The Federal Reserve Board issued Wednesday a policy governing eligibility and conflicts of interest for directors of Federal Reserve Banks and their branches. The new policy governs "Class B and C" directors, who are appointed to represent the public. Class A directors represent Fed member banks and have less stringent conflict-of-interest rules.
The policy was a result of controversy generated this spring by news reports detailing how Stephen Friedman, chairman of the Federal Reserve Bank of New York and a Goldman Sachs Group Inc. (NYSE:GS) director, was granted a waiver. The decision allowed Friedman to hold Goldman shares even after the New York bank became a federally regulated bank holding company in September. Freidman resigned from the New York Fed's board.
Until now the 12 regional Federal Reserve banks have had conflicting policies regarding directors' ties to federally regulated bank holding companies and their financial interests in banks.
Each regional bank has a nine-member board of directors. Commercial banks that are members of the Federal Reserve System elect three Class A and three Class B directors, and the Board of Governors appoints three Class C directors. As required by the Federal Reserve Act, Class A directors of each Reserve Bank represent the member banks within the Federal Reserve district. Class B and Class C directors represent the public and may not be officers, directors or employees of any bank. In addition, Class C directors may not be stockholders of any bank. The Fed's Board of Governors extended these prohibitions on affiliations and stockholdings to encompass bank holding companies and other financially related entities to ensure that Reserve Bank boards reflect an appropriate cross-section of industry and the public.
The revised policy states that if a Class B or Class C director is affiliated with a company that becomes a federally regulated entity during his or her term, the director must either resign from the impermissible affiliation or resign from the reserve bank's board within 60 days. During the interim, the director must recuse himself or herself from all reserve bank duties related until in compliance with Fed policy. Similarly, a Class C director who holds stock in a company that becomes a financial stock issuer during the course of the director's term must divest the impermissible stock or resign from the reserve bank's board within 60 days. Additionally, the Class C director would be recused from conducting reserve bank business during the interim. - Bill McConnell
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