§ 1239.32 Audit committee. ( a ) *Establishment.* The audit committee of each Bank established as required by § 1239.5(b) shall be consistent with the requirements set forth in this section.
( b ) *Composition.* ( 1 ) The audit committee shall comprise five or more persons drawn from the Bank's board of directors, each of whom shall meet the criteria of independence set forth in paragraph (c) of this section.
( 2 ) The audit committee shall include, to the extent practicable, a balance of representatives of: ( i ) Community financial institutions and other members; and
( ii ) Independent directors and member directors of the Bank, both as defined in the Bank Act.
( 3 ) The terms of audit committee members shall be appropriately staggered so as to provide for continuity of service.
( 4 ) At least one member of the audit committee shall have extensive accounting or related financial management experience.
( c ) *Independence.* Any member of the Bank's board of directors shall be considered to be sufficiently independent to serve as a member of the audit committee if that director does not have a disqualifying relationship with the Bank or its management that would interfere with the exercise of that director's independent judgment. Such disqualifying relationships include, but are not limited to: ( 1 ) Being employed by the Bank in the current year or any of the past five years;
( 2 ) Accepting any compensation from the Bank other than compensation for service as a board director;
( 3 ) Serving or having served in any of the past five years as a consultant, advisor, promoter, underwriter, or legal counsel of or to the Bank; or
( 4 ) Being an immediate family member of an individual who is, or has been in any of the past five years, employed by the Bank as an executive officer.
( d ) *Charter.* ( 1 ) The audit committee of each Bank shall review and assess the adequacy of the Bank's audit committee charter on an annual basis, and shall recommend to the board of directors any amendments that it believes to be appropriate;
( 2 ) The board of directors of each Bank shall review and assess the adequacy of the audit committee charter on an annual basis, shall amend the audit committee charter whenever it deems it appropriate to do so, and shall reapprove the audit committee charter not less often than every three years; and
( 3 ) Each Bank's audit committee charter shall: ( i ) Provide that the audit committee has the responsibility to select, evaluate and, where appropriate, replace the internal auditor and that the internal auditor may be removed only with the approval of the audit committee;
( ii ) Provide that the internal auditor shall report directly to the audit committee on substantive matters and that the internal auditor is ultimately accountable to the audit committee and board of directors;
( iii ) Provide that the audit committee shall be directly responsible for the appointment, compensation, retention, and oversight of the work of the external auditor;
( iv ) Provide that the external auditor shall report directly to the audit committee;
( v ) Provide that both the internal auditor and the external auditor shall have unrestricted access to the audit committee without the need for any prior management knowledge or approval; and
( vi ) Provide that the Bank shall make available appropriate funding, as determined by the audit committee, for payment of compensation to the external auditor, to any independent advisors or counsel engaged by the audit committee, and ordinary administrative expenses that are necessary or appropriate for the audit committee to carry out its duties.
( e ) *Duties.* Each Bank's audit committee shall have the duty to: ( 1 ) Direct senior management to maintain the reliability and integrity of the accounting policies and financial reporting and disclosure practices of the Bank;
( 2 ) Review the basis for the Bank's financial statements and the external auditor's opinion rendered with respect to such financial statements (including the nature and extent of any significant changes in accounting principles or the application thereof) and ensure that policies are in place that are reasonably designed to achieve disclosure and transparency regarding the Bank's true financial performance and governance practices;
( 3 ) Oversee the internal audit function by: ( i ) Reviewing the scope of audit services required, significant accounting policies, significant risks and exposures, audit activities, and audit findings;
( ii ) Assessing the performance and determining the compensation of the internal auditor; and
( iii ) Reviewing and approving the internal auditor's work plan.
( 4 ) Oversee the external audit function by: ( i ) Approving the external auditor's annual engagement letter; and
( ii ) Reviewing the performance of the external auditor.
( 5 ) Provide an independent, direct channel of communication between the Bank's board of directors and the internal and external auditors;
( 6 ) Conduct or authorize investigations into any matters within the audit committee's scope of responsibilities;
( 7 ) Ensure that senior management has established and is maintaining an adequate internal control system within the Bank by: ( i ) Reviewing the Bank's internal control system and the resolution of identified material weaknesses and significant deficiencies in the internal control system, including the prevention or detection of management override or compromise of the internal control system; and
( ii ) Reviewing the programs and policies of the Bank designed to ensure compliance with applicable laws, regulations and policies, and monitoring the results of these compliance efforts;
( 8 ) Review the policies established by senior management to assess and monitor implementation of the Bank's strategic business plan and the operating goals and objectives contained therein;
( 9 ) Report periodically its findings to the Bank's board of directors; and
( 10 ) Establish procedures for the receipt, retention, and treatment of complaints received by the Bank regarding accounting, internal accounting controls, or auditing matters, and for the confidential, anonymous submission by employees of the Bank of concerns regarding questionable accounting or auditing matters.
( f ) *Meetings.* The audit committee shall prepare written minutes of each audit committee meeting.
[80 FR 72336, Nov. 19, 2015, as amended at 81 FR 76295, Nov. 2, 2016]