BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 95-34 (SUP)
May 30, 1995
TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
SUBJECT: Sharing of Facilities and Staff by Banking Organizations
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.
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.
Stephen C. Schemering
Cross Reference: Branch and Agency Examination Manual, Section 4050.1
SR letters | 1995