82_FR_37371 82 FR 37219 - Proposed Guidance on Supervisory Expectation for Boards of Directors

82 FR 37219 - Proposed Guidance on Supervisory Expectation for Boards of Directors

FEDERAL RESERVE SYSTEM

Federal Register Volume 82, Issue 152 (August 9, 2017)

Page Range37219-37227
FR Document2017-16735

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.

Federal Register, Volume 82 Issue 152 (Wednesday, August 9, 2017)
[Federal Register Volume 82, Number 152 (Wednesday, August 9, 2017)]
[Notices]
[Pages 37219-37227]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-16735]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1570]


Proposed Guidance on Supervisory Expectation for Boards of 
Directors

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

ACTION: Notice.

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

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

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

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

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

[[Page 37220]]

expectations for senior management, and identifies five key attributes 
of effective boards of directors that the Board would use when 
assessing a firm's board of directors.
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    \1\ The proposed BE guidance would not apply to U.S. 
intermediate holding companies (IHCs) of foreign banking 
organizations (FBOs) established pursuant to Regulation YY. The 
Board anticipates proposing guidance on board effectiveness for IHCs 
at a later date.
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    The proposed BE guidance would be used in connection with the 
supervisory assessment of board effectiveness under the proposed Large 
Financial Institution (LFI) rating system, which the Federal Reserve is 
issuing for public comment concurrently with this proposal. The 
proposed LFI rating system would apply to all bank holding companies 
with total consolidated assets of $50 billion or more; all non-
insurance, non-commercial savings and loan holding companies with total 
consolidated assets of $50 billion or more; and U.S. intermediate 
holding companies of foreign banking organizations established pursuant 
to the Federal Reserve's Regulation YY. The proposed LFI rating system 
consists of three components, each of which would be assigned a rating: 
Governance and Controls, Capital Planning and Positions, and Liquidity 
Risk Management and Positions. The Governance and Controls component 
rating would evaluate the effectiveness of a firm's (i) board of 
directors, (ii) management of core business lines and independent risk 
management and controls,\2\ and (iii) recovery planning (only for 
domestic bank holding companies subject to the Federal Reserve's Large 
Institution Supervision Coordinating Committee (LISCC) supervisory 
framework).\3\
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    \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 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.
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    \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.
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    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.
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    \5\ Independent risk management includes compliance.
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    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\
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    \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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[[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
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                                                               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?
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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.
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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 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.
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    \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.
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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?

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.
---------------------------------------------------------------------------

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

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

Attributes of Effective Boards of Directors

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

A. Set Clear, Aligned, and Consistent Direction

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

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \26\ See, for example, 12 CFR 252.33(a)(3).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

* * * * *

    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 Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices                                                   37219

                                                Trust DTD 10/11/98, Charles A. Hapke                      • Email: regs.comments@                             directors and senior management have
                                                and Wendy C. Stewart, Trustees, all of                  federalreserve.gov. Include the docket                become increasingly difficult to
                                                Sunset Hills, Missouri, as members of a                 number in the subject line of the                     distinguish. Greater clarity regarding
                                                family control group, to retain voting                  message.                                              these supervisory expectations could
                                                shares of BancStar, Inc., St. Louis,                      • Fax: (202) 452–3819 or (202) 452–                 improve corporate governance overall,
                                                Missouri, and thereby retain shares of                  3102.                                                 increase efficiency, support greater
                                                Bank Star, Pacific, Missouri.                             • Mail: Address to Ann E. Misback,                  accountability, and promote compliance
                                                  Board of Governors of the Federal Reserve
                                                                                                        Secretary, Board of Governors of the                  with laws and regulations. The results
                                                System, August 3, 2017.                                 Federal Reserve System, 20th Street and               of the review also suggest that boards
                                                Yao-Chin Chao,                                          Constitution Avenue NW., Washington,                  often devote a significant amount of
                                                                                                        DC 20551.                                             time satisfying supervisory expectations
                                                Assistant Secretary of the Board.
                                                                                                          All public comments will be made                    that do not directly relate to the board’s
                                                [FR Doc. 2017–16712 Filed 8–8–17; 8:45 am]
                                                                                                        available on the Board’s Web site at                  core responsibilities, which include
                                                BILLING CODE 6210–01–P                                  http://www.federalreserve.gov/                        guiding the development of the firm’s
                                                                                                        generalinfo/foia/ProposedRegs.cfm as                  strategy and the types and levels of risk
                                                                                                        submitted, unless modified for technical              it is willing to take (also referred to as
                                                FEDERAL RESERVE SYSTEM
                                                                                                        reasons. Accordingly, comments will                   risk tolerance), overseeing senior
                                                [Docket No. OP–1570]                                    not be edited to remove any identifying               management and holding them
                                                                                                        or contact information. Public                        accountable for effective risk
                                                Proposed Guidance on Supervisory                        comments may also be viewed                           management and compliance among
                                                Expectation for Boards of Directors                     electronically or in paper in Room 3515,              other responsibilities, supporting the
                                                AGENCY: Board of Governors of the                       1801 K Street NW. (between 18th and                   stature and independence of the firm’s
                                                Federal Reserve System (Board).                         19th Street NW.), Washington, DC                      independent risk management and
                                                ACTION: Notice.
                                                                                                        20006 between 9:00 a.m. and 5:00 p.m.                 internal audit functions, and adopting
                                                                                                        on weekdays.                                          effective governance practices. Boards
                                                SUMMARY:   The Board invites comment                    FOR FURTHER INFORMATION CONTACT:                      completing such non-core tasks may do
                                                on a proposal addressing supervisory                    Michael Hsu, Associate Director, (202)                so at the expense of sufficiently focusing
                                                expectations for the boards of directors                912–4330, Michael Solomon, Associate                  on their core responsibilities, which
                                                of bank holding companies, savings and                  Director, (202) 452–3502, Richard                     when exercised effectively promote the
                                                loan holding companies, state member                    Naylor, Associate Director, (202) 728–                safety and soundness of the firm.
                                                banks, U.S. branches and agencies of                    5854, Division of Supervision and                     Finally, the results of the review suggest
                                                foreign banking organizations, and                      Regulation; Ben McDonough, Assistant                  that boards of large financial institutions
                                                systemically important nonbank                          General Counsel, (202) 452–2036, Scott                face significant information flow
                                                financial companies designated by the                   Tkacz, Senior Counsel, (202) 452–2744,                challenges, especially in preparing for
                                                Financial Stability Oversight Council for               Keisha Patrick, Senior Counsel, (202)                 and participating in board meetings.
                                                supervision by the Federal Reserve. For                 452–3559, or Chris Callanan, Senior                   Absent actively managing its
                                                the largest domestic bank and savings                   Attorney, (202) 452–3594, Legal                       information flow, boards can be
                                                and loan holding companies and                          Division, Board of Governors of the                   overwhelmed by the quantity and
                                                systemically important nonbank                          Federal Reserve System, 20th and C                    complexity of information they receive.
                                                financial companies, the proposal                       Streets NW., Washington, DC 20551. For                Although boards have oversight
                                                would establish principles regarding                    the hearing impaired only,                            responsibilities over senior
                                                effective boards of directors focused on                Telecommunications Device for the Deaf                management, they are inherently
                                                the performance of a board’s core                       (TDD) users may contact (202) 263–                    disadvantaged given their dependence
                                                responsibilities. The proposal would                    4869.                                                 on senior management for the quality
                                                also better distinguish between the roles                                                                     and availability of information.
                                                                                                        SUPPLEMENTARY INFORMATION: The Board                     The Board invites comment on a
                                                and responsibilities of an institution’s                invites comment on a proposal
                                                board of directors and those of senior                                                                        proposal consisting of three parts that
                                                                                                        addressing supervisory expectations on                are each intended to refocus supervisory
                                                management. For domestic bank and                       boards of directors (boards or boards of
                                                savings and loan holding companies,                                                                           expectations for boards on a board’s
                                                                                                        directors). The proposal has been                     core responsibilities. The first part
                                                the proposal also would eliminate or                    informed by a multi-year review by the
                                                revise supervisory expectations                                                                               includes proposed supervisory guidance
                                                                                                        Federal Reserve of practices of boards of             addressing effective boards of directors
                                                contained in certain existing Federal                   directors, particularly at the largest
                                                Reserve Supervision and Regulation                                                                            (proposed BE guidance), which would
                                                                                                        banking organizations. The review                     apply to all bank and savings and loan
                                                letters, which would be aligned with                    assessed, among other things, the factors             holding companies with total
                                                existing or proposed guidance for                       that make boards effective, the                       consolidated assets of $50 billion or
                                                boards depending on the size of the                     challenges boards face, and how boards                more, and to systemically important
                                                firm.                                                   influence the safety and soundness of                 nonbank financial companies
                                                DATES: Comments must be received no                     their firms and promote compliance                    designated by the Financial Stability
                                                later than October 10, 2017.                            with laws and regulations. The Federal                Oversight Council for supervision by the
                                                ADDRESSES: Interested parties are                       Reserve also reviewed expectations                    Federal Reserve.1 The proposed BE
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                                                invited to submit written comments by                   contained in Board supervisory                        guidance would clarify supervisory
                                                following the instructions for submitting               guidance. This notice and the guidance                expectations for boards as distinct from
                                                comments at http://                                     proposed herein constitute the results of
                                                www.federalreserve.gov/generalinfo/                     the review.                                              1 The proposed BE guidance would not apply to

                                                foia/ProposedRegs.cfm.                                    Among other things, the results of the              U.S. intermediate holding companies (IHCs) of
                                                   • Federal eRulemaking Portal: http://                review and discussions with                           foreign banking organizations (FBOs) established
                                                                                                                                                              pursuant to Regulation YY. The Board anticipates
                                                www.regulations.gov. Follow the                         independent directors suggest that                    proposing guidance on board effectiveness for IHCs
                                                instructions for submitting comments.                   supervisory expectations for boards of                at a later date.



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                                                37220                      Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices

                                                expectations for senior management,                        The third part of the proposal                     for boards of directors fails to take into
                                                and identifies five key attributes of                   includes proposed supervisory guidance                account differences in firms’ activities,
                                                effective boards of directors that the                  that would replace Federal Reserve SR                 risk profiles, and complexity, and
                                                Board would use when assessing a                        letter 13–13/CA letter 13–10.4 The                    potentially prevents a board from
                                                firm’s board of directors.                              proposed guidance would facilitate the                achieving maximum effectiveness in
                                                   The proposed BE guidance would be                    execution of boards’ core                             meeting its core responsibilities.
                                                used in connection with the supervisory                 responsibilities by clarifying                           In assessing a board’s effectiveness,
                                                assessment of board effectiveness under                 expectations for communicating                        supervisors rely on various sources of
                                                the proposed Large Financial Institution                supervisory findings to an institution’s              information, including firm-provided
                                                (LFI) rating system, which the Federal                  board of directors and senior                         materials and examinations. As noted in
                                                Reserve is issuing for public comment                   management. The proposed guidance                     the proposed BE guidance, a board of
                                                concurrently with this proposal. The                    would indicate that the Federal Reserve               directors may also provide to
                                                proposed LFI rating system would apply                  expects to direct most Matters Requiring              supervisors a self-assessment of its
                                                to all bank holding companies with total                Immediate Attention (MRIAs) and                       effectiveness, for example, relative to
                                                consolidated assets of $50 billion or                   Matters Requiring Attention (MRAs) to                 the five attributes, which the Federal
                                                more; all non-insurance, non-                           senior management for corrective                      Reserve would take into consideration
                                                commercial savings and loan holding                     action. MRIAs and MRAs would only be                  in its evaluation. The proposed BE
                                                companies with total consolidated                       directed to the board for corrective                  guidance does not prescribe how such a
                                                assets of $50 billion or more; and U.S.                 action when the board needs to address                self-assessment should be conducted or
                                                intermediate holding companies of                       its corporate governance responsibilities             documented.
                                                foreign banking organizations                           or when senior management fails to take
                                                                                                        appropriate remedial action. The board                II. Rescinding or Revising Existing
                                                established pursuant to the Federal
                                                                                                        would remain responsible for holding                  Federal Reserve Expectations for
                                                Reserve’s Regulation YY. The proposed
                                                                                                        senior management accountable for                     Boards of Directors
                                                LFI rating system consists of three
                                                components, each of which would be                      remediating supervisory findings. This                   The Federal Reserve is conducting a
                                                assigned a rating: Governance and                       proposed guidance would apply to all                  comprehensive review of all existing
                                                Controls, Capital Planning and                          financial institutions supervised by the              supervisory expectations and regulatory
                                                Positions, and Liquidity Risk                           Federal Reserve.                                      requirements relating to boards of
                                                Management and Positions. The                              Although the proposal would not                    directors of bank and savings and loan
                                                Governance and Controls component                       address all existing supervisory                      holding companies of all sizes. The
                                                rating would evaluate the effectiveness                 expectations for boards of directors, the             purpose of the review is to identify
                                                of a firm’s (i) board of directors, (ii)                Board intends to continue reviewing                   supervisory expectations for boards of
                                                management of core business lines and                   existing supervisory expectations for                 directors which do not relate to their
                                                independent risk management and                         boards of directors.                                  core responsibilities or are not aligned
                                                controls,2 and (iii) recovery planning                  I. Proposed Board Effectiveness (BE)                  with the Federal Reserve’s supervisory
                                                (only for domestic bank holding                         Guidance                                              framework. The Federal Reserve
                                                companies subject to the Federal                                                                              believes that revising or eliminating
                                                                                                           The proposed BE guidance better
                                                Reserve’s Large Institution Supervision                                                                       unnecessary, redundant, or outdated
                                                                                                        distinguishes the supervisory
                                                Coordinating Committee (LISCC)                                                                                expectations, as appropriate, will allow
                                                                                                        expectations for boards from those of
                                                supervisory framework).3                                                                                      boards to focus more of their time and
                                                                                                        senior management, and describes
                                                   The second part of the proposal                                                                            resources on fulfilling their core
                                                                                                        effective boards as those which: (1) Set
                                                would refocus supervisory guidance                                                                            responsibilities.
                                                                                                        clear, aligned, and consistent direction
                                                found in existing Supervision and                                                                                The Federal Reserve is conducting
                                                                                                        regarding the firm’s strategy and risk
                                                Regulation (SR) letters for boards of                                                                         this review in two phases. The first
                                                                                                        tolerance, (2) actively manage
                                                directors of bank and savings and loan                                                                        phase is focused on reviewing
                                                                                                        information flow and board discussions,
                                                holding companies of all sizes. This                                                                          supervisory expectations of boards set
                                                                                                        (3) hold senior management
                                                proposal would revise certain                                                                                 forth in existing SR letters that
                                                                                                        accountable, (4) support the
                                                supervisory expectations for boards to                                                                        communicate Board guidance. The
                                                                                                        independence and stature of
                                                ensure they are aligned with the Federal                                                                      preliminary results of the first phase are
                                                                                                        independent risk management 5 and
                                                Reserve’s supervisory framework, and                                                                          discussed in more detail below. The
                                                                                                        internal audit, and (5) maintain a
                                                would eliminate redundant, outdated,                                                                          second phase of the review is focused
                                                                                                        capable board composition and
                                                or irrelevant supervisory expectations.                                                                       on requirements and supervisory
                                                                                                        governance structure.
                                                The Board also plans to review guidance                                                                       expectations set forth in Board
                                                                                                           These five attributes support safety
                                                that has been adopted on an interagency                                                                       regulations or in various forms of
                                                                                                        and soundness and would provide the
                                                basis and requirements established by                                                                         interagency guidance. Revising Board
                                                                                                        framework with which the Federal
                                                rule concerning boards of directors and                                                                       regulations generally will take more
                                                                                                        Reserve proposes to assess a firm’s
                                                would consider modifications in those                                                                         time to complete, and revisions to
                                                                                                        board of directors under the proposed
                                                areas at a later date.                                                                                        interagency guidance require
                                                                                                        LFI rating system. Assessing the
                                                                                                                                                              consultation and collaboration with
                                                                                                        effectiveness of a board of directors
                                                   2 The Federal Reserve also plans to separately                                                             other federal banking agencies. The
                                                                                                        using these attributes reflects the view
                                                release additional proposed guidance seeking                                                                  Board’s proposed changes to
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                                                comment on supervisory expectations relating to a       that applying standardized expectations
                                                                                                                                                              supervisory expectations for the second
                                                firm’s management of core business lines and
                                                independent risk management and controls. The              4 See SR letter 13–13/CA letter 13–10,             phase would be released for notice and
                                                release describing the proposed LFI rating system       ‘‘Supervisory Considerations for the                  comment at a later date.6
                                                includes a summary of that planned guidance.            Communication of Supervisory Findings,’’ at
                                                   3 See SR letter 14–8, ‘‘Consolidated Recovery        https://www.federalreserve.gov/supervisionreg/          6 The Federal Reserve would make conforming

                                                Planning for Certain Large Domestic Bank Holding        srletters/sr1313.htm.                                 changes to existing examination manuals,
                                                Companies,’’ at https://www.federalreserve.gov/            5 Independent risk management includes             examination procedures, and training materials as
                                                supervisionreg/srletters/sr1408.htm.                    compliance.                                           supervisory expectations evolve over time.



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                                                                              Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices                                                                        37221

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

                                                SR 16–17 ...............    Supervisory Expectations for Risk Management of Reserve-Based Energy Lending                                      Yes .................   N/A. 1
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                                                                              Risk.
                                                SR 14–8 .................   Consolidated Recovery Planning for Certain Large Domestic Bank Holding Companies                                  Yes .................   N/A. 2
                                                SR 13–19/CA 13–             Guidance on Managing Outsourcing Risk .........................................................................   Yes .................   Yes.
                                                 21.
                                                SR 13–13/CA 13–             Supervisory Considerations for the Communication of Supervisory Findings ...................                      Yes .................   Yes.
                                                 10.
                                                SR 12–17/CA 12–             Consolidated Supervision Framework for Large Institutions .............................................           Yes .................   N/A. 2
                                                 14.



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                                                37222                          Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices

                                                    TABLE A—SR LETTERS IN WHICH GUIDANCE ON THE ROLES AND RESPONSIBILITIES FOR BOARDS OF DIRECTORS OF
                                                                     HOLDING COMPANIES WOULD BE RESCINDED OR REVISED—Continued
                                                                                                                                                                                                                Would                   Would
                                                                                                                                                                                                            expectations            expectations
                                                                                                                                                                                                                  for                     for
                                                                                                                                                                                                              boards of               boards of
                                                                                                                                                                                                             directors of            directors of
                                                                                                                                                                                                               holding                 holding
                                                                                                                                                                                                             companies               companies
                                                        SR/CA                                                                                                                                                    with                    with
                                                                                                                                       Title
                                                      letter No.                                                                                                                                            $50 billion or         less than $50
                                                                                                                                                                                                               more in                billion in
                                                                                                                                                                                                                 total                   total
                                                                                                                                                                                                            consolidated            consolidated
                                                                                                                                                                                                                assets                  assets
                                                                                                                                                                                                                  be                      be
                                                                                                                                                                                                            rescinded or            rescinded or
                                                                                                                                                                                                              revised?                revised?

                                                SR 11–15 ...............    Disposal of Problem Assets through Exchanges ...............................................................                   Yes .................   Yes.
                                                SR 11–14 ...............    Supervisory Expectations for Risk Management of Agricultural Credit Risk .....................                                 Yes .................   Yes.
                                                SR 09–4 .................   Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock                                               N/A 3 ...............   Yes.
                                                                              Redemptions, and Stock Purchases at BHCs.
                                                SR 08–9/CA 08–12            Consolidated Supervision of Bank Holding Companies and the Combined U.S. Oper-                                                 N/A 3 ...............   Yes.
                                                                              ations of Foreign Banking Organization.
                                                SR 08–8/CA 08–11            Compliance Risk Management Programs and Oversight at Large Banking Organiza-                                                   Yes .................   N/A. 2
                                                                              tions with Complex Compliance Profiles.
                                                SR 01–13 ...............    Supervisory guidance relating to a change to permissible securities activities of state                                        Yes .................   Yes.
                                                                              member banks.
                                                SR 01–8 .................   Supervisory Guidance on Complex Wholesale Borrowings ..............................................                            Yes .................   Yes.
                                                SR 00–9 .................   Supervisory Guidance on Equity Investment and Merchant Banking Activities ................                                     Yes .................   Yes.
                                                SR 99–7 .................   Supervisory Guidance Regarding the Investment of Fiduciary Assets in Mutual Funds                                              Yes .................   Yes.
                                                                              and Potential Conflicts of Interest.
                                                SR 98–25 ...............    Sound Credit Risk Management and the Use of Internal Credit Risk Ratings at Large                                              Yes .................   Yes.
                                                                              Banking Organizations.
                                                SR 98–18 ...............    Lending Standards for Commercial Loans .........................................................................               Yes .................   Yes.
                                                SR 98–9 .................   Assessment of Information Technology in the Risk-Focused Frameworks for the Super-                                             Yes .................   Yes.
                                                                              vision of Community Banks and Large Complex Banking Organizations.
                                                SR 97–25 ...............    Risk-Focused Framework for the Supervision of Community Banks ................................                                 N/A 4 ...............   Yes.
                                                SR 97–24 ...............    Risk-Focused Framework for Supervision of Large Complex Institutions .........................                                 Yes .................   Yes.
                                                SR 97–21 ...............    Risk Management and Capital Adequacy of Exposures Arising from Secondary Market                                                Yes .................   Yes.
                                                                              Credit Activities.
                                                SR 97–3 .................   Conversion of Common Trust Funds to Mutual Funds ......................................................                        Yes .................   Yes.
                                                SR 96–10 ...............    Risk-Focused Fiduciary Examinations ...............................................................................            Yes .................   Yes.
                                                SR 95–51 ...............    Rating the Adequacy of Risk Management Processes and Internal Controls at State                                                Yes .................   N/A. 5
                                                                              Member Banks and Bank Holding Companies.
                                                SR 94–53 ...............    Investment Adviser Activities ..............................................................................................   Yes .................   Yes.
                                                SR 93–69 ...............    Examining Risk Management and Internal Controls for Trading Activities of Banking Or-                                          Yes .................   Yes.
                                                                              ganizations.
                                                SR 90–22 ...............    Policy Statement on the Use of ‘‘Points’’ in settling foreign exchange contracts ..............                                Yes .................   Yes.
                                                SR 90–16 ...............    Implementation of Examination Guidelines for the Review of Asset Securitization Activi-                                        Yes .................   Yes.
                                                                              ties.
                                                   1 Prior to the issuance of SR 16–17, expectations for boards at domestic bank holding companies and savings and loan holding companies (in-
                                                cluding 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 hold-
                                                ing 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,                          Findings.’’ SR 13–13 currently                                        boards of directors to believe they
                                                ‘‘Supervisory Considerations for the                             establishes an expectation that all                                   should become directly involved in
                                                Communication of Supervisory                                     supervisory findings, referred to as                                  addressing the MRIA or MRA.
                                                Findings’’                                                       Matters Requiring Immediate Attention                                   The proposed guidance, like the
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                                                                                                                 (MRIAs) and Matters Requiring                                         existing guidance, would apply to all
                                                  The Board is also proposing to clarify                         Attention (MRAs), would be presented                                  Federal Reserve-supervised
                                                expectations regarding the                                       to the board of directors so that the                                 institutions,7 and would clarify the
                                                communication of supervisory findings                            board may ensure that senior
                                                                                                                                                                                         7 ‘‘Federal Reserve-supervised institutions’’
                                                set forth in SR letter 13–13/CA letter                           management devotes appropriate                                        includes bank holding companies, savings and loan
                                                13–10, ‘‘Supervisory Considerations for                          attention to addressing these matters.                                holding companies, state member banks, U.S.
                                                the Communication of Supervisory                                 This approach has in many cases led                                   branches and agencies of foreign banking



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                                                                           Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices                                             37223

                                                process that Federal Reserve examiners                  III. Administrative Law Matters                          Report title: Board Effectiveness
                                                and supervisory staff should follow in                                                                        Guidance.
                                                                                                        A. Paperwork Reduction Act Analysis
                                                communicating supervisory findings to                                                                            Agency form number: FR 4204.
                                                an institution’s board of directors and                    In accordance with the Paperwork                      OMB control number: 7100–NEW.
                                                senior management. The proposed                         Reduction Act of 1995 (44 U.S.C. 3501–                   Frequency: Annual.
                                                guidance would indicate that Federal                    3521) (PRA), the Federal Reserve may                     Respondents: Domestic bank and
                                                Reserve examiners and supervisory staff                 not conduct or sponsor, and a                         savings and loan holding companies
                                                would direct most MRIAs and MRAs to                     respondent is not required to respond                 with total consolidated assets of $50
                                                senior management for corrective                        to, an information collection unless it               billion or more (excluding intermediate
                                                action. MRIAs or MRAs would only be                     displays a currently valid Office of                  holding companies of foreign banking
                                                directed to the board for corrective                    Management and Budget (OMB) control                   organizations established pursuant to
                                                action when the board needs to address                  number. The Federal Reserve reviewed                  the Federal Reserve’s Regulation YY),
                                                its corporate governance responsibilities               the proposed supervisory guidance                     and systemically important nonbank
                                                or when senior management fails to take                 under the authority delegated to the                  financial companies designated by the
                                                appropriate remedial action. Boards of                  Federal Reserve by OMB.                               Financial Stability Oversight Council for
                                                directors would remain responsible for                     The proposed supervisory guidance                  supervision by the Federal Reserve.
                                                holding senior management accountable                   contains a collection of information                     Legal authorization and
                                                for remediating supervisory findings.                   subject to the PRA. The reporting                     confidentiality: This information
                                                                                                        requirement is found in the proposed                  collection is voluntary, and allows the
                                                Request for Comments                                                                                          board of directors of an affected
                                                                                                        BE guidance. The proposed BE guidance
                                                   The Board invites comment on all                     provides that a board of directors may                financial institution to submit to Federal
                                                aspects of the proposal, including                      provide to supervisors a self-assessment              Reserve supervisors a self-assessment of
                                                responses to the following questions:                   of its effectiveness, which the Federal               its effectiveness, which supervisors
                                                   (1) The Federal Reserve is considering               Reserve would take into consideration                 would take into consideration in their
                                                applying the proposed BE guidance to                    in its evaluation of the effectiveness of             evaluation of the effectiveness of the
                                                U.S. intermediate holding companies of                  the board of directors. The Federal                   board of directors. The Board has
                                                foreign banking organizations. How                      Reserve is not prescribing how such a                 determined that the collection of
                                                should the proposed BE guidance and                     self-assessment should be conducted or                information is authorized by section 5(c)
                                                refocusing of existing supervisory                      documented. This information would                    of the Bank Holding Company Act (12
                                                guidance be adapted to apply to boards                  assist supervisors in evaluating board                U.S.C. 1844(c)); section 10(b) of the
                                                of the U.S. intermediate holding                        effectiveness.                                        Homeowners’ Loan Act (12 U.S.C.
                                                companies of foreign banking                               Comments are invited on:                           1467a(b)(4), section 113 of the Dodd-
                                                organizations and state member banks?                      a. Whether the collections of                      Frank Act (12 U.S.C. 5323). The
                                                   (2) What other attributes of effective               information are necessary for the proper              information contained in the self-
                                                boards should the Board assess?                         performance of the Federal Reserve’s                  assessment would be considered
                                                   (3) Should boards of firms subject to                functions, including whether the                      confidential pursuant to exemption 8 of
                                                the proposed BE guidance be required to                 information has practical utility;                    FOIA (5 U.S.C. 552(b)(8)), as it relates to
                                                perform a self-assessment of their                         b. The accuracy or the estimate of the             examination reports prepared by
                                                effectiveness and provide the results of                burden of the information collections,                supervisors.
                                                that self-assessment to the Board? If so,               including the validity of the                            Estimated number of respondents: 40.
                                                what requirements should apply to how                   methodology and assumptions used;                        Estimated average time per
                                                the board performs the self-assessment?                    c. Ways to enhance the quality,                    respondent: 1,000 hours for initial
                                                Should such self-assessments be used as                 utility, and clarity of the information to            implementation, 800 hours for
                                                the primary basis for supervisory                       be collected;                                         subsequent years. This has been
                                                evaluations of board effectiveness?                        d. Ways to minimize the burden of the              calculated based on an estimate of five
                                                                                                        information collections on respondents,               (5) individuals each working for four (4)
                                                   (4) Would any parts of this proposal
                                                                                                        including through the use of automated                weeks to prepare this information
                                                conflict with effective governance of
                                                                                                        collection techniques or other forms of               collection.
                                                insurance and commercial savings and
                                                                                                        information technology; and                              Estimated total annual burden hours:
                                                loan holding companies? If so, what
                                                                                                           e. Estimates of capital or startup costs           40,000 hours for initial implementation;
                                                adjustments to the proposal would be
                                                                                                        and costs of operation, maintenance,                  32,000 hours for subsequent years.
                                                warranted?
                                                   (5) Is the proposed guidance on the                  and purchase of services to provide                   Regulatory Flexibility Analysis
                                                communication of supervisory findings                   information.
                                                                                                           All comments will become a matter of               B. Regulatory Flexibility Act
                                                clear with respect to the division of
                                                responsibilities between the board and                  public record. Comments on aspects of                    The Federal Reserve is providing an
                                                senior management?                                      this notice that may affect reporting,                initial regulatory flexibility analysis
                                                   (6) What Federal Reserve supervisory                 recordkeeping, or disclosure                          with respect to this proposal. While the
                                                expectations for boards are not included                requirements and burden estimates                     proposal is not being adopted as a rule,
                                                in Table A, yet interfere with a board’s                should be sent to: Secretary, Board of                the Federal Reserve has considered the
                                                ability to focus on its core                            Governors of the Federal Reserve                      potential impact of the proposal on
                                                                                                        System, 20th and C Streets NW.,                       small banking organizations using
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                                                responsibilities and should be included
                                                in the proposal? Should such                            Washington, DC 20551. A copy of the                   considerations that would apply if the
                                                expectations be rescinded or revised? If                comments may also be submitted to the                 Regulatory Flexibility Act, 5 U.S.C. 601
                                                revised, how?                                           OMB desk officer by mail to U.S. Office               et seq. (RFA) were applicable. For the
                                                                                                        of Management and Budget, 725 17th                    reason discussed in the SUPPLEMENTARY
                                                organizations, and systemically important nonbank
                                                                                                        Street NW., #10235, Washington, DC                    INFORMATION section above, the proposal
                                                financial companies designated by FSOC for              20503 or by facsimile to (202) 395–5806,              is intended to refocus the Federal
                                                supervision by the Federal Reserve.                     Attention, Agency Desk Officer.                       Reserve’s supervisory expectations for


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                                                37224                       Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices

                                                boards of directors on their core                       organizations, and may result in a slight                 regulatory, or listing requirements to which
                                                responsibilities. The proposal should                   reduction in burden. As discussed                         firms may currently be subject in the United
                                                not increase, and in fact may slightly                  above, the projected reporting,                           States, and nothing herein is believed to
                                                                                                                                                                  conflict with such requirements.
                                                reduce, the amount of burden imposed                    recordkeeping, and other compliance                          In assessing board effectiveness,
                                                on small banking organizations.                         requirements of the proposal will not                     supervisors rely on various sources of
                                                   Under regulations issued by the Small                increase burden on small banking                          information, including firm-provided
                                                Business Administration, a small                        organizations. The Federal Reserve does                   materials and examinations. A board of
                                                banking organization includes a                         not believe that the proposal duplicates,                 directors also may provide to supervisors a
                                                depository institution, bank holding                    overlaps, or conflicts with any Federal                   self-assessment of its effectiveness, for
                                                company, or savings and loan holding                    rules. In light of the foregoing, the                     example, relative to the five attributes, which
                                                company with total assets of $550                                                                                 the Federal Reserve would take into
                                                                                                        Federal Reserve does not believe that
                                                million or less, as measured by the                                                                               consideration in its evaluation. The Federal
                                                                                                        the proposal, if adopted in final form,                   Reserve is not prescribing how such a self-
                                                institution’s average assets reported on                would have a significant economic                         assessment should be conducted or
                                                its four quarterly financial statements                 impact on a substantial number of small                   documented.
                                                for the preceding year (collectively,                   entities. Nonetheless, the Board seeks
                                                small banking organizations).8 It is                                                                              Attributes of Effective Boards of Directors
                                                                                                        comment on whether the proposal
                                                estimated that as of June 1, 2017, there                would impose undue burdens on, or                            A board is most effective when directors
                                                are 3,539 small banking organizations                                                                             focus on establishing a firm-wide corporate
                                                                                                        have unintended consequences for,                         strategy and setting the types and levels of
                                                that would be subject to this proposal.                 small entities, and whether there are
                                                   If adopted in final form, only certain                                                                         risk it is willing to take (also referred to as
                                                                                                        ways such potential burdens or                            risk tolerance), making certain that senior
                                                sections of the proposal would apply to                 consequences could be minimized in a                      management effectively carries out that
                                                small banking organizations, and the                    manner consistent with the purpose of                     strategy within the established risk
                                                Federal Reserve believes that the                       the proposal. A final regulatory                          tolerances, and holding management
                                                proposal would not impose any new                       flexibility analysis will be conducted                    accountable for its actions, including
                                                burden on small banking organizations.                  after consideration of comments                           effective risk management and compliance.
                                                The proposed BE guidance would not                                                                                This guidance focuses on five key attributes
                                                                                                        received during the public comment                        of an effective board rather than on process-
                                                apply to or impact small banking                        period.
                                                organizations as it is intended for the                                                                           oriented supervisory expectations that do not
                                                                                                        Text for the Proposed Supervisory Guidance                directly relate to the board’s core
                                                largest financial institutions and would
                                                                                                        on Board of Directors’ Effectiveness for                  responsibilities.
                                                only apply to domestic depository
                                                institution holding companies with total                Domestic Bank and Savings and Loan                        A. Set Clear, Aligned, and Consistent
                                                                                                        Holding Companies With Total Consolidated                 Direction
                                                consolidated assets of $50 billion or                   Assets of $50 Billion or More (Excluding
                                                more. The rescission and revision of                    Intermediate Holding Companies of Foreign                    An effective board of directors guides the
                                                existing SR letters would not increase,                 Banking Organizations Established Pursuant                development of and approves the firm’s
                                                and in fact may reduce, the amount of                   to the Federal Reserve’s Regulation YY), and              strategy and sets the types and levels of risk
                                                burden on small bank holding                            Systemically Important Nonbank Financial                  it is willing to take. The strategy and
                                                companies and savings and loan                          Companies Designated by the Financial                     tolerance of risk should be clear and aligned,
                                                                                                        Stability Oversight Council for Supervision               and should also include a long-term
                                                holding companies with $550 million or                                                                            perspective on risks and rewards that is
                                                less in total consolidated assets. This is              by the Federal Reserve
                                                                                                                                                                  consistent with the capacity of the firm’s risk
                                                because the proposed rescission and                        The Federal Reserve is issuing this letter to          management framework.
                                                revision would reduce the overall                       provide additional guidance on key attributes                A clear strategy includes sufficient detail to
                                                number of supervisory expectations to                   of effective boards of directors (also referred           enable senior management 12 to identify the
                                                which their boards are subject,                         to as a firm’s ‘‘board’’).9 An effective board            firm’s strategic objectives; to create an
                                                                                                        of directors is central to maintaining the                effective management structure,
                                                including reporting, recordkeeping, and                 safety and soundness and continued
                                                other compliance requirements                                                                                     implementation strategies, plans and budgets
                                                                                                        resiliency of a firm’s consolidated                       for each business line; 13 and to establish
                                                associated with these expectations.                     operations.10                                             effective audit, compliance and risk
                                                Finally, the proposed guidance                             In developing this guidance, the Federal               management and control functions. A clear
                                                concerning the communication of                         Reserve considered other statutory and                    strategy also allows senior management to
                                                supervisory findings, which would also                  regulatory authorities which impose                       discern which opportunities the firm should
                                                apply to financial institutions                         requirements and expectations concerning                  pursue or avoid and determine the resources
                                                supervised by the Federal Reserve                       the roles, responsibilities, and expectations             and controls necessary to implement the
                                                                                                        of a firm’s board of directors. For example,              strategy.
                                                including small banking organizations,
                                                                                                        the Federal Reserve reviewed applicable                      A clear risk tolerance includes sufficient
                                                would not increase the amount of                        Delaware law,11 rules promulgated by the
                                                burden on small banking organizations                                                                             detail to enable the firm’s Chief Risk Officer
                                                                                                        U.S. Securities and Exchange Commission                   (CRO) and its independent risk management
                                                because it clarifies the process for                    (‘‘SEC’’), and listing requirements                       function 14 to set firm-wide risk limits.15 Risk
                                                communicating supervisory findings to                   implemented by the New York Stock
                                                an institution’s board of directors and                 Exchange (‘‘NYSE’’) and the NASDAQ Stock                    12 The term ‘‘senior management’’ refers to the
                                                senior management.                                      Market (‘‘NASDAQ’’). This proposal does not               core group of individuals directly accountable to
                                                   There are no significant alternatives to             supersede or replace any applicable legal,                the board of directors for the sound and prudent
                                                the proposal that would have less                                                                                 day-to-day management of the firm.
                                                                                                           9 ‘‘Board’’ or ‘‘board of directors’’ also refers to     13 A ‘‘business line’’ is a defined unit or function
                                                economic impact on small banking
                                                                                                        committees of the board of directors, as appropriate.     of a financial institution, including associated
                                                organizations, and as noted above, the
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                                                                                                           10 As used here, ‘‘resiliency’’ is defined as          operations and support that provides related
                                                proposal would not increase the amount                  maintaining effective governance and controls,            products or services to meet the firm’s business
                                                of burden on small banking                              including effective capital and liquidity governance      needs and those of its customers.
                                                                                                        and planning processes and sufficient capital and           14 An ‘‘independent risk management function’’ is

                                                   8 See 13 CFR 121.201. Effective July 14, 2014, the   liquidity, to provide for the firm’s continuity, and      responsible for identifying, measuring, aggregating,
                                                Small Business Administration revised the size          promote compliance with laws and regulations,             and reporting risks in a comprehensive and
                                                standards for banking organizations to $550 million     including those related to consumer protection,           independent manner.
                                                in assets from $500 million in assets. 79 FR 33647      through a range of conditions.                              15 The term ‘‘risk limits’’ refers to thresholds that

                                                (June 12, 2014).                                           11 See Del. Code Ann. tit. 8 (2016).                   constrain risk-taking so that the level and type of



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                                                                             Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices                                                     37225

                                                limits should be set in aggregate by                      allocation of responsibilities so the board can      and implementation of performance
                                                concentration and risk type, as well as at                evaluate whether senior management is                management and compensation programs
                                                more granular levels as appropriate. A clear              executing the firm’s strategic plan, as              that encourage prudent risk-taking behaviors
                                                risk tolerance also allows senior management              approved by the board.                               and business practices, which emphasize the
                                                to establish risk management expectations                                                                      importance of compliance with laws and
                                                and monitor risk-taking for the level and                 B. Actively Manage Information Flow and              regulations, including consumer
                                                types of risks assumed by the firm.                       Board Discussions                                    protection.22
                                                   A firm’s strategy and risk tolerance are                  An effective board of directors actively             An effective board has independent
                                                aligned when they are consistent, developed,              manages its information flow and its                 directors who are sufficiently empowered to
                                                considered, and approved together. For                    deliberations, so that the board can make            serve as a check on senior management. For
                                                instance, the firm’s strategy should clearly              sound, well-informed decisions in a manner           example, such empowerment may derive
                                                articulate objectives consistent with the                 that meaningfully takes into account risks           from the election of a lead independent
                                                firm’s risk tolerance, and the risk tolerance             and opportunities.                                   director with the authority to set agendas of
                                                should clearly specify the aggregate level and               For instance, an effective board directs          board meetings or to call board meetings with
                                                types of risks the board is willing to assume             senior management to provide information             or without the CEO and board chairman
                                                to achieve the firm’s strategic objectives.               that is timely and accurate with the                 present.
                                                   An effective board considers the capacity              appropriate level of detail and context to              An effective board establishes and
                                                of the firm’s risk management framework                   enable the board to make sound, well-                approves clear financial and nonfinancial
                                                when approving the firm’s strategy and risk               informed decisions. An effective board also          performance objectives for the CEO, CRO,
                                                tolerance. This practice helps ensure that                has practices and processes in place to              and Chief Audit Executive (CAE), and, as
                                                strategic plans are commensurate with the                 evaluate information flows and engage senior         appropriate, for other members of senior
                                                firm’s ability to identify and manage its risk.           management on improvements.                          management. These performance objectives
                                                For example, if a strategy calls for expansion               Directors of an effective board may seek          are aligned with the firm’s strategy and risk
                                                into a new line of business or a new                      information about the firm and its activities,       tolerance. In addition, each member of senior
                                                jurisdiction, the board should consider the               risk profile, talent, and incentives outside         management’s total compensation should be
                                                increased level of risk or expanded control               routine board and committee meetings,                informed by the board’s evaluation of the
                                                requirements for consistency with the risk                including through special sessions of the            individual’s performance against the
                                                management framework. The same                            board, outreach to staff other than the Chief        performance objectives. Performance
                                                evaluation could also be conducted on a                   Executive Officer (CEO) and his or her direct        objectives enable the board to hold senior
                                                regular basis to assess growth strategies                 reports, discussions with senior supervisors,        management accountable.
                                                within current businesses and products.                   and training on specialized topics.                     An effective board approves and
                                                   An effective board assesses whether the                   Directors of an effective board take an           periodically reassesses succession plans for
                                                firm’s significant policies, programs, and                active role in setting board meeting agendas         the CEO, and as needed, the CRO and CAE.23
                                                plans are consistent with the firm’s strategy,            such that the content, organization, and time        Succession plans for other members of senior
                                                risk tolerance, and risk management capacity              allocated to each topic allows the board to          management, such as the chief financial
                                                prior to approving them. Significant policies,            discuss strategic tradeoffs and to make              officer (CFO), may be warranted.
                                                programs, and plans include the firm’s                    sound, well-informed decisions. For
                                                capital plan,16 recovery and resolution                                                                        D. Support the Independence and Stature of
                                                                                                          example, the agenda is set such that the
                                                plans,17 audit plan,18 enterprise-wide risk                                                                    Independent Risk Management and Internal
                                                                                                          board has the opportunity to discuss a plan
                                                management policies,19 liquidity risk                                                                          Audit
                                                                                                          to strategically grow a new business
                                                management policies,20 compliance risk                    simultaneously, or in connection, with a                An effective board of directors, through its
                                                management program,21 and incentive                       discussion of risk management capabilities of        risk and audit committees, supports the
                                                compensation and performance management                   the new business and of internal audit’s             stature and independence of the firm’s
                                                programs. The policies, programs, and plans               perspective on relevant controls.                    independent risk management and internal
                                                should contain sufficient clarity and                                                                          audit functions. Active engagement by
                                                                                                          C. Hold Senior Management Accountable                directors on the board’s risk committee 24 and
                                                risks assumed remains aligned with the firm-wide            An effective board of directors holds senior       audit committee 25 entails a director’s inquiry
                                                risk tolerance.                                           management accountable for implementing
                                                   16 12 CFR 225.8(e)(iii); 12 CFR 252.47(a); SR letter
                                                                                                          the firm’s strategy and risk tolerance and              22 Hereinafter, when reference is made to
                                                15–19, ‘‘Federal Reserve Supervisory Assessment of        maintaining the firm’s risk management and           ‘‘compliance with laws and regulations’’ in this
                                                Capital Planning and Positions for Large and                                                                   guidance, this includes laws and regulations related
                                                Noncomplex Firms;’’ SR letter 15–18, ‘‘Federal
                                                                                                          control framework. An effective board of
                                                                                                          directors also evaluates the performance and         to banking and consumer protection.
                                                Reserve Supervisory Assessment of Capital                                                                         23 This may extend beyond requirements to which
                                                Planning and Positions for LISCC Firms and Large          compensation of senior management.
                                                                                                                                                               firms may be subject under other statutory and
                                                and Complex Firms;’’ and Federal Reserve paper on           To facilitate accountability, an effective         regulatory authorities. For example, the NYSE
                                                Capital Planning at Large Bank Holding Companies:         board actively engages senior management.            requires formalized succession planning for the
                                                Supervisory Expectations and Range of Current             For instance, in board meetings, active              CEO only. See NYSE Listed Company Manual,
                                                Practice (Federal Reserve Board press release issued      engagement may be supported by structuring           section 303A.09.
                                                on August 19, 2013).                                      sufficient time to facilitate frank discussion          24 The risk committee is responsible for the firm’s
                                                   17 12 CFR part 243; SR letter 14–8, ‘‘Consolidated
                                                                                                          and debate of information presented,                 global risk management policies and oversight of
                                                Recovery Planning for Certain Large Domestic Bank                                                              the firm’s global risk management framework. Bank
                                                Holding Companies;’’ and SR letter 14–1,
                                                                                                          encouraging diverse views, considering
                                                                                                          whether and how senior management’s                  holding companies with $50 billion or more in total
                                                ‘‘Heightened Supervisory Expectations for Recovery                                                             consolidated assets must maintain a risk committee
                                                and Resolution Preparedness for Certain Large Bank        assessments and recommendations support
                                                                                                                                                               pursuant to the enhanced prudential standards in
                                                Holding Companies—Supplemental Guidance on                the approved strategy and risk tolerance,            the Board’s Regulation YY. 12 CFR 252.33(a).
                                                Consolidated Supervision Framework for Large              challenging senior management’s                      Nonbank financial companies supervised by the
                                                Financial Institutions (SR letter 12–17/CA letter 12–     assessments and recommendations when                 Federal Reserve are required to establish a risk
                                                14).’’                                                    warranted, and identifying potential gaps or         committee pursuant to section 165 of the Dodd-
                                                   18 SR letter 13–1/CA letter 13–1, ‘‘Supplemental
                                                                                                          weaknesses in senior management’s                    Frank Act. 12 U.S.C. 5365(h)(1). SLHCs subject to
                                                Policy Statement on the Internal Audit Function           assessments and recommendations.                     this guidance should maintain a risk committee
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                                                and Its Outsourcing,’’ and SR letter 03–5,                                                                     which meets the supervisory expectations
                                                ‘‘Amended Interagency Guidance on the Internal
                                                                                                            An effective board engages in robust and
                                                                                                          active inquiry into, among other things,             discussed herein in order to enhance its safety and
                                                Audit Function and its Outsourcing.’’                                                                          soundness.
                                                   19 12 CFR 252.33.                                      drivers, indicators, and trends related to              25 See SR letter 13–1/CA letter 13–1. Firms that
                                                   20 12 CFR 252.34(a).                                   current and emerging risks; adherence to the         are publicly-traded are subject to the audit
                                                   21 SR letter 08–8/CA letter 08–11, ‘‘Compliance        board-approved strategy and risk tolerance           committee requirements contained in the U.S.
                                                Risk Management Programs and Oversight at Large           for relevant lines of business; material or          Securities and Exchange Commission’s Rule 10A–
                                                Banking Organizations with Complex Compliance             persistent deficiencies in risk management           3 (‘‘Rule 10A–3’’) under the Exchange Act of 1934,
                                                Profiles.’’                                               and control practices; and the development                                                       Continued




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                                                37226                      Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices

                                                into, among other things, material or                   also has the capacity to engage third-party                escalated in importance due to insufficient
                                                persistent breaches of risk appetite and risk           advisors and consultants, when appropriate,                attention or inaction by the institution; and
                                                limits, timely remediation of material or               in order to supplement the board’s                         (4) matters that have the potential to cause
                                                persistent internal audit and supervisory               knowledge, expertise, and experience, and to               significant consumer harm. An MRIA will
                                                findings, and the appropriateness of the                support the board in making sound, well-                   remain an open issue until resolution by the
                                                annual audit plan.                                      informed decisions.                                        institution and written confirmation from
                                                   An effective risk committee supports the               An effective board assesses its strengths                examiners to the institution that the
                                                stature and independence of the independent             and weaknesses, including the performance                  corrective action resolves the matter.
                                                risk management function, including                     of the board committees, particularly the risk,               The expected timeframe for a supervised
                                                compliance, by communicating directly with              audit, and other key committees. An effective              institution to take corrective action or
                                                the CRO on material risk management issues;             board adapts its structure and practices to                mitigate the risk with compensating controls
                                                reviewing independent risk management’s                 address identified weaknesses or                           for MRIAs is generally shorter than for
                                                budget, staffing, and systems; providing                deficiencies, and as the firm’s asset size,                MRAs, and may be ‘‘immediate,’’ in the case
                                                independent risk management with direct                 scope of operations, risk profile, and other               of heightened safety-and-soundness or
                                                and unrestricted access to the risk committee;          characteristics change over time.                          consumer compliance risk. For MRIAs that
                                                and directing the appropriate inclusion of              Text for the Proposed Guidance on the                      are necessary to preserve or restore the
                                                representatives of the independent risk                 Communication of Supervisory Findings                      viability of an institution, the timeframe will
                                                management function on senior management-                                                                          take into account any potential for losses to
                                                level committees; and can effect changes that             In response to questions from supervised                 the Federal Deposit Insurance Corporation’s
                                                align with the firm’s strategy and risk                 institutions, the Federal Reserve is issuing               Deposit Insurance Fund, including the
                                                tolerance after reviewing the risk                      this revised guidance 27 to clarify supervisory            possibility that a delay in action will increase
                                                management framework relative to the firm’s             communications to institutions concerning                  the potential for loss or the cost of resolution.
                                                structure, risk profile, complexity, activities,        examination and inspection findings
                                                                                                        requiring corrective actions.28 This guidance              Matters Requiring Attention (MRAs)
                                                and size.26
                                                   An effective audit committee supports the            explains the process that Federal Reserve                     MRAs constitute matters that are important
                                                stature and independence of internal audit by           examiners and supervisory staff will follow                and that the Federal Reserve is expecting a
                                                meeting directly with the CAE regarding the             in communicating supervisory findings to an                supervised institution to address over a
                                                internal audit function, organizational                 institution’s board of directors and senior                reasonable period of time, but the timing
                                                concerns, and industry concerns; supporting             management. This revised guidance, like the                need not be ‘‘immediate.’’ While issues
                                                internal audit’s budget, staffing, and system           existing guidance, would apply to all Federal              giving rise to MRAs must be addressed to
                                                relative to the firm’s asset size and                   Reserve-supervised institutions.29 In general,             ensure the institution operates in a safe-and-
                                                complexity and the pace of technological and            Federal Reserve examiners and supervisory                  sound and compliant manner, the threat to
                                                other changes; and reviewing the status of              staff will direct most supervisory findings to             safety and soundness is less immediate than
                                                actions recommended by internal audit and               senior management for corrective action.                   with issues giving rise to MRIAs. Likewise,
                                                external auditors to remediate and resolve                These supervisory findings are referred to               consumer compliance concerns that require
                                                material or persistent deficiencies identified          as Matters Requiring Immediate Attention                   less immediate resolution are communicated
                                                by internal audit and findings identified by            (MRIAs) and Matters Requiring Attention                    as an MRA. An MRA typically will remain
                                                supervisors.                                            (MRAs) that are included in examination and                an open issue until resolution by the
                                                   An effective board can identify specific             inspection reports, targeted and horizontal                institution and written confirmation from
                                                instances or decisions where the                        reviews, or any other supervisory                          examiners to the institution that the
                                                independence and stature—or lack thereof—               communication that Federal Reserve                         corrective action resolves the matter. If an
                                                of the independent risk management and                  examiners and supervisory staff send to a                  institution does not adequately address an
                                                internal audit have materially impacted                 supervised institution. The key distinction                MRA in a timely manner, examiners may
                                                business deliberations, decisions, practices,           between MRIAs and MRAs is the nature and                   elevate an MRA to an MRIA. Similarly, a
                                                and/or the firm’s strategy.                             severity of supervisory findings requiring                 change in circumstances, environment, or
                                                                                                        corrective action, as well as the immediacy                strategy can also lead to an MRA becoming
                                                E. Maintain a Capable Board Composition                 with which a supervised institution must                   an MRIA.
                                                and Governance Structure                                take corrective actions or mitigate the risk               Communications and Corrective Actions
                                                   An effective board has a composition,                with compensating controls.
                                                                                                                                                                      Federal Reserve examiners and supervisory
                                                governance structure, and established                   Matters Requiring Immediate Attention                      staff communicate MRIAs and MRAs in
                                                practices that support governing the firm in
                                                                                                          MRIAs arising from an examination,                       writing, for instance through examination or
                                                light of its asset size, complexity, scope of
                                                                                                        inspection, or any other supervisory activity              inspection reports. Because senior
                                                operations, risk profile, and other changes
                                                                                                        are matters of significant importance and                  management is responsible for the
                                                that occur over time.
                                                                                                        urgency that the Federal Reserve requires a                institution’s day-to-day operations, Federal
                                                   An effective board is composed of directors
                                                                                                        supervised institution to address                          Reserve examiners and supervisory staff
                                                with a diversity of skills, knowledge,
                                                experience, and perspectives. To support a              immediately and include: (1) Matters that                  would typically direct senior management to
                                                diverse composition, an effective board                 have the potential to pose significant risk to             take corrective action to address MRIAs and
                                                establishes a process for identifying and               the safety and soundness of the institution;               MRAs. Whereas, as the institution’s board of
                                                selecting director nominees which would                 (2) matters that represent significant                     directors is still responsible for establishing
                                                consider, for example, a potential nominee’s            noncompliance with applicable laws or                      policies that direct senior management how
                                                expertise, availability, integrity, and potential       regulations; (3) repeat criticisms that have               to manage the MRIAs and MRAs and when
                                                conflicts of interest.                                                                                             to escalate them to the board, it follows that
                                                   An effective board has a governance                     27 With the issuance of this SR/CA letter, SR letter    it will be the responsibility of senior
                                                structure, for example, committees and                  13–13/CA letter 13–10, ‘‘Supervisory                       management to keep the institution’s board
                                                management-to-committee reporting lines,                Considerations for the Communication of                    of directors apprised of its progress and
                                                which is capable of overseeing and                      Supervisory Findings,’’ is superseded.                     efforts to remediate MRIAs and MRAs
                                                addressing issues arising from the firm’s asset
                                                                                                           28 Nothing in this letter is intended to limit in any   consistent with these escalation policies.
                                                                                                        way the legal and regulatory responsibilities of an           Federal Reserve examiners and supervisory
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                                                size, scope of operations, activities, risk
                                                                                                        institution’s board of directors to oversee the            staff are expected to provide sufficient clarity
                                                profile, and resolvability. An effective board          institution.                                               in the MRIA or MRA for senior management
                                                                                                           29 Federal Reserve-supervised institutions
                                                                                                                                                                   to understand supervisory expectations for
                                                in addition to any requirements imposed by the          includes bank holding companies, savings and loan
                                                applicable stock exchange on which the firm is                                                                     corrective action and the timeline for taking
                                                                                                        holding companies, state member banks, U.S.
                                                listed. See, for example, NYSE Listed Company           branches and agencies of foreign banking                   such action. Highly technical subcomponents
                                                Manual, sections 303A.06 and 303A.07, and               organizations, and systemically important nonbank          of recommendations may be provided to
                                                NASDAQ Stock Market Rules, section 5605(c).             financial companies designated by FSOC for                 management separately from the examination
                                                   26 See, for example, 12 CFR 252.33(a)(3).            supervision by the Federal Reserve.                        or inspection report (for example, listing of



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                                                                             Federal Register / Vol. 82, No. 152 / Wednesday, August 9, 2017 / Notices                                           37227

                                                specific cases in which a banking                        ACTION:   Notice, request for comment.                FOR FURTHER INFORMATION CONTACT:    A
                                                organization’s transactions were completed                                                                     copy of the PRA OMB submission,
                                                outside of policy requirements or a listing of           SUMMARY:   The Board of Governors of the              including the proposed reporting form
                                                specific deficiencies in technical modelling             Federal Reserve System (Board) invites                and instructions, supporting statement,
                                                practices or data management requirements),              comment on a proposal to implement
                                                but this would be noted within the MRIA or                                                                     and other documentation will be placed
                                                                                                         the voluntary Survey of Household                     into OMB’s public docket files, once
                                                MRA in the examination or inspection report.
                                                Communications to supervised institutions                Economics and Decisionmaking (FR                      approved. These documents will also be
                                                about MRIAs and MRAs would specify a                     3077; OMB No. 7100–NEW). On June                      made available on the Federal Reserve
                                                timeframe within which the corrective action             15, 1984, the Office of Management and                Board’s public Web site at: http://
                                                is expected to be completed. The timeframe,              Budget (OMB) delegated to the Board                   www.federalreserve.gov/apps/
                                                at least initially, may require estimation               authority under the Paperwork                         reportforms/review.aspx or may be
                                                because the institution may first need to                Reduction Act (PRA) to approve of and                 requested from the agency clearance
                                                complete preliminary planning to establish               assign OMB control numbers to
                                                the timeframe for initiating and completing                                                                    officer, whose name appears below.
                                                                                                         collection of information requests and                  Federal Reserve Board Clearance
                                                the corrective action. The timeframes for
                                                                                                         requirements conducted or sponsored                   Officer—Nuha Elmaghrabi—Office of
                                                MRAs are likely to become more precise over
                                                time as planning evolves and circumstances               by the Board. In exercising this                      the Chief Data Officer, Board of
                                                make the completion of the MRAs more                     delegated authority, the Board is                     Governors of the Federal Reserve
                                                urgent.                                                  directed to take every reasonable step to             System, Washington, DC 20551 (202)
                                                Matters Referred to the Board of Directors               solicit comment. In determining                       452–3829. Telecommunications Device
                                                                                                         whether to approve a collection of                    for the Deaf (TDD) users may contact
                                                   Where significant weaknesses in an
                                                                                                         information, the Board will consider all              (202) 263–4869, Board of Governors of
                                                institution’s board governance structure and
                                                practices are identified, Federal Reserve                comments received from the public and                 the Federal Reserve System,
                                                examiners and supervisory staff would direct             other agencies.                                       Washington, DC, 20551.
                                                such matters to the institution’s board for              DATES: Comments must be submitted on                  SUPPLEMENTARY INFORMATION:
                                                corrective action in the first instance.30 Such          or before October 10, 2017.
                                                weaknesses could include instances where                                                                       Request for Comment on Information
                                                                                                         ADDRESSES: You may submit comments,
                                                the board does not provide effective oversight                                                                 Collection Proposal
                                                of senior management or fails to hold senior             identified by FR 3077, by any of the
                                                                                                         following methods:                                      The Board invites public comment on
                                                management accountable for fulfilling its
                                                responsibilities.                                          • Agency Web site: http://                          the following information collection,
                                                   In addition, when senior management fails             www.federalreserve.gov. Follow the                    which is being reviewed under
                                                to take or ensure appropriate action is taken            instructions for submitting comments at               authority delegated by the OMB under
                                                to correct material deficiencies or                      http://www.federalreserve.gov/apps/                   the PRA. Comments are invited on the
                                                weaknesses, Federal Reserve examiners and                foia/proposedregs.aspx.                               following:
                                                supervisory staff would escalate such matters              • Federal eRulemaking Portal: http://                 a. Whether the proposed collection of
                                                to an institution’s board of directors or an                                                                   information is necessary for the proper
                                                executive-level committee of the board.31
                                                                                                         www.regulations.gov. Follow the
                                                                                                         instructions for submitting comments.                 performance of the Federal Reserve’s
                                                *      *      *       *      *                             • Email: regs.comments@                             functions; including whether the
                                                  By order of the Board of Governors of the              federalreserve.gov. Include OMB                       information has practical utility;
                                                Federal Reserve System, August 3, 2017.                                                                          b. The accuracy of the Federal
                                                                                                         number in the subject line of the
                                                Margaret McCloskey Shanks,                                                                                     Reserve’s estimate of the burden of the
                                                                                                         message.
                                                                                                                                                               proposed information collection,
                                                Deputy Secretary of the Board.                             • FAX: (202) 452–3819 or (202) 452–
                                                                                                                                                               including the validity of the
                                                [FR Doc. 2017–16735 Filed 8–8–17; 8:45 am]               3102.
                                                                                                                                                               methodology and assumptions used;
                                                BILLING CODE 6210–01–P                                     • Mail: Ann E. Misback, Secretary,
                                                                                                                                                                 c. Ways to enhance the quality,
                                                                                                         Board of Governors of the Federal
                                                                                                                                                               utility, and clarity of the information to
                                                                                                         Reserve System, 20th Street and
                                                                                                                                                               be collected;
                                                FEDERAL RESERVE SYSTEM                                   Constitution Avenue NW., Washington,                    d. Ways to minimize the burden of
                                                                                                         DC 20551.                                             information collection on respondents,
                                                Proposed Agency Information                                All public comments are available                   including through the use of automated
                                                Collection Activities; Comment                           from the Board’s Web site at http://                  collection techniques or other forms of
                                                Request                                                  www.federalreserve.gov/apps/foia/                     information technology; and
                                                AGENCY: Board of Governors of the                        proposedregs.aspx as submitted, unless                  e. Estimates of capital or startup costs
                                                Federal Reserve System.                                  modified for technical reasons.                       and costs of operation, maintenance,
                                                                                                         Accordingly, your comments will not be                and purchase of services to provide
                                                   30 For foreign banking organizations (FBOs) that      edited to remove any identifying or                   information.
                                                do not have a U.S. domiciled board of directors,         contact information. Public comments                    At the end of the comment period, the
                                                Federal Reserve examiners and supervisory staff          may also be viewed electronically or in               comments and recommendations
                                                would generally direct the supervisory finding to        paper form in Room 3515, 1801 K Street
                                                the senior U.S. manager responsible for the FBO’s                                                              received will be analyzed to determine
                                                U.S. operations. However, examiners have the             (between 18th and 19th Streets NW.,)                  the extent to which the Federal Reserve
                                                discretion to direct to the FBO’s global board of        Washington, DC 20006 between 9:00                     should modify the proposed revisions
                                                directors those supervisory findings that concern        a.m. and 5:00 p.m. on weekdays.                       prior to giving final approval.
                                                weaknesses in the FBO’s governance structure over          Additionally, commenters may send a
sradovich on DSK3GMQ082PROD with NOTICES




                                                its U.S. operations or to address excessive risks in                                                           Proposal To Approve Under OMB
                                                its U.S. business strategies that have or may have       copy of their comments to the OMB
                                                negative ramifications to safety and soundness.          Desk Officer—Shagufta Ahmed—Office                    Delegated Authority the
                                                   31 Escalation of a matter to the board of directors   of Information and Regulatory Affairs,                Implementation of the Following
                                                or an executive-level committee of the board is not      Office of Management and Budget, New                  Report
                                                a precondition to the Federal Reserve System’s
                                                initiation of an enforcement action against the
                                                                                                         Executive Office Building, Room 10235,                  Report title: Survey of Household
                                                institution or its directors for failure to address an   725 17th Street NW., Washington, DC                   Economics and Decisionmaking.
                                                MRIA or MRA.                                             20503 or by fax to (202) 395–6974.                      Agency form number: FR 3077.


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Document Created: 2017-08-09 02:17:56
Document Modified: 2017-08-09 02:17:56
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
ActionNotice.
DatesComments must be received no later than October 10, 2017.
ContactMichael 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.
FR Citation82 FR 37219 

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