Guidance for boards

The Federal Reserve Board has released Supervisory Guidance for Boards of Directors

Amy S. Matsuo

Amy S. Matsuo

Regulatory and ESG Insights Leader, KPMG US

+1 919-664-7100

Key points

  • The FRB has finalized its supervisory guidance for board effectiveness.
  • The final guidance is substantially similar to the proposed guidance released in 2017.
  • The guidance is applicable to large financial institution holding companies (total assets of $100 billion or more), except U.S. IHCs, and supervisory assessments will be included in a firm’s supervisory rating.

The Federal Reserve Board (FRB) has released SR 21-3, Supervisory Guidance for Boards of Directors (Guidance), which describes attributes of effective boards of directors as observed by FRB supervisors. The Guidance finalizes proposed guidance released in 2017 with some revisions reflecting comments received and statutory changes subsequent to the proposal date. These changes include an increase in the applicability threshold from $50 billion to $100 billion, further differentiation of the roles and responsibilities of board directors from those of senior management, and elimination of a suggestion that boards conduct regular self-assessments and provide the results to FRB examiners.
The final Guidance retains the five key attributes of an effective board:
  • Sets clear, aligned, and consistent direction regarding the firm’s strategy and risk tolerance.
  • Actively manages information flow and board discussions by directing senior management to provide directors with information that is sufficient in scope, detail, and analysis to enable sound, well-informed decisions and consider potential risks.
  • Oversees and holds senior management accountable for effectively implementing the firm’s strategy, consistent with its risk appetite, while maintaining an effective risk management framework and system of internal controls.
  • Assesses and supports, through its risk and audit committees, the independence and stature of independent risk management and internal audit functions.
  • Maintains a capable Board composition, governance structure, and practices that support the firm’s safety and soundness and the ability to promote compliance with laws and regulations consistent with the firm’s size, complexity, scope of operations, and risk profile.
The Guidance applies to U.S. bank and savings and loan holding companies (BHCs, SLHCs) with $100 billion or more in assets, and systemically important nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) for supervision by the FRB. Intermediate holding companies (IHCs) of foreign banking organizations are excluded.
Board effectiveness and supervisory ratings
The supervisory assessment of a board’s effectiveness is one of the elements included in the Governance and Controls component of the FRB’s large financial institution rating system. (see KPMG Regulatory Alert here) The FRB states that supervision staff will work closely with firms to help them understand the board effectiveness guidance. The staff will also review other sources of information, including publicly available information, examinations from other regulators, and firm-provided materials, when assessing a board’s effectiveness.

Revisions to or rescission of existing supervisory expectations

Concurrent with finalizing the guidance for board effectiveness, the FRB completed its review of existing supervisory expectations for BHC/SLHC boards in firms of all sizes as set forth in twenty-seven separate Federal Reserve Supervision and Regulation Letters (SR Letter). The review resulted in determinations to revise twelve letters, inactivate nine letters, and retain six letters without change. The changes are included in a table attached to SR 21-4, which is available here.

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