Review of the Failure of Waccamaw Bank

Finding 3: Controlling Policies Did Not Address Certain Procedural Aspects Associated With the Appeals Process

Our review of the Board's Guidelines for Appeals of Material Supervisory Determinations and FRB Richmond's Policy Statement on Appeals of Material Supervisory Determination revealed that both policies discuss standards and procedures Reserve Banks should follow when reviewing appeals of material supervisory determinations. In addition, both policies address the composition and appointment of the appeals panel and the appeals review process, including the evaluation of evidence and applicable time frames for resolution of appeals. Further, both policies outline the process for filing a subsequent appeal to the Reserve Bank President and the Board of Governors. Nevertheless, neither policy outlines a standard procedural framework for conducting a subsequent appeal. For example, both policies remain silent on key procedural aspects of the second- and third-level appeal, including (1) the standard for the review; (2) the allocation of the burden of proof; (3) the scope of the record to be reviewed and whether additional evidence may be gathered; and (4) the appellant's right to review and rebut the evidence that resulted in the material supervisory determination, even if confidential supervisory information protections apply. In our opinion, these illustrative omissions may lead to variations in the approach to the procedural aspects of an appeal.

Recommendation

We recommend that the Director of the Division of Banking Supervision and Regulation

4. Review and update the Board's Guidelines for Appeals of Material Supervisory Determinations to establish a framework for Reserve Bank Presidents and the Board to conduct appeals. In addition to any enhancements identified during the review, the framework should address

1. 1. the standard of review for the appeal.
   2. whether the appellant has the burden of proof to demonstrate that the material supervisory determination should be reversed.
   3. whether the party assessing the higher-level appeal is limited to reviewing the prior factual record.
   4. whether the appellant has the right to comment on the evidence providing the basis for the initial material supervisory determination, even if confidential supervisory information protections apply.

Management's Response

The Director of the Division of Banking Supervision and Regulation agreed with our recommendation. In his response to recommendation 4, the Director stated that Banking Supervision and Regulation staff agree that the Board's Guidelines for Appeals of Material Supervisory Determinations should be updated to address the elements listed in the OIG's draft report. The Director noted that Banking Supervision and Regulation staff are developing revised guidance that will address the OIG's recommended changes and are making other enhancements to this process.

OIG Comment

The actions described by the Director of Banking Supervision and Regulation appear to be responsive to our recommendation. We plan to follow up on the Board's actions to ensure that the recommendation is fully addressed.