Federal Reserve Proposes to Refocus Expectations for Banking Organization Directors on Core Responsibilities: Proposal Recognizes the Distinct Role of the Board as Compared to Management and the Adverse Impact of Unduly Extensive Requirements on the Board’s Attention and Effectiveness

Sullivan & Cromwell LLP - August 7, 2017

On August 3, the Board of Governors of the Federal Reserve System (the FRB) proposed supervisory expectations for banking organization boards of directors that are intended, among other things, to better distinguish the roles and responsibilities of the board from those of management. The proposal would:

  •  Establish five attributes of an effective board (applicable to large bank and savings and loan holding companies and systemically important nonbank financial companies, but not intermediate holding companies of foreign banking organizations):
    • setting clear, aligned and consistent direction regarding the firm’s strategy and risk tolerance;
    • actively managing information flow and board discussions;
    • holding senior management accountable;
    • supporting the independence and stature of independent risk management and internal audit; and
    • maintaining a capable board composition and governance structure.
  • Include a review of existing supervisory guidance for all holding company boards to identify and revise or eliminate board expectations that go beyond the core board responsibilities.
  • Provide that supervisory findings (MRAs and MRIAs) should generally be directed to senior management for corrective action, and should be directed to the board only if they relate to the board’s governance responsibilities or where senior management has failed to take remedial action.
Comments on the proposal are due 60 days after publication in the Federal Register.

The FRB concurrently issued a related proposal to establish a new rating system for the supervision of large financial institutions, which is discussed in a separate memorandum.