The Federal Reserve Board has requested public comment on a corporate governance proposal to enhance the effectiveness of boards of directors by refocusing the Fed's supervisory expectations for the largest firms' boards of directors on their core responsibilities, to promote the safety and soundness of the firms. The proposed board effectiveness guidance would be used in connection with the supervisory assessment of board effectiveness under the proposed Large Financial Institution rating system, which the Federal Reserve issued for public comment concurrently.
For the largest domestic bank and savings and loan holding companies and systemically important nonbank financial companies, the proposal would establish principles for effective boards of directors. The proposal would also better distinguish between the roles and responsibilities of an institution’s board of directors and those of senior management. The comment period expires on October 10, 2017.
The corporate governance proposal is made up of three parts. First, it identifies the attributes of effective boards of directors, such as setting a clear and consistent strategic direction for the firm as a whole, supporting independent risk management, and holding the management of the firm accountable. For the largest institutions, Fed supervisors would use these attributes to inform their evaluation of a firm's governance and controls. Second, it clarifies that supervised firms must submit their findings to the firm's senior management for corrective action, rather than to its board of directors. And third, the proposal identifies existing supervisory expectations for boards of directors that could be eliminated or revised.
Rating system. The Fed is also requesting public comment on a proposal to better align the Fed's rating system for large financial institutions with the post-crisis supervisory program for these firms.
The current supervisory program for the largest firms sets higher standards to lower the probability of a firm’s failure or material distress, and also reduce risks to financial stability. The proposed changes would incorporate the regulatory and supervisory changes made by the Fed since 2012, which focus on capital, liquidity, and the effectiveness of governance and controls, including firms’ compliance with laws and regulations. Supervisors would assess and assign confidential ratings in each of these categories.
The proposed rating system would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate
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