United States: The Federal Reserve Proposes Guidance On Supervisory Expectations For Boards Of Directors


On August 3, 2017, the Board of Governors of the Federal Reserve System issued proposed guidance on supervisory expectations for the boards of directors of bank holding companies. Key goals of the proposed guidance include better distinguishing a board's roles and responsibilities from those of senior management and refocusing supervisory expectations for boards on a board's core responsibilities. The proposal is an outgrowth of the Federal Reserve's multi-year review of board practices at large banks, which revealed that boards spend a significant amount of time on satisfying supervisory expectations that are not directly related to the board's core responsibilities, which include, but are not limited to, guiding strategic development, overseeing risk management, and holding management accountable. The review also revealed that boards of large banks face "information flow challenges" that can impact board meeting participation and preparation due to the amount and complexity of the information that boards are asked to process.

The proposal would:

  • Include a review of existing Federal Reserve supervisory guidance for all bank holding companies to revise or eliminate expectations that go beyond a board's core responsibilities or that are redundant, outdated, or irrelevant;
  • Provide that most supervisory findings (i.e., MRAs or MRIAs) be directed to senior management for corrective action, as opposed to the board (for all banking organizations regulated by the Federal Reserve); and
  • Establish five principles for an effective board focused on the performance of a board's core responsibilities (for the largest financial institutions).

The Federal Reserve has requested comments on the proposal, with comments due no later than October 10, 2017. A copy of the proposal is available here:

Rescinding or Revising Existing Guidance

The Federal Reserve is currently conducting a comprehensive review of all existing supervisory expectations and regulatory requirements relating to the boards of directors of bank holding companies of all sizes. The goal of the review is to reduce or eliminate supervisory expectations for boards that do not relate to their core responsibilities, are not aligned with the Federal Reserve's supervisory framework, or are otherwise redundant, outdated, or irrelevant.

The review will occur in two phases. In the first phase, the Federal Reserve will focus on existing Supervision and Regulation ("SR") letters, from which it has currently identified 27 SR letters for potential elimination or revision. For larger banking organizations, supervisory expectations for boards would be revised to align with the five attributes for board effectiveness described below. For smaller banking organizations (i.e., domestic bank and savings and loan holding companies with consolidated assets of less than $50 billion), 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," which outlines the Federal Reserve's supervisory expectations for the board's risk management responsibilities, including approving business strategies and significant policies, understanding the risks facing institutions, providing guidance regarding the level of appropriate risk exposure, and overseeing senior management's implementation of board-approved business strategies and risk limits.

The second phase of the review is focused on Federal Reserve regulations and interagency guidance, which is expected to take more time to complete than the first phase. Proposed changes to supervisory expectations in this second phase would be released for notice and comment at a later date.

Communication of Supervisory Findings Guidance

The Federal Reserve's proposal also seeks to clarify expectations regarding the communication of supervisory findings in SR letter 13-13, which currently provides that all Matters Requiring Attention ("MRAs") and Matters Requiring Immediate Attention ("MRIAs") be presented to the board of directors, which has led many boards to believe that they are required to be more directly involved in remediation efforts. The proposed guidance, which would apply to all organizations supervised by the Federal Reserve, provides that MRAs and MRIAs generally would be directed to senior management to address remedial action. MRAs and MRIAs would only be directed to the board for remedial action when the board either needs to address it as part of its corporate governance responsibilities or when senior management has failed to take the appropriate remedial action. Nonetheless, the board would remain responsible for holding senior management accountable for remediating supervisory findings.

Proposed Board Effectiveness Guidance

The proposed board effectiveness guidance establishes five attributes of an effective board to support safety and soundness. These attributes would apply to large bank and savings and loan holding companies with total consolidated assets of $50 billion or more and systemically important non-bank financial companies. The five attributes are:

  1. Setting clear, aligned and consistent direction regarding the firm's strategy and risk tolerance;
  2. Actively managing information flow and board discussions;
  3. Holding senior management accountable;
  4. Supporting the independence and stature of independent risk management (including compliance) and internal audit; and
  5. Maintaining a capable board composition and governance structure.

Boards of directors would be permitted (but not required to) to provide to supervisors a self-assessment of its effectiveness with respect to the five attributes described above, which the Federal Reserve would then take into consideration in its evaluations.


If approved, the Federal Reserve's proposal should reduce the burden for boards of directors at financial institutions of all sizes, including community banks, as federal regulators appear to be moving away from a "one-size-fits-all" approach towards corporate governance. Additionally, the proposal should provide boards the opportunity to refocus on their core responsibilities. If the proposal is approved, the Federal Reserve expects that greater clarity around supervisory expectations will lead to improvement in corporate governance overall, increased efficiency, greater accountability, and increased compliance with laws and regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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