Financial Stability Oversight Council for supervision by the Federal Reserve.
The Fed delineated five key functions of effective boards of directors that would be used in assessments by the regulator: (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 outside risk management 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 [Large Financial Institution] rating system,” according to the proposed guidance.
Next, the proposal explained that the Federal Reserve would update existing supervisory expectations for boards of directors in Supervision and Regulation (SR) letters by removing language, tweaking content or eliminating the SR altogether where necessary. A preliminary review identified 27 SR letters for potential elimination or revision, the Fed said, which collectively include more than 170 supervisory expectations for holding company boards.
Finally, the Fed proposed to replace Federal Reserve SR letter 13-13/CA letter 13-10, indicating that it expects to direct most Matters Requiring Immediate Attention (MRIA) and Matters Requiring Attention (MRA) to senior management—and not the board of directors—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 Federal Reserve wrote. “This proposed guidance would apply to all financial institutions supervised by the Federal Reserve.”
The proposal asked for comment on questions including the scope of application (such as whether U.S. intermediate holding companies of foreign banking organizations should be included), whether boards should be required to perform a self-assessment of their effectiveness and provide the results to the Fed, and whether there are other attributes of effective boards the Fed should assess.
In a separate proposal, the Federal Reserve said it is considering changing the way it rates risk management at banks with $50 billion or more in total assets.
To read the proposed supervisory guidance, click here.
Why it matters
The proposal on governance for bank boards of directors—the result of a multiyear review conducted by the Federal Reserve—would allow boards to focus on their core responsibilities, the regulator said, reducing unnecessary burdens on boards and promoting the safety and soundness of the firms. Comments will be accepted for 60 days.