Publication of the December 2003 update to the Bank Holding Company Supervision Manual

Federal Reserve Bulletin, Winter, 2004

The December 2003 update to the Bank Holding Company Supervision Manual, Supplement No. 25, has been published and is now available. The Manual comprises the Federal Reserve System's regulatory, supervisory, and inspection guidance for bank holding companies. The new supplement includes the following subjects:

1. The Applicability of Corporate Governance Initiatives to Nonpublic Banking Organizations. The Manual's section on the 2003 "Interagency Policy Statement on the Internal Audit Function and its Outsourcing" has been revised to incorporate the May 5, 2003, Statement on Application of Recent Corporate Governance Initiatives to Nonpublic Banking Organizations. The statement (issued by the Federal Reserve, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision) responds to questions received regarding the way that small, nonpublic banking organizations are to comply with the corporate governance, auditing, and other requirements of the Sarbanes-Oxley Act. Although the act does not require small, nonpublic banking organizations to strictly adhere to its provisions, the agencies expect these banking organizations to ensure that their policies and procedures are consistent with applicable laws, regulations, and supervisory guidance and that they remain appropriate for the organization's size, operations, and resources. See SR letter 03-8.

2. Insurance Sales Activities and Consumer Protection in Sales of Insurance. New sections provide examiners with guidance on insurance sales activities and consumer protection in sales of insurance as the guidance pertains to financial holding companies (FHCs), bank holding companies (BHCs), or state member banks. Examiner guidance is provided on (1) conducting risk assessments of BHCs or state member bank insurance and annuity sales activities in accordance with the Federal Reserve's risk-focused supervisory approach and (2) examining a state member bank's compliance with the new Consumer Protection in Sales of Insurance (CPSI) regulation contained in Subpart H of the Board's Regulation H (12 CFR 208.81-86). The CPSI regulation (effective October 1, 2001) applies only to federally insured depository institutions. It implements section 305 of the Gramm-Leach-Bliley Act (the GLB Act; 12 USC 1831x). The guidance provides a comprehensive review of insurance and annuity sales activities as they pertain to a BHC or bank and discusses the Federal Reserve's responsibility for enforcing a depository institution's compliance with the CPSI regulation. Consistent with the GLB Act, the guidance incorporates applicable restrictions on examining a functionally regulated subsidiary of a BHC or bank. A glossary of terms associated with insurance and annuity sales activities is provided. Inspection objectives, inspection procedures, and an internal control questionnaire are also provided.

3. The Appropriate Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management. The section on bank liquidity has been revised to incorporate the July 25, 2003, Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management. The advisory presents information on the new Federal Reserve primary and secondary discount window programs. The board of directors and senior management of BHCs and state member banks are advised to consider the Federal Reserve's primary credit program as part of their contingency funding plans and to provide for adequate diversified potential funding sources to satisfy liquidity needs, which includes planning for certain significant liquidity events. See SR letter 03-15.

4. Restrictions on Institutions in Troubled Condition. The section on formal corrective actions has been revised to discuss the existing restrictions on, and requirements for, severance payments made to institution-affiliated-parties (so called "golden parachute payments"). The restrictions originated from the Crime Control Act of 1990, which added section 18(k) to the Federal Deposit Insurance Act (12 USC 1828(k); the FDI Act). The FDIC's regulations on golden parachute payments (or any agreement to make any payment), found in 12 CFR 359, are discussed. The thirty-day prior-notice requirement for appointing any new directors or senior executive officers of state member banks and bank holding companies is also discussed. See section 32 of the FDI Act (12 USC 1831i) and Subpart H of Regulation Y (12 CFR 225.71). This notice requirement also applies to any change in the responsibilities of any current senior executive officer who proposes to assume a different position. See SR letter 03-6.

5. Nonbanking Activities. Certain new or revised sections of the Nonbanking Activities chapter provide supervisory and inspection guidance or they discuss the Board's authorizations or staff interpretations:

a. Trust (Fiduciary) Activities. The trust services section is revised to discuss the oversight responsibilities of the board of directors and senior management for operating the fiduciary activities of their financial holding company (FHC) or bank holding company (BHC) in a safe and sound manner. This oversight at the consolidated level is important because the risks associated with financial activities as well as fiduciary activities can cross legal entities and business lines. Relying on the examination findings of the appropriate trust activities regulator, the examiner is to review and assess the internal policies, reports, and procedures and the effectiveness of the consolidated risk-management process for trust activities. The revision includes a discussion of the available reported supervisory information and analytical support tools that an examiner can use to evaluate the trust services of the holding company and its subsidiaries. See SR letter 00-13.