Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551


SR 93-12 (FIS)
March 16, 1993


SUBJECT: Elements of a Sound Conflict of Interest Program

                        Various efforts are currently underway to review and revise, where necessary, the System's ethics and conflicts of interest program. Because of the special nature of the supervision function and the fact that examiners can be subject to criminal penalties for borrowing from banking organizations that they examine, the S&R departments of each Reserve Bank perform an essential role in the monitoring of conflicts of interest. The importance of appropriate management oversight cannot be overemphasized. Each supervision department, therefore, should continue its ongoing efforts and, where necessary, strengthen its internal procedures for obtaining required disclosures, educating employees about conflict of interest rules, and monitoring for potential conflicts to ensure compliance with existing programs.

                          Board staff are in the process of working with Reserve Bank representatives to clarify and revise existing policies and procedures with respect to identifying and preventing conflicts of interest among S&R personnel, both at the Board and at the Reserve Banks. Efforts also are underway to draft a standard financial disclosure form to be used by S&R staff at all Reserve Banks. Until the Board issues the new rules and the standard form, each Reserve Bank supervision department must ensure that its current program is effectively administered and meets the following broad compliance objectives:

                        1)     Examiners should not be scheduled to participate in assignments from which they must be disqualified because of an actual conflict or the appearance of a conflict of interest. Examples include (a) a borrowing relationship with an institution to be examined or an affiliate; or (b) other relationships, such as employment of a spouse, household member, or close relative at the institution to be examined.

                        2)    Examiners should not take out a loan or establish a line of credit at any state member bank, bank holding company or its nonbank subsidiaries while employed at the Federal Reserve Bank, including such organizations in other Reserve Bank Districts.

                        3)    All non-clerical S&R employees should fill out and file all required financial disclosure forms so that potential conflicts are fully disclosed. Because of the special rules applicable to them, examiners must disclose all borrowing relationships with banking organizations, including credit cards or credit lines with zero balances.

                        4)    Appropriate, trained staff should review the disclosure forms so that conflict of interest issues are identified and resolved in a timely manner. Reserve Banks should consult with the Board's supervision and legal staffs when issues arise. Consultation is essential to ensure System consistency.

                        5)    Restriction lists should be kept current using up-to-date banking structure information as well as recent disclosure forms.

                        The following are elements that have proved to contribute to successful Reserve Bank ethics programs. Reserve Bank management should ensure that each of these elements is present in their own Bank's program:

1.     Preemployment Screens: Examiner borrowing rules and investment prohibitions should be reviewed thoroughly with prospective employees during the interview process to screen and resolve potential problems.

2.    Financial Disclosure: A comprehensive financial disclosure program, consisting of effective forms and instructions, review and control procedures, and accountability, plays an essential role in identifying and appropriately responding to potential conflicts of interest.

                        In successful financial disclosure programs: (1) an effective system exists to review financial disclosure forms in order to identify potential conflicts of interest and policy violations; (2) control procedures are in place to ensure adequate and timely review of disclosure forms through initialing by the reviewer or sign-off by an officer; (3) current restriction lists are consistently checked before examiners are assigned to an institution; and (4) officers and employees are held accountable for program deficiencies.

3.    Training and Employee Education: A formal training program for employees, reviewers of disclosure forms, and schedulers of examinations (and other sensitive work) contributes significantly to a successful ethics program.

                        In effective training and education programs: (1) a statement of responsibilities, with respect to conflict of interest rules, and policy guidance that discusses borrowing rules in a clear and concise manner, incorporating examples, is distributed to and reviewed with employees at least on an annual basis; (2) specific instructions that accompany disclosure forms are clearly stated and emphasize the need for a complete disclosure of information from employees; (3) periodic memoranda remind personnel of their personal responsibilities with respect to conflict of interest rules; and (4) instructions for reviewers of disclosure forms encourage them to communicate frequently with the Reserve Bank's ethics officer.

                         Guidance that is provided in the form of a recitation of the Board FRAM or legal citation, by itself, is not a very effective means for communicating the rules. Rather, guidance to employees should outline borrowing and conflict of interest rules in simple, concise terms, and may illustrate rules by providing examples. One Reserve Bank has compiled a list of brief bullet points which highlight each rule and provides specific examples for reference; another Bank requires a box to be checked as each explanatory point is read by the employee.

4.    Staff Resources: Sufficient administrative support should be made available to prepare paperwork for officer reviews, maintain and update restrictions lists, perform administrative checks, ensure that information is complete and accurate, and perform effective follow-up.

5.    Commitment of Senior Officers: A demonstrated commitment to a sound and well-managed program by senior Reserve Bank officers ensures that policies and procedures are periodically reviewed and updated, and that the program is effectively run with tight controls. Moreover, incorporating a quality assurance aspect in the program ensures conformity of the program with ethics rules, policies, and procedures.

                            Any questions or suggestions regarding the maintenance of a sound conflict of interest program may be directed to Cynthia Rotruck at (202) 452-3633.

Richard Spillenkothen

SR letters | 1993