Fed proposes corporate governance rule designed to ‘enhance effectiveness’

Enhancing the effectiveness of boards of directors of firms under supervision is the aim of a proposal issued Thursday by the Federal Reserve Board.

Additionally, the Fed issued a second proposal that it said is intended to “better align the Board’s rating system for large financial institutions with the post-crisis supervisory program” for those firms.

According to the central bank, the first proposal (issued for a 60-day comment period) is intended to refocus the Fed’s supervisory expectations on the core responsibilities for the boards of directors of the largest firms, “which will promote the safety and soundness of the firms.”

Core responsibilities, the Fed noted, include oversight of the types and levels of risk a firm may take and aligning the firm’s business strategy with those risk decisions.

The proposal, the Fed also stated, would “reduce unnecessary burden for the boards of smaller institutions.”

The proposal, the Fed said, is made up of three parts:

  • Identification of the attributes of effective boards of directors, such as setting a clear and consistent strategic direction for the firm as a whole, supporting independent risk management, and holding the management of the firm accountable. For the largest institutions, Federal Reserve supervisors would use these attributes to inform their evaluation of a firm’s governance and controls, the Fed said.
  • Clarification that for all supervised firms, most supervisory findings should be communicated to the firm’s senior management for corrective action, rather than to its board of directors.
  • Identification of existing supervisory expectations for boards of directors that could be eliminated or revised.

Under the second proposal (also issued for a 60-day comment period), the Fed noted that proposed changes to the rating system will incorporate the regulatory and supervisory changes made by the Federal Reserve since 2012 (when the most recent supervisory program for the largest firms were introduced), which focus on capital, liquidity, and the effectiveness of governance and controls, including firms’ compliance with laws and regulations.

“The proposed rating system would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate holding companies of foreign banking organizations operating in the United States,” the Fed said.

Firms with less than $50 billion in total consolidated assets, including community banks, would continue to use the current rating system, which reflects long-standing supervisory practices for those firms, the Fed said.

Press release: Federal Reserve Board invites public comment on two proposals; corporate governance and rating system for large financial institutions

 

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