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

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Attachment

Supervisory Considerations for the Communication of

Supervisory Findings

Purpose

The purpose of this supervisory guidance is to update and clarify the manner in which

Federal Reserve examiners communicate supervisory findings to banking organizations and

institutions supervised by the Federal Reserve (collectively referred to as "banking

organizations" or "organizations" in this guidance). This 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 the organization's board of directors. This guidance also

highlights supervisory considerations for corrective actions and Reserve Bank follow-up. In

particular, this guidance reaffirms the definitions for Matters Requiring Immediate Attention

(MRIAs) and Matters Requiring Attention (MRAs) and their use by safety-and-soundness and

consumer compliance examiners when communicating supervisory findings to banking

organizations.

[Footnote

- Examiners' use of these standard terms (MRIAs and MRAs) facilitates the Federal Reserve's national systems of

record for 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 programmatic challenges facing banking organizations supervised by the Federal Reserve. End of Footnote 1.]

Communication of Supervisory Findings

Communication of supervisory findings to the organization's board of directors is an

important part of the supervision of a banking organization. While the board itself may not

directly undertake the work to remediate supervisory findings as senior management is

responsible for the organization's day-to-day operations, it is nevertheless important that the

board be made aware of significant supervisory issues and ultimately be accountable for the

safety and soundness and assurance of compliance with applicable laws and regulations of the

organization.

Depending upon the size and complexity of the organization, supervisory findings are

communicated in writing through formal examination or inspection reports, reports summarizing

the results of targeted reviews, a roll-up of those reviews into a comprehensive report, any other

supervisory communication, or some combination thereof. These written communications

(referred to collectively as "reports" in this document) are generally directed to the board of

directors, or an executive-level committee of the board, [Footnote 2

- An executive-level committee of the board (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 board of directors. End of Footnote 2.]

as appropriate. In turn, the board of

directors (or executive-level committee of the board) typically will direct the organization's

management to take corrective action and will provide management with appropriate oversight,

including approvals of proposed management actions as necessary.

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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

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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

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

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organization operates in a safe-and-sound and compliant manner, the threat to safety and

soundness is less immediate than with issues giving rise to MRIAs. Likewise, consumer

compliance concerns that require less immediate resolution should be communicated as an

MRA. An MRA typically will remain an open issue until resolution and confirmation by

examiners that the banking organization has taken corrective action. If a banking organization

does not adequately address an MRA in a timely manner, examiners may elevate an MRA to an

MRIA. Similarly, a change in circumstances, environment, or strategy can also lead to an MRA

becoming an MRIA. The key distinction between MRIAs and MRAs is the nature and severity

of matters requiring corrective action, as well as the immediacy with which the banking

organization must begin and complete corrective actions.

Required Language: Federal Reserve examiners are expected to use the standardized

language below to communicate MRAs 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..."

Timeframe: Communications to banking organizations about MRAs must specify a

timeframe within which the corrective action is expected to be completed. The timeframe, at

least initially, may require estimation because the banking organization may first need to

complete preliminary planning to establish the timeframe for initiating and completing the

corrective action. The timeframes for MRAs are likely to become more precise over time as

planning evolves and circumstances make the completion of the MRAs more urgent.

Timeframes that span more than one examination cycle for safety-and-soundness issues or that

exceed twelve months for consumer compliance issues should include appropriate interim

progress reports.

Organization Response: Following its review of the report, the banking organization's

board of directors is required to provide a written response to the Reserve Bank regarding its

plan, progress, and resolution of the MRA.

Supervisory Follow-up: The Reserve Bank must follow-up on MRAs to assess progress

and verify satisfactory completion. The timeframe for follow-up should correspond with the

timeframe during which actions are to be completed. For intermediate- or long-term corrective

actions for MRAs, Reserve Bank follow-up may consist of assessing the organization's progress

to address the MRAs, whether satisfactory or unsatisfactory, and noting whether the initial

estimated timeframe continues to be reasonable or warrants adjustment.

The means of supervisory follow-up may vary based upon the nature and severity of the

matter for which corrective action is expected. Follow-up may take the form of a subsequent

examination, targeted review, continuous monitoring, reliance on validation work conducted by

an internal audit function,

[Footnote

- Examiners may choose to rely on the work of internal audit when internal audit's overall function and related

processes are effective, as discussed in SR letter 13-1/CA letter 13-1, "Supplemental Policy Statement on the 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.]

reliance on the results of examinations conducted by other

supervisors, or any other supervisory activity deemed suitable for evaluating the issue at hand.

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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.