A senior FRB Richmond official involved in issuing the material supervisory determination under appeal by Waccamaw initiated the request to organize the appeals panel. FRB Richmond’s appeals policy, including updates to the policy, addresses conflicts of interest related to examiners participating in appeals panels for institutions they supervised. However, the policy does not address the possible appearance of a conflict of interest that we observed in this situation. In our opinion, this official’s involvement in the material supervisory determination under appeal and any aspect of the appeals panel, including initiating the request to convene the panel, created an appearance of a conflict of interest. In our opinion, any appearance of a conflict of interest can undermine the integrity of the process.
On September 8, 2011, Waccamaw appealed FRB Richmond’s material supervisory determination that $16.3 million in proceeds from the sale of preferred stock could not be counted as regulatory capital.15 A senior FRB Richmond official involved in supervising Waccamaw and responsible for the material supervisory determination under appeal initiated the request to convene the appeals panel. Although this official did not participate in the appeals panel, we believe that this official’s prior involvement in the matter under appeal presented the appearance of a conflict of interest.16 We do not believe, however, that this appearance issue affected the outcome of the appeal.
Our review of FRB Richmond’s appeals policy in effect at the time, as well as an updated version issued in August 2012, confirmed that the policies prohibit examiners from participating on appeals panels for banks they supervised. However, neither iteration completely separates the team members involved in supervising the institution initiating the appeal from all aspects of the appeals process. In our opinion, any appearance of a conflict of interest can undermine the integrity of the process.
We recommend that the Director of the Division of Banking Supervision and Regulation
The Director of the Division of Banking Supervision and Regulation agreed with our recommendation. In his response to recommendation 5, 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 and 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.
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.
