TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
Background
Some recent Federal Reserve inspections and examinations have disclosed
problems associated with the sharing of offices and staff by various entities operated by a
banking organization. These problems have been encountered in the case of both domestic
and foreign banking organizations. In one case, a large foreign banking organization had
several of its entities, including its U.S. agency and state nonmember bank subsidiary, share
office space and staff. This banking organization kept common employee payroll records and
had a common employment application form that designated only the parent foreign bank as
the employer. As a consequence, neither the banking organization itself nor the Federal
Reserve or FDIC could readily determine whether an individual was employed by the U.S.
agency or the insured bank, thereby making it difficult to determine which agency had
supervisory authority over an instance of misconduct by some of the organization's staff.
In another situation, a review of a banking organization's activities revealed that
several members of its staff, during the course of interviews conducted by Reserve Bank
examiners and others, were not able to identify which subsidiary of the holding company
employed them. In this case, the distinction was important because some of the personnel
were performing activities that were restricted by law to a separate holding company
subsidiary.
We found in the aforementioned cases that the sharing of facilities and staff led
to an obfuscation of lines of authority and confusion by the banking organizations' customers
and regulators. With some simple corrective measures, these problems can be resolved; and
the diverse operations of complex financial institutions supervised by the Federal Reserve and
other supervisory agencies can continue to be carried out in conformance with applicable laws
and regulations, as well as safety and soundness standards, with minimal enhancements to
the internal policies and controls at these institutions.
Identification of Facilities and Staff
Generally, unless there are statutory restrictions or explicit written proscriptions
issued by the Federal Reserve or other regulators, such as those concerning section 20 firms
and mutual fund sales on bank premises, there is no fundamental legal prohibition on a
banking organization's entities sharing, or using unmarked contiguous, facilities, and, in some
instances, sharing officials and employees. There are, however, concerns about safety and
soundness and about conflicts of interest. These may arise where a banking organization
does not take appropriate actions to define and differentiate the functions and responsibilities
of each of its entities and of its staff.
Good corporate governance requires that a banking organization be able to
identify readily the authority and responsibilities of its officials and employees at each of its
entities, especially where the entities share facilities or use contiguous offices that are not
clearly marked to indicate the identify of the different entities. This is necessary to ensure that
an official or employee who makes a commitment to a counterparty on behalf of the
organization has both the corporate and legal authority to do so, that the counterparty
understands with whom it is dealing, and that each entity is in compliance with any legal
restrictions under which it operates.
In order to accomplish this goal of ready identification, a banking organization
should maintain well-defined job descriptions for each category of its staff at each entity.
Where officials and employees of one entity have responsibilities for other entities, particularly
in shared facilities, the staff's responsibilities should be clearly defined and, when appropriate,
disclosed or made clear to customers and the public in general. This procedure clarifies for
both the public and the regulators for which entity officials or employees are carrying out their duties and responsibilities. Also, this serves to clarify whether an entity is operating within the
scope of its charter, license or other legal restrictions. Finally, a banking organization should
establish and maintain appropriate internal controls designed to ensure the separation of the
legal entities' functions, where required, and an adequate audit program to monitor such
activities.
Examiner Guidance
Reserve Banks are asked to continue to ensure that their examiners are fully
aware of the issues and potential problems involved in the sharing of staff and the sharing of,
or use of unmarked contiguous, facilities by the different entities of a banking organization with
varied activities. At a minimum, examiners should check to see that a banking organization
maintains clear records indicating the duties and responsibilities of the officials and employees
at each of its entities. They should also take steps to check whether, in those situations
where an employee may perform duties for more than one entity in a shared facility, the
banking organization has adequate policies and controls in place to ensure that the duties are
carried out in conformance with the statutory restrictions applicable to each of the entities and
that the banking organization's staff has the corporate and legal capacity to commit the
organization to its counterparties.
In order to assist your examination efforts, examination and inspection manuals
are being updated to include a discussion of shared facilities and staff. A section of the
Federal Reserve's new Examination Manual for U.S. Branches and Agencies of Foreign
Banking Organizations already covers this area in Section 4050.1 and states:
Should branch employees have responsibilities for other offices or affiliates of
the foreign banking organization, particularly those that share facilities with the
branch, these responsibilities should be clearly defined and, when appropriate,
disclosed or made clear to branch customers and the public in general. This
procedure serves to clarify for which entity branch employees are carrying out
their duties. Furthermore, in establishing employee responsibilities, whether or
not for the branch, management should ensure that they are within the scope of
the entity's license or charter.
In the event that you have any questions regarding the domestic or foreign
supervisory aspects of this matter, please contact Mr. James I. Garner, Deputy Associate
Director, at (202) 452-2704, or Mr. Stephen M. Hoffman, Jr., Assistant Director, at (202) 452-5271. For other questions, please contact Mr. Herbert A. Biern, Deputy Associate Director, at
(202) 452-2620.
Deputy Director
|
||||||||||||
