SUBJECT:

Guidelines for Using External Experts on Examinations, Inspections, and Other Bank Supervision Matters

Introduction and Summary

                      Earlier this year, the Division of Banking Supervision and Regulation (Division) outlined procedures for using System experts and specialists outside of the banking supervision function (internal experts) on supervision assignments.  This letter outlines the procedures and uniform documents that are to be used when a Reserve Bank wants to engage an external expert (or external consultant) to supplement existing examination resources or to provide specialized expertise on an examination, inspection, or other bank supervision matter where the external expert will have access to confidential supervisory data, databases, or financial institution data.  The use of an external expert to meet resource needs is permissible provided the appropriate safeguards are in place to ensure that the Reserve Bank and supervised financial institutions sufficiently are protected from any misuse of information or conflict of interest, and further provided that there are established practices to ensure that an external expert will comply with applicable laws and policies.  The new program provides an additional tool for a Reserve Bank that seeks to supplement its existing supervisory resources.  Other options include hiring temporary employees and using System resource-sharing arrangements.

                      The framework outlined in this letter addresses the supervisory requirements and policies for Reserve Banks to use in their procurement process to contract with an individual such as a retired examiner, ex-banker, or academic to provide consulting services on bank supervision matters.  The framework is not meant to allow arrangements with large or small accounting, consulting, or audit firms for examination and other bank supervision matters, which present more difficult policy, legal, and clearance issues.  If it appears that there is a need to use the services of such entities for examination and other bank supervision matters, the Reserve Bank should immediately contact Board staff to determine if such an arrangement is appropriate.  Looking forward, we plan to reassess the framework for using external experts/consultants in 2002 to determine modifications in scope that may be warranted, and to assess, in general, the System's experience with using internal and external experts on bank supervision matters. 

Reasons for Using External Experts

                      Reserve Banks have expressed an interest in using nonemployee experts or consultants on bank supervision matters for a number of reasons.  A Reserve Bank may seek to engage retired examiners to address fluctuating resource demands, for example, in the event of a rapid but temporary need for examiners experienced in loan underwriting and credit review.  An external expert may be used to provide supplemental training, for example, to expose examiners to new analytical techniques, or to provide on-the-job training to examiners who have not experienced an economic downturn, problem loans, or problem banks.  While it is important to maintain adequate resources and expertise on an ongoing basis, a Reserve Bank may decide in a particular situation that using a consultant is a more cost effective or efficient approach to meeting a specialized skill need.  For example, a consultant may be engaged for a one-time assignment that does not justify a full-time expert on staff, particularly if a System expert is not available.  Similarly, an external expert with industry-specific knowledge may be retained to evaluate a business activity that is nontraditional to banking, such as brokerage services or insurance.

                      There are several caveats that a Reserve Bank should keep in mind when it considers using an external consultant.  The practice should not reduce the overall strength of System resources or eliminate career advancement opportunities for Federal Reserve examiners.  Further, the practice should not compromise System resource-sharing initiatives or use of competency/knowledge centers.  It is also imperative that a Reserve Bank sufficiently review background and financial disclosures to determine whether an individual is an appropriate candidate to work for the Federal Reserve on bank supervision matters.

Compliance with System Contracting Guidelines and Required Documentation

                      It is not within the scope of this letter to describe all necessary contract provisions and procurement procedures that a Reserve Bank should use when retaining the services of an external expert to work on a bank supervision matter.  In general, each Reserve Bank seeking to retain such a consultant should follow its own internal procurement procedures and must comply with System and Reserve Bank acquisition guidelines, which promote competitive acquisition processes through the use of requests for proposals (RFPs) and other procurement tools.  The acquisition guidelines provide the flexibility to conduct a sole source award for circumstances in which only one vendor has the capability to provide the required services or the timeframes for the project require immediate action.  A contract should contain a sufficiently detailed statement of work that is agreed to between the Reserve Bank and the consultant.

                      This letter implements the use of uniform documents that must be integrated into the Reserve Bank's procurement procedures.  The documents include: (1) Federal Reserve Bank Consultant Agreement on Non-Disclosure of Confidential Information Obtained from the Banking Supervision Function (Confidentiality Agreement), (2) Agreement for External Consultants in the Bank Supervision Function (Consultant Agreement), and (3) two disclosure forms - the Reserve Bank Uniform Disclosure Form For Supervision and Regulation Personnel (Form D) and a supplement to Form D (Disclosure Forms).  These documents (Uniform Documents) are included as attachments to this letter, Documents 1 - 3, respectively.  A sample statement of work is included in Document 4.  The Uniform Documents contain provisions that are designed to provide the necessary safeguards to protect the Reserve Bank's and the financial institution's information, and to enable the Reserve Bank to sufficiently evaluate potential legal and ethical issues, and to determine conflicts of interest restrictions.  While a Reserve Bank will be expected to use the Uniform Documents when contracting with an external expert for bank supervision services, a Reserve Bank may opt to incorporate the provisions of the Consultant Agreement into its standard procurement contract for obtaining consulting services.

                      In addition, uniform guidance (Guidance) has been developed for use by a Reserve Bank to inform an external consultant working on a bank supervision matter and an employee supervising that consultant.  The Guidance summarizes the rules that will apply to the consultant while he or she is under contract to the Reserve Bank (for example, the conflicts of interest requirements and limitations to the consultant's authority).  The Guidance is contained in two documents: (1) Use of External Consultants within the Bank Supervision Function, and (2) Expectations of Consultants while Working on Bank Supervision Assignments, which are included as Documents 5 and 6.

                      Individuals responsible for procurement at your Reserve Bank should be advised of the unique requirements that will apply when the Reserve Bank is contracting for examination and other bank supervision services.  For example, an external expert who is to be credentialed as a temporary examiner must be either a U.S. citizen or an immigrant alien lawfully admitted to the United States with a permanent resident visa (valid Green Card) and who has signed a Declaration of Intent to Become a United States Citizen.  Further, an external expert will be required to make disclosures about his/her debt, investment, and employment relationships so that a Reserve Bank can determine the propriety and legality of a proposed assignment.  Finally, a Reserve Bank is expected to conduct an appropriate background, security, and/or credit check in light of the work that is being proposed for the consultant, using as a guide the requirements for Reserve Bank employees performing similar tasks.¹

Limitations on an External Expert's Authority

                      It is important to note that there are limitations on an external expert's authority that reflect the distinctions between an independent contractor/consultant and an employee.  For example, a consultant under contract with the Reserve Bank has the authority to make recommendations, give opinions, and provide analysis to the Reserve Bank only within the scope of the work outlined in the consulting contract.  A consultant does not have policy, managerial, or decision-making authority, and may not make final decisions.  When participating with an examination team on an examination or inspection, the consultant must report to a designated employee such as the examiner-in-charge, and may not serve as an examiner-in-charge.  A consultant may not attend a meeting with a supervised institution to present findings or conclusions without a member of the examination team, the examiner-in-charge, or other Reserve Bank representative being present.  The consultant may, however, independently perform data-gathering functions, such as interviewing bank personnel or attending meetings to collect information to complete his or her work assignment.  These and other provisions are outlined in the Uniform Documents and Guidance to be provided to the consultant. 

Ethics and Security Requirements for External Experts Working on
   Bank Supervision Matters

                      As a matter of policy, the Division believes that external experts to the bank supervision function should be subject to similar conflicts of interest standards as Federal Reserve employees.²  For example, a consultant may not participate in an examination of a bank where he or she, a spouse, or a dependent child has a loan or investment.³ A consultant may not, at any time, use confidential information obtained while under contract with the Reserve Bank for private gain or for the private gain of another person or entity.  While under contract, a consultant may not invest in the debt or equity securities of any bank, thrift, or other depository institution or any affiliate, but unlike employees, may be permitted to make such an investment if it does not involve or affect the consultant's present or proposed assignment and only if specific authorization is granted by the Reserve Bank's Ethics Officer.  An external expert will not be expected to divest of an existing investment in, or loan with a bank, thrift, or other depository institution or any affiliate, although such an investment or loan will have a bearing on the supervisory assignments to which the consultant can be assigned.  A consultant should be provided the appropriate training, information, and guidance to understand and comply with this and other applicable conflicts of interest requirements and any additional ethics requirements that may be imposed by the Reserve Bank.

                      Any analysis or document prepared by an external expert for an examination, inspection, or other supervision assignment is the property of the Board of Governors of the Federal Reserve System (Board).  A consultant granted access to confidential information must comply with the Board's and Reserve Bank's procedures for handling such information, and should receive appropriate training, information, and guidance in this regard.  The consultant also may be subject to additional prohibitions contained in the consulting contract with the Reserve Bank. 

Required Notice to a Supervised Institution

                      When a Reserve Bank plans to use an external consultant on an examination or inspection, or to complete on-site work at a supervised institution, the Reserve Bank must advise the institution in advance of the on-site work that a consultant will be used and provide a letter of introduction for the consultant to a senior executive of the institution (for example, the CEO or president).  A sample letter of introduction for an examination is included as Document 7.  Each Reserve Bank, in its own discretion, may determine who will call the appropriate senior executive at the supervised institution and send the letter of introduction. 

External Experts Participating in Examinations and Inspections

                      When an external expert will be participating in an examination or inspection of a supervised institution, a Reserve Bank must request a temporary examiner credential following existing System procedures.⁴  In its request to the Division, the Reserve Bank must include a completed temporary credential disclosure form (i.e., the same procedure currently outlined for a noncredentialed employee obtaining a temporary credential).  In addition, the Reserve Bank also must include an executed copy of the Consulting Agreement and the Confidentiality Agreement.  The disclosure Form D and the Supplement to Form D that the consultant is required to complete as part of the contracting process need not be included in the package submitted to the Division.  However, these disclosure documents must be reviewed in advance by the Reserve Bank (i.e., during the contracting process) to determine and resolve any conflict of interest issue that would have a bearing on the proposed assignment and consulting contract.

                      A request for a temporary examiner credential will be reviewed by staff in the Division's System Planning, Budgeting, and Evaluations Section.  Staff will verify that the proposed assignment is appropriate relative to the conflict of interest disclosures and will ensure that the Division is in receipt of the required documents (i.e., letter request, temporary disclosure form(s), Confidentiality Agreement, and Consultant Agreement).  After the appropriate Division review, the request will be forwarded to the Board's Office of the Secretary for final approval.  A sample request and credential are included as Document 8.

                      An external expert who receives a temporary examiner credential is subject to the same rules and laws governing participation in a bank examination.  The Consultant Agreement and the Guidance outline these requirements.  While holding a temporary credential that is in effect and not expired, an external consultant may not accept a loan, gift, or gratuity from a bank or affiliated entity examined by the consultant (18 U.S.C. 213).  The consultant may not unlawfully take or conceal any money, note, draft, bond, or any other property of value from any bank or banking institution (18 U.S.C. 655).  The consultant may not disclose information obtained on a bank examination, including the names of borrowers or the collateral for loans, other than to appropriate officers of the examined institution or the Reserve Bank examination team or officials (18 U.S.C. 1906).  A violation of any of these statutes could result in criminal prosecution.

Conclusion

                      This letter provides a framework for a Reserve Bank to pursue contracting arrangements with external experts for bank supervision services using the Reserve Bank's internal procurement process.  Questions about the policy should be directed to Angela Desmond, Assistant Director, at 202-452-3497 or Cynthia Rotruck, Senior Supervisory Financial Analyst, at 202-452-3633 in this Division, or Alicia (Alye) Foster, Counsel in the Board's Legal Division, at 202-452-5289.  Questions about the requirements for obtaining temporary examiner credentials should be directed to Jamie Lenoci, Supervisory Financial Analyst, at 202-452-2288.

Richard Spillenkothen
Director

Attachments

cc:  The Officer in Charge of Procurement at each Federal Reserve Bank

Notes:

1.  If the Reserve Bank has sufficient knowledge of a candidate�s background, for example, the candidate has a longstanding working relationship with the Reserve Bank or is a recently retired employee, the Reserve Bank may tailor the scope of such checks as appropriate. Such decisions should be fully documented. Return to text

2.  The conflicts of interest requirements under this policy are similar to the requirements at other Federal bank regulatory agencies that currently have programs to contract for bank examination services. In its own discretion, a Reserve Bank may determine that it is appropriate to apply other areas of the Reserve Bank�s Code of Conduct to an external expert. Return to text

3.  The rules provide for some limited exceptions, for example, a person holding a credit card issued by an affiliate of the examined institution. A waiver to permit an employee to participate in an examination assignment may also be possible, typically related to employment relationships, as described in Section the 5-041, Part V, of the Federal Reserve Administrative Manual. Return to text

4.  The temporary credential process, which is done under a delegation from the Board to the Division of Banking Supervision and Regulation, assures that the examiner is selected, appointed, and authorized by the Board to examine the institution, and is in compliance with the applicable criminal conflict of interest statutes and the Board�s rules related to access to sensitive information. Return to text

List of Attachments

External Consulting Documents