Federal Reserve Bank Governance: Opportunities Exist to Broaden Director Recruitment Efforts and Increase Transparency
Published: 2011-10-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Events surrounding the 2007 financial crisis raised questions about the governance of the 12 Federal Reserve Banks (Reserve Banks), particularly the boards of directors' roles in activities related to supervision and regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act required GAO to review the governance of the Reserve Banks. This report (1) analyzes the level of diversity on the boards of directors and assesses the extent to which the process of identifying possible directors and appointing them results in diversity on the boards, (2) evaluates the effectiveness of policies and practices for identifying and managing conflicts of interest for Reserve Bank directors, and (3) compares Reserve Bank governance practices with the practices of selected organizations.
section_title: What GAO Found
paragraphs: The Federal Reserve Act requires each Reserve Bank to be governed by a nine-member board--three Class A directors elected by member banks to represent their interests, three Class B directors elected by member banks to represent the public, and three Class C directors that are appointed by the Federal Reserve Board to represent the public. The diversity of Reserve Bank boards was limited from 2006 to 2010. For example, in 2006 minorities accounted for 13 of 108 director positions, and in 2010 they accounted for 15 of 108 director positions. Specifically, in 2010 Reserve Bank directors included 78 white men, 15 white women, 12 minority men, and 3 minority women. According to the Federal Reserve Act, Class B and C directors are to be elected with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumer representation. During this period, labor and consumer groups had less representation than other industries. In 2010, 56 of the 91 directors that responded to GAO's survey had financial markets experience. Reserve Banks generally review the current demographics of their boards and use a combination of personal networking and community outreach efforts to identify potential candidates for directors. Reserve Bank officials said that they generally limit their director search efforts to senior executives. GAO's analysis of Equal Employment Opportunity Commission data found that diversity among senior executives is generally limited. While some Reserve Banks recruit more broadly, GAO recommends that the Federal Reserve Board encourage all Reserve Banks to consider ways to help enhance the economic and demographic diversity of perspectives on the boards, including by broadening their potential candidate pool. The Federal Reserve System mitigates and manages the actual and potential conflicts of interest by, among other things, defining the directors' roles and responsibilities, monitoring adherence to conflict-of-interest policies, and establishing internal controls to identify and manage potential conflicts. Reserve Bank directors are often affiliated with a variety of financial firms, nonprofits, and private and public companies. As the financial services industry evolves, more companies are becoming involved in financial services or interconnected with financial institutions. As a result, directors of all three classes can have ties to the financial sector. While these relationships may not give rise to actual conflicts of interest, they can create the appearance of a conflict as illustrated by the participation of director-affiliated institutions in the Federal Reserve System's emergency programs.
section_title: What GAO Recommends
paragraphs: To increase transparency, GAO recommends that all Reserve Banks clearly document the directors' role in supervision and regulation activities in their bylaws. One option for addressing directors' conflicts of interest is for the Reserve Bank to request a waiver from the Federal Reserve Board, which, according to officials, is rare. Most Reserve Banks do not have a process for formally requesting such waivers. To strengthen governance practices and increase transparency, GAO recommends that the Reserve Banks develop and document a process for requesting conflict waivers for directors. The Federal Reserve System's governance practices are generally similar to those of selected central banks and comparable institutions such as bank holding companies and have similar selection procedures for directors. However, Reserve Bank governance practices tend to be less transparent than those of these institutions. For instance, comparable organizations make information on their board committees and ethics policies available on their websites; most Reserve banks do not.

section_title: Letter
paragraphs: The Federal Reserve System, which consists of the Board of Governors  of the Federal Reserve System (Federal Reserve Board), 12 regional  Reserve Banks, and the Federal Open Market Committee (FOMC),  played a key role in the U.S. government’s policy responses to the  financial crisis that began in the summer of 2007. From late 2007  through mid-2010, Reserve Banks provided more than a trillion dollars in  emergency loans to the financial sector to address strains in credit  markets and to avert failures of individual institutions believed to be a  threat to the stability of the financial system. The scale and nature of this  assistance amounted to a rare and significant exercise of the Federal  Reserve System’s emergency powers as a lender of last resort.
Unlike the Federal Reserve Board, the Reserve Banks are not federal  agencies. Each Reserve Bank is a federally chartered corporation with a  board of directors. The membership of each Reserve Bank board  includes three directors who represent commercial banks that are  members of the Federal Reserve System and six directors who represent  the public. During the crisis, the Federal Reserve System came under  scrutiny when it became known that several institutions that borrowed  from the emergency programs were affiliated with Reserve Bank  directors. Some Members of Congress and others raised concerns about  actual or potential conflicts of interest that may have been created by  these affiliations and the possibility that some directors had exerted  influence on the emergency lending activities of the Reserve Banks. More  broadly, the Reserve Bank board structure that includes three directors  who represent banks supervised by the Reserve Banks caused public  concern about the governance of the banks, including the selection and  roles of directors and the extent to which directors elected to represent  the public do so. For example, questions were raised as to whether the  directors representing member banks had any involvement in the  Reserve Banks’ role in supervising member banks.
Title XI of the Dodd-Frank Wall Street Reform and Consumer Protection  Act (Dodd-Frank Act) contains provisions intended to enhance  transparency and accountability related to the Federal Reserve System’s  emergency lending activities as well as a change to the elections of  Reserve Bank presidents. As part of this title, the Dodd-Frank Act  directed us to review various issues related to the governance of the  Federal Reserve Banks. Accordingly, the objectives of this report are to  (1) analyze the level of diversity on the boards of directors and assess the  extent to which the process of identifying possible directors and  appointing them results in diversity on the boards of directors, (2)  evaluate the effectiveness of policies and practices for identifying and  managing conflicts of interest for Reserve bank directors, and (3)  compare Federal Reserve bank governance practices with the practices  of selected organizations. Appendix I reports on the Reserve Banks’  involvement in the establishment and implementation of the emergency  programs.
subsections: section_title: Scope and Methodology
paragraphs: To determine the extent to which the current system of appointing  Reserve Bank directors effectively ensures that they are elected without  discrimination on the basis of race, creed, color, sex, or national origin,  and that, for some directors, they are elected with due but not exclusive  consideration to the interests of agriculture, commerce, industry, services,  labor, and consumers, as required by section 4 of the Federal Reserve  Act, we reviewed the Reserve Banks’ processes for identification,  nomination, and selection of directors. We created a descriptive profile of  the demographic characteristics, including race, gender, and industry, of  Reserve Bank directors from 2006 through 2010. We used (1) the  demographic characteristics of directors obtained from the Federal  Reserve Board, and (2) the demographic characteristics of executives  who would likely meet the criteria for potential directors using Equal  Employment Opportunity Commission (EEOC) data. We determined  whether the diversity trends of Reserve Bank directors are generally  consistent with the trends illustrated by the Employer Information Report  (EEO-1) data. The EEO-1 data represent the pool of potential  candidates with the requisite skills and experience from which the Federa Reserve generally selects directors. To assess the reliability of the  Federal Reserve Board data, we interviewed Federal Reserve Board staf about steps they took to maintain the integrity and reliability of the  database. To assess the reliability of the EEO-1 data, we reviewed  documentation related to the data and interviewed EEOC officials on the  methods used to collect data and checks performed to ensure data  reliability. We believe that these data are sufficiently reliable for the  purpose of our analysis. Also, to obtain baseline information from all  current directors on a cross section of high-level issues, we conducted a  web-based survey of the 105 Reserve Bank directors that served for thefull year during 2010. Of the 105 directors surveyed, 91 responded to the  survey overall. However, the number of responses to individual questio ns  varied. We collected and summarized additional information from thesedirectors, such as their other board positions, prior employment, an education. For a full description of the methodology of the survey, see  appendix II. To assess the extent to which Federal Reserve Banks’  processes for identification, nomination, and selection of directors resu in diversity, we reviewed documentation on the process and interview officials from Federal Reserve Board and Reserve Banks.
To examine whether there are actual or potential conflicts of interests  created when certain directors of Reserve Banks are elected by member  banks, we reviewed and summarized the selection procedures for  Reserve Bank directors, and their roles and responsibilities identified in  current Federal Reserve System documents and those included in the  Federal Reserve Act. We surveyed all Reserve Bank directors who  served for the full year during 2010 to collect their perception of their roles  and responsibilities and to determine whether they are aware of any past  or present conflict of interest. Also, we interviewed selected Reserve  Bank directors and Reserve Bank officials from each Reserve Bank to  collect information on directors’ roles and responsibilities, any conflict of  interest concerns and procedures for addressing the appearance of or  actual conflicts, and potential changes to Reserve Bank governance.  Specifically, at each of the 12 Reserve Banks, we interviewed at least one  director from each class (A, B, and C), all board and audit committee  chairs, the president, general counsel or ethics officer, and corporate  secretary. In addition, to identify any discussions on instances of potential  or actual conflicts of interest during board meetings, we reviewed board  minutes for each of the 12 Reserve Banks for the period of November  2007 to October 2010. To address the Reserve Bank directors’  involvement in the establishment and operations of the Federal Reserve  emergency programs, we leveraged our work from the recent Federal  Reserve Emergency Program review, which conducted related work  under the Dodd-Frank Act. We reviewed relevant documents from each  of the 12 Reserve Banks, including bylaws, procurement policies and any  policies for waivers to the Federal Reserve Board’s policies on director  eligibility, qualifications, and rotation. We also reviewed Reserve Bank  board minutes to help determine the extent of the directors’ involvement  in any activities associated with the emergency programs and supervision  and regulation matters. In addition, we interviewed a sample of directors  and relevant Reserve Bank officials as noted earlier to determine the  directors’ involvement in the implementation and operation of the  programs.
To compare Reserve Bank governance practices with the practices of  selected organizations, we reviewed literature on current best practices  for governance within major financial institutions, analyzed similar  institutions in other countries or the United States to evaluate best  practices or alternative structures, and relied on the results of our work  done for our other objectives. We examined how the Federal Reserve  System’s governance practices compare with relevant practices at  selected foreign central banks, a self-regulatory organization, a  government-sponsored enterprise, and several large bank holding  companies. For the foreign central banks, we contacted officials at foreign  central banks in Australia, Canada, the European Union, and the United  Kingdom to obtain governance documents and we analyzed governance  policies and practices in order to compare governance of the Reserve  Banks with governance of other foreign central banks. We spoke to  academic researchers knowledgeable about central bank governance.  We verified the accuracy of our analysis and interpretations of  governance documents by requesting comments on the relevant draft  sections from each of the central banks included in our review. We  incorporated their comments as appropriate. For the self-regulatory  organization and the government-sponsored entity, we identified and  analyzed the relevant governance policies and practices of the Financial  Industry Regulation Authority (FINRA) and for the cooperative system, the  Federal Home Loan Banks (FHLBanks). To verify the accuracy of our  analysis, we spoke with officials from these entities and obtained  comments on the relevant sections of a draft of this report. Finally, for  private corporations, we interviewed an industry group and some  academic researchers knowledgeable about corporate governance and  analyzed the governance practices of the 10 largest bank holding  companies and compared them with the governance policies and  practices of the previously discussed organizations.
We conducted this performance audit from July 2010 to July 2011 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Background
subsections: section_title: Overview of the Federal Reserve System
paragraphs: The Federal Reserve Act of 1913 established the Federal Reserve  System as the country’s central bank. The Federal Reserve Act made  the Federal Reserve System an independent, decentralized bank to  better ensure that monetary policy would be based on a broad economic  perspective from all regions of the country. The Federal Reserve Board  has defined the term “monetary policy” as the actions undertaken by a  central bank, such as the Federal Reserve System, to influence the  availability and cost of money and credit to help promote national  economic goals. The Federal Reserve Act of 1913, as amended, gave the  Federal Reserve System responsibility for setting monetary policy. The  Federal Reserve System consists of three parts: the Federal Reserve  Board, Reserve Banks, and the FOMC.
The Federal Reserve Board is a federal agency located in Washington,  D.C., that is responsible for maintaining the stability of financial markets;  supervising financial, bank, and thrift holding companies, state-chartered  banks that are members of the Federal Reserve System, and the U.S.  operations of foreign banking organizations; establishing monetary policy;  and providing general supervision over the operations of the Reserve  Banks. The top officials of the Federal Reserve Board are the seven  members of the Board of Governors who are appointed by the President  and confirmed by the U.S. Senate. Although the Federal Reserve Board  is required to report to Congress on its activities, its decisions do not have  to be approved by either the President or Congress.
The Federal Reserve System is divided into 12 districts. Each district is  served by a regional Reserve Bank. Most Reserve Banks have one or  more branches, adding to a total of 24 branches (see fig. 1). Unlike the  Federal Reserve Board, the Reserve Banks are not federal agencies.  Each Reserve Bank is a federally chartered corporation with a board of  directors and member banks who are stockholders in the Reserve Banks.  The membership of each Reserve Bank board of directors is determined  by a process established by statute that is intended to ensure that each  bank board represents both the public and member banks in its district.  Under the Federal Reserve Act, Reserve Banks are subject to the general  supervision of the Federal Reserve Board. The Federal Reserve Board  has delegated some of its supervisory responsibilities to the Reserve  Banks, such as responsibility for examining bank and thrift holding  companies and state member banks under rules, regulations and policies  established by the Federal Reserve Board. The Federal Reserve Act  authorizes the Reserve Banks to make discount window loans, in  accordance with the rules and regulations prescribed by the Federal  Reserve Board, and to execute monetary policy operations at the  direction of the FOMC. The Reserve Banks also provide payment  services, such as check clearing and wire transfers, to depository  institutions, the Treasury, and government agencies. The provision of  these payment services to depository institutions is subject to the full cost  recovery provisions of the Monetary Control Act of 1980. Reserve Banks  also provide cash services to financial institutions and serve as the  Treasury’s Fiscal Agent.
The FOMC plays a central role in the execution of the Federal Reserve  System’s monetary policy mandate to promote price stability and  maximum employment. The FOMC consists of the seven members of the  Board of Governors, the President of the Federal Reserve Bank of New  York, and four other Reserve Bank presidents who serve on a rotating  basis. All presidents participate in FOMC deliberations even though not  all vote. The FOMC is responsible for directing open market operations to  influence the total amount of money and credit available in the economy.  The Federal Reserve Bank of New York (FRBNY) carries out FOMC  directives on open market operations by engaging in purchases or sales  of certain securities, typically U.S. government securities, in the  secondary market.
The Federal Reserve Board and the Reserve Banks are subject to an  annual independent audit of their financial statements by a public  accounting firm. In addition, each Reserve Bank has an internal auditor  who is responsible to the Reserve Bank’s board of directors. The Federal  Reserve Board’s Division of Reserve Bank Operations and Payment  Systems (RBOPS) performs periodic examinations on 4 of 12 Reserve  Banks each year on a range of oversight activities and assesses  compliance with Federal Reserve Board policies. The Federal Reserve  Board’s Office of Inspector General also conducts audits, reviews, and  investigations related to the Federal Reserve Board’s programs and  operations, including those programs and operations that have been  delegated to the Reserve Banks by the Federal Reserve Board. Finally,  we may conduct a number of reviews each year to look at specific  aspects of the Federal Reserve System’s activities.
All national banks—U.S. commercial banks that are chartered by the  federal government through the Office of the Comptroller of the  Currency—are required to be members of the Federal Reserve System.  Banks chartered by the states may elect to become members of the  Federal Reserve System if they meet certain requirements set by the  Federal Reserve Board. Member banks must subscribe to stock in their  Reserve Bank in an amount that is related to the size of the member  bank. Holding of the stock does not confer any rights of ownership and  the member bank may not sell or trade the Federal Reserve district bank  stock. Member banks receive a statutory fixed annual dividend of 6  percent on their stock and may vote for six of the nine members of the  board of directors of the Reserve Bank.
section_title: Reserve Bank and Branch Structure
paragraphs: Governance can be broadly described as the process of providing  leadership, direction, and accountability in fulfilling an organization’s  mission, meeting objectives, and providing stewardship of an  organization’s resources. Because the Reserve Bank boards are  supervised by the Federal Reserve Board and their authority is  constrained by both provisions of the Federal Reserve Act and guidelines  of the Federal Reserve Board, among other things, they are not typical  corporate boards of directors. However, Reserve Bank boards are the  focal points of the Reserve Banks’ governance framework that also  includes the broad oversight of the Federal Reserve Board.
The Federal Reserve Act established nine-member boards of directors to  govern each of the 12 Reserve Banks. Each board is split equally into  three classes. Class A directors represent the member banks, while Class  B and C directors represent the public with, as required by the Federal  Reserve Act, “due but not exclusive consideration to the interests of  agriculture, commerce, industry, services, labor, and consumers.” As  required by the Federal Reserve Act, six of the nine directors, Class A  and Class B, are elected by the member banks, and the remaining three,  the Class C directors, are appointed by the Federal Reserve Board.  Figure 2 illustrates how the directors of the Reserve Banks are chosen  and their roles in appointing Reserve Bank presidents.
The process for selecting the boards of directors of the Reserve Banks is  outlined in the Federal Reserve Act. The Federal Reserve Act requires  that the member banks of each Reserve Bank District be classified into  three groups consisting of banks of similar capitalization—small, medium,  and large. Each group is responsible for one of the three Class A  directorships and one of the three Class B directorships. Each member  bank in the group may nominate a candidate for an open directorship  within its group. Once nominations close, each member bank in the group  receives the list of nominees and a ballot to vote in the election. Directors  serve 3-year terms, and the terms are staggered so that one position in  each class becomes vacant every year. Although directors can be  reelected to an indefinite number of terms, the Federal Reserve Board  recommends that the Reserve Banks follow a limit of two consecutive  appointments for a given director.
The Federal Reserve Act does not prescribe how the Federal Reserve  Board is to identify and appoint the candidates for Class C directors.  Pursuant to the Federal Reserve Act, one Class C director, who must be  a person of “tested banking experience,” is designated by the Federal  Reserve Board as chairman of the Reserve Bank board of directors, and  the Federal Reserve Board also designates another Class C director as  deputy chairman. The Federal Reserve Act provides that the chairman of  the board, like all Class C directors, cannot be an officer, director,  employee, or stockholder of any bank. The Federal Reserve Board policy  extends this limitation to prevent affiliations by Class B and Class C  directors with any thrift, credit union, bank holding company, foreign bank,  and other similar institutions and affiliates. Additionally, the Federal  Reserve Act states that Class C directors must have been residents of  the district of their Reserve Bank for 2 years prior to appointment. As with  the election of Class A and B directors, the appointment of Class C  directors is staggered so that one director position becomes vacant every  year. The Federal Reserve Board has established a policy of appointing a  given Class C director to no more than two terms. See table 1 for a  detailed description of the requirements for selection of all three classes  of directors.
Nine of the 12 Reserve Banks also have branch offices, which provide  banking services, and in some cases house supervision employees. The  branches are subject to the governance of the Reserve Banks and their  boards of directors, as well as to oversight from the Federal Reserve  Board. Twenty-three of the 24 branches have boards of seven directors,  four of which are appointed by the Reserve Bank and three of which are  appointed by the Federal Reserve Board. One branch (Helena)  comprised five directors, three of which are appointed by the Reserve  Bank, and two of which are appointed by the Federal Reserve Board. The  chair of the branch office board is selected from the members appointed  by the Federal Reserve Board. This report focuses primarily on the  governance practices at the Reserve Banks and not branch offices.
section_title: Roles and Responsibilities of Reserve Bank Directors
paragraphs: The three principal functions of Reserve Bank directors are to (1)  participate in the formulation of national monetary and credit policies; (2)  oversee the general management of the Reserve Bank, including its  branches; and (3) act as a link between the Federal Reserve Bank and  the community.
The Reserve Bank boards have the ability to influence the nation’s  monetary policy in three primary ways (1) by providing input on economic  conditions to the Reserve Bank president, which is used by some  presidents in their reports to the FOMC about regional economic  conditions; (2) by participating in the establishment every 2 weeks of a  discount rate recommendation sent to the Federal Reserve Board for its  consideration; and (3) for the Class B and C directors, by appointing the  Reserve Bank president and first vice president.    Beige Books: The Reserve Banks publish a Summary of  Commentary on Current Economic Conditions, informally known as  the Beige Book, eight times per year. The Beige Book is a compilation  of reports on current district economic conditions filed by each  Reserve Bank drawing on its network of district contacts. Reserve  Banks’ directors’ observations on the economy may be included in the  Reserve Bank’s Beige Book report. The Reserve Banks take turns  summarizing economic information for the Beige Book and writing the  report’s summary. The FOMC and the Federal Reserve Board use the  Beige Books—which are published 2 weeks before each FOMC  meeting—to inform their decisions on discount rates and the Federal  Funds Rate target.    Discount rate: The Federal Reserve Act authorizes each Reserve  Bank to establish, subject to review and determination by the Federal  Reserve Board, discount rates. The statute provides that each  Reserve Bank shall establish such rates every 14 days or more often  if deemed necessary by the Federal Reserve Board. Reserve Bank  directors typically conduct a conference call every 14 days, unless  they are holding an in-person meeting, to vote on the discount rate.
The rate established by the Reserve Bank must be approved by the  Federal Reserve Board.    Reserve Bank president: Each Reserve Bank board’s Class B and  Class C directors appoint, with the approval of the Federal Reserve  Board, the president of their Reserve Bank. The president of the  Reserve Bank uses the information (s)he gathers from the Reserve  Bank’s board of directors, research department, and a variety of other  sources to influence monetary policy through (her)his position on the  FOMC. The FOMC sets the Federal Funds Rate target and monitors  and directs the Open Market Operations necessary to achieve that  rate. All of the 12 Reserve Bank presidents attend and participate in  deliberations at each meeting of the FOMC. As noted earlier, the  president of FRBNY has a permanent voting position and the other 11  presidents rotate, on an annual basis, among four voting positions on  the FOMC. Figure 3 illustrates how the members of the FOMC are  selected.
section_title: Financial Crisis and Federal Reserve Emergency Programs
paragraphs: The recent financial crisis that began around mid-2007 was the most  severe that the United States has experienced since the Great  Depression. A number of financial institutions were threatened with failure  and some failed. The crisis also affected businesses and individuals, who  found it increasingly difficult to obtain credit as cash-strapped banks held  on to their assets. By late summer of 2008, the potential ramifications of  the financial crisis included the continued failure of financial institutions,  increased losses of individual wealth, reduced corporate investments, and  further tightening of credit that would exacerbate the emerging global  economic slowdown that was beginning to take shape.
Between late 2007 and early 2009, the Federal Reserve Board created  more than a dozen new emergency programs to stabilize financial markets  and authorized the Reserve Banks to provide financial assistance to avert  the failures of a few individual institutions. In many cases, the decisions by  the Federal Reserve Board, the FOMC, and the Reserve Banks about the  authorization of, the initial terms of, and implementation of the Federal  Reserve System’s emergency assistance were made over the course of  only days or weeks as the Federal Reserve Board sought to act quickly to  address rapidly deteriorating market conditions. FRBNY implemented most  of these emergency activities under authorization from the Federal Reserve  Board. (See app. I for more information on the emergency programs and  the Reserve Banks’ involvement in their implementation).
section_title: Federal Reserve Bank Board Economic and Demographic Diversity Is Limited, and More Could Be Done to Identify Diverse Candidates
paragraphs: According to the U.S. Census Bureau, the U.S. population has become  more racially and ethnically diverse in the last 10 years. Between 2000  and 2010, the Asian population experienced the fastest rate of growth  and the white population experienced the slowest rate of growth. In the  2010 Census, 97 percent of all respondents (299.7 million) reported only  one race. The largest group reported was white (223.6 million),  accounting for 72 percent of all people living in the United States. The  African-American population was 38.9 million and represented 13 percent  of the total population. There were 2.9 million respondents who indicated  American Indian and Alaska Native (0.9 percent). Approximately 14.7  million (about 5 percent of all respondents) identified their race as Asian.  In 2010, there were 50.5 million Hispanics in the United States,  composing 16 percent of the total population. Between 2000 and 2010,  the Hispanic population grew by 43 percent—rising from 35.3 million in  2000, when this group made up 13 percent of the total population. The  non-Hispanic population grew relatively slower over the decade, about 5  percent.
The Federal Reserve Act of 1913 as enacted did not include demographic  diversity requirements. The act specified that the three Class A directors  were to be chosen by and be representative of the stockholding banks.  Further, the three Class B directors were to be actively engaged in their  district in commerce, agriculture, or some other industrial pursuit, and the  three Class C directors were appointed by the Federal Reserve Board.  The Federal Reserve Reform Act of 1977 amended the Federal Reserve  Act to add the present antidiscrimination requirements and to expand the  economic diversity provisions to agriculture, commerce, industry,  services, labor, and consumer representation for Class B and C  directors. According to the legislative history of the Reform Act, these  changes were made to help broaden Reserve Bank board representation  to include women and minorities, as well as industries and other interest  groups.
The Federal Reserve Board maintains a database of current and past  directors that is used to track demographic information voluntarily  provided by directors. Information in this database is entered by the  individual Reserve Banks and managed by the Federal Reserve Board.  We analyzed demographic characteristics of bank (head office) and  branch directors who served at some time during 2006 through 2010 to  present a profile of director demographic characteristics.
Figure 4 shows the representation of head office directors from 2006  through 2010 using Federal Reserve Board data. Over the 5-year period,  we found that generally the representation of women and minority head  office directors has remained limited. For example, in 2006, minorities  accounted for 13 of 108 director positions; and in 2010 they accounted for  15 of 108 director positions. More specifically, in 2010, head office  directors comprised 78 white men, 15 white women, 12 minority men, and  3 minority women.
We also analyzed the total number of female and minority directors  serving from 2006 through 2010 by class. As shown in figure 4, Class B  and Class C directors were more diverse in gender, race, and ethnicity  than Class A directors. For example, of the 202 directors serving from  2006 through 2010, 7 Class A directors were female, while there were  approximately twice that number of female Class B and C directors,  respectively—16 Class B and 16 Class C female directors. Furthermore,  there were 3 minority Class A directors, while there were 14 minority  Class B and 9 minority Class C directors. Several Reserve Bank officials  we spoke with told us that Class B and Class C directors are a source of  both economic and demographic diversity on Reserve Bank boards.
Figure 5 shows the representation of branch directors from 2006 through  2010. Over the 5-year period we also found that generally, the  representation of women and minority branch directors has also remained  limited. For example, in 2006, minorities accounted for 40 of 182 director  positions; and in 2010, they accounted for 30 of the 164 positions. More  specifically, in 2010, branch directors comprised 97 white men, 37 white  women, 22 minority men, and 8 minority women.
The data show that labor and consumer groups are less represented than  other industry groups on both head office and branch boards. As shown  in figure 4, from 2006 through 2010, 5 of the 202 head office directors  served as consumer representatives and 6 of the 202 head office  directors served as labor representatives. As shown in figure 5, from 2006  through 2010, 11 of the 309 branch directors served as consumer  representatives and 4 of the 309 branch directors served as labor  representatives. The Federal Reserve Board has encouraged Reserve  Banks to recruit directors from consumer and labor organizations. For  example, in a February 2010 memo to Reserve Bank presidents on  director recruitment, the Federal Reserve Board listed recruiting leaders  from these two industry groups as a “high priority.” Despite these efforts,  two Reserve Bank officials we spoke with said recruiting consumer and  labor representatives is a challenge because many of them are politically  active and the Federal Reserve Board policy, which restricts a director’s  political activity, would generally require them to give up such activities  while serving on the board.
As shown in figure 6, Federal Reserve Board data show that generally,  representation of minority and female directors varied somewhat across  districts. For example, of the 16 head office directors serving from 2006  through 2010 at both Federal Reserve Bank of Dallas and Federal  Reserve Bank of Kansas City, 2 were women; and of the 18 head office  directors serving from 2006 through 2010 at Federal Reserve Bank of  Boston, 5 were women. One Reserve Bank corporate secretary we spoke  with said that it was difficult to recruit diverse candidates within his district  because of a lack of overall diversity in the region.
To obtain information from all current directors on a cross section of high- level issues, we conducted a web-based survey of the 105 Reserve Bank  directors that served for the full year during 2010. We collected and  summarized additional demographic information for 2010 directors, such  as their prior work experience, education, and other board positions.  Many Reserve Bank directors responding to the survey typically had  experience in the finance industry and almost all currently serve on a  variety of other boards. At least 56 have had some financial industry  experience. After the financial industry, the next most reported work  experiences by industry were manufacturing; professional, scientific, and  technical services; retail trade; and real estate and rental leasing. The  vast majority of the directors who responded to the survey reported that  they had completed a bachelor’s degree. More specifically, over half of  the directors responding to the survey (55) reported that they had  completed some type of advanced degree, such as a master’s, juris  doctor, or doctorate. In 2010, 86 of 91 Reserve Bank directors responding  to our survey served on a variety of nonprofit, private, and public  company boards. For example, directors held board positions at public  and private universities; for-profit companies such as Loews Corporation,  Safeway, Inc., and Energizer Holdings; and nonprofit organizations such  as the Ford Foundation and Ronald McDonald House Charities.
subsections: section_title: Reserve Bank Directors Are Generally Senior Executives, a Subset of Management That Is Less Diverse
paragraphs: We analyzed EEOC’s EEO-1 data for employers with 100 or more  employees from 2007 through 2009. The EEO-1 data provide information  on racial/ethnic and gender representation for various occupations within  a broad range of industries. We used the EEO-1 “executive and senior  level officials and managers” job category as the basis for our analysis  because this is the category of employees from which Reserve Banks  would most likely recruit directors. EEOC defines the job category of  executive and senior level officials and managers as individuals residing  in the highest levels of organizations who plan, direct, and formulate  policies, and provide overall direction for the development and delivery of  products and services. Figure 7 provides EEO-1 data for individual  minority groups and illustrates their trend in representation at the  management level, which varied by group.
As shown in figure 7, among all EEO-1 reporters, senior management  representation by whites and Asians increased from 2007 through 2009.  For example, whites accounted for 87.4 percent of all industry senior  management positions in 2007; and they accounted for 88.6 percent of  senior managers in 2009. Moreover, while representation by Asians also  increased during this period, African Americans and Hispanics in senior  management decreased steadily. For example, Hispanics accounted for  4.5 percent of all industry senior management positions in 2007; and they  accounted for 3.5 percent in 2009. Representation for “Other” races  remained constant from 2007 through 2009.
Figure 7 also compares race and ethnicity and gender between the EEO- 1 and Federal Reserve Board datasets. EEO-1 data show that the pool of  senior managers—a possible pipeline for potential Federal Reserve  directors—has limited diversity. For example, minorities accounted for  12.6 percent of all senior management positions in 2007 and 11.4 percent  in 2009. Similarly, minorities accounted for 12.4 percent of Federal  Reserve directors in 2009.
As shown in figure 8, diversity was limited among senior-level  management in the commercial banking industry. Because Class A  directors are nominated and elected by the member banks in each  Federal Reserve district to represent the stockholding banks, they are  generally officers or directors of a member commercial bank. EEO-1  data show that, on average, the pool of senior managers in the  commercial banking industry, a source that provides the pool of  candidates for Class A directors, is less diverse than senior management  in terms of race and ethnicity in all other industries combined. In 2009, the  percentage of senior management positions held by minorities ranged  from an average of 9.6 percent for commercial banking institutions to an  average of 11.5 percent for all other industries combined. However, the  average percentage of positions held by women was relatively consistent  between commercial banking institutions and all other industries, 29.0  percent and 28.3 percent, respectively.
Reserve Bank officials said they generally focus their search on senior  executives. To explore whether Reserve Banks expanding their search to  include nonexecutives would increase diversity, we spoke with officials  and directors about their views on this matter. Several Reserve Bank  executives and directors told us that having senior executives on the  board of directors helps elevate the stature of the board. In addition, they  said that individuals working at the top of their organization may have a  broader view of how their industry is being affected by the economy. On  the other hand, one Reserve Bank official told us that he felt looking  below the executive level for potential directors was important. Further, at  one Reserve Bank, the corporate secretary told us the bank actively looks  for directors who may not be senior-level executives in an attempt to  increase diversity. At another Reserve Bank, the corporate secretary  stated that the bank has had nonexecutives serve on the board both  currently and in the past.
In previous work on diversity in the financial services industry, we found  that individuals holding positions one level below senior management  were more diverse than senior management. According to this work,  EEOC data showed that generally, management-level representation by  minority women and men increased from 11.1 percent to 17.4 percent  from 1993 through 2008. However, these EEOC data overstated minority  representation at senior management levels, because the category  included midlevel management positions, such as assistant branch  manager, that may have greater minority representation. In 2008, EEOC  reported revised data for senior-level positions only, which showed that  minorities held 10 percent of such positions compared with 17.4 percent  of all management positions. This suggests that by broadening its pool of  potential candidates below the executive level, Reserve Banks may be  able to attract more diverse director candidates with potentially more  diverse backgrounds and perspectives on the economy.
We also analyzed EEO-1 data by Federal Reserve district to determine  district-level trends in senior management across all industries. This  analysis demonstrates that diversity of senior managers in the Federal  Reserve districts varies. As shown in figure 9, certain Federal Reserve  districts’ territories are somewhat more diverse than others at the senior  management level. For example, in 2009, the percentage of senior  management positions held by minorities ranged from a high of 18.7  percent within the Federal Reserve Bank of San Francisco’s territory to a  low of 4.0 percent within the Federal Reserve Bank of Minneapolis  territory, indicating that diversity among senior managers does vary by  district.
Reserve Banks select candidates to fill director vacancies based upon  criteria in the Federal Reserve Act and guidance from the Federal  Reserve Board. The act provides requirements for the nomination and  election of directors. The act requires that member banks of each district  be classified into three groups consisting of banks of similar  capitalization—small, medium, and large. The member banks in each  group nominate and elect one Class A director to represent that group’s  banks and one Class B director to represent the public. After the  candidates are identified and a list of their names is forwarded to the  member banks, each bank may cast one vote for a Class A director and  one vote for a Class B director. Class C directors, who also represent the  public, are recommended by the Reserve Banks and appointed by the  Federal Reserve Board. The Federal Reserve Board also provides  guidance on director election and eligibility requirements in the Federal  Reserve Administrative Manual (FRAM). Additionally, the act specifies  that all directors shall be chosen without discrimination as to race, creed,  color, sex, or national origin and that Class B and Class C directors who  represent the public shall be elected “with due but not exclusive  consideration to the interests of agriculture, commerce, industry, services,  labor, and consumers.” Each year the Federal Reserve Board provides a  memorandum to Reserve Banks with priority objectives for the  recruitment of individuals with independent and diverse views and  potential sources from which to obtain diverse directors. In addition, it  distributes a yearly report on the demographic and industry  characteristics of directors to each of the Reserve Banks for their use as  they seek to identify and consider potential candidates.
Reserve Banks review the current demographics and areas of expertise  of their boards when selecting candidates to fill director vacancies. At  each Reserve Bank, the corporate secretary works collaboratively with  the president and other senior bank staff to assess the demographics of  their board and identify areas where additional representation may be  needed. Several Reserve Bank officials with whom we spoke told us they  also consider geography and educational background as selection  criteria, in addition to those outlined in the act. Three Reserve Bank  officials told us that while they strive to find diverse candidates from a  variety of industries, they also want to find people who have the skills and  knowledge that will fill a gap in the board’s existing knowledge and skill  set. Additionally, Reserve Bank officials said they generally focus their  search on senior executives, usually chief executive officers (CEO) or  presidents. For example, of the 108 directors serving in 2010, 82 were the  president or CEO of their company. Further, we identified at least 23 who  were employed by Fortune 500 companies in 2010. Three Reserve  Bank officials we spoke with indicated that CEOs generally have a better  familiarity with the economic and business community of their district than  less senior managers. However, as discussed previously, while having  executives on the boards may elevate the stature of the board, it may limit  the diversity of the pool of potential candidates.
Reserve Banks identify potential director candidates in a variety of ways  and often use different recruitment methods. In general, Reserve Banks  use a combination of personal networking and community outreach  efforts to identify potential candidates. Two directors with whom we spoke  told us they have recommended personal or business acquaintances they  believe would be qualified to serve as directors. In addition, some  Reserve Banks contact former directors for help in identifying possible  candidates. Several Reserve Bank presidents and senior staff also attend  community roundtables and forums to network and identify potential  candidates. Several Reserve Banks use their advisory councils and  branch boards as a source for potential candidates. One Reserve Bank  official told us that they look for candidates in a variety of industry lists  such as a Forbes’ magazine list of the most powerful women in business.  At another Reserve Bank, member banks of the states represented in the  district have agreed to a rotating nomination process for Class A and  Class B directors to help ensure geographic representation. That is, when  it is one particular state’s turn to nominate a candidate, the state’s  Banking Association identifies potential candidates. At least one Class C  director said he self-identified for the position and approached the  Reserve Bank to express his interest in serving on the board when a  vacancy came up.
Some Reserve Banks also use nominating committees to identify  qualified director candidates. These committees may do so by recruiting  candidates to fill vacant seats on the board, reviewing candidates  recommended by the Reserve Banks and others, or conducting inquiries  into the backgrounds and qualifications of potential candidates. Five  Reserve Banks use nominating committees to identify potential  candidates. For example, one Reserve Bank has a nominating committee  that considers candidates for the Federal Reserve Board-appointed Class  C directors. At another Reserve Bank, the nominating committee currently  consists of three Class C directors and two Class A directors that meet to  consider and make recommendations concerning board membership for  all classes of directors. Guidelines in the FRAM require that nominating  committees recommending Class A and Class B director candidates not  include Reserve Bank officers and employees.
Typically, a Reserve Bank identifies and vets potential candidates for  Class A and B directors, and communicates their names and credentials  to member banks for their nomination and election. Reserve Banks  generally submit an open call for nominations to the district’s voting  banks, even if they also have a nominating committee. Typically, the  member banks will elect the Class A and B candidates identified and  vetted by the Reserve Bank’s nominating committee. However, member  banks can nominate and elect a candidate that has not been vetted by  the Reserve Bank. In such cases, the bank will inform the nominee of a  director’s eligibility requirements, to determine if the candidate is eligible  to serve, if elected. We found that member bank voter turnout was often  low at some Reserve Banks. Although the Federal Reserve Act sets forth  specific procedures and voting requirements for director elections,  shareholder elections of Reserve Bank directors do not have a  requirement for a minimum number of votes.
The Federal Reserve Board requires every Reserve Bank to provide a  slate of at least two candidates for each Class C vacancy to the Federal  Reserve Board for appointment. Typically, the Federal Reserve Board will  appoint a candidate from the slate provided by the Reserve Banks to  serve as a Class C director. However, the Federal Reserve Board may  ask for further explanation of why Reserve Banks selected certain  candidates or ask for alternative candidates.
Several Reserve Banks indicated that recruiting directors for several  groups—specifically women, minority, and labor or consumer  representatives—can be challenging. According to Reserve Bank  officials, recruiting labor and consumer representatives is particularly  difficult because many of them are politically active and the Federal  Reserve Board policy generally restricts a director’s political activity. They  also noted that Reserve Bank directors’ roles and responsibilities can be  time consuming and that compensation is low compared with that  available in other opportunities to serve on private boards. After the  passage of the Sarbanes-Oxley Act in 2002, directors are limited in the  number of public company boards on which they can serve; therefore,  Reserve Banks compete with other private corporations for these  directors’ time, especially women and minorities. In addition, some  individuals do not want to divest of their stock holdings in the banking- related industry (which would be required for Class C) and also may not  wish to refrain from political participation, according to Federal Reserve  System officials.
As we have previously reported, many private and public organizations  have recognized the importance of recruiting and retaining minority and  women candidates for key positions as the U.S. workforce has become  increasingly diverse. Some Reserve Bank officials told us that many  organizations are searching for diverse directors to have on their boards,  and the Reserve Banks are competing with private corporations for the  same small pool of qualified individuals. Although the policies of private  corporate boards we reviewed do not have specific requirements for board  diversity, the Securities and Exchange Commission (SEC) recently started  requiring companies to identify steps taken to ensure diversity of their  boards in their proxy statement to shareholders. In our review of the proxy  statements from the 10 largest bank holding companies in 2010, we found  that companies generally did not list specific steps taken to identify and  select diverse board members (see app. IV for a list of the 10 largest bank  holding companies included in our review). Rather they provided a broad  statement about diversity. For example, one company stated, “The   Committee evaluates diversity in a broad sense, recognizing  the benefits of racial and gender diversity, but also considering the breadth  of backgrounds, skills, and experiences that directors and candidates may  bring to our Board.”
Having a demographically and economically diverse board strengthens  an organization by bringing a wider variety of perspectives and  approaches to the organization. While officials at some Reserve Banks  told us they consider candidates who are not chief-level executives (i.e.,  not chief financial officers, chief operating officers, or executive vice  presidents), the vast majority of directors in 2010 held such positions in  their organizations. By broadening their pool of candidates, Reserve  Banks may be able to improve diversity, and ultimately public  representation, on the Reserve Bank boards. Such diversification can  help ensure that the Federal Reserve System receives a broader  spectrum of information useful for the formation and execution of  monetary policy and the oversight of Reserve Bank operations.
section_title: Additional Steps Needed to Manage Directors’ Actual or Potential Conflicts of Interest and Outside Affiliations
paragraphs: From the creation of the Federal Reserve System, the Federal Reserve  Act has required the Reserve Banks to include Class A directors on their  boards to be representative of the member banks, as each of the Reserve  Banks is owned by the member banks in its district. While Class A  directors are not required to be officers or employees of member banks,  in practice, most Class A directors are officers or directors of member  banks in the district. The requirement to have representatives of member  banks creates an appearance of a conflict of interest because, as noted  previously, the Federal Reserve System has supervisory authority over  state-chartered member banks and bank holding companies. Conflicts of  interest involving directors have been historically addressed through both  federal law and Federal Reserve System policies and procedures, such  as by defining roles and responsibilities and implementing codes of  conduct to identify, manage, and mitigate potential conflicts.  Nevertheless, directors’ affiliations with financial firms and former  directors’ business relationships with Reserve Banks continue to pose  reputational risks to the Federal Reserve System. When the Federal  Reserve System played a key role in providing assistance to financial  institutions during the 2007-2009 financial crisis, Reserve Bank board  governance came under scrutiny because, among other things, a number  of director-affiliated banks and nonbank financial institutions participated  in the Federal Reserve System’s emergency programs. Since then,  Congress, the Federal Reserve Board, and Reserve Banks have made a  number of changes to the policies and procedures that address Reserve  Bank governance. However, without more complete documentation of the  directors’ roles and responsibilities with regard to the supervision and  regulation functions, as well as increased public disclosure on  governance practices to enhance accountability and transparency,  questions about Reserve Bank governance will remain.
subsections: section_title: Some Directors’ Affiliations Can Expose Reserve Banks to Reputational Risk
paragraphs: The three classes of Reserve Bank directors have varying degrees of  involvement in the financial services industry, and their affiliations with  financial companies could create reputational risk for the Reserve Banks.  In addition, relationships between current and former directors and  interactions between former directors and the Reserve Banks could also  raise questions about the independence of the directors and actions of  the Reserve Banks. Finally, questions about directors’ involvement in the  emergency programs authorized by the Federal Reserve Board during  the financial crisis spurred allegations of conflicts of interest. As we  reported in our July 2010 report on the emergency programs, our review  found that the boards of directors generally were not directly involved in  the development and implementation of emergency programs.
Federal Reserve Bank directors often serve on the boards of a variety of  financial firms as well as those of nonprofit, private, and public  companies. For example, in 2010, 86 of 91 Reserve Bank directors  responding to our survey held board positions at public and private  companies, public and private universities, and nonprofit organizations.  As noted earlier, our survey indicated that most of the Reserve Banks  have directors who have held positions at financial services firms or  insurance companies as well as banks. This includes Class A directors  who are officials of banks that hold stock in the Reserve Bank, and Class  C directors, who are required by the Federal Reserve Act to be persons  of tested banking experience, which the Federal Reserve Board says has  come to be interpreted as requiring familiarity with banking or financial  services. In addition, as the financial services industry has evolved, more  companies are involved in financial services or otherwise interconnected  with financial institutions. These changes have resulted in a few Class B  and Class C directors who were previously employed by financial  institutions or have served on their boards.
A recent example that raised questions about affiliations, and the nature  of director affiliations with financial firms, involved the then-FRBNY  chairman in late 2008, who was former chairman and a current board  member and shareholder of the Goldman Sachs Group, Inc. (Goldman  Sachs). As illustrated in figure 10, when the then-FRBNY chairman joined  the FRBNY board as a Class C director in January 2008, Goldman Sachs  was an investment bank outside the supervisory authority of the Federal  Reserve System. However, in September 2008, in response to the  unfolding financial crisis, Goldman Sachs applied for and was approved  by the Federal Reserve Board to become a bank holding company. As a  result, under Federal Reserve Board policy, the then-FRBNY chairman  became ineligible to serve as a Class C director because he was then a  director and stockholder of a bank holding company. Without  consultation with the full FRBNY board, FRBNY sought a waiver to allow  the then-FRBNY chairman to continue to serve on the board. According  to an FRBNY official, FRBNY sought the waiver in October 2008 for a  number of reasons. First, finding a new chairman during the financial  crisis would have been difficult, given that FRBNY already had one  director vacancy on its board at the time. Further, the event leading to the  need for a waiver was unexpected and unforeseen. In late November  2008, an additional concern was raised that the then-FRBNY president  was expected to be nominated as the Secretary of the Treasury, thereby  raising the potential that FRBNY would be searching for both a new  president and a new chairman simultaneously, with the added  complication that, as the chair of the FRBNY board, the then-FRBNY  chairman would be heading the search committee for a new president.  The waiver was granted by the Federal Reserve Board in January 2009  on the basis of these considerations. However, the Federal Reserve  Board was unaware that the then-FRBNY chairman had purchased  additional shares in Goldman Sachs via an automatic stock purchase  program. The then-FRBNY chair resigned in May 2009. As discussed  later, on the basis of this waiver experience, the Federal Reserve Board  decided to develop and institute a formal policy governing the treatment  of situations in which Class B or C directors’ stockholdings unexpectedly  become impermissible. This policy has since been adopted. FRBNY also  changed its policy, which would require that waivers be discussed by the  board of directors before going to the Federal Reserve Board.
Federal Reserve Board officials told us that after receiving the waiver  request from FRBNY, they contacted other Reserve Bank boards to  determine whether any other directors held stocks in companies that had  recently converted to bank holding companies. According to these  officials, this review identified a director from the Federal Reserve Bank of  Minneapolis who held less than $100,000 in stock in Merrill Lynch & Co.,  Inc., an investment bank, which had been acquired by Bank of America, a  bank holding company. This director remained on the board and a waiver  was granted by the Federal Reserve Board, but nonetheless, he  subsequently divested the shares in January 2009.
Another situation that raised questions about affiliations involved a  FRBNY Class B director. The director was the Chief Executive Officer of  Lehman Brothers Holdings, Inc. (Lehman), an investment bank that  experienced significant financial problems during the unfolding financial  crisis and ultimately failed. An FRBNY official said that he met with the  FRBNY president and chairman about Lehman’s deteriorating financial  condition, without the full board, and concluded that FRBNY faced  reputational risk regardless of the action taken. Specifically, it was  concluded that although the board of directors was not involved in  approving and implementing the emergency programs, a recusal from  board meetings by the Lehman director might not have managed the  appearance of a conflict and a public resignation might have sent a  negative signal to the market and hastened the collapse of the firm.  Under Federal Reserve Board practice, Reserve Bank directors affiliated  with troubled financial institutions are encouraged to resign or risk  removal from the board. Federal Reserve System officials said that the  director voluntarily resigned before Lehman filed for bankruptcy.
Although directors’ affiliations with financial firms do not necessarily  create conflicts of interest, they may complicate the directors’  relationships with the Reserve Banks and increase public scrutiny of  them. One issue relates to directors’ communications with Reserve Bank  officials in their roles as senior executives of their companies. These  situations have raised questions as to whether directors have greater  access to Reserve Bank officials than other financial institution officials  and whether they have influence over matters that may affect banks or  institutions with which they are affiliated. Reserve Bank officials with  whom we spoke said that there are no restrictions on directors  communicating with Reserve Bank staff about their respective banks or  holding companies in their capacity as officials of the bank nor are there  restrictions on conversations about the financial markets. However,  according to Federal Reserve Board officials, members of the Reserve  Bank board of directors are not granted special access to supervisory  staff, and it has been the practice of the Federal Reserve Board and the  Reserve Banks to restrict their involvement in supervision issues. Further,  Reserve Bank officials said that requests from other financial institutions  to meet with Reserve Bank staff are processed in the same manner as  those from the directors. As discussed later, the financial crisis  highlighted situations where directors were in contact with Reserve Bank  staff in their capacity as representatives of their financial institutions and  market participants.
After completing their terms, directors who had represented member  banks or who have affiliations with other financial institutions may  maintain contact with Federal Reserve Bank officials for various reasons.  FRBNY officials said that actions such as the Reserve Banks’  management of such communications may help safeguard against  improprieties. For example, during the 2008 financial crisis, the company  of a former FRBNY director was negotiating with FRBNY regarding  assets the Reserve Bank had acquired when it extended credit against  the assets of Bear Stearns Companies, Inc. The former director felt that  there was a miscommunication and contacted a number of FRBNY staff  he knew to discuss the issue. The director’s preexisting relationship with  FRBNY raised questions about the appropriateness of FRBNY’s actions  in its negotiations with the former director’s firm. Recently, FRBNY  implemented a procedure to document contacts involving directors by  reporting calls and their content in a memo to the chairman of the board’s  Audit and Operational Risk Committee.
Reserve Bank officials said that many of the Reserve Banks maintain  programs to keep in touch with former directors. These can be formal  programs such as annual holiday functions or informal ways to continue  to seek former directors’ views on the economy and their industries.  Reserve Bank officials described these contacts as “unobjectionable.” A  former Federal Reserve Board governor with whom we spoke also  thought that these contacts are appropriate. As discussed later, indirect  connections between directors’ firms and Reserve Banks when the firms  used the emergency programs or acted as service providers have also  raised questions.
The Federal Reserve Board, and in some cases, the FOMC, authorized  the creation and modification of most of the emergency programs under  authorities granted by the Federal Reserve Act. Although a number of  Reserve Bank directors were affiliated with institutions that borrowed from  the emergency programs, we did not find evidence that Reserve Bank  boards of directors participated directly in making any decisions about  authorizing, setting the terms of, or approving a borrower’s participation in  the emergency programs.
Our review did not reveal that Reserve Bank directors received nonpublic  information on the emergency programs. A review of minutes from the 12  Reserve Bank board meetings during the unfolding crisis revealed that  discussions of emergency programs during board meetings appeared to  have occurred after the emergency programs had been publicly  announced. Further, presentations by Reserve Bank staff generally  covered explanations of the related emergency lending authority,  administration of the program, descriptive information about the  programs’ operations and risks, and the impact on the Reserve Banks’  balance sheets. Moreover, Federal Reserve Board officials and Reserve  Bank directors from all 12 Reserve Banks with whom we spoke told us  that the Reserve Bank boards did not play a role in the creation or  implementation of the emergency programs. Federal Reserve Board  officials also pointed out that all Reserve Bank directors are prohibited  from disclosing nonpublic information related to the programs and such  disclosures may risk violating insider trading laws.
While all Reserve Banks implemented the Term Auction Facility, FRBNY  implemented the majority of the emergency programs. A number of  FRBNY’s directors played a limited oversight role as prescribed in a  written Audit and Operational Risk Committee (AORC) protocol that  states the oversight by the directors was focused on operational risks. For  example, according to FRBNY officials, FRBNY staff periodically briefed  the committee on the composition of an asset portfolio that was created to  assist Bear Stearns when it was near failure to help ensure that the  directors were aware of how the bank was managing certain high-risk  assets. FRBNY has five directors on the audit committee. During the  financial crisis, at least one Class A director served on this committee at  any given time. According to FRBNY officials, to help ensure that one  class of directors does not have undue influence, FRBNY strengthened  its governance structure by revising its AORC charter to permit only two  out of five committee members to be Class A directors. Although  implemented after the unwinding of many of the emergency programs,  the enhanced standards helped mitigate the appearance of actual and  potential director conflicts by ensuring that Class A directors are not the  majority on the AORC. Appendix III provides more information on the  Reserve Bank committees.
As mentioned earlier, in their role as market participants, some FRBNY  directors were consulted by FRBNY management and staff as certain  emergency facilities were being created. According to FRBNY officials, a  director providing information to FRBNY management and staff in his or  her role as chief executive officer of an institution does not equate to  “participating personally and substantially”—as defined by 18 U.S.C. §  208, discussed below—because the director is not playing a direct role  with respect to approving a program or providing a recommendation.  According to FRBNY officials, FRBNY’s Capital Markets Group contacted  representatives from primary dealers, commercial paper issuers, and  other institutions to gain a sense of how to design and calibrate some of  the emergency programs. For example, FRBNY officials said that General  Electric Company (General Electric), whose chief executive officer was  serving as a Class B director at the time, was one of the largest issuers of  commercial paper and General Electric was one of the companies  FRBNY consulted when creating the emergency program to assist with  the commercial paper market. FRBNY officials said they contacted  institutions for this purpose irrespective of whether one of FRBNY’s  directors was affiliated with the institution.
Some of the institutions that borrowed from the emergency programs had  senior executives and stockholders that served on Reserve Banks’ board  of directors. These relationships contributed to questions about Reserve  Bank governance and also raised concerns about conflicts of interest. We  identified at least 18 former and current Class A, B, and C directors from  9 Reserve Banks who were affiliated with institutions that used at least  one emergency program. In those cases, 11 Class A directors who  served between 2008 and 2010 worked for member banks that used an  emergency program. There are 2 Class B directors who served between  2008 and 2010 and worked for companies that used an emergency  program. Similarly, one Class C director who served between 2008 and  2009 was affiliated with a company that used at least one program. In  addition, there are 4 former Class A directors who served between 2006  and 2007 whose companies used the emergency facilities. The Term  Auction Facility was the most commonly used facility.
According to Federal Reserve Board officials, the Federal Reserve Board  allowed borrowers to access its emergency programs only if they satisfied  publicly announced eligibility criteria. Thus, Reserve Banks granted  access to borrowing institutions affiliated with Reserve Bank directors  only if these institutions satisfied the proper criteria, regardless of  potential director-affiliated outreach or whether the institution was  affiliated with a director. As we reported in our July report, our analysis  did not find evidence indicating a systemic bias toward favoring one or  more eligible institutions. While some institutions that borrowed from  these programs were affiliated with a Reserve Bank director, these  institutions were subject to the same terms and conditions as those that  had no such affiliation.
As another example, the Chief Executive Officer of JP Morgan Chase &  Co. (JP Morgan Chase) served on the FRBNY board of directors at the  same time that his bank participated in various emergency programs and  served as one of the clearing banks for emergency lending programs.  According to Federal Reserve Board officials, there are only two entities,  including JP Morgan Chase, that offer services as clearing banks for  triparty repurchase agreements and both banks served as clearing banks  for the emergency programs. Similarly, Lehman’s Chief Executive  Officer served on the FRBNY board while Lehman’s broker-dealer  subsidiary participated in emergency programs such as the Primary  Dealer Credit Facility.
section_title: Existing Policies and Procedures to Manage and Mitigate Actual and Potential Conflicts of Interest Involving Directors
paragraphs: Having the Class A directors, who represent member banks, and the  Class B directors, who are elected by member banks, as required by the  Federal Reserve Act, creates an appearance of a conflict of interest. This  is because Class A or B directors might own stock in banks or Class A  directors might work for banks that are supervised by the Reserve Bank  while also overseeing aspects of the Reserve Banks’ operations,  including the bank presidents’ evaluation and salary and personnel  decisions for the supervision and regulation function. In addition, Class  B directors are involved in the president selection process. In turn, the  president oversees the supervision and regulation function, which  regulates the member banks that vote for the Class A and B directors.  The president also may serve on the FOMC.
Conflicts of interest involving directors have been historically addressed  through both federal law and Federal Reserve System policies and  procedures. First, individuals serving on the boards of directors of the  Reserve Banks are generally subject to the federal criminal conflict-of-  interest restrictions in section 208 of title 18 of the U.S. Code and its  implementing regulations. 18 U.S.C. § 208 generally prohibits Reserve  Bank directors from participating personally and substantially in their  official capacities in any matter in which, to their knowledge, they have a  financial interest, if the particular matter will have a direct and predictable  effect on that interest. The Office of Government Ethics regulations  implementing 18 U.S.C. § 208 include provisions concerning divestiture,  disqualification (recusal), and waivers or exemptions from  disqualification. The regulations also provide that Reserve Bank  directors may participate in specified matters, even though they may be  particular matters in which they have a disqualifying financial interest.  These matters concern the establishment of rates to be charged to  member banks for all advances and discounts; consideration of monetary  policy matters and other matters of broad applicability; and approval or  ratification of extensions of credit, advances or discounts to healthy  depository institutions, or in certain conditions, to depository institutions in  hazardous condition. As the rulemaking for these exemptions notes,  because of their ties to the financial services industry and their  communities, it is likely that at least some directors will have financial  conflicts with their duties, and the exemptions adopted by the Office of  Government Ethics were necessary to resolve any possible conflict  between the directors’ statutorily mandated function and the performance  of their official duties.
The Federal Reserve Board and Reserve Banks have policies and  procedures to identify, manage, and mitigate conflicts of interest that  could result from a Reserve Bank director having financial or other  interests that conflict with the interests of the Reserve Bank. These steps  include defining the roles and responsibilities of directors to avoid  conflicts, managing and mitigating conflicts of interest through adherence  to federal law and the Federal Reserve board’s conflict-of-interest  policies, and establishing internal controls and policies to identify and  manage potential conflicts.
The Federal Reserve Board, within the requirements of the Federal  Reserve Act, defines Reserve Bank directors’ overall roles and  responsibilities. In doing so, it manages and mitigates conflicts with  respect to directors’ involvement with bank supervision and regulation by  precluding director involvement in institution-specific supervision matters  and establishes restrictions on directors’ interaction with the Reserve  Banks’ supervision and regulation function. Additionally the Federal  Reserve Board monitors the performance of the Supervision and  Regulation Department of the Reserve Banks. Actual or potential conflicts  of interest could arise if directors were consulted about supervisory  matters because of their stock ownership or affiliation with the supervised  entity or with a competitor or customer of the supervised entity. Our  analysis of the board minutes, interviews, and survey of Reserve Bank  directors reveals that interaction between the directors and the  supervision and regulation staff was generally limited and that the  directors were not involved in the day-to-day operations of supervision  and regulation or specific bank supervisory matters such as bank  examination ratings or potential enforcement actions. Reserve Bank  officials and directors told us that when supervision and regulation staff  report on the operations in board meetings, they do not provide details on  examination issues or identify institutions by name. Our review of board  minutes showed a few instances where supervision and regulation staff  shared summary information concerning the general condition of banking  institutions in the district.
According to Federal Reserve Board and Reserve Bank officials, because  the Federal Reserve Board has delegated the examination of bank and  financial holding companies, member banks, and affiliates to the Reserve  Bank staff, the staff report through the Reserve Bank presidents to the  Federal Reserve Board and not directly to the boards of directors of the  Reserve Bank. Further, although Supervision and Regulation generally  reviews and approves member bank applications to purchase other banks  or establish branch offices, among other things, applications that involve  institutions affiliated with a Reserve Bank director are approved by the  Federal Reserve Board. As an example, Goldman Sachs’s application to  become a bank holding company in September 2008 was reviewed by  the Federal Reserve Board because one of the company’s directors was  also a director on the board of the Reserve Bank.
Questions also have been raised about the role of the Reserve Bank  board in approving the Reserve Banks’ discount window lending and  whether conflicts of interest arise because officials from member banks  that borrow from the discount window may serve as Class A directors on  Reserve Bank boards. To avoid this potential conflict, no boards take part  in loan approval, although some boards ratify loans that have already  been granted under the discount window on a quarterly basis. Moreover,  directors and Reserve Bank officials we spoke with said that Class A  directors recuse themselves from the loan approval discussion when their  institution has borrowed.
As explained more fully earlier, Reserve Bank directors are subject to the  federal criminal conflict of interest restrictions under 18 U.S.C. § 208,  which generally prohibits Reserve Bank directors from participating  personally and substantially in their official capacities in any matter in  which, to their knowledge, they have a financial interest, if the particular  matter will have a direct and predictable effect on that interest. In addition,  Reserve Bank directors are expected to follow relevant policies in the  FRAM developed by the Federal Reserve Board. As stated in the FRAM’s  “Guide to Conduct for Directors of the Federal Reserve Banks and  Branches,” directors are expected to be “above reproach” in their  personal financial dealings and should never use information they obtain  as directors for personal gain. The FRAM states that in carrying out their  responsibilities, directors should avoid any action that might result in or  create the appearance of (1) affecting adversely the confidence of the  public in the integrity of the Federal Reserve System, (2) using their  position as director for private gain, or (3) giving unwarranted preferential  treatment to any organization or person. Moreover, it states that directors  should strictly preserve the confidentiality of Reserve Bank and Federal  Reserve System information, and should avoid making public statements  that suggest the nature of any monetary policy action that has not been  officially disclosed. Directors also are expected to adhere to high ethical  standards of conduct. In addition, directors are also expected to comply  fully with all applicable laws and regulations governing their actions as  directors and in their conduct outside of the Federal Reserve System.  The FRAM also prohibits directors from engaging in certain types of  political activities. As a general principle, it states that directors should not  engage in any political activity or serve in any public office where such  activity or service might be interpreted as associating the Reserve Bank  or the Federal Reserve System with any political party or partisan political  activity, might embarrass the Reserve Bank or the Federal Reserve  System in the conduct of its operations, or might raise any question as to  the independence of the individual’s judgment or ability to perform his or  her duties with the Reserve Bank or System. The Federal Reserve  Board’s policy does not prohibit directors from participating in activities as  individual voters or as members of nonpartisan public service bodies  when that would not be potentially embarrassing to the Federal Reserve  System.
The Reserve Banks have internal controls, including annual certifications,  oaths, and affirmations, to help the banks monitor directors’ compliance  with the FRAM and conflict of interest policies and procedures. These  mechanisms require directors to report new directorships or affiliations,  and to reaffirm that they are free of conflicts of interest. While directors  are not required to disclose their financial holdings, Reserve Banks  provide updates to directors whenever there is a change to the list of  prohibited investments and affiliations (based on institutions that become  bank holding companies or other institutions supervised by the Federal  Reserve System). Also, during the directors’ selection process, Reserve  Bank officials conduct a background check using publicly available  information on the directors and the financial status of the directors’  companies. Once directors are on the board, the Reserve Banks rely on  the directors to self report any actual or potential conflicts of interest.  Additionally, the directors receive training at the beginning of their terms,  from both the Reserve Bank and the Federal Reserve Board. The Federal  Reserve Board training includes meetings where the directors are able to  meet the Board of Governors, Federal Reserve Board staff, and other  directors from across the system. The training provided by the Reserve  Banks includes information on the FRAM’s “Guide to Conduct for  Directors of Federal Reserve Banks and Branches,” roles and  responsibilities, ethics, oaths, affidavits, and certifications. Many directors  also receive ethics training annually, in addition to the beginning of their  terms. Reserve Banks provide training to directors to guide them in  determining what investments/affiliations may be prohibited. The Federal  Reserve Board also offers midterm training to all directors, which officials  said is generally well attended.
According to Federal Reserve Board and Reserve Bank officials with  whom we spoke, the most likely potential conflict of interest involves  procurement matters, and the Reserve Banks have taken a variety of  steps to address them. Some Reserve Bank boards are involved in  approving the bank’s vendor contracts. Because some directors are  affiliated with businesses in the banks’ district that may offer services the  Reserve Bank seeks, they could potentially have a conflict of interest if  their firms or competitors were to compete for the contracts. To help  ensure that procurement practices are untainted by actual or potential  conflicts of interest from directors, the Federal Reserve Board requires all  of the Reserve Banks to have procurement policies that provide guidance  for directors that includes the role of directors in procurements, the nature  of the procurement, an education program for directors, written  procedures for the directors to follow for recusal, written certification  process, and record keeping of training materials and attendance,  recusals, and procurement certifications. Our review noted that all banks  require the directors to sign certifications stating whether or not they have  a conflict of interest with a procurement that is being considered. All  Reserve Banks have processes and certifications to help ensure that  directors do not have conflicts. Likewise, all Reserve Banks have  delegated certain procurement decisions to management.
section_title: Federal Reserve Banks’ Ethics Policies and Practices Are Generally Consistent with Other Organizations’ Policies and Practices, but Waiver Policies Could be Improved
paragraphs: We compared the Federal Reserve System’s ethics and related policies  and practices with those of other organizations, including other central  banks, a self-regulatory organization whose members serve on its board  of directors, a government-sponsored enterprise, and large bank holding  companies. See appendix IV for a list of the 10 largest bank holding  companies included in our review.
The authorizing laws, policies, and procedures for all four central banks  we studied, like the authorizing law, policies, and procedures for the  Federal Reserve System, included provisions relating to ethical behavior  and conduct. All four central banks and the U.S. Reserve Banks  emphasized that directors must demonstrate a high level of ethical  conduct and adhere to applicable laws and regulations, but policies for  managing conflicts of interest varied. For example, the Reserve Bank of  Australia waives all conflict of interest requirements for its board, and  allows directors to participate in policy deliberations as long as they  disclose their interests to the bank annually. However, the Reserve Bank  of Australia prohibits directors from working for or having a material  financial interest in private financial companies in Australia. Conversely,  the Bank of Canada Act requires that directors (1) disclose any material  interest in writing or in the minutes of board meetings, (2) disclose the  conflict as quickly as possible after the conflict is discovered or realized,  and (3) not vote in any resolution or action related to the conflict.  Directors must also avoid or withdraw from participation in any activity or  situation that places them in a real, potential, or apparent conflict of  interest. The Bank of Canada prohibits directors from having affiliations  with entities that perform clearing and settlement functions in the financial  services industry, serving as a dealer for government securities, or being  government employees. Table 2 provides additional information on the  ethics and conflict-of-interest practices of the central banks we reviewed.
Reserve Banks’ ethics policies were generally consistent with those of  FINRA and those required of the FHLBanks and public companies listed  on the New York Stock Exchange (NYSE). FINRA prohibits directors who  have a substantial financial interest or are affiliated with a regulated entity  from participating in any regulatory matter, disciplinary action,  investigation, or decision regarding an application from that entity for an  exemption. The Federal Housing Finance Agency—FHLBanks’  regulator—requires that FHLBanks have a conflict of interest policy and  that directors promptly disclose any actual or apparent conflicts of interest  and recuse themselves from issues in which they have a conflict. Public  companies listed on the NYSE—including the 10 largest bank holding  companies included in our review—must adopt and disclose a code of  business conduct and ethics. The code must contain a policy that  prohibits conflicts of interest and allows directors to communicate  potential conflicts with the company. Table 3 shows the ethics and conflict  of interest practices of the comparable organizations we reviewed.
Federal Reserve Banks do not require directors to periodically disclose  their financial interests. Officials at the Federal Reserve Board stated that  directors were doing a civic duty by serving on a Reserve Bank board and  that the Federal Reserve Board does not want to make it burdensome for  them to serve. The officials also noted that directors’ investments may  change frequently, so keeping accurate information on all investments  would be difficult. Class C directors submit an annual certification stating  that they do not have any prohibited stockholdings. Although Federal  Reserve Bank directors do not submit an annual disclosure of non- financial interests, both Class B and Class C directors are required to  submit an annual certification stating that they do not have any prohibited  affiliations. The directors are required to notify the corporate secretary if  there are any changes in their affiliations or stockholdings, as appropriate.  All four central banks we reviewed required directors to disclose some  information about their personal affiliations with other organizations, such  as other directorships. The Reserve Bank of Australia requires directors  to disclose material personal financial interests—including financial and  nonfinancial—to the treasurer on a yearly basis. The European Central  Bank (ECB) requires all Governing Council members (i.e., Executive  Board members and governors of the National Central Banks) to annually  disclose their public and private affiliations, and Executive Board  members must also complete a yearly financial disclosure.
FINRA governors annually disclose their relationships with other  organizations, such as other directorships, but do not typically provide  financial information annually, according to FINRA officials. FHLBanks  are required to file an annual report on Form 10-K with the Securities and  Exchange Commission. This form includes information about the  directors’ other directorships on the boards of publicly traded companies  or investment companies. Most FHLBanks do not require directors to file  a comprehensive annual financial disclosure, but most of the banks  require directors to sign an annual certification agreeing to adhere to the  ethics policies. All public companies—including the bank holding  companies we reviewed—are also required by SEC to file a Form 10-K,  which includes information about any other directorships of board  members.
Other comparable organizations had a variety of policies on waiving ethics  and related requirements. Central banks in our review varied in the extent  to which they had policies or procedures for directors to apply for waivers to  their ethics policies. The Bank of Canada does not have a waiver process.  An official at the bank stated that waivers would be inconsistent with the  bank’s conflict of interest policy, which requires that directors avoid or  withdraw from participation in any activity that places the director in a real,  potential, or apparent conflict of interest. The European Central Bank Code  of Conduct instructs Governing Council members to seek counsel from an  ethics adviser if a conflict arises. The adviser either decides the issue or  forwards it to the Governing Council. The NYSE requires that listed  companies, including the large bank holding companies we reviewed,  promptly disclose any waivers of codes of conduct for directors or  executive directors. Only boards and board committees can grant waivers,  which must be disclosed to shareholders within 4 business days, using  either a press release, the institutional website, or an SEC Form 8-K.  FINRA’s code of conduct for directors states the board must approve  waivers from the code. However, FINRA officials told us that in practice, its  governors have chosen to manage conflicts through recusal rather than  seeking waivers. About half of the FHLBanks reported that they have a  process in place for directors to request a waiver of the code of conduct.
There are two types of waivers relevant to Reserve Bank directors. First, as  discussed earlier, the Federal Reserve Board can grant waivers to directors  in connection with 18 U.S.C. §208, pursuant to applicable federal  regulations. Second, Reserve Banks may request waivers from the Federal  Reserve Board’s policies related to director eligibility, qualifications and  rotation, such as allowing directors to remain on the Reserve Bank board  despite having a prohibited investment or other prohibited affiliation.  Federal Reserve Board officials said they have received few waiver  requests. According to the officials, the Federal Reserve Board waiver  process permits Reserve Banks to make informal inquiries of Federal  Reserve Board staff as to whether a given action would be appropriate.  The officials noted that most of the time Reserve Banks’ questions could be  resolved without an official waiver request. Additionally, Reserve Bank  officials told us that they frequently receive questions from directors about  the policies, which they either discuss and handle internally, or contact the  ethics officer or corporate secretary at the Federal Reserve Board to  determine the appropriate actions that should be taken. For example, one  director checked with the general counsel at the Reserve Bank to discuss a  situation in which family members had inherited bank stock that was held in  a trust for which the director was named trustee. The general counsel  discussed the issue with relevant officials at the Reserve Bank and advised  the director to resign his position in the trust so that he would not have a  conflict of interest.
Not all Reserve Banks have procedures in place for directors to request a  waiver of the eligibility policy from the Federal Reserve Board. We found  that the Reserve Banks are not required to have a waiver request process  and only FRBNY has a formal process in place to review waiver requests.  An official from one Reserve Bank told us that the bank does not have a  formal process for considering waiver requests nor has it had directors who  needed to request a waiver from the Federal Reserve Board. When  FRBNY sought the waiver on behalf of the then-FRBNY chairman from the  Federal Reserve Board, FRBNY did not have a formal waiver process and  did not consult with the board of directors before making a waiver request  to the Federal Reserve Board. An FRBNY official told us that in hindsight  the board should have been involved. On the basis of this experience,  FRBNY implemented a formal waiver process. While we recognize that the  need to request a waiver from Federal Reserve Board policies may be rare,  a crisis situation may create unanticipated conflicts without providing time  for comprehensive actions before a decision must be made. However,  without a formal process in place to consider a request for a waiver from  Federal Reserve Board policies, Reserve Banks risk inconsistent treatment  of requests and being exposed to questions about their governance  practice and the integrity of their decisions and actions.
If waivers to policies are granted, making the process and decisions  transparent is vital. Given the public nature of Reserve Bank activities,  disclosing waivers provided to directors is one way to improve  transparency and accountability and reduce the appearance of conflicts of  interest. Public companies listed on the NYSE are required to promptly  disclose any waivers of the code of conduct for directors and executive  officers, which can be made only by the board or a committee of the  board. To the extent that a waiver of the code of conduct is granted, the  waiver must be disclosed to shareholders within 4 business days of the  decision, by distributing a press release, providing website disclosure, or  filing a report with SEC. Reserve Banks are not required to disclose  information to the public about waivers of the policy on director eligibility  and qualifications for one of their directors that were granted by the  Federal Reserve Board. As demonstrated during the recent financial  crisis and the waiver request for the then-FRBNY chairman, a lack of  transparency around the waiver request process and outcome contributed  to greater distrust of Reserve Bank governance.
section_title: Additional Steps Are Needed to Improve Transparency and Accountability
paragraphs: Congress and the Federal Reserve System have taken steps aimed at  improving Reserve Bank governance. The Dodd-Frank Act, enacted on  July 21, 2010, made several amendments to the Federal Reserve Act.  One of these amendments changed the selection process for Reserve  Bank presidents and first vice presidents. Before the amendment, all  directors acted to appoint the president of the Reserve Bank, subject to  the approval of the Federal Reserve Board. This created the  appearance of a conflict because the Class A directors voted to appoint  the Reserve Bank president, who would play a role in supervision and  regulation and may be a voting member of the FOMC. After the  amendment, only Class B directors (who are elected by district member  banks to represent the public) and Class C directors (who are appointed  by the Federal Reserve Board to represent the public) may appoint the  Reserve Bank presidents. Class A directors, who are elected by member  banks to represent member banks, may no longer appoint presidents of  the Federal Reserve Banks. This same change also affects the  appointment of the first vice president.
In part because of the financial crisis that started in mid 2007 and the  increased scrutiny of the Federal Reserve System, the Federal Reserve  Board conducted a study of the governance of the Federal Reserve  Banks, which included a review of the roles and responsibilities of the  Reserve Bank directors. In November 2009, the results of this study were  presented to the Reserve Bank presidents, corporate secretaries, and  board chairmen, which led some banks to conduct reviews of the roles  and responsibilities of their bank directors. As a result of the Federal  Reserve Board review, the board revised two policies governing directors.
First, the board amended the eligibility policy to explicitly address  situations in which Class B or C directors’ stockholdings unexpectedly  become impermissible, such as if a company in which a director holds  stock converts to a bank holding company. Before this revision, the  Federal Reserve Board did not have a formal policy governing the  treatment of such situations. The revised policy requires directors to  resign from the board or divest their interests within 60 days from the time  the Reserve Bank or director learned about an impermissible situation.  During this time, the director would have to recuse himself or herself from  all duties related to service as a Reserve Bank director until the affiliation  is severed. Second, the Federal Reserve Board revised its policy on  director conduct by requiring Reserve Banks to adopt a policy that  governs instances when directors are involved with procurement, as  discussed previously.
Since this Federal Reserve Board study and the Dodd-Frank Act  amendments, all of the Reserve Banks have changed the directors’ roles  to remove the Class A directors from the process of appointing the bank  president. In addition, some banks have included additional restrictions  on Class A directors’ involvement in supervision and regulation personnel  and other matters. For example, the Federal Reserve Banks of New York,  Richmond, and Minneapolis restricted Class A directors’ involvement in  personnel appointments for supervision and regulation. Moreover, after  the recent study, the board of the Federal Reserve Bank of St. Louis  reevaluated its procedures so that the Class A directors are not involved  with personnel matters related to the senior vice president of its  supervision and regulation function, or any institution-specific matters.
According to Federal Reserve System officials, it has been a standing  practice, predating the enactment of the Dodd-Frank Act, that Reserve  Bank directors do not vote on institution-specific supervisory matters.  Beyond that practice, the Federal Reserve Banks of New York,  Richmond, St. Louis, and Minneapolis recently revised their bylaws to  include the role of their boards of directors with regard to supervision and  regulation. FRBNY made clear that Class A directors are prohibited from  voting on appointment, termination, and compensation of employees in  the Financial Institutions Supervision group. Federal Reserve Bank of  Richmond stated directors cannot vote on institution-specific supervision  and regulation matters and that Class A directors should not vote on the  budget for the supervision and regulation function and matters related to  senior personnel in that function. Federal Reserve Bank of St. Louis  states that actions by the board of directors related to oversight of the  supervision and regulation function shall be upon a vote of a majority of  the Class B and Class C directors present at any such meeting. Similarly,  Federal Reserve Bank of Minneapolis stated that directors are not  involved in institution-specific supervision and regulation matters and  Class A and Class B directors should not vote on matters of an  administrative nature.
Although there are restrictions on directors’ involvement in supervision  and regulation matters, the Reserve Banks are not required to document  the directors’ roles in their bylaws. As a result, 8 of the 12 Reserve Banks  have not documented the extent of board of directors’ involvement in  supervision and regulation in their bylaws. The Federal Reserve Banks of  Boston, Chicago, Cleveland, Dallas, Kansas City, Philadelphia, and San  Francisco do not document the directors’ roles and responsibilities to  further clarify the extent of their involvement in supervision and regulation  matters.
Although Reserve Bank directors may be cognizant of their roles and  responsibilities, a lack of a clear statement in the bylaws on the directors’  involvement in supervision and regulation matters could contribute to lack  of clarity around the directors’ roles, create confusion for the public, and  lead to questions about Reserve Bank governance. Moreover, by  documenting the roles of directors with regard to such matters, the  Federal Reserve System could help enhance the public’s understanding  of the roles of the directors and reduce the appearance of conflicts of  interest.
section_title: Changes to the Structure of the Reserve Banks’ Boards to Further Strengthen Governance Involve Trade-offs
paragraphs: Some officials, directors, and academics with whom we spoke also  suggested potential changes to the Reserve Bank board structure that  could further strengthen governance, but these changes would involve  tradeoffs. First, some suggested that increasing the number of directors  appointed by the Federal Reserve Board who represent the public could  help alleviate the appearance of member bank control. This could be  accomplished by expanding the Reserve Bank board size by increasing  the number of Class C directors or by adding a fourth class of 3 directors  appointed by the Federal Reserve Board. By adding 3 more appointed  directors to the Reserve Bank board, the boards would have an equal  number of directors elected by member banks and directors appointed by  the Federal Reserve Board, therefore eliminating the perception of  member bank control of the boards. We have previously reported that  board size is not one-size-fits-all and should be based on the needs and  complexity of the organization. As discussed later in the report, board  size for other public and private organizations varies, but a board size of  12 members would still be within the range of board sizes at other  comparable organizations such as central banks, self-regulatory  organizations, and large bank holding companies. A larger board could  also enhance opportunities for diverse candidates. However, adding 3  board members would create more positions for Reserve Banks to fill,  and it may be more difficult for some of the Reserve Banks to fill these  positions. As of September 16, 2011, there were two director positions in  the 12 Reserve Banks open. Additionally, some Reserve Bank officials  and directors stated that a larger board size could reduce the opportunity  for directors to participate in the meeting and may increase absences or  decrease committee participation because directors could feel that their  contributions were less important because there were more directors to  accomplish the necessary board work. Additionally, an increase in the  size of the Reserve Bank board would require an amendment to the  Federal Reserve Act.
Second, some Reserve Bank officials and directors suggested that the  Federal Reserve Board could appoint Class B directors to represent the  public rather than having them elected by member banks. The perception  of conflicts of interest and member bank control could be reduced by  making this change. However, we heard from several academics and  Reserve Bank officials that the current system provides a set of checks  and balances between the Federal Reserve Board in Washington, D.C.,  and the 12 Reserve Banks and their members. By allowing the Federal  Reserve Board to appoint two-thirds of the Reserve Bank boards, the  balance of power would shift to the Federal Reserve Board. Officials and  directors we spoke with emphasized the importance of regional input in  the Federal Reserve System, which includes the ability of the regions to  select their representatives on the Reserve Bank board. Additionally, as  discussed earlier, while the FRAM prohibits bank officials and employees  from serving on nomination committees for Class A and B directors,  Reserve Bank officials told us that they played a significant role in the  identification, vetting, and recruiting of Class B directors before they are  nominated and elected by member banks. Because Reserve Bank  officials are involved in the identification and vetting process for both  types of candidates, whether changing the selection process for Class B  directors would change the outcome significantly is unclear. Additionally,  allowing the Federal Reserve Board to appoint the Class B directors  would require an amendment to the Federal Reserve Act.
section_title: Changes to the Federal Reserve System Structure Also Involve Trade-offs
paragraphs: Congress, academics, and others have offered a number of ways to  change the structure of the Federal Reserve System, which would have  implications for governance and ongoing concerns about conflicts of  interest. First, some academics and others have commented that the  Reserve Banks should become offices or branches of the Federal  Reserve Board rather than independent entities within the system, which  would eliminate the boards of directors, or they said the boards of  directors should be converted into advisory councils. One academic told  us that making them branches would help address concerns about the  current governance structure because it would eliminate the need for  boards of directors and thereby eliminate conflicts. As an example, the  central bank of Germany follows this model. However, others we  interviewed noted that this would concentrate all of the power and  influence with the Federal Reserve Board. Moreover, it would increase  the size of the federal agency. In addition, others have said that  converting boards to advisory councils in the districts would undermine  governance by reducing the responsibility of the boards and would make  it harder to attract quality candidates to serve on the councils.
Second, some have questioned the need for 12 Reserve Banks given  changes in the financial markets and advances in technology. The views  of Federal Reserve System officials varied. A few of the individuals we  interviewed thought there could be fewer banks because the current  structure was outdated and reflected a U.S. economy that existed 100  years ago. However, others believe that the structure is still appropriate  given differences in regional economies and perspectives. Federal  Reserve System officials also point to the greater efficiencies that have  been implemented through the Reserve Banks’ consolidation of certain  ongoing operations such as check clearing and information technology.
Third, some in Congress and others recommended that the Federal  Reserve System’s role in supervision and regulation be eliminated, which  would have eliminated concerns about conflicts of interest involving  directors affiliated with institutions supervised by the Reserve Banks. Some  believe that the central bank should be focused exclusively on monetary  policy and that supervision and regulation should be conducted by another  regulatory entity. Others viewed the two functions as critically intertwined,  and ultimately, this approach to reform was not pursued by Congress in the  Dodd-Frank Act. Rather, the Federal Reserve System’s supervisory role  was increased to include thrift holding companies and systemically  important financial institutions. Others have taken a less sweeping  approach to reform by questioning the Federal Reserve Board’s delegation  of supervision to the Reserve Banks. However, consolidating supervision  with the Federal Reserve Board would require a substantial increase in the  federal workforce for the Federal Reserve Board to conduct this function.  Currently, the supervision and regulation staff at the Reserve Banks are not  federal employees because they are employees of the Reserve Banks and  not the Federal Reserve Board. Rather, the Reserve Bank supervision and  regulation staff act under authority delegated from and are overseen by the  Federal Reserve Board. With the exception of the delegation of authority,  these other structural changes involve policy decisions that would require  changes to the Federal Reserve Act.
section_title: Although Most Federal Reserve Banks’ Governance Practices Are Consistent with Those of Other Organizations, Board Governance Could Be More Transparent
paragraphs: Reserve Bank boards are generally similar in size, composition, and term  lengths and limits to the boards of comparable organizations. Additionally,  they employ similar accountability measures, such as annual performance  reviews of the organization and management, as other comparable  organizations. However, Reserve Banks lack transparency in their  governance practices compared with those of other organizations we  reviewed. For example, while most all of the other organizations we  reviewed make key governance documents, such as board bylaws, ethics  policies, committee mission statements, and committee assignments,  available to the public, most Reserve Banks do not post this information on  their websites.
subsections: section_title: Reserve Banks’ Board Structure and Independence Requirements Are Similar to Those of Comparable Organizations
paragraphs: As previously discussed, the size of Reserve Bank boards is established  by the Federal Reserve Act of 1913 and sets each board’s size at nine  directors. The size of the Reserve Bank boards is within the range of  board sizes and composition that we identified at comparable  organizations. As we have seen, the boards of the organizations we  studied had from 9 to 23 members (see table 4). Neither the NYSE nor  SEC has size requirements for the boards of listed and public companies,  and most of the bank holding companies we reviewed included provisions  in their bylaws that allowed for flexibility in board size. For example, one  company’s bylaws state the board has the authority to determine the  number of directors and that the number should be in the range of 13 to  19, with the flexibility to increase the size as needs and circumstances  change. The number of allowable directors under the bylaws of bank  holding companies we studied ranged from 3 to 36, while the actual  number of directors on the boards of bank holding companies included in  our study ranged from 11 to 15.
According to NYSE, independence for directors means having no material  relationship with the listed company, either directly or as a partner,  shareholder, or officer of an organization that has a relationship with the  company. Central bank literature typically refers to independence in terms  of the central bank being independent of the government; therefore,  independent directors are those who do not work for the central bank or  other government entity. Independence is an important aspect of board  governance because it provides accountability and an outside  perspective. Further, the Organisation for Economic Co-operation and  Development (OECD) notes that boards must be able to exercise  objective judgment in order to fulfill their duties and that, to accomplish  this goal, a sufficient number of board members should be independent of  management.
Reserve Bank directors have varying levels of independence. As  discussed earlier in this report, Class C directors are appointed by the  Federal Reserve Board. These directors are independent—that is, they  are not employees or managers of the Reserve Banks at which they  serve, nor are they a partner, shareholder, or officer of an organization  that has a relationship with the Reserve Bank, such as a member bank.  Class B directors are elected by member banks and are statutorily  required to represent the public. They meet almost all of the  independence requirements listed above, with the exception that they can  be a stockholder in a bank. Class A directors, who represent the member  banks that elect them, are the least independent of the Reserve Bank  directors. Some have questioned whether Reserve Bank boards have  enough independence from the member banks that the Reserve Banks  supervise. FINRA’s bylaws balance public and industry representation by  requiring that members representing the public outnumber those  representing industry on the board. No FHLBank managers serve on the  FHLBank boards, and by law at least two-fifths of the directors must be  independent and not affiliated with member banks. Additionally, at least  two of the independent directors must be “public interest” directors with at  least 4 years of experience representing community or consumer  interests in banking services, credit needs, housing, or consumer financial  protections.
section_title: Term Lengths and Limits and Selection Procedures Were Comparable across Organizations
paragraphs: Reserve Bank directors’ term lengths and limits were also within the range  of term lengths and limits we observed for other comparable entities. For  example, both Reserve Bank and FINRA directors can serve up to two  consecutive 3-year terms. At the other four central banks we reviewed,  independent directors—who are not government or central bank officials, or  for the ECB, the board members from national central banks—served 3- to  5-year terms. Other board members (including governors and other  government officials) served 5- to 8-year terms. FHLB directors may serve  up to three consecutive 4-year terms. The NYSE and SEC do not have  requirements for listed or public companies regarding term length or limits.  Two of the large bank holding companies we reviewed opted to have  directors serve 1-year terms so that each director had to be reelected by  the stockholders each year, but none of the companies enacted term limits  for their directors. One company noted in its annual proxy statement that  although term limits might be a source of fresh ideas and viewpoints, they  had the disadvantage of potentially reducing the knowledge and insight that  experienced directors gained over time. Another bank holding company’s  proxy statement said that the company favored monitoring individual  director performance over term limits.
Selection procedures for directors varied across the entities we  examined. As we have discussed, Federal Reserve Bank boards consist  of both appointed and elected directors. However, all the boards of the  four central banks we reviewed had directors who were appointed to the  board by various entities. For example, for the ECB Executive Board,  members are nominated by the governments of euro-area member  states. Both the ECB’s Governing Council and the European Parliament  are consulted on prospective candidates and issue opinions on them. The  European Parliament holds a hearing for the nominated candidate, and  the European Council (only member states that have adopted the euro)  votes to appoint a new Executive Board member. The 17 euro-area  National Central Bank governors who are members of the Governing  Council in addition to the 6 Executive Board members are selected  according to national procedures. The directors of the Reserve Bank of  Australia and independent directors of the Bank of Canada are appointed  by the Treasurer and Minister of Finance, respectively. The Queen of  England appoints governors and nonexecutive directors to the Court of  Directors at the Bank of England.
The other comparable organizations we studied had a combination of  elected and appointed members and used nominating committees as part  of the director selection process. FINRA’s bylaws require that all  members be nominated by a committee and certified by the corporate  secretary. Of the 10 industry directors, 7 are elected by their constituents.  The 3 remaining industry directors and all of the public directors are  appointed by FINRA’s Board of Governors after nomination by the  committee. FHLBank member directors are nominated and voted on by  member institutions within their state, whereas independent directors are  nominated by the FHLBank’s board of directors, after consultation with its  Advisory Council, and elected by the FHLBanks’ members at-large.  Companies listed on the NYSE must have nominating/corporate  governance committees composed entirely of independent directors to  identify qualified individuals and select them or recommend them to the  board for selection. Stockholders elect the directors of the 10 largest bank  holding companies we reviewed.
Like the Reserve Banks, other comparable entities also considered skills  and experience as key factors in selecting board members. Reserve  Banks recruit directors in accordance with the requirements in the Federal  Reserve Act, which stipulate that directors shall be chosen without  discrimination as to race, creed, color, sex, or national origin and that  Class B and Class C directors who represent the public shall be elected  “with due but not exclusive consideration to the interests of agriculture,  commerce, industry, services, labor, and consumers.” Some Reserve  Bank officials told us that while they strive to find diverse candidates from  a variety of industries, they primarily want to find people who have the  skills and knowledge that will fill gaps in the board’s existing knowledge  and skill set. Similarly, all four central banks we reviewed had skill or  experience qualifications for board members. For example, the Bank of  Canada focuses on the collective skills of the board of directors in areas  such as accounting, human resources, corporate governance, and  financial markets.
FHLBanks and FINRA also look for directors with particular skills and  experience to complement the boards. FHLBank nonmember directors  are required to have experience in, or knowledge of, one or more of the  following areas: auditing and accounting, derivatives, financial  management, organizational management, project development, risk  management practices, and the law. FINRA officials stated that they had  no written qualifications but added that for each opening they analyzed  the type of expertise the board lacked—for example, technological, legal,  or academic—to identify skills that would complement the existing  expertise. SEC requires public companies to disclose information about  the qualifications of directors and nominees for director and to provide  reasons why each should serve but does not require specific types of  experience or expertise.
As with the Federal Reserve Banks, none of the comparable entities had  specific requirements for gender or race and ethnic diversity for their  boards. One central bank required that directors represent different  geographies and industries within the country. As discussed earlier,  public companies must report in their proxy and information statement on  how the nominating committee considered diversity when reviewing  candidates for director. In our analysis of the 10 largest bank holding  companies in 2010, proxy statements indicated that companies primarily  value candidates that will bring complementary skills and experience to  the board but also consider diversity in selecting them.
section_title: Federal Reserve Banks’ Accountability Measures Are Consistent with Comparable Organizations’ Measures
paragraphs: Reserve Banks and comparable institutions, both public and private, have  a variety of accountability measures in place, including annual  performance reviews of the organization and management, internal and  self-assessments, and external audits. All 12 Reserve Bank boards  conduct bankwide performance reviews on a yearly basis. Similarly, a  committee of the board at the Bank of England—the Committee of the  Court (NedCo)—is responsible for reviewing the bank’s performance in  relation to its objectives and strategy, monitoring the extent to which its  financial management objectives are met, reviewing the procedures of the  Monetary Policy Committee and the bank’s internal controls, and  determining the pay and terms of employment of the governors, executive  directors and external Monetary Policy Committee members. To a large  extent, NedCo’s work is done through the Court of Directors; it is chaired  by the Court’s chairman and consists of all nonexecutive members.
Internal reviews and self-assessments are also part of board  accountability practices across the institutions that we reviewed. Within  the Federal Reserve System, the Federal Reserve Board relies on  RBOPS to oversee Reserve Banks’ management and operations.  RBOPS reviews each Reserve Bank at least every 3 years. In addition, 6  of the 12 Federal Reserve Bank boards of directors conduct an annual  self-evaluation. Some of the other organizations that we reviewed had  similar evaluations conducted by their boards. For example, the Bank of  similar evaluations conducted by their boards. For example, the Bank of  Canada’s board conducts an annual self-assessment through one-on-one  interviews between each director and the lead director, supported by a  survey that solicits directors’ views on various elements of the board’s  operations, governance, and effectiveness. The survey is completed  electronically and aggregated results are distributed to directors for  discussion in open session. The board also has developed and maintains  a skills map of the current directors’ competencies and takes note of any  gaps or deficiencies. Further, companies listed on the NYSE must adopt  corporate governance guidelines that include provisions for the board to  conduct a self-evaluation at least annually to determine whether it and its  committees are functioning effectively.
Reserve Bank boards and publicly listed companies also hold meetings of  nonmanagement directors to promote accountability by encouraging  nonmanagement directors to serve as a more effective check on  management. All Federal Reserve Bank boards have executive  committees that vary across banks in terms of the composition of Class  A, B, and C directors (see app. III for more information on the Reserve  Bank committees). The NYSE requires that nonmanagement directors of  each listed company meet at regularly scheduled executive sessions  without management.
Some of the organizations that we reviewed, including the Federal  Reserve Banks, had audit committees in place. Each Reserve Bank has  an audit committee that oversees the bank’s internal auditor and reviews  and approves the annual audit plan. The audit committee is also  responsible for coordinating with external auditors and helping ensure  that audit recommendations and concerns are properly addressed.  Similarly, the Bank of England has two committees that play a role in  accountability. First, as previously discussed, the Committee of the Court,  NedCo, is responsible for conducting a performance assessment of the  central bank. Second, the Risk and Audit Committee provides  independent assurance to the Court of Directors that the bank’s internal  controls are appropriate. The committee meets regularly and reviews the  work of internal and external auditors, annual financial statements, and  the appropriateness of the accounting policies and procedures adopted. It  also makes recommendations on the appointment of the external  auditors, including their independence and fees, and reviews the bank’s  risk matrix and specific business controls. The Reserve Bank of Australia  and the Bank of Canada also have audit committees that play a role  similar to that of the Reserve Banks’ committees.
FINRA’s bylaws require the board to have an audit committee of four or  five governors, none of them officers or employees of the corporation and  including at least two public governors. The audit committee’s functions  are similar to those of committees at other organizations previously  discussed. Finally, NYSE-listed companies are required to have audit  committees with at least three independent members. NYSE guidelines  stipulate that audit committees must assist with board oversight of the  company’s financial statements, compliance with legal and regulatory  requirements, the independent auditor’s qualifications and independence,  and the performance of the company’s internal audit function and  independent auditors. The audit committees are also responsible for  SEC’s required disclosures on committee activity.
section_title: Although Reserve Banks Have Taken Steps to Make Their Governance Practices More Transparent, More Needs to Be Done
paragraphs: Governance practices should be transparent to protect organizational  reputation and help ensure accountability. Reserve Bank governance  practices lack transparency compared with those of comparable  institutions that we reviewed. We have previously reported that good  governance, transparency, and accountability are critical in both the  private and public sectors. In the private sector, they promote efficiency  and effectiveness in the capital and credit markets, and overall economic  growth, both domestically and internationally. In the public sector, they  are essential to the effective and credible functioning of a healthy  democracy and to fulfilling the government’s responsibility to citizens and  taxpayers. Additionally, the World Bank, the International Monetary Fund,  OECD, and other researchers agree that transparency is an important  principle in good governance. While the Federal Reserve System has  begun to increase the disclosure of information, more can be done to  enhance the transparency of the Reserve Banks’ governance practices.
Most Reserve Banks do not routinely disclose governance practices to  the public, while most comparable institutions we reviewed do. For  example, all four central banks we studied had public websites that  displayed information about board governance, including information  about the committee structure and conflict of interest policies. FINRA  bylaws, including committee mission statements and conflict-of-interest  rules, are also available on the FINRA website. The Federal Housing  Finance Agency does not have any reporting requirements for FHLBanks,  and while FHLBanks vary in what they publish on their websites, most  provide some information. For example, three-quarters of the FHLBanks  post information about their code of ethics, bylaws, or both, and half  provide information about the election process, including time frames and  independent director applications. One-third of the FHLBanks post  biographical information about the directors beyond the director’s  company, position, and location. 6 of the 12 FHLBanks post information  about the board committees—either a description of each committee and  its purpose or board members serving on each committee, and six  FHLBanks publish the audit committee charter on their websites.
Publicly traded companies were subject to the most stringent disclosure  guidelines of the institutions we examined. The NYSE requires that listed  companies publicly disclose corporate governance guidelines that  address director qualification standards, responsibilities, compensation,  and access to management and independent advisers, as well as director  orientation and continuing education, management succession, and  annual performance evaluations of the board. Corporate websites must  be accessible from the United States, must clearly indicate in the English  language the location of governance documents, and documents must be  available in printable versions in English.
By comparison, few of the Reserve Banks post information about board  governance, such as committee structure and assignments, or conflict of  interest and ethics policies on their websites. While the Federal Reserve  Board notes vacant positions among its list of Reserve Bank board  directors, the Reserve Banks do not publish information about vacant  director positions on their websites. Additionally, all Reserve Banks have  publicly accessible websites, but most banks post only the names, titles,  and employers of current directors rather than richer biographical  information. Four of the Reserve Banks provide descriptions of the board  and their roles, and two banks post more comprehensive information. For  example, FRBNY includes the board’s bylaws, biographies for current  board members, the members and charters of each of the board’s  committees, and the bank president’s daily schedule. Federal Reserve  Bank of Kansas City posts information about the directors’ selection and  roles, biographies for current directors, and lists alumni directors from  1992 to the present.
A few individuals we spoke with noted that, in particular, Reserve Banks  could be more transparent about director elections. One researcher  stated that as a result of the lack of transparency around the director  election process, there is a lack of understanding of how and why  directors were chosen to serve on Reserve Bank boards. This can also  cause increased concern about potential conflicts of interest among the  directors because how and why certain individuals were selected for the  board is not clear to the public. Further, in our survey of Reserve Bank  directors, one director noted that transparency around the election  process should be improved. The director noted that the topic was not  discussed in board meetings or executive sessions of board meetings.  Federal Reserve Board officials said that two Reserve Banks are publicly  announcing board vacancies, but because Class A and B directors are  elected by the member banks, Class C directors were the only vacancies  for which the general public could apply. Further, officials said that while  they could enhance transparency by advertising a vacant Class C  position, the nature of the job and the need for a specific skill set  generally meant that it was better for the banks themselves to recruit  candidates instead of publicly seeking applications.
Enhanced transparency of the director selection process, including  posting director vacancies and selection procedures, could not only make  the election process more transparent but also help increase the diversity  of the candidate pool. Some of the institutions we reviewed have taken  steps to increase transparency of their director selection process. Two of  the central banks we reviewed publicized and solicited applications for  governor/director positions. It was announced in July 2008 that the Bank  of England would advertise vacant positions. Additionally, in Canada, a  government website permits individuals to submit their names for  consideration as directors of government. Also ministers responsible for  entities requiring directors maintain a pool of all eligible candidates, so the  Minister of Finance develops this pool of candidates for the Bank of  Canada. As previously noted, about half of the FHLBanks publish  information on their websites about the director election process and  provide applications for potential candidates to submit to be considered  by the nomination committee. Further, as previously mentioned, some  Members of Congress and others raised questions about the governance  of the Reserve Banks, including the selection and roles of directors.  Improving the transparency of the Reserve Bank director selection  process is one way to help address concerns about Reserve Bank  governance.
The Federal Reserve System has taken some important steps to increase  transparency. For example, the Federal Reserve Board has recently  taken steps to increase transparency of the monetary policy-making  process. In March, the Federal Reserve Board announced that the  Chairman would hold press briefings four times per year to present the  Federal Open Market Committee’s current economic projections and to  provide additional context for its policy decisions. The first press  conference was held in April 2011. Additionally, some Reserve Banks  have begun placing additional information about governance  arrangements on their public websites. The Federal Reserve Board  describes these postings as a recent trend and said that FRBNY has  been a leader in this area.
Further, the Reserve Bank boards conduct community outreach that  focuses primarily on financial literacy and informing the public on their  role in monetary policy. One of the three main roles for Reserve Bank  directors is to be a liaison between the bank and the community. Several  directors and bank officials told us that they believe that public outreach  was necessary to help reduce the public’s misperception about the roles  and responsibilities of the Reserve Banks. In our survey of Reserve Bank  directors, some directors noted that outreach should be continued to  create a more transparent environment and strengthen governance. For  example, one director said that one way to strengthen Reserve Bank  governance was to continue to foster an environment of transparency,  with open and frequent communication. Further, the director noted that  not everyone understood the difference between monetary and fiscal  policy and that the Reserve Banks could help to educate the general  public and the media. One director also noted that outreach activities  generated goodwill and awareness throughout the community and the  district and led to better public representation on Reserve Bank boards.  Additionally, another director noted that the Reserve Banks needed to  continue their outreach to educate the public about monetary policy and  the need for an independent Federal Reserve System but cited the  Reserve Banks’ budget constraints as a limitation to their outreach efforts.
Officials at the Federal Reserve Board noted that the Federal Reserve  System functions more effectively and efficiently when each Reserve  Bank is implementing good governance procedures because good  corporate governance is a key element in improving economic efficiency.  Additionally, in a time when the relationships between directors and  financial firms are being questioned, transparent governance practices  can help in managing reputational risk. Moreover, when there is  increased public interest in governance, the Federal Reserve System  would be well served by making clear the roles and responsibilities of  Reserve Bank directors. Moreover, without more public disclosure of  governance arrangements, such as board bylaws and conflict-of-interest  policies, there will be continued concerns about Reserve Bank  governance.
section_title: Conclusions
paragraphs: The Federal Reserve System was designed as a decentralized entity with  a governmental institution and 12 separately incorporated Reserve  Banks. Under this public-private partnership, the Reserve Bank directors  serve a role in bringing information from their communities to inform the  monetary policy deliberations of the central bank and helping oversee the  operations of the Reserve Banks. The directors, like the Federal Reserve  Board, are also part of the governance framework of the Reserve Banks.  However, the operations and governance of the Federal Reserve System  came to the forefront during the 2007-2009 financial crisis when it played  a prominent role in stabilizing financial markets through the use of its  emergency lending authorities. These unprecedented actions resulted in  Congress and the public raising questions about the Reserve Banks’  governance practices and potential conflicts of interest involving the  directors.
Specifically, some questioned how well the Reserve Bank boards  represent the public, which in part could be measured by the economic  and demographic diversity of the directors. Our analysis shows that from  2006 through 2010 labor and consumer groups tended to be less  represented than other industry groups on both head office and branch  boards. While the Federal Reserve Board encouraged the Reserve Banks  to recruit directors from consumer and labor organizations, restrictions on  directors’ political activities appeared to be a challenge in recruiting  representatives from these organizations, who tend to be politically active.  Our analysis also shows that while there is some variation among the  Reserve Banks in the representation of women and minorities at head  office and branch boards, overall, it has remained limited. Although it is  difficult to know whether the board’s decisions would have been different  had there been greater diversity on the boards, the public that the board  represents is becoming increasingly diverse. Officials from most Reserve  Banks generally focus their search for candidates on senior corporate  executives, who are perceived to have a relatively broad perspective on  the economy. However, seeking directors from among senior or chief- level executives may contribute to the limited diversity on the boards  because as our analysis of EEOC data shows, diversity at the senior  executive level is more limited than at the senior manager level across  industries. To the extent that director searches are limited to chief-level  executives, the Reserve Banks not only limit the diversity of the pool of  potential candidates but also risk limiting the perspectives shared about  the economy in the formation of monetary policy.
The statutory requirement for three classes of directors was intended to  provide representation of both stockholding banks and the public.  However, the existence of Class A and to a lesser extent Class B  directors on the boards creates an appearance of a conflict of interest,  particularly in matters involving supervision and regulation. Moreover,  directors from all three classes could have past and current affiliations  with financial institutions. These affiliations have given rise to  relationships that pose reputational risk to the Reserve Banks. While  director conflicts can be identified and managed, interconnectedness  between directors and financial institutions cannot be eliminated;  therefore, ongoing challenges remain. For example, the credibility of the  Federal Reserve System will be affected by the perceived effectiveness  of its ability to manage conflict issues. While the Federal Reserve System  has recognized the importance of public perception and made changes to  Reserve Bank governance practices, more could be done to increase the  flow of information on the directors’ roles to the public and strengthen  controls. Specifically, greater transparency could assist the public in  understanding the roles and functioning of the Reserve Bank boards,  such as clarifying the limited nature of Reserve Bank directors’  involvement in supervision and regulation operations with a statement in  the Reserve Bank board bylaws could help to improve the public’s  confidence in Reserve Bank governance. While waivers are one way the  Federal Reserve System mitigates conflicts involving Federal Reserve  Board eligibility requirements, not all Reserve Banks have procedures for  requesting a waiver from the Federal Reserve Board. Moreover, if  waivers are granted, there is no requirement to make that information  public. Failing to make the process and decisions more transparent can  decrease confidence in the Federal Reserve System and has resulted in  questions about the integrity of Reserve Banks’ operations and the  appearance of conflicts of interest.
Finally, while the Federal Reserve System has taken steps to increase  transparency of governance practices as well as transparency overall,  Reserve Bank governance practices were generally not as transparent as  those of other central banks and financial institutions that we studied. In a  time when the Federal Reserve System’s emergency actions have  resulted in relationships between Reserve Banks and directors and the  relationships between directors and financial firms being questioned,  more transparent governance practices are essential to the effective and  credible functioning of the Reserve Banks and the Federal Reserve  System as a whole. While the Federal Reserve System has taken some  steps to increase the transparency of its governance practices, such as  conducting quarterly press conferences after the FOMC meetings,  additional actions such as making key governance documents easily  accessible to the public could enhance transparency and protect  organizational reputation. Moreover, without more public disclosure of  governance arrangements, such as board of director bylaws and director  eligibility and ethics policies, there may be continued concerns about  Reserve Bank governance and the integrity of the Federal Reserve  System.
section_title: Recommendations for Executive Action
paragraphs: While the Federal Reserve System recently has made changes to  Reserve Bank governance, it can take additional steps to strengthen  controls designed to manage conflicts of interest involving Reserve Bank  directors and increase public disclosure of directors’ roles and  responsibilities. As such, we recommend that the Chairman of the  Federal Reserve Board take the following four actions:    To help enhance economic and demographic diversity and broaden  perspectives among Reserve Bank directors who are elected to  represent the public, encourage all Reserve Banks to consider ways  to broaden their pools of potential candidates for directors, such as  including officers who are below the senior executive level at their  organizations.    To further promote transparency, direct all Reserve Banks to clearly  document the roles and responsibilities of the directors, including  restrictions on their involvement in supervision and regulation  activities, in their bylaws.    As part of the Federal Reserve System’s continued focus on  strengthening governance practices, develop, document, and require  all Reserve Banks to adopt a process for requesting waivers from the  Federal Reserve Board director eligibility policy and ethics policy for  directors. Further, consider requiring Reserve Banks to publicly  disclose waivers that are granted to the extent disclosure would not  violate a director’s personal privacy.    To enhance the transparency of Reserve Bank board governance,  direct the Reserve Banks to make key governance documents, such  as such as board of director bylaws, committee charters and  membership, and Federal Reserve Board director eligibility policy and  ethics policy, available on their websites or otherwise easily  accessible to the public.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided copies of this draft report to the Federal Reserve Board and  the 12 Federal Reserve Banks for their review and comment. The Federal  Reserve Board and the Reserve Banks provided written comments that  we have reprinted in appendixes V and VI, respectively. The Federal  Reserve Board and Reserve Banks also provided technical comments  that we have incorporated as appropriate.
In its written comments, the Federal Reserve Board agreed that our  recommendations have merit and to work to implement each of them. In  particular, regarding our first recommendation on broadening the pools of  candidates for the Reserve Bank directors, the Federal Reserve Board  stated that, as we did in the report, several of the Reserve Banks are  already considering qualified candidates who are not chief executives, as  we have recommended, and the Federal Reserve Board will continue to  explore ways to broaden the pool of candidates to increase diversity on  Reserve Bank boards. We believe that diverse perspectives can enhance  the formation of monetary policies.
With respect to our three recommendations to improve transparency, the  Federal Reserve Board stated that it will work with the Reserve Banks to  consider ways to more clearly include the directors’ roles and  responsibilities in the bylaws and the Federal Reserve System will  continue to ensure that Reserve Bank directors are fully aware of their  roles and the policies that govern their positions on the Reserve Bank  boards. Further, as we noted in the report, the Federal Reserve Board  stated that in 2009 it adopted a process for Reserve Banks to request  waivers from the eligibility policy and will consider adopting a process for  waivers to the Guide to Conduct as well. In addition, it will consider  making public any waivers granted, with due regard for protecting  personal privacy. The Federal Reserve Board also stated that it will post  various Reserve Bank director-related publications on its website and will  work with the Reserve Banks to make available to the public other  relevant governance documents and information. We believe that greater  transparency could assist the public in understanding the roles and  functioning of the Reserve Bank boards and help increase public  confidence in the Federal Reserve System.
In its written comments, the Federal Reserve Banks stated that diversity  and transparency are attributes valued and supported uniformly by all  Reserve Banks. They stated that they welcomed our recommendation for  Reserve Banks to consider ways to broaden the pool of potential  candidates and reiterated that some Reserve Banks have already been  considering qualified candidates who are not chief executives. They also  agreed that transparency could be enhanced by our other  recommendations.
We are sending copies of this report to the majority and minority leaders  of the Senate and the House of Representatives, appropriate  congressional committees, the Board of Governors of the Federal  Reserve System, the 12 Federal Reserve Banks, and other interested  parties. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Orice Williams Brown at williamso@gao.gov or (202) 512-8678. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. GAO staff who made major  contributions to this report are listed in appendix VII.
section_title: Appendix I: Federal Reserve Emergency Programs and Reserve Bank Involvement
subsections: section_title: The Federal Reserve Board Used Emergency and Other Authorities to Authorize Liquidity Programs to Stabilize Markets and Institutions
paragraphs: Between late 2007 and early 2009, the Federal Reserve Board created  more than a dozen new emergency programs to stabilize financial  markets and provided financial assistance to avert the failures of a few  individual institutions. The Federal Reserve Board authorized most of  this emergency assistance under emergency authority contained in  section 13(3) of the Federal Reserve Act. Three of the programs covered  by this review—Term Auction Facility (TAF), dollar swap lines with foreign  central banks, and the Agency Mortgage-Backed Securities (MBS)  Purchase program—were authorized under other provisions of the  Federal Reserve Act that do not require a determination that emergency  conditions exist, although the swap lines and the Agency MBS Purchase  Program did require authorization by the Federal Open Market Committee  (FOMC). In many cases, the decisions by the Federal Reserve Board, the  FOMC, and the Reserve Banks about the authorization, initial terms of,  and implementation of the Federal Reserve System’s emergency  assistance were made over the course of only days or weeks as the  Federal Reserve Board sought to act quickly to address rapidly  deteriorating market conditions. As illustrated in table 5, the Federal  Reserve Bank of New York (FRBNY) implemented most of these  emergency activities under authorization from the Federal Reserve  Board.
In 2009, FRBNY, at the direction of the FOMC, began large-scale  purchases of MBS issued by the housing government-sponsored  enterprises, Fannie Mae and Freddie Mac, or guaranteed by Ginnie  Mae. Purchases of these agency MBS were intended to provide support  to the mortgage and housing markets and to foster improved conditions in  financial markets more generally. Most of the Federal Reserve Board’s  broad-based emergency programs closed on February 1, 2010. Figure 11  provides a timeline for the establishment, modification, and termination of  Federal Reserve System emergency programs subject to this review.
In the months before the authorization of TAF and new swap line  arrangements, which were the first of the emergency programs subject to  this review, the Federal Reserve Board took steps to ease emerging strains  in credit markets through its traditional monetary policy tools. In late summer  2007, sudden strains in term interbank lending markets emerged primarily  due to intensifying investor concerns about commercial banks’ actual  exposures to various mortgage-related securities. The cost of term funding  (loans provided at terms of 1 month or longer) spiked suddenly in August  2007, and commercial banks increasingly had to borrow overnight to meet  their funding needs. The Federal Reserve Board feared that the disorderly  functioning of interbank lending markets would impair the ability of  commercial banks to provide credit to households and businesses. To ease  stresses in these markets, on August 17, 2007, the Federal Reserve Board  made two temporary changes to the terms at which Reserve Banks  extended loans through the discount window. First, it approved the reduction  of the discount rate—the interest rate at which the Reserve Banks extended  collateralized loans at the discount window—by 50 basis points. Second, to  address specific strains in term-funding markets, the Federal Reserve Board  approved extending the discount window lending term from overnight to up  to 30 days, with the possibility of renewal. According to a Federal Reserve  Board study, this change initially resulted in little additional borrowing from  the discount window. In addition to the discount window changes, starting in  September 2007, the FOMC announced a series of reductions in the target  federal funds rate—the FOMC-established target interest rate that banks  charge each other for loans. In October 2007, tension in term funding  subsided temporarily. However, issues reappeared in late November and  early December, possibly driven in part by a seasonal contraction in the  supply of year-end funding.
On December 12, 2007, the Federal Reserve Board announced the  creation of TAF to address continuing disruptions in U.S. term interbank  lending markets. The Federal Reserve Board authorized Reserve Banks  to extend credit through TAF by revising the regulations governing  Reserve Bank discount window lending. TAF was intended to help  provide term funding to depository institutions eligible to borrow from the  discount window. In contrast to the traditional discount window program,  which loaned funds to individual institutions at the discount rate, TAF was  designed to auction loans to many eligible institutions at once at a  market-determined interest rate. Federal Reserve Board officials noted  that one important advantage of this auction approach was that it could  address concerns among eligible borrowers about the perceived stigma  of discount window borrowing. Federal Reserve Board officials noted   that an institution might be reluctant to borrow from the discount window  out of concern that its creditors and other counterparties might become  aware of its discount window use and perceive it as a sign of distress.  The auction format allowed banks to approach the Reserve Banks  collectively rather than individually and obtain funds at an interest rate set  by auction rather than at a premium set by the Federal Reserve Board.  Additionally, whereas discount window loan funds could be obtained  immediately by an institution facing severe funding pressures, TAF  borrowers did not receive loan funds until 3 days after the auction. For  these reasons, TAF-eligible borrowers may have attached less of a  stigma to auctions than to traditional discount window borrowing. The first  TAF auction was held on December 17, 2007, with subsequent auctions  occurring approximately every 2 weeks until the final TAF auction on  March 8, 2010.
Concurrent with the announcement of TAF, the FOMC announced the  establishment of dollar swap arrangements with two foreign central banks  to address similar disruptions in dollar funding markets abroad. In a  typical swap line transaction, FRBNY exchanged dollars for the foreign  central bank’s currency at the prevailing exchange rate, and the foreign  central bank agreed to buy back its currency (to “unwind” the exchange)  at this same exchange rate at an agreed upon future date. The market for  interbank funding in U.S. dollars is global, and many foreign banks hold  U.S.-dollar-denominated assets and fund these assets by borrowing in  U.S. dollars. In contrast to U.S. commercial banks, foreign banks did not  hold significant U.S.-dollar deposits, and as a result, dollar funding  disruptions were particularly acute for many foreign banks during the  recent crisis. In December 2007, the European Central Bank and Swiss  National Bank requested dollar swap arrangements with the Federal  Reserve System to increase their ability to provide U.S. dollar loans to  banks in their jurisdictions. Federal Reserve Board staff memorandums  recommending that the FOMC approve these swap arrangements noted  that continuing tension in dollar funding markets abroad could further  exacerbate tensions in U.S. funding markets. On December 6, 2007,  the FOMC approved requests from the European Central Bank and Sw National Bank and authorized FRBNY to establish temporary swap lines  under section 14 of the Federal Reserve Act. During 2008, the FOMC  iss  approved temporary swap lines with 12 other foreign central banks.  FRBNY’s swap lines with the 14 central banks closed on February 1,  2010. In May 2010, to address the re-emergence of strains in dollar  funding markets, FRBNY reopened swap lines with the Bank of Canada,  the Bank of England, the European Central Bank, the Bank of Japan, and  the Swiss National Bank through January 2011. On December 21, 2010,  the FOMC announced an extension of these lines through August 1,  2011. On June 29, 2011, the Federal Reserve Board announced an  extension of these swap lines through August 1, 2012.
subsections: section_title: In March 2008, the Federal Reserve Board Invoked Emergency Authority to Facilitate Sale of Bear Stearns and Expansion of Liquidity Support to Primary Dealers
paragraphs: In early March 2008, the Federal Reserve Board observed growing tension  in the repurchase agreement markets—large, short-term collateralized  funding markets—that many financial institutions rely on to finance a wide  range of securities. Under a repurchase agreement, a borrowing institution  generally acquires funds by selling securities to a lending institution and  agreeing to repurchase the securities after a specified time at a given price.  The securities, in effect, are collateral provided by the borrower to the  lender. In the event of a borrower’s default on the repurchase transaction,  the lender would be able to take (and sell) the collateral provided by the  borrower. Lenders typically will not provide a loan for the full market value  of the posted securities, and the difference between the values of the  securities and the loan is called a margin or haircut. This deduction is  intended to protect the lenders against a decline in the price of the  securities provided as collateral. In early March, the Federal Reserve  Board found that repurchase agreement lenders were requiring higher  haircuts for loans against a range of securities and were becoming  reluctant to lend against mortgage-related securities. As a result, many  financial institutions increasingly had to rely on higher-quality collateral,  such as U.S. Treasury securities, to obtain cash in these markets, and a  shortage of such high-quality collateral emerged. In March 2008, the  Federal Reserve Board cited “unusual and exigent circumstances” in  invoking section 13(3) of the Federal Reserve Act to authorize FRBNY to  implement four emergency actions to address deteriorating conditions in  these markets: (1) TSLF, (2) a bridge loan to Bear Stearns, (3) a  commitment to lend up to $30 billion against Bear Stearns assets that  resulted in the creation of Maiden Lane LLC, and (4) PDCF.
On March 11, 2008, the Federal Reserve Board announced the creation  of the TSLF to auction 28-day loans of U.S. Treasury securities to primary  dealers to increase the amount of high-quality collateral available for  these dealers to borrow against in the repurchase agreement markets.  Through competitive auctions that allowed dealers to bid a fee to  exchange harder-to-finance collateral for easier-to-finance Treasury  securities, TSLF was intended to promote confidence among lenders and  to reduce the need for dealers to sell illiquid assets into the markets,  which could have further depressed the prices of these assets and  contributed to a downward price spiral. TSLF auctioned loans of  Treasury securities against two schedules of collateral. Schedule 1  collateral included treasuries, agency debt, and agency MBS collateral  that FRBNY accepted in repurchase agreements for traditional open  market operations with primary dealers. Schedule 2 included schedule 1  collateral as well as a broader range of assets, including highly rated  mortgage-backed securities. The Federal Reserve Board determined  that providing funding support for private mortgage-backed securities  through the schedule 2 auctions fell outside the scope of FRBNY’s  authority to conduct its securities lending program under section 14 of the  Federal Reserve Act. Accordingly, for the first time during this crisis, the  Federal Reserve Board invoked section 13(3) of the Federal Reserve Act  to authorize the extension of credit, in this case in the form of Treasury  securities, to nondepository institutions—in this case, the primary dealers.  As discussed later in this appendix the Federal Reserve Board later  expanded the range of collateral eligible for TSLF as the crisis intensified.  TSLF closed on February 1, 2010.
Shortly following the announcement of TSLF, the Federal Reserve Board  invoked its emergency authority for a second time to authorize an  emergency loan to avert a disorderly failure of Bear Stearns. TSLF was  announced on March 11, 2008, and the first TSLF auction was held on  March 27, 2008. Federal Reserve Board officials noted that although  TSLF was announced to address market tensions affecting many firms,  some market participants concluded that its establishment was driven by  specific concerns about Bear Stearns. Over a few days, Bear Stearns  experienced a run on its liquidity as many of its lenders grew concerned  that the firm would suffer greater losses in the future and stopped  providing funding to the firm, even on a fully secured basis with high- quality assets provided as collateral. Late on Thursday, March 13, 2008,  the senior management of Bear Stearns notified the Federal Reserve that  it would likely have to file for bankruptcy protection the following day  unless the Federal Reserve provided the firm with an emergency loan.  The Federal Reserve Board feared that the sudden failure of Bear  Stearns could have serious adverse impacts on markets in which Bear  Stearns was a significant participant, including the repurchase  agreements market. In particular, a Bear Stearns failure may have  threatened the liquidity and solvency of other large institutions that relied  heavily on short-term secured funding markets. On Friday, March 14,  2008, the Federal Reserve Board voted to authorize FRBNY to provide a  $12.9 billion loan to Bear Stearns through JP Morgan Chase Bank,  National Association, the largest bank subsidiary of JP Morgan Chase &  Co. (JPMC), and to accept $13.8 billion of Bear Stearns assets as  collateral. This back-to-back loan transaction was repaid on Monday,  March 17, 2008, with almost $4 million of interest. This emergency loan  enabled Bear Stearns to avoid bankruptcy and continue to operate  through the weekend. This provided time for potential acquirers, including  JPMC, to assess Bear Stearns’s financial condition and for FRBNY to  prepare a new liquidity program, PDCF, to address strains that could  emerge from a possible Bear Stearns bankruptcy announcement the  following Monday. Federal Reserve Board and FRBNY officials hoped  that bankruptcy could be averted by the announcement that a private  sector firm would acquire Bear Stearns and stand behind its liabilities  when the markets reopened on the following Monday.
On Sunday, March 16, 2008, the Federal Reserve Board announced that  FRBNY would lend up to $30 billion against certain Bear Stearns assets  to facilitate JPMC’s acquisition of Bear Stearns. Over the weekend, JPMC  had emerged as the only viable acquirer of Bear Stearns. In  congressional testimony, Timothy Geithner, who was the President of  FRBNY in March 2008, provided the following account:  “Bear approached several major financial institutions, beginning on March  13. Those discussions intensified on Friday and Saturday. Bear’s  management provided us with periodic progress reports about a possible  merger. Although several different institutions expressed interest in  acquiring all or part of Bear, it was clear that the size of Bear, the  apparent risk in its balance sheet, and the limited amount of time  available for a possible acquirer to conduct due diligence compounded  the difficulty. Ultimately, only JPMorgan Chase was willing to consider an  offer of a binding commitment to acquire the firm and to stand behind  Bear’s substantial short-term obligations.”
According to FRBNY officials, on the morning of Sunday, March 16, 2008,  JPMC’s Chief Executive Officer told FRBNY that the merger would be  possible only if certain mortgage-related assets were taken off Bear  Stearns’s balance sheet. Negotiations between JPMC and FRBNY senior  management resulted in a preliminary agreement under which FRBNY  would make a $30 billion nonrecourse loan to JPMC collateralized by  these Bear Stearns assets. A March 16, 2008, letter from then-FRBNY  president Geithner to JPMC’s Chief Executive Officer documented the  terms of the preliminary agreement.
Significant issues that threatened to unravel the merger agreement  emerged soon after the announcement. Bear Stearns board members  and shareholders thought JPMC’s offer to purchase the firm at $2 per  share was too low and threatened to vote against the merger. Perceived  ambiguity in the terms of the merger agreement raised further concerns  that JPMC could be forced to stand behind Bear Stearns’s obligations  even in the event that the merger was rejected. Moreover, some Bear  Stearns counterparties stopped trading with Bear Stearns because of  uncertainty about whether JPMC would honor certain Bear Stearns  obligations. FRBNY also had concerns with the level of protection  provided under the preliminary lending agreement, under which FRBNY  had agreed to lend on a nonrecourse basis against risky collateral. The  risks of an unraveled merger agreement included a possible Bear Stearns  bankruptcy and losses for JPMC, which might have been legally required  to stand behind the obligations of a failed institution. Recognizing the risk  that an unraveled merger posed to JPMC and the broader financial  markets, FRBNY officials sought to renegotiate the lending agreement.
During the following week, the terms of this agreement were renegotiated,  resulting in the creation of a new lending structure in the form of Maiden  Lane LLC. From March 17 to March 24, 2008, FRBNY, JPMC, and Bear  Stearns engaged in dual track negotiations to address each party’s  concerns with the preliminary merger and lending agreements. On March  24, 2008, FRBNY and JPMC agreed to a new lending structure that  incorporated greater loss protections for FRBNY. Specifically, FRBNY  created a special-purpose vehicle (SPV), Maiden Lane LLC, that used  proceeds from a $28.82 billion FRBNY senior loan and a $1.15 billion  JPMC subordinated loan to purchase Bear Stearns assets.
While one team of Federal Reserve Board and FRBNY staff worked on  options to avert a Bear Stearns failure, another team worked to ready  PDCF for launch by Monday, March 17, 2008, when Federal Reserve  Board officials feared a Bear Stearns bankruptcy announcement might  trigger runs on the liquidity of other primary dealers. The liquidity support  from TSLF would not become available until the first TSLF auction later in  the month. On March 16, 2008, the Federal Reserve Board announced  the creation of PDCF to provide overnight collateralized cash loans to the  primary dealers. FRBNY quickly implemented PDCF by leveraging its  existing legal and operational infrastructure for its existing repurchase  agreement relationships with the primary dealers. Although the Bear  Stearns bankruptcy was averted, PDCF commenced operation on March  17, 2008, and in its first week extended loans to 10 primary dealers. Bear  Stearns was consistently the largest PDCF borrower until June 2008.  Eligible PDCF collateral initially included investment-grade corporate  securities, municipal securities, and asset-backed securities, including  mortgage-backed securities. The Federal Reserve Board authorized an  expansion of collateral types eligible for PDCF loans later in the crisis.  This program was terminated on February 1, 2010.
section_title: In Fall 2008, the Federal Reserve Board Modified Existing Programs and Launched Additional Programs to Support Other Key Markets
paragraphs: In September 2008, the bankruptcy of Lehman Brothers triggered an  intensification of the financial crisis, and the Federal Reserve Board  modified the terms for its existing liquidity programs to address worsening  conditions. On September 14, 2008, shortly before Lehman Brothers  announced it would file for bankruptcy, the Federal Reserve Board  announced changes to TSLF and PDCF to provide expanded liquidity  support to primary dealers. Specifically, the Federal Reserve Board  announced that TSLF-eligible collateral would be expanded to include all  investment-grade debt securities and PDCF-eligible collateral would be  expanded to include all securities eligible to be pledged in the triparty  repurchase agreements system, including noninvestment grade securities  and equities. In addition, TSLF schedule 2 auctions would take place  weekly rather than only biweekly. On September 21, 2008, the Federal  Reserve Board announced that it would extend credit—on terms similar to  those applicable for PDCF loans—to the U.S. and London broker-dealer  subsidiaries of Merrill Lynch & Co. (Merrill Lynch), Goldman Sachs Group  Inc. (Goldman Sachs), and Morgan Stanley to provide support to these  subsidiaries as they became part of bank holding companies that would be  regulated by the Federal Reserve System. On September 29, 2008, the  Federal Reserve Board also announced expanded support through TAF  and the dollar swap lines. Specifically, the Federal Reserve Board doubled  the amount of funds that would be available in each TAF auction cycle from  $150 billion to $300 billion, and the FOMC authorized a $330 billion  expansion of the swap line arrangements with foreign central banks.
In the months following Lehman’s bankruptcy, the Federal Reserve Board  authorized several new liquidity programs under section 13(3) of the  Federal Reserve Act to provide support to other key funding markets,  such as the commercial paper and the asset-backed security markets. In  contrast to earlier emergency programs that represented relatively  modest extensions of established Federal Reserve System lending or  open market operation activities, these newer programs incorporated  more novel design features and targeted new market participants with  which the Reserve Banks had not historically transacted. As was the case  with the earlier programs, many of these newer programs were designed  and launched under extraordinary time constraints as the Federal  Reserve Board sought to address rapidly deteriorating market conditions.  In order of their announcement, these programs included (1) Asset- Backed Commercial Paper Money Market Mutual Fund Liquidity Facility  (AMLF) to provide liquidity support to money market mutual funds  (MMMF) in meeting redemption demands from investors and to foster  liquidity in the asset-backed commercial paper (ABCP) market, (2)  Commercial Paper Funding Facility (CPFF) to provide a liquidity backstop  to eligible issuers of commercial paper, (3) the Money Market Investor  Funding Facility (MMIFF) to serve as an additional backstop for MMMFs,  and (4) the Term Asset-Backed Securities Loan Facility (TALF) to assist  certain securitization markets that supported the flow of credit to  households and businesses.
On September 19, 2008, the Federal Reserve Board authorized FRBB to  establish AMLF to provide liquidity support to MMMFs facing redemption  pressures. According to FRBB staff, the processes and procedures to  implement AMLF were designed over the weekend before FRBB  commenced operation of AMLF on September 22, 2008. MMMFs were a  major source of short-term credit for financial institutions, including  through MMMFs’ purchases and holdings of ABCP. ABCP continued to  be an important source of funding for many businesses. Following the  announcement that a large MMMF had “broken the buck”—net asset  value fell below $1 per share—as a result of losses on Lehman’s  commercial paper, other MMMFs faced a large wave of redemption  requests as investors sought to limit their potential exposures to the  financial sector. The Federal Reserve Board was concerned that attempts  by MMMFs to raise cash through forced sales of ABCP and other assets  into illiquid markets could further depress the prices of these assets and  exacerbate strains in short-term funding markets. AMLF’s design, which  relied on intermediary borrowers to use Reserve Bank loans to fund the  same-day purchase of eligible ABCP from MMMFs, reflected the need to  overcome practical constraints in lending to MMMFs directly. According to  Federal Reserve System officials, MMMFs would have had limited  capacity to borrow directly from the Reserve Banks in amounts that would  be sufficient to meet redemption requests because of statutory and fund- specific limitations on fund borrowing. To quickly support the MMMF  market, the Federal Reserve Board authorized loans to entities that  conduct funding and custodial activities, which include holding and  administering the accounts with MMMF assets, with MMMFs to fund the  purchase of ABCP from MMMFs. Eligible borrowers were identified as  discount-window-eligible depository institutions (U.S. depository  institutions and U.S. branches and agencies of foreign banks) and U.S.  bank holding companies and their U.S. broker-dealer affiliates. The  interest rate on AMLF loans was lower than the returns on eligible ABCP,  providing incentives for eligible intermediary borrowers to participate.  AMLF closed on February 1, 2010.
On October 7, 2008, the Federal Reserve Board announced the creation  of CPFF to provide a liquidity backstop to U.S. issuers of commercial  paper. Commercial paper is an important source of short-term funding for  U.S. financial and nonfinancial businesses. CPFF became operational  on October 27, 2008, and was operated by FRBNY. In establishing  CPFF, FRBNY created an SPV that was to directly purchase new issues  of eligible ABCP and unsecured commercial paper with the proceeds of  loans it received from FRBNY for that purpose. In the weeks leading up  to CPFF’s announcement, the commercial paper markets showed clear  signs of strain: the volume of commercial paper outstanding declined,  interest rates on longer-term commercial paper increased significantly,  and increasing amounts of commercial paper were issued on an  overnight basis as money market funds and other investors became  reluctant to purchase commercial paper at longer-dated maturities.
During this time, MMMFs faced a surge of redemption demands from  investors concerned about losses on presumably safe instruments. The  Federal Reserve Board concluded that disruptions in the commercial  paper markets, combined with tension in other credit markets, threatened  the broader economy as many large commercial paper issuers promoted  the flow of credit to households and businesses. By standing ready to  purchase eligible commercial paper, CPFF was intended to eliminate  much of the risk that commercial paper issuers would be unable to issue  new commercial paper to replace their maturing commercial paper  obligations. By reducing this risk, CPFF was expected to encourage  investors to continue or resume their purchases of commercial paper at  longer maturities. CPFF closed on February 1, 2010.
On October 21, 2008, the Federal Reserve Board authorized FRBNY to  work with the private sector to create MMIFF to serve as an additional  backstop for MMMFs. MMIFF complemented AMLF by standing ready to  purchase a broader range of short-term debt instruments held by MMMFs,  including certificates of deposit and bank notes. MMIFF’s design featured a  complex lending structure through which five SPVs would purchase eligible  instruments from eligible funds. In contrast to other Federal Reserve Board  programs that created SPVs, MMIFF SPVs were set up and managed by  private sector entities. According to FRBNY staff, JPMC, in collaboration  with other firms that sponsored large MMMFs, brought the idea for an  MMIFF-like facility to FRBNY in early October 2008, FRBNY worked with  JPMC to set up the MMIFF SPVs but did not contract directly with JPMC or  the firm that managed the MMIFF program. While MMIFF became  operational in late November 2008, it was never used.
In November 2008, the Federal Reserve Board authorized FRBNY to  create TALF to reopen the securitization markets in an effort to improve  access to credit for consumers and businesses. During the recent  financial crisis, the value of many asset-backed securities (ABS) dropped  precipitously, bringing originations in the securitization markets to a virtual  halt. Problems in the securitization markets threatened to make it more  difficult for households and small businesses to access the credit that  they needed to, among other things, buy cars and homes and expand  inventories and operations. TALF provided nonrecourse loans to eligible  U.S. companies and individuals in return for collateral in the form of  securities that could be forfeited if the loans were not repaid. TALF was  one of the more operationally complex programs, and the first TALF  subscription was not held until March 2009. In contrast to other programs  that had been launched in days or weeks, TALF required several months  of preparation to refine program terms and conditions and consider how  to leverage vendor firms to best achieve TALF policy objectives. TALF  closed on June 30, 2010.
section_title: In Late 2008 and Early 2009, the Federal Reserve Board Announced Its Participation in Government Assistance to Individual Institutions
paragraphs: In late 2008 and early 2009, the Federal Reserve Board again invoked its  authority under section 13(3) of the Federal Reserve Act to authorize  assistance to avert the failures of three institutions that it determined to be  systemically significant (1) American International Group, Inc. (AIG);   (2) Citigroup, Inc. (Citigroup); and (3) Bank of America Corporation (Bank  of America).
In September 2008, the Federal Reserve Board and the Treasury  determined through analysis of information provided by AIG and  insurance regulators, as well as publicly available information, that market  events could cause AIG to fail, which would pose systemic risk to  financial markets. The Federal Reserve Board and subsequently  Treasury took steps to ensure that AIG obtained sufficient liquidity and  could complete an orderly sale of some of its operating assets and  continue to meet its obligations. On September 16, 2008, one day after  the Lehman Brothers bankruptcy announcement, the Federal Reserve  Board authorized FRBNY to provide a revolving credit facility (RCF) of up  to $85 billion to help AIG meet its obligations. The AIG RCF was created  to provide AIG with a revolving loan that AIG and its subsidiaries could  use to address strains on their liquidity. The announcement of this  assistance followed a downgrade of the firm’s credit rating, which had  prompted collateral calls by its counterparties and raised concerns that a  rapid failure of the company would further destabilize financial markets.  Two key sources of AIG’s difficulties were AIG Financial Products Corp.  (AIGFP) and a securities lending program operated by insurance  subsidiaries of AIG. AIGFP faced growing collateral calls on credit  default swaps it had written on collateralized debt obligations (CDO).  Meanwhile, AIG faced demands on its liquidity from securities lending  counterparties who were returning borrowed securities and demanding  that AIG return their cash collateral. Despite the announcement of the  AIG RCF, AIG’s condition continued to decline rapidly in fall 2008.
On subsequent occasions, the Federal Reserve Board invoked section  13(3) of the Federal Reserve Act to authorize either new assistance or a  restructuring of existing assistance to AIG.    First, in October 2008, the Federal Reserve Board authorized the  creation of the securities borrowing facility (SBF) to provide up to  $37.8 billion of direct funding support to a securities lending program  operated by AIG’s domestic insurance companies. From October 8,  2008, through December 11, 2008, FRBNY provided cash loans to  AIG’s domestic life insurance companies, collateralized by investment  grade debt obligations.
In November 2008, as part of plans to restructure the assistance to  AIG to further strengthen its financial condition, and once again avert  the failure of the company, the Federal Reserve Board and Treasury  restructured AIG’s debt. Under the restructured terms, Treasury  purchased $40 billion in shares of AIG preferred stock and the cash  from the sale was used to pay down a portion of AIG’s outstanding  balance from the AIG RCF. The limit on the facility also was reduced  to $60 billion, and other changes were made.    Also in November 2008, the Federal Reserve Board authorized the  creation of two SPVs—Maiden Lane II LLC and Maiden Lane III  LLC—to purchase certain AIG-related assets. Similar to Maiden Lane  LLC, these SPVs funded most of these asset purchases with a senior  loan from FRBNY. Maiden Lane II replaced the AIG SBF and served  as a longer-term solution to the liquidity problems facing AIG’s  securities lending program. Maiden Lane III purchased the underlying  CDOs from AIG counterparties in connection with the termination of  credit default swap contracts issued by AIGFP and thus the  elimination of liquidity drain from collateral calls on the credit default  swaps sold by AIGFP.
In March 2009, the Federal Reserve Board and Treasury announced  plans to further restructure AIG’s assistance. According to the Federal  Reserve Board, debt owed by AIG on the AIG RCF would be reduced  by $25 billion in exchange for FRBNY’s receipt of preferred equity  interests totaling $25 billion in two SPVs. AIG created both SPVs to  hold the outstanding common stock of two life insurance company  subsidiaries—American Life Insurance Company and AIA Group  Limited.    Also in March 2009, the Federal Reserve Board authorized FRBNY to  provide additional liquidity to AIG by extending credit by purchasing a  contemplated securitization of income from certain AIG life insurance  operations. FRBNY staff said this life insurance securitization option  was abandoned for a number of reasons, including that it would have  required FRBNY to manage a long-term exposure to life insurance  businesses with which it had little experience.
On November 23, 2008, the Federal Reserve Board authorized FRBNY to  provide a lending commitment to Citigroup as part of a package of  coordinated actions by Treasury, FDIC, and the Federal Reserve Board  to avert a disorderly failure of the company. As discussed in our April  2010 report on Treasury’s use of the systemic risk determination,  Treasury, FDIC, and the Federal Reserve Board said they provided  emergency assistance to Citigroup because they were concerned that the  failure of a firm of Citigroup’s size and interconnectedness would have  had systemic implications. FRBNY agreed to lend against the residual  value of approximately $300 billion of Citigroup assets if losses on these  assets exceeded certain thresholds. On the basis of analyses by the  various parties and an outside vendor, FRBNY determined that it would  be unlikely that losses on the Citigroup “ring-fence” assets would reach  the amount at which FRBNY would be obligated to provide a loan. At  Citigroup’s request, Treasury, FDIC, and FRBNY agreed to terminate this  loss sharing agreement in December 2009. As part of the termination  agreement, Citigroup agreed to pay a $50 million termination fee to  FRBNY. FRBNY never provided a loan to Citigroup under this lending  commitment.
On January 15, 2009, the Federal Reserve Board authorized FRBR to  provide a lending commitment to Bank of America. As with Citigroup, the  Federal Reserve Board authorized this assistance as part of a  coordinated effort with Treasury and FDIC to assist an institution that the  agencies determined to be systemically important. The circumstances  surrounding the agencies’ decision to provide this arrangement for Bank  of America, however, were somewhat different and were the subject of  congressional hearings. While the Citigroup loss-sharing agreement  emerged during a weekend over which the agencies attempted to avert  an impending failure of the firm, the agencies’ discussions with Bank of  America about a possible similar arrangement occurred over several  weeks during which Bank of America was not facing imminent failure.  According to Federal Reserve Board officials, possible assistance for  Bank of America was first discussed in late December 2008 when Bank of  America management raised concerns about the financial impact of  completing the merger with Merrill Lynch, which was expected at the time  to announce larger than anticipated losses (and did in fact announce  these losses the following month). Following the January 1, 2009,  completion of Bank of America’s acquisition of Merrill Lynch, the Federal  Reserve Board and the other agencies agreed to provide a loss-sharing  agreement on selected Merrill Lynch and Bank of America assets to  assure markets that unusually large losses on these assets would not  destabilize Bank of America. On September 21, 2009, the agencies and  FRBR terminated the agreement in principle to enter into a loss sharing  agreement with Bank of America. The agreement was never finalized,  and FRBR never provided a loan to Bank of America under this lending  commitment. As part of the agreement to terminate the agreement in  principle, Bank of America paid $57 million to FRBR in compensation for  out-of-pocket expenses incurred by FRBR and an amount equal to the  commitment fees required by the agreement.
section_title: In 2009 and 2010, FRBNY Executed Large-Scale Purchases of Agency MBS to Provide Broader Support to the Economy
paragraphs: On November 25, 2008, the FOMC announced that FRBNY would  purchase up to $500 billion of agency mortgage-backed securities to  support the housing market and the broader economy. The FOMC  authorized the Agency MBS program under its authority to direct open  market operations under section 14 of Federal Reserve Act. By  purchasing MBS securities with longer maturities, the Agency MBS  program was intended to lower long-term interest rates and to improve  conditions in mortgage and other financial markets. The Agency MBS  program commenced purchases on January 5, 2009, a little more than a  month after the initial announcement. FRBNY staff noted that a key  operational challenge for the program was its size. FRBNY hired external  investment managers to provide execution support and advisory services  needed to help execute purchases on such a large scale. In March 2009,  the FOMC increased the total amount of planned purchases from $500  billion to up to $1.25 trillion. The program executed its final purchases in  March 2010 and settlement was completed in August 2010.
On several occasions, the Federal Reserve Board authorized extensions  of its emergency loan programs, and most of these programs closed on  February 1, 2010. For example, AMLF, PDCF, and TSLF were extended  three times. The Federal Reserve Board cited continuing disruptions in  financial markets in announcing each of these extensions. Table 6  provides a summary of the extensions for the emergency programs.
section_title: Appendix II: Federal Reserve Bank Director Survey Methodology and Results
subsections: section_title: Federal Reserve Bank Directors Survey: Survey Methodology
paragraphs: We conducted a brief Web-based survey of all Federal Reserve Bank  (FRB) directors that served in 2010. The purpose of this survey was to  gather basic information from FRB directors to fulfill GAO’s congressional  mandate to assess Federal Reserve Bank governance. Specifically, the  survey asked about each director’s (1) educational and professional  background; (2) roles and responsibilities as a FRB director; and (3)  opinions on FRB governance. The survey questions and summary results  can be found below.
We sent a survey to all 105 directors that served for the full year during  2010. We received completed surveys from 91 directors (87 percent  response rate). The web-based survey was administered from April 4,  2011, to May 6, 2011. Directors were sent an e-mail invitation to complete  the survey on a GAO web server using a unique username and  password. Nonrespondents received a reminder e-mail from GAO to  complete the survey. We also contacted the corporate secretaries at  every bank and asked them to encourage their directors to participate in  the survey. Even though we received responses from a majority of  directors in all 12 banks, it is possible some bias may exist in certain  survey responses if characteristics of respondents differed from those of  nonrespondents in ways that affect the responses (e.g., if any knew of a  potential conflict of interest at their bank they may or may not be less  likely to respond to the survey).
The practical difficulties of conducting any survey may introduce  additional nonsampling errors, such as difficulties interpreting a particular  question, which can introduce unwanted variability into the survey results.  We took steps to minimize nonsampling errors by pretesting the  questionnaire with three directors in February and March 2011. We  conducted pretests to make sure that the questions were clear and  unbiased and that the questionnaire did not place an undue burden on  respondents. An independent reviewer within GAO also reviewed a draft  of the questionnaire prior to its administration. We made appropriate  revisions to the content and format of the questionnaire after the pretests  and independent review. All data analysis programs were independently  verified for accuracy.
section_title: Survey of Federal Reserve Bank Directors: Survey Questions and Results
paragraphs: We are interested in learning about the breadth of experience that  Federal Reserve Bank directors bring to their positions on the Board.  1.  How many years have you served as a Federal Reserve Bank head  office director?  2.  Educational Background of Federal Reserve Bank directors.
Degrees   Associate’s degree (for example: AA, AS)
Bachelor’s degree (for example: BA,BS)
At least one Advanced Degree (Master’s, Professional, or  Doctorate)
Professional degree (for example: MD, DDS, JD)
Doctorate (for example: PhD, EdD)
3.  Work experience of Federal Reserve Bank directors.
Mining, Quarrying, and Oil and Gas Extraction  Information (Publishing, Broadcasting, and  Telecommunications)
Financial Services (directors who selected at least one of  the following five categories)
Credit Intermediation and Related Activities  Securities, Commodity Contracts, and Other Financial  Investments and Related Activities  Insurance Carriers and Related Activities  Funds, Trusts, and Other Financial Vehicles  Offices of bank or other holding companies/ Corporate,  Subsidiary, and Regional Managing Offices  Real Estate and Rental and Leasing  Professional, Scientific, and Technical Services (Legal,  accounting, consulting, design, advertising, and public  relations services)
4.  Do you currently serve on any other boards (i.e., nonprofit, private or  public company boards)?  5.  Has someone from your current employer served as a Federal  Reserve Bank (FRB) board director in the past 10 years?
We are interested in learning about your duties as a Federal Reserve  Bank director.  6.  As a FRB Director, which of the following do you primarily represent?  (check only one box)
Seven directors provided an open-ended response to describe who they  represent. Four directors indicated that their constituencies included the  public, their business or industry, and other businesses or industries in  the district. The other three directors listed food manufacturing and  private equity, labor, transportation, communications, construction, and  the public sector, and civic leadership and the nonprofit sector as the  industries that they represent.  7.  The three principal functions of FRB directors are listed below. Within  each of these principal functions, which activities have you been  involved in at your FRB? (check one box per question)
8.  How frequently do you communicate with the following Reserve Bank  personnel while carrying out your official duties? (check one box per  person)
In the open-ended question that asked directors to specify what “other”  FRB staff with whom they interacted, directors listed the following staff  members: assistants to senior management, executive vice president of  operations, vice president of Information Technology, assistant general  auditor, librarian, Federal Reserve Information Technology officers,  members of the Federal Reserve Board, presidents of other Reserve  Banks, other staff as questions arise, and vice president of Human  Resources/Diversity.  9.  In the past year, in your role as a director, have you been involved in  any Division of Supervision and Regulation matters in which you did  any of the following: (check one box per question)
Supervision and Regulation Activities    Were involved in making decisions about specific banks  that the FRB supervises?    Received general information about the supervisory  status of banks in the district?    Received supervisory information about the status of  any specific banks?    Were involved in making personnel decisions about pay  or promotion for employees in the Division of  Supervision and Regulation?    Were involved in making decisions about the budget for  the Division of Supervision and Regulation?    Had other involvement with the Division of Supervision  and Regulation not described above?
GAO asked directors who answered “yes” to any of these questions to  explain their answer. We analyzed the open ended answers for this  question and no improper conflicts of interest were identified.  10. The following questions are about the FRB’s code or standards of  conduct for directors (code). Did you do any of the following? (check  one box per question)
Standard of Conduct    Receive training on the code at your  FRB at the beginning of your term in  office?    Receive training on the code in  Washington, D.C. at the beginning of  your term in office?  Sign an oath of office at the beginning  of your term agreeing to adhere to the  code?    Receive an annual briefing on the code  of conduct by a member of the bank’s  senior management?  Sign an annual certification agreeing to  adhere to the code?
GAO asked directors who answered “no” to any of the above questions to  provide an explanation. Four directors stated they were unable to attend  the training in Washington, D.C. Two directors said they attended the  training but did not receive training on the code of conduct and two other  directors said they did not recall if they signed an annual certification.  11. Are you aware of any past or current conflicts of interest with any FRB  directors in your district?
GAO asked directors who responded “yes” to this question to explain the  conflict and how it was resolved. Five directors provided responses to this  open-ended question on the survey. Two of the responses described  actual or potential conflicts of interest involving procurement matters and  the directors recused themselves from voting on the matter. One of those  directors also noted that the CEO of Lehman Brothers, Inc., resigned as a  director because the company was requesting assistance from the FRB.  Another described a director who resigned because he expressed a  desire to be involved in a political campaign. One director declined a  board position at another entity because of perceived conflicts of interest.  Another director noted that the board was apprised of a potential conflict  of interest between a branch director and FRB auditors, and that the  situation was resolved and reported to the Audit Committee.
We are interested in learning about your views on how, if at all, Federal  Reserve Bank governance practices could be strengthened.  12. In terms of Federal Reserve Bank governance, how would you  strengthen achievement in the following areas, if at all? Please  include examples of practices in your district or from other relevant  board experience that may assist the Federal Reserve System in  strengthening achievement in the following areas.  a.  Improve public representation on FRB Boards?  b.  Eliminate actual or potential conflicts of interest of Reserve Bank  directors? c.
Increase the availability of information useful for the formation and  execution of monetary policy?  d.  Increase the effectiveness or efficiency of reserve banks?
The open-ended responses were analyzed and included as examples in  the report when appropriate.
section_title: Appendix III: Federal Reserve Banks Board Committees
paragraphs: The Reserve Bank boards use committees to help oversee the operations  of the Reserve Banks and their branches. The Federal Reserve Board  requires all Reserve Banks to have standing audit committees and as  needed search committees for the selection and appointment of a  president. The Reserve Banks use various other committees, including  budget and governance committees.
section_title: Appendix IV: Ten Largest Domestic Bank Holding Companies by Total Asset Size as of December 31, 2010
paragraphs: Total Assets as of 12/31/10  (Dollars in thousands)
section_title: Appendix V: Comments from the Board of Governors of the Federal Reserve System
section_title: Appendix VI: Comments from the Federal Reserve Banks
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: GAO Acknowledgments
paragraphs: In addition to the contact named above, Karen Tremba (Assistant  Director), Sonja Bensen, Kathleen Boggs, Tania Calhoun, Emily  Chalmers, Helen Culbertson, Rachel DeMarcus, Heather Hampton,  Grace Haskins, Camille Keith, Jill Lacey, Marc Molino, Rubin Montes de  Oca, and Andrew Stavisky made significant contributions to this report.