Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION


SR 95-6 (GEN)
January 30, 1995

TO THE OFFICER IN CHARGE OF SUPERVISION
          AT EACH FEDERAL RESERVE BANK


SUBJECT: Revised Policies Concerning Conflicts of Interest and Issuance of Examiner Credentials

                        Last week the Board approved revised conflict of interest rules and a new uniform financial disclosure form pertaining to Federal Reserve examiners and other supervision personnel at the Reserve Banks.  In addition, the Board approved revisions to policies concerning the issuance of examiner credentials.

                        The new disclosure form and revisions to the Federal Reserve Administrative Manual (FRAM) that contain the policy changes, were conveyed to each Reserve Bank under S-2568, dated January 20, 1995.  These are attached.  Also attached is a reference table that summarizes the old and new rules applicable to Reserve Bank supervision staff.

                        Under the new rules, supervision staff at the Reserve Banks is defined to include Reserve Bank presidents and other senior officials with supervisory responsibilities, Federal Reserve examiners (including examination staff in all specialty areas such as Consumer Affairs), all other professional staff in the supervision and regulation department (including officers and managers), as well as other professional staff outside of the supervision and regulation department with substantive participation in supervision matters involving institutions supervised by the Federal Reserve (for example, attorneys and economists reviewing applications).  The rules also apply to individuals in the Discount Window function.

                        The attached revisions to FRAM replace FRAM sections 5-040 and 5-041.  The revised policies and disclosure form may be put into effect immediately, at the discretion of each Reserve Bank, but should be implemented no later than June 1, 1995.  Questions concerning these policies and their implementation can be directed to Cynthia Rotruck, Supervisory Financial Analyst, at 202-452-3633.


Richard Spillenkothen
Director

ATTACHMENTS TRANSMITTED ELECTRONICALLY BELOW:


S-2568      

                        On January 17, 1995, the Board approved revisions to the Federal Reserve Administrative Manual (FRAM) concerning conflicts of interest policies applicable to examiners and other supervision and regulation personnel at the Federal Reserve Banks, and concerning the issuance of examiner credentials.  The revisions were adopted in order to clarify and update guidance to the Reserve Banks, to address issues that have resulted from changes in banking industry structure, and to eliminate policy ambiguities and thereby increase System consistency.  The Board also approved a new standardized financial disclosure form to be used by supervision and regulation personnel at the Reserve Banks.  Copies of the revised documents are attached.

                        These rules supplement the Uniform Code of Conduct, approved by the Board last year, and address issues that apply uniquely to Federal Reserve examiners and to other individuals participating in supervisory matters, including Reserve Bank Presidents and other senior officials with supervisory responsibilities.

                        The revised policies and disclosure form may go into effect immediately, but should be implemented no later than June 1, 1995.

                        This letter supersedes S-2293 (October 28, 1975), and S-2545 (June 18, 1979), as revised by S-2545 (September 18, 1991).

Sincerely yours,

William W. Wiles
Secretary

Attachments


TO THE PRESIDENTS AND FIRST VICE PRESIDENTS OF ALL FEDERAL RESERVE BANKS AND OFFICERS IN CHARGE OF BRANCHES


FRAM 5 - Administrative Policy Statements

Index

EXAMINATION PERSONNEL -- Policies and Procedures for Obtaining Examiner Credentials and Commissions

          Page

I. Examination Authority 1

II. Designations and Credentials for Examiners and Other Supervisory Personnel 2
A. Standard Credentials 2
B. Special Credentials 3
C. Temporary Credentials 4
D. Ad Hoc Credentials 5

III. Initial Appointment of an Employee to an Examining Position 6

IV. Appointment of an Assistant Examiner to Commissioned Examiner 10

V. Issuance of Credentials 11

VI. Cancellation of Credentials 13

VII. Transfer of Examiners Within the Federal Reserve System 13

VIII. Status of Examiners Returning from Military Service And Leaves of Absence 14

IX. Assistant Examiners Performing Duties of an Examiner 15

================================================================

EXAMINATION PERSONNEL--Investment Policy, Borrowing Prohibitions
and Recusal From Examinations and Inspections

          Page

I. Coverage 18

II. General Procedures 19
A. Reporting 19
B. Review and Restrictions List 20
C. Documentation 20
D. Sharing Examination Personnel 20

III. Investment Policy 21
A. General Rule 21
B. Divestiture 21
C. Waivers 22
D. Recusal Requirement 22
E. Other Guidance 23
1. Mutual Funds 23
2. Credit Reviews 23

IV. Examiner Borrowing Prohibitions
A. Criminal Code 25
1. General Guidance 25
2. Examination or Inspection Authority 25
B. Borrowing Prohibition 25
1. General Rule 25
2. Exceptions to the Borrowing Prohibition 27
a. Pre-existing debt 27
b. Loans Sold, Transferred, or Acquired 28
c. Charter Conversions or Change in Membership 29
3. Waiver Authority 29
4. Borrowing By Spouses and Dependent Children 30
5. In-District Borrowing Restriction  31

V. Recusal from Examinations and Inspections 31
A. Borrowing Relationships 31
1. General Rule 31
2. Exceptions 31
3. Waivers 32
4. Servicing Relationships 34
B. Former Employer 34
1. General Rule 34
2. Exception 34
3. Pension Plans 35
C. Employer of a Family Member 35
1. General rule 35
2. Exception 36

VI. Acceptance of Meals and Gratuities 36
A. General Rule 36
B. Exceptions 37

================================================================

OTHER SUPERVISORY PERSONNEL--Recusal from Supervisory
Matters other than Examinations and Inspections
          Page

I. Coverage 38
A. General Guidance 39
B. Definition of Covered Employee 39
C. Application to Federal Reserve Examiners 39

II. General Procedures 40
A. Reporting 40
B. Review and Restrictions List 40
C. Documentation 41

III. Investments 41

IV. Borrowing Relationships 41
A. General Guidance 42
B. Recusal From Matters Other Than Examinations and Inspections 42
1. General Rule 42
2. Exceptions 43
3. Other Situations Warranting Recusal 44
C. Temporary Prohibition on Seeking New Loans 44
D. Waivers 45

V. Employment Relationships and Recusal Requirements 45
A. Former Employer 45
1. General Rule 45
2. Exception 46
3. Pension Plans 46
B. Employer of a Family Member 47
1. General Rule 47
2. Exception 47


BANKING SUPERVISION AND REGULATION
ADMINISTRATIVE POLICY STATEMENTS


EXAMINATION PERSONNEL -- Policies and Procedures for Obtaining Examiner Credentials and Commissions
         
I. Examination Authority

II. Designations and Credentials for Examiners and Other Supervisory Personnel
A. Standard Credentials
B. Special Credentials
C. Temporary Credentials
D. Ad Hoc Credentials

III. Initial Appointment of an Employee to an Examining Position

IV. Appointment of an Assistant Examiner to Commissioned Examiner

V. Issuance of Credentials

VI. Cancellation of Credentials

VII. Transfer of Examiners Within the Federal Reserve System

VIII. Status of Examiners Returning from Military Service And Leaves of Absence

IX. Assistant Examiners Performing Duties of an Examiner

I.    Examination Authority

                        Only an employee holding a credential may examine or inspect an institution.  A credential, approved and issued by the Board, will enable an employee to participate as an examiner or assistant examiner in an examination or inspection of an institution in accordance with the credential and subject to any restrictions on that credential.  An examiner or assistant examiner is not, however, authorized to examine or inspect any institution until he or she is specifically assigned to that institution by the appropriate supervisor at the relevant Reserve Bank or at the Board.  

II.    Designations and Credentials for Examiners and Other Supervisory Personnel

                        Each person employed by a Federal Reserve Bank or the Board of Governors who is approved or appointed by the Board to examine or inspect supervised institutions shall be designated as an "examiner" or "assistant examiner." In its discretion, a Reserve Bank may use an additional title, such as "supervising examiner," "senior examiner," or "senior assistant examiner." An employee's specific title and employment classification shall be determined in accordance with the plan in effect at the Bank of employment.

                         An employee appointed as an examiner or assistant examiner shall be issued a credential appropriate to the employee's level of responsibility (i.e., examiner or assistant examiner) and to the nature of the employee's supervisory assignments (i.e., standard, special, temporary, or ad hoc).  The different types of credentials and the circumstances under which each type of credential should be issued are described below.

                         A.    Standard Credentials.  A Federal Reserve System employee who is assigned to the supervision and regulation function and whose primary responsibility is to participate regularly in examinations or inspections of institutions for which the Federal Reserve serves as the primary federal banking authority1 shall be issued a standard credential upon appointment by the Board as an examiner or assistant examiner.  A standard credential typically will not have a stated expiration date and is subject to revocation by the Board with any change in the employee's employment status or job responsibilities.  A standard credential will be issued with restricted language in cases where a person appointed an examiner or assistant examiner has debt outstanding from an institution for which the Federal Reserve is the primary federal regulator, so as to prevent a person from examining or inspecting the institution until the indebtedness is repaid.

                         At the discretion of each Reserve Bank, a supervisory employee whose primary responsibilities include oversight of or involvement in supervisory activities but do not include regular participation in examinations or inspections may also be designated as an examiner or assistant examiner.  Such an employee will be issued a standard credential subject to the conditions stated above and consistent with the qualifications required for obtaining such credentials.

                         B.    Special Credentials.  A Federal Reserve System employee who assists occasionally in examinations or inspections of institutions for which the Federal Reserve serves as the primary federal banking authority shall be designated upon appointment by the Board a "special examiner" or "special assistant examiner," as deemed appropriate by the Reserve Bank and consistent with the employee's grade level.  Such an individual will be issued a special credential.  The special credential typically will not have a stated expiration date and is subject to revocation by the Board with any change in the employee's employment status or job responsibilities.  However, a temporary employee, such as a summer intern assigned to the supervision and regulation department who will be participating in on-site examinations or inspections, should be issued a special credential with a stated expiration date.

                         Just as with the standard credential, a special credential will be issued with restricted language in cases where a person appointed a special examiner or special assistant examiner has debt outstanding from an institution for which the Federal Reserve is the primary federal regulator, so as to prevent a person from examining or inspecting the institution until the indebtedness is repaid.

                         C.    Temporary Credentials.  A Federal Reserve System employee who does not have a standard or special credential and who is assigned to assist in an examination or inspection of a particular institution (or group of institutions) for which the Federal Reserve serves as the primary federal banking authority, shall be issued a temporary credential upon appointment by the Board.  A temporary credential is issued for a designated period of time and identifies the specific institution(s) the employee has the authority to examine or inspect.  An employee holding a temporary credential has the authority and status of an examiner only during the stated duration of the temporary credential.

                         Prior to the Board's issuance of a temporary credential, the appropriate supervisor at the Reserve Bank must review the employee's actual and potential conflicts of interest with respect to the institution(s) to be examined.  A request to the Board for a temporary credential must indicate that the employee receiving the credential is not indebted to the institution being examined, and that the proposed assignment is consistent with conflicts of interest policy and recusal requirements.  The Board will not issue a temporary credential in the absence of such a determination.

                         D.    Ad Hoc Credentials.  An ad hoc credential may be granted by the Board to permit the examination or inspection of an institution (or a group of institutions) for which the Federal Reserve has statutory examination authority but does not serve as the primary federal banking authority.  For example, authority to examine a national bank, state nonmember bank, or thrift affiliate of a holding company (or of a state member bank) must be specifically granted on an ad hoc basis by the Board of Governors, even if the employee already has a standard or special credential.  However, an ad hoc credential is not required to conduct certain specialty examinations, such as Regulation G inspections, and reviews of EDP servicers and software vendors.  An ad hoc credential is issued for a designated period of time and specifies the institution(s) that the employee is authorized to examine or inspect.  

                         Prior to the Board's issuance of an ad hoc credential, the appropriate supervisor at the Reserve Bank must review the employee's actual and potential conflicts of interest with respect to the institution(s) to be examined.  A request to the Board for an ad hoc credential must indicate that the employee receiving the credential is not indebted to the institution being examined, and that the proposed assignment is consistent with recusal requirements defined under conflict of interest policies.  The Board will not issue an ad hoc credential in the absence of such a determination.

III.    Initial Appointment of an Employee to an Examining Position

                         In the selection of personnel for the examining staff of a Reserve Bank, it is expected that the field of possible appointees will be carefully reviewed by the Reserve Bank in order to obtain the services of those best fitted for the positions.  In considering persons for such positions, it is desirable to select individuals who, judged by their education, experience, and personality, give reasonable promise of developing into competent senior examiners.  Because of their exposure to the financial and other affairs of entities supervised by the Federal Reserve, as well as their broad range of responsibilities, particular care should be exercised in selecting examining personnel.  Any information in an application that raises questions as to the fitness of the applicant should be investigated thoroughly before the final decision is made.  For example, an indication of excessive debt levels or inability to manage one's financial affairs would be cause for further investigation and evaluation.  

                         When a proposed new appointee to the position of examiner or assistant examiner is indebted to an institution for which the Federal Reserve serves as the primary federal banking authority, the Board's approval will be granted subject to the condition that such person is not permitted to participate in any examination or inspection of that institution until the indebtedness has been liquidated.  For further guidance, See Section IV.B.2(a), "Pre-existing debt" under the next part of FRAM, entitled "EXAMINATION PERSONNEL -- Investment Policy, Borrowing Prohibitions and Recusal From Examinations and Inspections."

                         Whenever a person is under consideration for a new appointment as an examiner or assistant examiner at a Federal Reserve Bank, an application for appointment should be forwarded to the Board with the following information about the proposed appointee:

    1. Personal and employment data:  Include name, place of birth, citizenship, proposed date of employment, salary, title, and grade.
    2. Education and other specialized training:  Include names of schools, colleges or universities attended, periods of attendance, and degrees, diplomas or certificates received.
    3. Employment:  Names and addresses of previous employers, periods of employment, positions held and nature of work, salary, reasons for leaving, and, to the extent possible, information obtained from previous employers as to quality of applicant's work.  
    4. Other relevant experience:  Other experience pertinent to the applicant's qualifications as an examiner or assistant examiner, including information about commissioned status at another federal regulatory agency or state banking agency.
    5. Indebtedness:  Information about the indebtedness of the applicant and of the applicant's spouse and dependent children, as reported on the employee's confidential financial disclosure form.  Include a statement about any indebtedness to institutions for which the Federal Reserve serves as the primary federal banking authority, so that a restricted credential may be issued, if necessary.  
    6. Outside employment and activities:  Information describing business relationships and other activities of the applicant and action proposed to be taken to eliminate any such activities that might interfere with the individual's service as an employee of the Federal Reserve Bank.
    7. Other relationships:  Information about family members employed by financial institutions, and other relationships or circumstances that could present a conflict of interest with the applicant's examination responsibilities.
    8. Investments:  Information about any debt or equity interests in depository institutions or depository institution affiliates owned or controlled by the applicant or the applicant's spouse or dependent children and proposed plans for disposition of any such debt or equity interests.
    9. Other relevant information:  Any other information, whether adverse or favorable, that will be of assistance in the consideration of the application.

                        A copy of the application for employment (unless the proposed appointee has been in the employ of the Reserve Bank for some time), a copy of the applicant's confidential disclosure form for supervision and regulation personnel at the Federal Reserve Banks, and a recent photograph should be submitted.  Information requested above that is supplied in the person's application for employment at the Reserve Bank and the confidential disclosure form need not be duplicated.

IV.    Appointment of an Assistant Examiner to Commissioned Examiner

                        When a Reserve Bank determines that an "assistant examiner" is qualified to be commissioned as an "examiner," in accordance with Board and Reserve Bank policies, an application requesting that the assistant examiner be commissioned as an examiner should be forwarded to the Board.  The application should include the following information about the proposed appointee:

    1. Employment data:  Name, grade, date of employment in the supervision and regulation function, and current area of specialization.  Include dates of employment in other areas of the Reserve Bank, or other Reserve Banks, if applicable.
    2. Initial appointment date:  The date on which the Board approved the candidate's appointment as an Assistant Examiner.
    3. Training:  A list of System schools and other training completed while employed at the Federal Reserve Bank, including the completion of Core schools which satisfy policy requirements for commissioning.  List other Board and FFIEC training completed during employment in the supervision and regulation function.  If applicable, list relevant training completed during employment at other regulatory agencies.
    4. Proficiency test:  The date on which the employee passed the examiner proficiency test.  If testing is not applicable, explain.  (For example, indicate whether the candidate was hired prior to January 1, 1991, or whether the candidate was commissioned as an examiner at another federal regulatory agency.)
    5. Reserve Bank experience:  A brief statement about field examination experience or special expertise supporting the promotion to commissioned examiner.  Such information typically would include the types of examinations or inspections performed as an assistant examiner, and the specific details regarding examiner-in-charge (EIC) experience (including the number, type, and complexity of institutions reviewed as EIC).  
    6. Other relevant information:  When applicable, a statement about prior relevant experience, such as examination experience at another regulatory agency, or any additional information deemed relevant to the approval of the application.

V.    Issuance of Credentials

                        Upon approving an examiner's or assistant examiner's appointment, the Board will issue a credential to the individual. Standard and special credentials for examiners or assistant examiners consist of two items:  (a) a letter issued by the Office of the Secretary of the Board appointing the individual to his or her position as approved by the Board; and (b) a photo identification card issued by the Reserve Bank and signed by the Reserve Bank president.  (Temporary and ad hoc credentials for examiners and assistant examiners generally consist of only the first item noted above.) An individual appointed to the position of examiner and issued a standard credential also receives a certificate signed by the Chairman of the Board of Governors and the Director of the Division of Banking Supervision and Regulation.  

                         In the interest of uniformity, the following form should be used for the photo identification card issued to examiners and assistant examiners:

Federal Reserve Bank of______________

No._________        

_______________19____

   This is to certify that                          ________________________
    (photo)    has been appointed, with the
   approval of the Board of
   Governors of the Federal
   Reserve System, an _______
   _______________________for
   the Federal Reserve Bank
   of__________________
       ___________________

                       President

_____________________
Signature of Examiner
(or Assistant Examiner)

                        The suggested form provides space for adding the examiner or assistant examiner designation, but there is no objection to a Reserve Bank printing one set of identification cards for examiners and another for assistant examiners.  The photograph of the appointee should be unalterably affixed to the identification card.

VI.    Cancellation of Credentials

                        As no expiration date is typically specified on standard and special credentials, an examiner or assistant examiner should be informed that his or her credential is subject to surrender and cancellation upon termination of employment or change of employment responsibilities.  Because the status of "examiner" or "assistant examiner" subjects an individual to coverage by the criminal statutes governing borrowing by examiners, Reserve Banks should consider cancelling the credential of an employee who no longer performs examinations or inspections.  Reserve Banks should inform the Board, in writing, whenever an employee's credential is cancelled as a result of termination of employment, transfer to another Reserve Bank or the Board, or change of employee responsibilities.  The certificate issued to a commissioned examiner may be retained by the employee as a memento of service to the System.  

VII.    Transfer of Examiners Within the Federal Reserve System

                        A credential issued to a Reserve Bank employee appoints that individual to the position of examiner or assistant examiner at his or her respective Reserve Bank.  Therefore, when an examiner or assistant examiner terminates his or her employment at a Reserve Bank by transferring to another Reserve Bank or to the Board, the Reserve Bank should cancel the departing employee's credential and notify the Board in writing of such cancellation (as described under VI., above).  The Reserve Bank hiring the transferring employee must request a new appointment to examiner or assistant examiner consistent with the requirements previously outlined.  To expedite a request for a new credential, the application to the Board should clearly indicate that the individual is transferring from another Federal Reserve Bank and contain a description of the employee's prior System experience.  

VIII.  Status of Examiners Returning from Military Service and Leaves of Absence

                         The following section, which outlines those circumstances under which a Reserve Bank must obtain a new appointment for an employee returning from military service should also be used as guidance with respect to an employee returning from a leave of absence.

                         Whether an examiner or assistant examiner returning from military service requires reappointment by the Board depends on the circumstances of the employee's leaving the Reserve Bank and the employee's status as carried on the Bank's records during the absence. If the employee resigned prior to entering military service and is subsequently re-employed, reappointment as an examiner or assistant examiner by the Reserve Bank would require the Board's approval.  If, however, the employee did not resign but was carried on military leave and is reinstated to active duty after returning from military service, there would be no break in the appointment and, therefore, no action by the Board is required.  In the former case, the Reserve Bank should submit an application for appointment of the employee to examiner or assistant examiner, as appropriate.  In the latter case, the Board's Division of Banking Supervision and Regulation should be informed of the date the employee returned to active duty, and the employee's current title and grade. Reserve Banks should ensure that current conflicts of interest information has been obtained and reviewed (including information concerning indebtedness, outside employment, investments, employment of family members at financial institutions and other relationships posing potential conflicts of interest with supervised institutions.)

IX.    Assistant Examiner Performing Duties of an Examiner

                         As a general policy, a commissioned examiner acting as the examiner-in-charge (EIC) should conduct all examinations and inspections.  Only in exceptional circumstances should an assistant examiner serve as the EIC of an examination or inspection and then only when the assistant examiner has the appropriate qualifications and the Reserve Bank ensures proper oversight of the assistant examiner's work. In addition, an assistant examiner may serve as an EIC under the supervision of experienced examiners (or management) when he or she is: (1) being considered for promotion and appointment to commissioned examiner (and hence, acting as an EIC nominee); (2) inspecting a bank holding company that is neither complex nor of substantial size; or (3) conducting a specialty examination or inspection of activities that are neither complex nor of substantial size.  

                         In all cases where an assistant examiner acts as the EIC, the report should be signed by the individual as "examiner" rather than as "assistant examiner."


EXAMINATION PERSONNEL--Investment Policy, Borrowing Prohibitions
and Recusal From Examinations and Inspections

I. Coverage

II. General Procedures
A. Reporting
B. Review and Restrictions List
C. Documentation
D. Sharing Examination Personnel

III. Investment Policy
A. General Rule
B. Divestiture
C. Waivers
D. Recusal Requirement
E. Other Guidance
1. Mutual Funds
2. Credit Reviews

IV. Examiner Borrowing Prohibitions
A. Criminal Code
1. General Guidance
2. Examination or Inspection Authority
B. Borrowing Prohibition
1. General Rule
2. Exceptions to the Borrowing Prohibition
a. Pre-existing debt
b. Loans Sold, Transferred, or Acquired
c. Charter Conversions or Change in Membership
3. Waiver Authority
4. Borrowing By Spouses and Dependent Children
5. In-District Borrowing Restriction 

V. Recusal from Examinations and Inspections
A. Borrowing Relationships
1. General Rule
2. Exceptions
3. Waivers
4. Servicing Relationships
B. Former Employer
1. General Rule
2. Exception
3. Pension Plans
C. Employer of a Family Member
1. General rule
2. Exception

VI. Acceptance of Meals and Gratuities
A. General Rule
B. Exceptions

I.     Coverage

                         The conflict of interest rules contained in this policy statement apply to all Federal Reserve examiners.2 In addition, Federal Reserve examiners, as well as other Reserve Bank staff, participating in supervisory matters other than examinations and inspections are subject to the conflict of interest rules outlined under the next part of FRAM entitled,"OTHER SUPERVISORY PERSONNEL"(see Section I.C., "Application to Federal Reserve Examiners").  Other conflict of interest rules that apply to all Reserve Bank personnel are contained in each Reserve Bank's code of conduct and are uniform throughout the System.

                         To the extent that the rules contained in this policy statement set more stringent standards than those contained in the Reserve Bank's code of conduct, the rules in this policy statement are to be followed.  For example, an examiner may not accept a fifteen dollar sweatshirt from a bank that he or she examines even though the Reserve Bank code of conduct would permit other Bank personnel to accept such a gift given its de minimis value.

                         A Reserve Bank examiner may not participate in the examination or inspection of an institution if the examiner has a relationship that might result in a conflict of interest or the appearance of a conflict of interest.  It is the responsibility of each Reserve Bank to arrange examination and inspection assignments to ensure that this general principle and the specific principles covered in this policy statement are scrupulously adhered to.  Thus, a Reserve Bank should maintain careful records concerning the nature of an examiner's authority and establish a system of assigning examiners to jobs that ensures compliance with System policies.  

II.    General Procedures

                         A.    Reporting.  Each Reserve Bank will require examining personnel to submit periodic reports, at least annually, disclosing: (1) debt and equity interests of the examiner and the examiner's spouse and dependent children in a depository institution or a depository institution affiliate; (2) borrowing relationships of the examiner, the examiner's spouse and dependent children, and any related entity (as defined below) at a financial institution3 or its affiliates; (3) outside employment positions held by the examiner; (4) employment at a financial institution or its affiliate by an immediate family member (spouse, dependent children, parent, sibling); and (5) any other relationship posing a potential conflict of interest with a financial institution or its affiliate.  

                         Related entity" is defined to mean a company or business where the employee or the employee's spouse or dependent child owns or controls more than 10 percent of its equity, or a partnership where the employee or the employee's spouse is a general partner.

                         An examiner should report debt of a spouse, dependent child, and any related entity to the best of his or her knowledge.  In addition, any change occurring between reporting periods that may affect an examiner's restrictions must be reported by an examiner to the examiner's supervisor or the Bank's Ethics Official as soon as possible after the change has occurred.  In circumstances where an examiner does not have control over such a change (e.g., where a loan is transferred or sold by the originator, or a loan is originated by a spouse or related entity), the examiner must report the change, to the best of his or her knowledge.  The examiner should make a reasonable effort to obtain such current information.

                         B.    Review and Restrictions List.  Each Reserve Bank shall regularly review investment, debt, employment, and other information submitted by an examiner and determine whether divestiture, recusal, or some other action is necessary.  Using information contained on each disclosure form, a Reserve Bank should routinely prepare a list(s) of restrictions to be imposed on examination personnel to prevent actual or apparent conflicts of interest and to restrict assignments in accordance with System policy requirements.  

                         C.    Documentation. Each Reserve Bank should appropriately document the review and resolution of conflict of interest issues, with such documentation made available upon request for review by Board staff.

                         D.    Sharing Examination Personnel. Prior to lending a member of its examining staff to assist in an examination or inspection conducted by another Federal Reserve Bank, a Reserve Bank should determine that for any proposed assignment there exists no relationship between that individual and the supervised institution in the other District that might result in a violation of Federal Reserve policy.  In instances where the assignment is not known in advance, the host Reserve Bank is responsible for ensuring that all assignments made to borrowed staff are consistent with System conflict of interest policy governing recusal requirements.

III.    Investment Policy

                         A.    General Rule.  A Federal Reserve examiner is subject to the same investment prohibitions as other System employees.  These prohibitions, which are uniform throughout the System, are set forth in each Reserve Bank's code of conduct.  In general, an examiner, and his or her spouse, and minor child may not own or control a debt or equity interest in a depository institution or its affiliate, or in a primary dealer of U.S. government securities or its affiliate, with certain limited exceptions, as described in the uniform code of conduct.         

                         B.    Divestiture.  An examiner is generally provided a maximum of 90 days to divest a prohibited debt or equity interest.  Therefore, a new employee holding a prohibited debt or equity interest and applying for an examiner credential will typically be issued a standard credential by the Board that expires after ninety days.  A permanent standard credential will be reissued to the individual upon notification by the Reserve Bank to the Board that the prohibited debt or equity interest has been divested as agreed.  With this notification, a Reserve Bank should also provide supporting documentation relevant to the transaction.  

                         C.    Waivers.  An examiner may request a waiver from investment prohibitions when extenuating circumstances exist.  Such requests will be stringently reviewed and granted only on a very limited basis, taking into consideration the examiner's duties and his or her potential access to confidential supervisory information.  When considering a waiver for a supervision and regulation employee, Reserve Banks should consult with the Board's Division of Banking Supervision and Regulation to determine whether a waiver would be appropriate.  When a determination is made to waive a System policy, the review must be fully documented, with such documentation made available for subsequent review by Board staff.

                         D.    Recusal Requirement.  When an examiner, or his or her spouse, or minor child is permitted to retain an investment otherwise prohibited under System policy, the examiner generally must be disqualified from participating in any particular matter affecting the organization or its affiliates, and must refrain from discussing or accessing confidential information pertaining to that organization.  Any exception to this recusal requirement must be approved in writing by the Reserve Bank's legal department.

                         E.    Other Guidance.     (1) Mutual Funds -- The Board believes that an investment in a mutual fund, even a proprietary mutual fund, serviced or advised by a bank or bank holding company, does not require an examiner to refrain from participating in matters involving that bank or bank holding company. An investor in a mutual fund has an interest in the fund and not in the bank or bank holding company that services or advises the fund.  While the Board recognizes that banks and bank holding companies benefit financially from their mutual fund activities, this fact alone does not create a conflict of interest or an appearance of a conflict of interest.  However, Reserve Bank employees, including examiners, are prohibited from investing in a mutual fund that has a stated policy of concentrating in the financial services industry.  The prospectus of each mutual fund is required to state whether the fund has a policy of concentrating its assets in any particular industry.  Reserve Bank employees may rely on the prospectus in applying this rule.  

                         Finally, an examiner may not engage in a financial transaction as a result of relying on confidential information obtained in the course of an examination or inspection, including confidential information about a mutual fund.

                         (2) Credit Reviews -- Section 208 of the Criminal Code prohibits a Bank employee from participating in a matter that directly and predictably affects the employee's financial interests or the financial interests of the employee's spouse, minor child, or general partners, or the financial interests of an organization of which the employee serves as officer, director, trustee, general partner, or employee.  18 U.S.C. 208.  Because of the possible application of this criminal law, an examiner should not participate in the review of a credit file during a Federal Reserve examination, inspection, or a Shared National Credit examination if the examiner (or a related person or entity as described above) has a financial interest in the borrower whose credits are being reviewed unless the examiner has obtained the prior written approval of his or her supervising officer after consultation with the Bank's Ethics Official and, where necessary, has received a section 208 waiver.  For example, if an examiner owns stock in ABC Hardware, the examiner should not evaluate a loan or credit facility of ABC Hardware during an examination or inspection without receiving the prior written approval of the examiner's supervising officer, after consultation with the Bank's Ethics Official and, where necessary, obtaining a section 208 waiver.  

                         It is the responsibility of each Reserve Bank to advise its examiners that their review of a borrower's credit files during an examination or inspection may result in a violation of criminal conflict of interest laws if they, their spouses or minor children, related entities or persons (as described above), have a financial interest in the borrower whose loans and credit facilities are being reviewed.

IV.    Examiner Borrowing Prohibitions

                         A.    Criminal Code.  (1) General Guidance -- Section 213 of the U.S. Criminal Code prohibits a bank examiner from accepting a loan or gratuity from any bank examined by the individual. 18 U.S.C. 213. Section 212 of the U.S. Criminal Code prohibits an officer, director, or employee of a bank from making or granting any loan or gratuity to any examiner who examines or has authority to examine the bank. 18 U.S.C. 212.  These provisions of the Criminal Code also could be held applicable to a loan obtained by an employee who is issued a special, temporary, or ad hoc credential.  

                         (2) Examination or Inspection Authority -- An individual is not authorized to examine an institution until that individual: (a) has a credential issued and approved by the Board; and (b) has been assigned to an examination or inspection of the institution by the appropriate supervisor at the relevant Reserve Bank or at the Board.

                         B.    Borrowing Prohibition. (1) General Rule -- Federal Reserve examiners4 are prohibited from directly or indirectly borrowing from (including having a line of credit or a credit card issued by) an institution for which the Federal Reserve is the primary federal banking authority.  The Federal Reserve is the primary federal banking authority for state member banks, bank holding companies, most non-bank subsidiaries of bank holding companies, Edge Act and Agreement corporations, and U.S. branches and agencies, representative offices and nonbank subsidiaries of foreign banks.  The Federal Reserve is not the primary federal banking authority for national banks, non-member banks, limited special purpose banks or nonbank banks authorized under Section 4 of the Bank Holding Company Act (if the banks are not state member banks), and thrift institutions (even when such entities are subsidiaries of bank holding companies).  The FDIC, OCC, and OTS are the primary federal banking authorities for these institutions.

                         A Federal Reserve examiner may borrow from any institution for which the Federal Reserve is not the primary federal banking authority (such as a national bank or a thrift institution).  Such borrowing is permitted even if the institution is owned by a bank holding company or is affiliated with a state member bank, an Edge Act or Agreement corporation, or a foreign banking organization.  However, when such a borrowing exists (except in the case of credit cards and overdraft protection lines), the examiner will need to be restricted from examining any affiliate of the lender (See Section V., "Recusal from Examinations and Inspections.")

                         (2) Exceptions to the Borrowing Prohibition -- (a) Pre-existing debt.  An examiner may retain any debt incurred prior to appointment as an examiner by the Board so long as:  (i) the debt is amortizing (i.e., a loan with regular payments of principal and interest); (ii) the debt is not renewed, renegotiated, or increased; (iii) payments are current; (iv) the credential issued by the Board authorizing the appointment of the examiner specifically excludes the creditor institution and its affiliates until such time that the debt is satisfied; (v) the examiner does not participate in any examination or inspection of the institution or its affiliates; and (vi) the examiner indicates, in writing, that he or she understands and will comply with these conditions while the debt remains outstanding.  

                         An individual with other types of pre-existing debt from an institution for which the Federal Reserve is the primary federal banking authority, such as credit extended under a revolving line of credit, advances under a credit card, or non-amortizing debt (i.e., a loan with no regular payments of principal and interest), may be hired as an examiner on condition that:  (i) the debt is not increased; (ii) the facility is terminated within six months of appointment or converted to an amortizing facility; (iii) the credential issued by the Board authorizing the appointment of the examiner specifically excludes the creditor institution and its affiliates; (iv) the credential is valid for no more than six months; and (v) the examiner does not examine the institution or its affiliates.  A permanent credential will be issued to the individual upon notification by the Reserve Bank to the Board that the indebtedness has been terminated or converted in compliance with this policy.  The Reserve Bank should obtain appropriate documentation to assure that the actions required by this policy have been taken, and forward such documentation with the request to the Board.  So that an individual's examination authority does not lapse, a permanent standard credential should be requested prior to the expiration of a restricted credential.  

                         (b) Loans Sold, Transferred, or Acquired. As the sections of the Criminal Code are designed to prevent examiners from obtaining loans from banks examined by them or which they have authority to examine, the statutes would not appear to apply to obligations of examiners obtained from permissible sources that later are acquired by institutions for which the Federal Reserve is the primary federal banking authority. Thus, an examiner will be permitted to retain a loan originated with a permissible institution that is later transferred or sold to a prohibited institution so long as the debt is not renewed, renegotiated, or increased, payments are current, and the examiner is restricted from examining or inspecting the institution which holds the indebtedness. However, credit card debt or debt extended under a revolving line of credit which is subsequently sold or transferred to an impermissible credit source is deemed to be impermissible debt as a result of the sale or transfer, given that each advance under such a facility is considered to be a new extension of credit.  Such debt must be eliminated or converted to an amortizing facility within six months of the date when the examiner is notified of such sale or transfer.

                         (c) Charter Conversions or Change in Membership. A loan originated at a lending institution that undergoes a charter conversion or change in membership, and as a result becomes an institution for which the Federal Reserve serves as the primary federal banking authority, is to be treated in the same manner as a loan sold or transferred among such institutions.  Thus, if an examiner obtains an automobile loan from a national bank that later converts to a state charter and becomes a member of the Federal Reserve System, the examiner may retain the loan provided that the examiner does not participate in an examination of the state member bank and the debt is not renewed, renegotiated, or increased, and payments are current.   When an institution undergoes such a charter conversion or change in membership between the time that a loan is approved and funded, the loan may be advanced.  

                         (3) Waiver Authority -- The Director of the Division of Banking Supervision and Regulation is authorized to waive the borrowing prohibitions for an examiner or an examiner's spouse or dependent child under the following conditions:  (a) the examiner can demonstrate that the credit is not available from a permissible source on comparable terms, and that absent a waiver financial hardship will ensue; (b) the examiner has never examined the lending institution; (c) the examiner will be borrowing from an institution located outside of the Reserve Bank district and for which the local Reserve Bank does not have primary supervisory authority (e.g. the parent BHC is not headquartered in the District); (d) it is feasible to restrict the examiner from examining the lender and its affiliates; and (e) the examiner is reissued a credential explicitly stating that the examiner is not authorized to examine the lender until such time as the debt is satisfied.  It is anticipated that this waiver authority will be exercised rarely.  A request for a waiver must be made by the Reserve Bank to the Board's Division of Banking Supervision and Regulation, in writing, and must outline the relevant circumstances.

                        (4)    Borrowing By Spouses and Dependent Children -- The Department of Justice has attributed the debt of an examiner's spouse to the examiner in the context of the criminal laws.  As a result, the borrowing prohibitions outlined above for examiners should be applied to borrowings by an examiner's spouse or dependent child unless such borrowing: (1) is supported only by the income or independent means of the spouse or dependent child; (2) was obtained on terms and conditions no more favorable than those offered to the public; and (3) was not negotiated, endorsed, guaranteed, or co-signed by the examiner.  Even if the borrowing by a spouse or dependent child meets these requirements, the examiner is required to disclose all such relationships, to the best of his or her knowledge, and must not be permitted to participate in an examination or inspection of the organization or its affiliates unless the examiner would be permitted to participate under these rules if the borrowing were his or her own debt.

                         (5)    In-District Borrowing Restriction -- In its discretion, a Reserve Bank may prohibit examiners from borrowing from any subsidiary of an in-district bank holding company if such borrowing would hinder the Reserve Bank's ability to carry out its supervisory responsibilities by limiting staffing resources.

V.   Recusal from Examinations and Inspections

                         A.    Borrowing Relationships.  (1) General Rule -- An examiner may not examine any bank (including foreign subsidiaries or branches), Edge Act or Agreement corporation, a U.S. branch or agency of a foreign banking office, or inspect any holding company or nonbank subsidiary that is affiliated with or owned by any company or bank from which the examiner, the examiner's spouse or dependent child, or a related entity5 is presently borrowing.  

                         (2) Exceptions -- There are two limited exceptions to the general rule:  An examiner may examine an affiliate of an institution from which the examiner, the examiner's spouse or dependent child:  (i) has obtained a credit card on the same terms and conditions offered to the public; or (ii) has an overdraft protection line.      

                         Thus, for example, an examiner with a student loan from a national bank subsidiary of a bank holding company would not be permitted to inspect the national bank or any of its affiliates including the parent holding company.  If, on the other hand, the examiner was borrowing from the national bank solely through the use of a credit card, or had an overdraft protection line on his or her checking account at the national bank, the examiner would be permitted to examine or inspect any affiliate of the national bank including the parent holding company.  In no instance, however, would the examiner be permitted to examine or inspect the organization from which he or she is borrowing as this could result in a violation of the criminal statutes.

                         (3) Waivers -- In certain limited circumstances, a Reserve Bank may provide a waiver for an examiner to participate in the examination or inspection of an affiliate of an organization from which the examiner (spouse, dependent child, or related entity) is borrowing through means other than a credit card or an overdraft protection line6, under the following circumstances and conditions: (a) the borrowing relationship was not originated at the institution or its affiliates and transfer of the debt resulted from a merger, consolidation, loan sale, or other event outside of the examiner's control; (b) the borrowing relationship was originated more than six months prior to the proposed assignment; (c) the borrowing is either an amortizing consumer loan (including a first or second mortgage on a personal residence) or a home equity line of credit; (d) the examiner's participation in the examination or inspection of an affiliate of the organization where the examiner is borrowing is deemed of critical importance, either because of the examiner's particular expertise, or due to resource constraints; and (e) the Reserve Bank's Ethics Official provides an opinion that the employee's participation in the proposed assignment is legal and will not present a conflict of interest.  Such waivers must be in writing, satisfying the criteria (a through e) above, and must be made available for review by Board staff upon request.  

                         For example, Federal Reserve examiner John Sharp recently received a notice that his home mortgage, which was originated seven months ago at Independent Savings and Loan, has been sold to a national bank subsidiary of MultiBank, Inc., the largest bank holding company in the District.  John Sharp and two other Reserve Bank examiners are highly skilled in evaluating commercial real estate loans.  Their participation in the upcoming inspection of MultiBank, Inc. and examination of its lead bank, Grand State Member Bank, is deemed of critical importance to the Reserve Bank, as the Bank has a large and complex real estate loan portfolio, and the three examiners are needed to complete the evaluation of the portfolio within the time-frame required.  The Reserve Bank deems a waiver appropriate for Mr. Sharp, having satisfied conditions a-d, and will seek an opinion from the Reserve Bank's Ethics Official to satisfy condition e.   In no case, however, would John Sharp be permitted to participate directly in an examination of the national bank subsidiary from which he is borrowing as this could be a violation of criminal conflict of interest statutes.

                         (4) Servicing Relationships -- An examiner may participate in an examination, inspection, investigation, or other review of an organization servicing the examiner's loan provided that the servicer does not retain a financial interest in the underlying value of the credit.  A financial interest may exist if, for example, the servicing organization has a residual credit interest in the loans it services, or is obligated to share in credit losses caused by a borrower.

                     B.    Former Employer.  (1) General Rule -- An examiner may not participate in an examination or inspection of a financial institution or its affiliates if the examiner was employed by that institution within the past twelve months.  

                         After the one-year period has elapsed, the Reserve Bank shall determine whether the examiner's former position with the financial institution and current responsibilities at the Reserve Bank indicate a need to continue the restriction in order to avoid the appearance of a conflict of interest.  This determination should be appropriately documented and made available for subsequent review when requested by Board staff.

                         (2) Exception -- The one year recusal requirement may be waived if, after consultation with the Reserve Bank's Ethics Official and consideration of the relevant facts, the examiner's supervising officer determines that no violation of law nor appearance of conflict of interest would occur as a result of the assignment.  Factors to consider in making this determination include: (a) the examiner's former position and years of employment at the institution; (b) the examiner's level of responsibility in the matter; and (c) the need for the examiner on the assignment.  Any such determination must be appropriately documented and made available for subsequent review when requested by Board staff.  

                         (3) Pension Plans -- If an examiner continues to participate in a pension or retirement plan obtained through prior employment at a financial institution or its affiliates, the examiner must be disqualified from participating in an examination or inspection of that institution or its affiliates, unless the examiner receives a written opinion from the Bank's legal department that such disqualification is not necessary because the pension does not represent a disqualifying financial interest under the criminal laws.  It is preferred, however, that participation in a self-directed retirement plan (e.g., a 401K plan or a 403(b) plan) resulting from employment with a financial institution or its affiliate, be terminated, rolled-over or transferred, prior to, or within a reasonable period, after employment.  At a minimum, an examiner should request a termination, transfer, or roll-over from such a plan within 90 days of appointment as an examiner.  

                         C.    Employer of a Family Member.  (1) General Rule -- An examiner may not participate in an examination or inspection of a financial institution or its affiliate if such financial institution or affiliate employs a member of the examiner's immediate family (i.e., spouse, child, parent, or sibling).   A Reserve Bank may require recusal in other situations where an examiner has a relationship that could create an actual or apparent conflict of interest with a financial institution.  For example, if a financial institution employs an examiner's sister-in-law, or if an examiner's parent is a principal shareholder of a financial institution, the Reserve Bank may conclude that recusal is appropriate.  

                         (2) Exception -- In certain circumstances, recusal will not be required if, after a review of the relevant facts of each case and after consultation with the Reserve Bank's Ethics Official, the examiner's supervising officer determines that no violation of law nor appearance of conflict of interest would occur as a result of the assignment. Factors to consider in making this determination include:  (a) the family member's position with the institution; (b) the employee's level of responsibility in the matter; and (c) the need for the employee on the assignment.  Any determination must be appropriately documented and made available for subsequent review when requested by Board staff.

VI.    Acceptance of Meals and Gratuities

                         A.    General Rule. Consistent with the criminal laws and the need to avoid even the appearance of a conflict of interest, a Federal Reserve examiner may not accept a gratuity or a meal from an entity that the examiner has examined, examines, or is authorized to examine.  An examiner may eat in the cafeteria of a regulated entity, even if the cafeteria is subsidized, provided that the examiner pays for the meal at the rate charged the general public (i.e. guests other than regulators visiting the premises).  In no event should an examiner accept an invitation to eat, free of charge, in a private dining room or at a restaurant.

                         B.    Exceptions. An examiner may accept modest items of food and refreshments such as soft drinks, coffee, and donuts offered other than as part of a meal.  An examiner may also accept items with little intrinsic value, such as a pen or pencil or calendar provided that such items are also offered to the general public.   However, in all cases, an examiner should avoid situations which appear to call into question the objectivity and integrity of the supervisory process.


OTHER SUPERVISORY PERSONNEL--Recusal from Supervisory
Matters other than Examinations and Inspections

I. Coverage
A. General Guidance
B. Definition of Covered Employee
C. Application to Federal Reserve Examiners

II. General Procedures
A. Reporting
B. Review and Restrictions List
C. Documentation

III. Investments

IV. Borrowing Relationships
A. General Guidance
B. Recusal From Matters Other Than Examinations and Inspections
1. General Rule
2. Exceptions
3. Other Situations Warranting Recusal
C. Temporary Prohibition on Seeking New Loans
D. Waivers

V. Employment Relationships and Recusal Requirements
A. Former Employer
1. General Rule
2. Exception
3. Pension Plans
B. Employer of a Family Member
1. General Rule
2. Exception

I.    Coverage

                         A.  General Guidance.  The conflict of interest rules contained in this policy statement apply to Reserve Bank staff who participate in supervision and regulation matters other than examinations or inspections.  There are additional conflict of interest rules that apply to all Federal Reserve Bank personnel.  These rules are contained in each Reserve Bank's code of conduct and are uniform throughout the System.  To the extent that the rules contained in this policy statement set more stringent standards than those contained in the Reserve Bank's code of conduct, the rules in this policy statement are to be followed.

                         B.  Definition of Covered Employee.  Covered employees include Reserve Bank Presidents and other senior officials with supervisory responsibilities, all professional staff (except examiners7) in the Reserve Bank's supervision and regulation department, including officers and managers, as well as other professional Reserve Bank staff outside of the Reserve Bank's supervision and regulation department with substantive participation in supervisory matters involving institutions supervised by the Federal Reserve (e.g. attorneys and certain economists).  In addition, all professional staff, including officers and managers, in the discount window function are defined as covered employees for purposes of applying this policy.  Reserve Banks are individually responsible for identifying the employees covered under this policy.

                         C.  Application to Federal Reserve Examiners.  In general, Federal Reserve examiners participating in supervisory matters other than examinations and inspections are subject to the same recusal standards set forth here for covered employees participating in such matters.  The specific sections that are applicable to examiners are Section IV.B., "Recusal from Matters other than Examinations and Inspections", and Section V., "Employment Relationships and Recusal Requirements".  (An examiner holding a valid standard or special credential is also subject to the borrowing prohibitions outlined in Section IV., "Examiner Borrowing Prohibitions" contained in the previous part of FRAM entitled "EXAMINATION PERSONNEL -- Investment Policy, Borrowing Prohibitions and Recusal From Examinations and Inspections".)

II.   General Procedures

                         A.  Reporting.  Each Reserve Bank will require a covered employee to submit periodic reports, at least annually, disclosing:  (1) debt and equity interests of the employee and the employee's spouse and dependent children in a depository institution or a depository institution affiliate; (2) borrowing relationships of the employee, the employee's spouse and dependent children, and any related entity (as defined below) at a financial institution8 or its affiliates; (3) outside employment positions held by the employee; (4) employment at a financial institution or its affiliate by an immediate family member (spouse, dependent child, parent, sibling); and (5) any other relationship posing a potential conflict of interest with a financial institution or its affiliate.  "Related entity" is defined to mean a company or business where the employee or the employee's spouse or dependent child owns or controls more than 10 percent of its equity, or a partnership where the employee or the employee's spouse is a general partner.

                         An employee should report debt of a spouse, dependent child, and any related entity to the best of his or her knowledge. In addition, an employee should be reminded of his or her responsibility to notify a supervisor or the Ethics Official of changes occurring between reporting periods that may affect restrictions.  

                         B.  Review and Restrictions List.  After review of investment, debt, outside employment, and other information submitted by a covered employee, a Reserve Bank should determine whether divestiture, recusal, or some other action is necessary.  Using information contained on each employee disclosure form, a Reserve Bank should regularly prepare a list(s) of restrictions to be imposed on the supervisory activities of the covered employee to prevent actual or apparent conflicts of interest.  Alternatively, Reserve Banks may use other methods deemed appropriate and sufficient, between reporting periods, to ensure that assignments are appropriate within a department or section (e.g. before participating in a specific matter, an employee affirms in writing that no change has occurred in debt, family members employed at banks, or other circumstance which would require the employee to be restricted from the proposed assignment).

                         C.    Documentation. Each Reserve Bank should appropriately document the review and resolution of conflict of interest issues for covered employees.  This documentation must be made available for subsequent review when requested by Board staff.

III.  Investments

                         A covered employee is generally subject to the same investment prohibitions as other System employees.  These prohibitions, which are uniform throughout the System, are set forth in each Reserve Bank's code of conduct.  The additional investment guidance applicable to examiners, which is discussed in the previous part of FRAM, also should be applied to covered employees (See Section III., entitled "Investment Policy" under "EXAMINATION PERSONNEL-- Investment Policy, Borrowing Prohibitions and Recusal From Examinations and Inspections").

IV.  Borrowing Relationships

                         A.  General Guidance.   A covered employee is generally not restricted from borrowing from financial institutions (including those institutions for which the Federal Reserve is the primary federal banking authority), unless the employee is assigned to a matter specifically involving the institution (see Section IV.C. below).9 However, in order to prevent a conflict of interest or appearance thereof, a covered employee must recuse himself or herself from supervisory matters specifically involving an institution from which the employee or related entities (as defined below) have certain kinds of debt.  As discussed below, this restriction does not apply to most kinds of consumer debt.  Identical rules apply to Board supervisory staff.

                         B.  Recusal from Matters Other than Examinations and Inspections.  (1) General Rule -- A covered employee may not participate in any particular matter10 to which a financial institution or a financial institution affiliate is a party if the employee, the employee's spouse or dependent child, or a related entity11 is indebted to that financial institution or affiliate, other than the kinds of indebtedness excepted below.   A particular matter includes an application, audit, review (including report review), investigation, institution-specific analysis or surveillance, and enforcement action, but does not include rulemaking or financial analysis broadly affecting financial institutions.  A particular matter also includes credit review, collateral analysis, and lending decisions pertaining to the discount window function.  

                         (2) Exceptions -- (i) Consumer debt.  Recusal from particular matters other than examinations and inspections will not be required as a result of the following types of consumer indebtedness, if the indebtedness is on terms and conditions offered to the public, and payment on the indebtedness is current: (a) a line of credit extended through a credit card; (b) an amortizing consumer loan (including a first or second mortgage on a personal residence) or a home equity line of credit; and (c) an overdraft protection line.

                         (ii)  Debt of spouse, dependent child and related entities.  In addition, disqualification is not required with respect to any indebtedness of the employee's spouse or dependent child, or a company, business or partnership in which the employee's spouse or dependent child has an interest otherwise requiring disqualification if:  (a) the indebtedness represents the sole financial interest or responsibility of the spouse, child, company, business or partnership, and is not derived from the employee's income, assets or activities; and (b) the employee has no knowledge of the identity of the lender.      

                         (3) Other Situations Warranting Recusal -- Reserve Banks should be especially cautious in assigning employees to work on matters involving troubled institutions to which they are indebted, even if the employee's debt relationship would not otherwise require recusal.  This is because the employee's participation in the matter could, in certain circumstances, affect his or her financial interest and thus raise an issue under the conflicts of interest statute,(18 U.S.C. 208).

                         For example, a Reserve Bank may determine that it should restrict an employee from reviewing an application involving a troubled institution from which the employee has a home equity line of credit that could be closed or otherwise affected by the System's decision in the matter.  Similarly, the Reserve Bank might restrict the employee from evaluating collateral securing a discount window loan to the troubled organization.

                         C.  Seeking Credit from Institutions Involved in Assignments. A covered employee may not, on his or her own behalf, or on behalf of his or her spouse or child or anyone else (including any business or nonprofit organization), seek or accept credit from, or renew or renegotiate credit with, a depository institution or any of its affiliates if the institution or affiliate is a party to an application, enforcement action, investigation, or other particular matter pending before the Board and:  (i) the employee is assigned to the matter; or (ii) the employee is aware of the pendency of the matter and knows that he or she will participate in the matter by action, advice or recommendation.  This prohibition also applies for three months after the employee's participation in the matter has ended.  

                         In addition, a covered employee must disqualify himself or herself from participating (by action, advice or recommendation) in any application, enforcement action, investigation or other particular matter to which a depository institution or any of its affiliates is a party in the event that the employee learns that any of the following related persons are seeking or have sought or accepted credit from, or have renewed or renegotiated credit with, the depository institution or any of its affiliates while the matter is pending before the Board:  (i) the employee's spouse or dependent child; (ii) a company or business where the employee or the employee's spouse or dependent child owns or controls more than 10 percent of its equity; or (iii) a partnership where the employee, or the employee's spouse or dependent child is a general partner.

                         The prohibition and the disqualification requirements set forth above do not apply with respect to credit obtained through the use of a credit card or overdraft protection obtained on terms and conditions available to the public.

                         D.  Waivers.    The Reserve Bank's Ethics Official may grant a waiver to a covered employee from the recusal requirement or from the temporary prohibition on seeking new credit.  However, waivers should be granted only on a limited basis when extenuating circumstances exist.  For example, a waiver from recusal requirements potentially could be justified by an inability to find another employee with appropriate qualifications to review an application.  A waiver of the temporary prohibition on seeking new credit could be justified, for example, if the employee demonstrates that the credit is not available from another source on comparable terms, and that absent a waiver a financial hardship will ensue.  Prior to granting a waiver, the Ethics Official must determine that granting the waiver would not be prohibited by law and would not result in a conflict of interest or an appearance thereof.  Each waiver granted must be appropriately documented and available for subsequent review by the Board's staff.               

V.  Employment Relationships and Recusal Requirements

                         A.  Former Employer.  (1) General Rule -- A covered employee may not participate in a particular matter involving a financial institution if the employee was employed by that institution within the past twelve months.  After the one-year period has elapsed, the Reserve Bank shall determine whether the employee's former position with the financial institution and current responsibilities at the Reserve Bank indicate a need to continue the restriction in order to avoid the appearance of a conflict of interest.  This determination should be appropriately documented and made available for subsequent review when requested by Board staff.  

                         (2) Exception -- The one year recusal requirement may be waived if, after consultation with the Reserve Bank's Ethics Official and consideration of the relevant facts, the employee's supervising officer determines that no violation of law nor appearance of a conflict of interest would occur as a result of the assignment.  Factors to consider in making this determination include: (a) the employees's former position and years of employment at the institution; (b) the employee's level of responsibility in the matter; and (c) the need for the employee on the assignment.  Any such determination must be appropriately documented and made available for subsequent review when requested by Board staff.  

                         (3) Pension Plans -- If a covered employee continues to participate in a pension or retirement plan obtained through prior employment at a financial institution or its affiliates, the employee must be disqualified from participating in a particular matter involving that institution or its affiliates, unless the employee receives a written opinion from the Bank's legal department that such disqualification is not necessary because the pension does not represent a disqualifying financial interest under the criminal laws.

                         B.  Employer of a Family Member.  (1) General Rule -- A covered employee may not participate in any particular matter to which a financial institution or its affiliate is a party, if such financial institution or its affiliate employs a member of the employee's immediate family (i.e., spouse, dependent child, parent, or sibling).  A Reserve Bank may also require recusal in other situations where a covered employee has a relationship that could create an actual or apparent conflict of interest with a financial institution.  For example, if a state member bank employs a covered employee's sister-in-law, or if a covered employee's parent is a principal shareholder of a bank holding company, the Reserve Bank may conclude that recusal is appropriate.

                         (2)  Exception -- Recusal will not be required if, after a review of the relevant facts of each case and after consultation with the Reserve Bank's Ethics Official, the employee's supervising officer determines that no violation of law nor conflict of interest would occur as a result of the assignment.  Factors to consider in making this determination include:  (a) the family member's position with the institution; (b) the employee's level of responsibility in the matter; and (c) the need for the employee on the assignment.  Any such determination must be appropriately documented and made available for subsequent review when requested by Board staff.


Disclosure Form (33 KB PDF)


Conflict of Interest Rules (275 KB PDF)


Footnotes

1.  The Federal Reserve is the primary federal banking authority for state member banks, bank holding companies, most non-bank subsidiaries of bank holding companies, Edge Act and Agreement corporations, and U.S. branches and agencies, representative offices and nonbank subsidiaries of foreign banks.  The Federal Reserve is not the primary federal banking authority for national banks, non-member banks, limited special purpose banks or nonbank banks authorized under Section 4 of the Bank Holding Company Act (provided they are not state member banks), and thrift institutions (even when such entities are subsidiaries of bank holding companies).  The FDIC, OCC, and OTS are the primary federal banking authorities for these institutions.  Return to text

2.  The term "examiner" is defined in this policy statement to include all individuals holding a valid credential approved and issued by the Board. However, Section IV, "Examiner Borrowing Prohibitions", does not generally apply to individuals holding temporary or ad hoc credentials.  Return to text

3.  The term "financial institution" is defined here to include any lending institution.  This would of course include any entity regulated by the Federal Reserve or any entity that could legally be acquired by an entity regulated by the Federal Reserve, for example, a mortgage company, a consumer finance company, or a broker dealer.  Return to text

4.  The general borrowing prohibitions outlined in this section (Section IV. B.) apply to examiners holding standard or special credentials.  An employee holding a temporary credential has the authority and status of an examiner only during the stated duration of the temporary credential.  As such, an individual holding a temporary or ad hoc credential may not borrow from the institution or affiliate of an institution he or she is assigned to examine but is not generally subject to the borrowing prohibitions outlined in this section.  Return to text

5.  As previously defined, "related entity" means a company or business where the examiner or the examiner's spouse or dependent child owns or controls more than 10 percent of its equity, or a partnership where the examiner or the examiner's spouse is a general partner.  Return to text

6.  Borrowing from an affiliate through a credit card or an overdraft protection line by an examiner, an examiner's spouse, or dependent child is already excepted from recusal requirements and, therefore, does not require a waiver.  Return to text

7.  Examiners are not deemed to be covered employees under this policy.  However, portions of this policy are applicable to examiners, as discussed in the next section, C., "Application to Federal Reserve Examiners".  Return to text

8.  The term "financial institution" is defined here to include any lending institution.  This would of course include any entity regulated by the Federal Reserve or any entity that could legally be acquired by an entity regulated by the Federal Reserve, for example, a mortgage company, a consumer finance company, or a broker dealer.  Return to text

9.  Note that an individual holding a standard or special credential is already subject to borrowing prohibitions (regardless of the type of assignments given to the individual).  These are outlined in Section IV., "Examiner Borrowing Prohibitions" under "Examination Personnel--Investment Policy, Borrowing Prohibitions, and Recusal During Examinations and Inspections".  Return to text

10.  This section (Section IV.B.1) applies to matters other than examinations or inspections.  The rules governing recusal from participation in examinations and inspections are addressed in the previous part of FRAM entitled "Examination Personnel--Investment Policy, Borrowing Prohibitions, and Recusal From Examinations and Inspections."  Return to text

11.  As previously defined, "related entity" means a company or business where the employee or the employee's spouse or dependent child owns or controls more than 10 percent of its equity, or a partnership where the employee or the employee's spouse is a general partner.  Return to text


SR letters | 1995