Supervisory Considerations for the Communication of Supervisory Findings

SR 13-13 / CA 13-10: Supervisory Considerations for the Communication of Supervisory Findings

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

DIVISION OF BANKING
SUPERVISION AND REGULATION

DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

SR 13-13 / CA 13-10
June 17, 2013

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK AND TO ALL INSTITUTIONS SUPERVISED BY THE FEDERAL RESERVE

SUBJECT:

Supervisory Considerations for the Communication of Supervisory Findings

Applicability to Community Banking Organizations: This letter applies to all Federal Reserve-supervised banking organizations.

The purpose of this letter is to update and clarify existing examiner guidance concerning the communication of supervisory findings to banking organizations and institutions supervised by the Federal Reserve (collectively referred to as "banking organizations" or "organizations" in the guidance). The attached guidance discusses the Federal Reserve's standard language for examination/inspection findings, which improves the consistency and clarity of written communications to banking organizations, and enhances the focus on matters requiring attention by an organization's board of directors. In particular, the guidance clarifies requirements for addressing Matters Requiring Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs) that are included in examination or inspection reports or any other supervisory communication during the supervisory cycle.

Beginning with supervisory activities commenced after the date of this letter when communicating supervisory findings to banking organizations, examiners are to discontinue using Observations as a separate category. Observations are being removed from the standard nomenclature in order to better focus an organization's board of directors' attention on deficiencies found during the supervision process. In the narrative sections of examination or inspection reports or other supervisory communications, examiners may, nevertheless, continue to apprise management of matters that are informative or advisory in nature that address the range of acceptable practices and that could further improve the efficiency or effectiveness of the banking organization's operations. However, when examiners expect the banking organization to take action to address practices in a particular area or business function, examiners should treat these matters as MRIAs or MRAs.

The attached guidance revises guidance issued in 2008 and discusses the standard language that the Federal Reserve uses to enhance the focus on matters requiring attention and highlights supervisory expectations for corrective actions, Reserve Bank follow-up, and other supervisory considerations.1 The guidance also defines MRIAs and MRAs and outlines the procedures that safety-and-soundness and consumer compliance examiners will follow in presenting and communicating their supervisory findings.

Reserve Banks are asked to distribute this letter to Federal Reserve-supervised banking organizations and the appropriate safety-and-soundness examiners, consumer compliance examiners, and other supervisory staff. Questions regarding this letter and the attached examiner guidance may be directed to the following staff in the Division of Banking Supervision and Regulation (BS&R):

• Vitus Ukwuoma, Manager, at (202) 452-3163, for Community Banking Organizations;
• Keith Coughlin, Manager, at (202) 452-2056, for Regional Banking Organizations;
• Celeste Molleur, Manager, at (202) 452-2783, and Kwayne Jennings, Manager, at (202) 452-3088, for Large and Foreign Banking Organizations;
• Karen Caplan, Manager, at (202) 452-2710, for Saving and Loan Holding Companies; and
• Molly Mahar, Assistant Director, at (202) 973-7360, for LISCC portfolio institutions.

Questions regarding this letter and the attached examiner guidance may also be directed to the following staff in the Division of Consumer and Community Affairs: Tim Robertson, Manager, Reserve Bank Oversight and Community Banking Supervision, at (202) 452-2565; or Tracy Anderson, Manager, Holding Company and Large and Regional Financial Institutions, at (202) 736-1921.

In addition, questions may be sent via the Board's public website.2

signed by
Michael S. Gibson
Director
Division of Banking
Supervision and Regulation

signed by
Sandra F. Braunstein
Director
Division of Consumer and Community Affairs

Supersedes:

• SR letter 08-1/CA letter 08-1, "Communication of Examination/Inspection Findings"

Attachments:

• Supervisory Considerations for the Communication of Supervisory Findings

Cross References:

• SR letter 13-1/CA letter 13-1, "Supplemental Policy Statement on the Internal Audit Function and Its Outsourcing"

Notes:

1. SR letter 08-1/CA letter 08-1, “Communication of Examination/Inspection Findings,” is superseded with the issuance of this guidance. Return to text
2. See http://www.federalreserve.gov/apps/contactus/feedback.aspx Return to text

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Attachmen t
Supervisor y Consideration s fo r th e Communicatio n o f Supervisor y Finding s Purpos e Th e purpos e o f this supervisor y guidanc e is t o updat e an d clarif y th e manne r i n whic h Federa l Reserv e examiner s communicat e supervisor y finding s t o bankin g organization s an d institution s supervise d b y th e Federa l Reserv e (collectivel y referre d t o a s "bankin g organizations " o r "organizations " i n this guidance) . Thi s guidanc e discusse s th e Federa l Reserve' s standar d languag e fo r examination/inspectio n findings , whic h improve s th e consistenc y an d clarit y o f writte n communication s t o bankin g organizations, an d enhance s th e focu s o n matter s requirin g attentio n b y th e organization' s boar d o f directors. Thi s guidanc e als o highlights supervisor y consideration s fo r correctiv e action s an d Reserv e Ban k follow-up . I n particular , this guidanc e reaffirm s th e definition s fo r Matters Requiring Immediate Attention (MRIAs ) an d Matters Requiring Attention (MRAs ) an d thei r us e b y safety-and-soundnes s an d consume r complianc e examiner s whe n communicatin g supervisor y finding s t o bankin g organizations. [Footnote 1

• Examiners' use of these standard terms (MRIAs and MRAs) facilitates the Federal Reserve's national systems of
  record fo r information related to examination and inspection issues. This standardization enables the Federal Reserve to access information about supervisory issues and remediation efforts and aids in the identification of systemic and programmati c challenges facing bankin g organizations supervised by the Federal Reserve . End of Footnote 1.] Communicatio n o f Supervisor y Finding s Communicatio n o f supervisor y finding s t o th e organization' s boar d o f directors is a n importan t par t o f th e supervisio n o f a bankin g organization . Whil e th e boar d itsel f ma y no t directl y undertak e th e wor k t o remediat e supervisor y finding s a s senio r managemen t is responsibl e fo r th e organization' s day-to-da y operations, it is nevertheles s importan t tha t th e boar d b e mad e awar e o f significan t supervisor y issue s an d ultimatel y b e accountabl e fo r th e safet y an d soundnes s an d assuranc e o f complianc e wit h applicabl e law s an d regulation s o f th e organization . Dependin g upo n th e siz e an d complexit y o f th e organization , supervisor y finding s ar e communicate d i n writin g throug h forma l examinatio n o r inspectio n reports, report s summarizin g th e results o f targete d reviews , a roll-u p o f thos e review s int o a comprehensiv e report , an y othe r supervisor y communication , o r som e combinatio n thereof . Thes e writte n communication s (referre d t o collectivel y a s "reports " i n this document ) ar e generall y directe d t o th e boar d o f directors, o r a n executive-leve l committe e o f th e board , [Footnote 2
• A n executive-level committee of the boar d (such as, the audit committee or risk committee) typically meets
  regularly, keeps minutes of those meetings, and is accountable to and routinely reports to the boar d of directors. End of Footnote 2.] a s appropriate . I n turn , th e boar d o f directors (o r executive-leve l committe e o f th e board ) typicall y wil l direc t th e organization' s managemen t t o tak e correctiv e actio n an d wil l provid e managemen t wit h appropriat e oversight , includin g approval s o f propose d managemen t action s a s necessary .

To be effective, the communication of supervisory findings must be: (1) written in clear and concise language; (2) prioritized based upon degree of importance; and (3) focused on any significant matters that require attention. Reserve Banks must formally communicate MRIAs and MRAs resulting from any supervisory activity to the organization in these written reports. In order to promote an understanding of these terms, examiners should include definitions of MRIAs and MRAs in all supervisory documents communicating supervisory findings. [Footnote 3

• In a safety-and-soundness report, these definitions could be included on the "Scope" page, in an appendix, or as a
  footnote on the "Matters Requiring Attention" section. In a consumer compliance report, these definitions could be included on the "Executive Summary and Examination Ratings" section. End of Footnote 3.] When included in a safety-and￾soundness examination or inspection report, MRIAs and MRAs should be listed in the "Matters Requiring Attention" section. In the case of findings from consumer compliance examinations, MRIAs and MRAs should be reflected in the "Executive Summary and Examination Ratings"
  section of the consumer affairs report of examination. Only outstanding MRIAs and MRAs are
  required to be discussed in the report; however, examiners have discretion to discuss closed MRIAs and MRAs in the report if such discussion would be meaningful. For large banking organizations, an annual roll-up report summarizes the significant findings, based on outstanding MRIAs or MRAs, included in the reports of targeted reviews or other supervisory activities conducted during the supervisory cycle. These findings may be grouped by major supervisory issues, rating components, risks, or themes. This information should enable the banking organization's board of directors and any executive-level committee of the board to understand the substance and status of outstanding MRIAs or MRAs and focus their attention on the most critical and time-sensitive issues. Communications to banking organizations concerning safety-and-soundness or consumer compliance MRIAs or MRAs must specify a timeframe within which the banking organization must complete the corrective actions. In certain circumstances, examiners may require the banking organization to submit an action plan that identifies remedial actions to be completed within specified timeframes. Action plans with intermediate- and long-term timeframes that span more than one supervisory or examination cycle with regard to safety-and-soundness matters, or a twelve-month period with regard to consumer compliance issues, should include interim progress targets. Both safety-and-soundness and consumer protection or compliance considerations will remain a priority in determining whether the organization's timeframes to correct the matter are reasonable. Matters Requiring Immediate Attention MRIAs arising from an examination, inspection, or any other supervisory activity are matters of significant importance and urgency that the Federal Reserve requires banking organizations to address immediately and include: (1) matters that have the potential to pose significant risk to the safety and soundness of the banking organization; (2) matters that represent significant noncompliance with applicable laws or regulations; (3) repeat criticisms that have escalated in importance due to insufficient attention or inaction by the banking organization; and (4) in the case of consumer compliance examinations, matters that have the potential to cause

significant consumer harm. An MRIA will remain an open issue until resolution and examiners confirm the banking organization's corrective actions. Required Language: Federal Reserve examiners are expected to use the standardized language below to communicate MRIAs to the board of directors (or executive-level committee of the board):

• "The board of directors (or executive-level committee of the board), or banking
  organization is required to immediately... "
  Timeframe: The expected timeframe for a banking organization to address MRIAs is generally short, and may be "immediate," in the case of heightened safety-and-soundness or consumer compliance risk. For MRIAs that are necessary to preserve or restore the viability of a banking organization, the timeframe should take into account any potential losses to the Federal Deposit Insurance Corporation's Deposit Insurance Fund, including the possibility that a delay in action will increase the potential for loss or the cost of resolution. Organization Response: Following its review of MRIAs discussed in the report, the banking organization's board of directors is required to respond to the Reserve Bank in writing regarding corrective action taken or planned along with a commitment to corresponding timeframes. Supervisory Follow-up: The Reserve Bank must follow up on MRIAs to assess progress and verify satisfactory completion. The timeframe for follow-up should correspond with the timeframe specified for the action being required, and should be appropriate for the severity of the matter requiring the corrective action. The means of follow-up may vary depending upon the nature and severity of the matter requiring the action. Follow-up may take the form of a subsequent examination, a targeted review, or any other supervisory activity deemed suitable for evaluating the issue at hand. In some cases, when follow-up indicates the organization's corrective action has not been satisfactory, the initiation of additional formal or informal investigation or enforcement action may be necessary. In such cases, examiners should consult with enforcement staff. [Footnote 4 - Such consultation should be made in accordance with existing guidance to Reserve Bank supervisory staff on the processing of enforcement actions, which provides that recommendations concerning formal enforcement actions should be submitted simultaneously to both the Board's Legal Division and Division of Banking Supervision and Regulation. End of Footnote 4.] In all instances, examiners are expected to exercise judgment as to the supervisory activities best suited for evaluating a particular issue. Once follow-up is completed, examiners are expected to clearly and fully document the rationale for their decision to close any issue. Examiners are also expected to communicate in writing the results of their work and findings to the banking organization. Matters Requiring Attention (MRAs) MRAs constitute matters that are important and that the Federal Reserve is expecting a banking organization to address over a reasonable period of time, but when the timing need not be "immediate." While issues giving rise to MRAs must be addressed to ensure the banking

Pag e 4 o f 5 organizatio n operate s i n a safe-and-soun d an d complian t manner , th e threa t t o safet y an d soundnes s i s les s immediat e tha n wit h issue s givin g ris e t o MRIAs . Likewise , consume r complianc e concern s tha t requir e les s immediat e resolutio n shoul d b e communicate d a s a n MRA . A n MR A typicall y wil l remai n a n ope n issu e unti l resolutio n an d confirmatio n b y examiner s tha t th e bankin g organizatio n ha s take n correctiv e action . I f a bankin g organizatio n doe s no t adequatel y addres s a n MR A i n a timel y manner , examiner s ma y elevat e a n MR A t o a n MRIA . Similarly , a chang e i n circumstances , environment , o r strateg y ca n als o lea d t o a n MR A becomin g a n MRIA . Th e ke y distinctio n betwee n MRIA s an d MRA s i s th e natur e an d severit y o f matter s requirin g correctiv e action , a s wel l a s th e immediac y wit h whic h th e bankin g organizatio n mus t begi n an d complet e correctiv e actions . Require d Language : Federa l Reserv e examiner s ar e expecte d t o us e th e standardize d languag e belo w t o communicat e MRA s t o th e boar d o f director s (o r executive-leve l committe e o f th e board) :

• "Th e boar d o f director s (o r executive-leve l committe e o f th e board) , o r bankin g
  organizatio n i s require d to... "
  Timeframe : Communication s t o bankin g organization s abou t MRA s mus t specif y a timefram e withi n whic h th e correctiv e actio n i s expecte d t o b e completed . Th e timeframe , a t leas t initially , ma y requir e estimatio n becaus e th e bankin g organizatio n ma y firs t nee d t o complet e preliminar y plannin g t o establis h th e timefram e fo r initiatin g an d completin g th e correctiv e action . Th e timeframe s fo r MRA s ar e likel y t o becom e mor e precis e ove r tim e a s plannin g evolve s an d circumstance s mak e th e completio n o f th e MRA s mor e urgent . Timeframe s tha t spa n mor e tha n on e examinatio n cycl e fo r safety-and-soundnes s issue s o r tha t excee d twelv e month s fo r consume r complianc e issue s shoul d includ e appropriat e interi m progres s reports . Organizatio n Response : Followin g it s revie w o f th e report , th e bankin g organization' s boar d o f director s i s require d t o provid e a writte n respons e t o th e Reserv e Ban k regardin g it s plan , progress , an d resolutio n o f th e MRA . Supervisor y Follow-up : Th e Reserv e Ban k mus t follow-u p o n MRA s t o asses s progres s an d verif y satisfactor y completion . Th e timefram e fo r follow-u p shoul d correspon d wit h th e timefram e durin g whic h action s ar e t o b e completed . Fo r intermediate - o r long-ter m correctiv e action s fo r MRAs , Reserv e Ban k follow-u p ma y consis t o f assessin g th e organization' s progres s t o addres s th e MRAs , whethe r satisfactor y o r unsatisfactory , an d notin g whethe r th e initia l estimate d timefram e continue s t o b e reasonabl e o r warrant s adjustment . Th e mean s o f supervisor y follow-u p ma y var y base d upo n th e natur e an d severit y o f th e matte r fo r whic h correctiv e actio n i s expected . Follow-u p ma y tak e th e for m o f a subsequen t examination , targete d review , continuou s monitoring , relianc e o n validatio n wor k conducte d b y a n interna l audi t function , [Footnote 5
• Examiner s ma y choos e t o rel y o n th e wor k o f interna l audi t whe n interna l audit' s overal l functio n an d relate d
  processe s ar e effective , a s discusse d i n S R lette r 13-1/C A lette r 13-1 , "Supplementa l Polic y Statemen t o n th e Internal Audit Function and Its Outsourcing." When relying on internal audit to follow-up on MRAs, examiners are expected to review the relevant work papers and, when necessary, meet with internal audit staff who documented the resolution of the issue. End of Footnote 5.] relianc e o n th e result s o f examination s conducte d b y othe r supervisors , o r an y othe r supervisor y activit y deeme d suitabl e fo r evaluatin g th e issu e a t hand .

In some cases, when follow-up indicates the organization's corrective action has not been satisfactory, the initiation of additional formal or informal investigation or enforcement action may be necessary. In all instances, examiners are expected to exercise judgment regarding the supervisory activities best suited for evaluating a particular issue. Once follow-up is complete, examiners are expected to clearly and fully document the rationale for their decision to close any issue. Examiners also are expected to communicate in writing the results of their work and findings to the organization. Supervisory Considerations The volume of MRIAs and MRAs should be one of the many considerations in assigning a supervisory rating to a banking organization. The presence of a large number of MRIAs or MRAs may indicate that additional formal or informal investigation may be necessary or that the initiation of a formal or informal enforcement action may be warranted. Irrespective of the number of MRIAs or MRAs, in some cases, additional formal or informal investigation may be necessary or the initiation of a formal or informal enforcement action may be warranted based on the severity of the issues, the repeat nature of issues, lack of responsiveness of management, violations of law, insider abuse, fraud, or other material deficiency. In any of these cases, examiners should consult with the Board enforcement staff in the Legal Division and the Division of Banking Supervision and Regulation.