[Federal Register Volume 60, Number 61 (Thursday, March 30, 1995)]
[Notices]
[Pages 16470-16473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-7795]



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FEDERAL RESERVE SYSTEM

[Docket No. R-0867]


Internal Appeals Process

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final guidelines.

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SUMMARY: The Board is issuing its final guidelines on an internal 
appeals process for institutions wishing to appeal an adverse material 
supervisory determination.

EFFECTIVE DATE: March 24, 1995.

FOR FURTHER INFORMATION CONTACT: Gregory A. Baer, Managing Senior 
Counsel, Legal Division (202/452-3236); Shawn McNulty, Assistant 
Director, Division of Consumer and Community Affairs (202/452-3946); or 
Ann Marie Kohlligian, Senior Counsel/Manager, Division of Banking 
Supervision and Regulation (202/452-3528), Board of Governors of the 
Federal Reserve System. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544).

SUPPLEMENTARY INFORMATION:

Background

    Section 309 of the Riegle Community Development and Regulatory 
Improvement Act of 1994 (the Act), 12 U.S.C. 4806, requires the Board 
(as well as the other Federal banking agencies) to establish an 
independent, intra-agency appellate process that is available to 
institutions to seek review of material supervisory determinations. 
Section 309 specifies various requirements that the appellate process 
must meet.
    On December 29, 1994, the Board published for public comment its 
proposed guidelines that would implement the intra-agency appellant 
[[Page 16471]] process required by section 309 of the Act. (59 FR 67297 
(December 29, 1994)). In general, the proposed guidelines required 
that: (1) All appeals be in writing and approved by the institution's 
board of directors; (2) all appeals be heard and decided within 
specified timeframes; (3) the initial appeal be heard by a person or 
persons selected by the Reserve Bank (the review panel) who had not 
participated in, or reported to the persons who made, the material 
supervisory determination under review; (4) an adverse decision by the 
review panel be appealable to a Reserve Bank President; (5) an adverse 
decision by a Reserve Bank President be appealable to the Board; and 
(6) Reserve Banks establish safeguards to protect institutions that 
file appeals from examiner retaliation.
    Although section 309 requires the Board to develop an internal 
appeals process only for state member banks, the proposed guidelines 
expanded the process and made it available to all institutions that are 
subject to Federal Reserve oversight, including bank holding companies, 
U.S. agencies and branches of foreign banks and Edge 
corporations.1 The proposed guidelines also defined a ``material 
supervisory determination'' to include all material matters relating to 
the examination or inspection process, but exclude those matters, such 
as the imposition of a prompt corrective action directive or a cease 
and desist order, for which an alternative, independent right of appeal 
exists.

    \1\ The final guidelines have been modified to state explicitly 
that third party EDP servicers subject to examination by the Federal 
Reserve may appeal any material supervisory determination.
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    As noted in the proposed guidelines, the Board continues to believe 
that questions about or objections to supervisory determinations made 
during the course of an inspection or examination are most effectively 
handled through the longstanding Federal Reserve practice of resolving 
any problems informally during the course of the inspection or 
examination process.

Public Comments

    The Board received 27 comments on its proposed guidelines from 
Federal Reserve Banks, financial institutions, trade associations, law 
firms and a consulting firm. While the comments were generally 
supportive of the proposed guidelines, most comments submitted 
suggested changes or raised concerns regarding the implementation of 
the internal appeals process. These proposed changes and concerns, 
which are discussed below, relate to five areas: (1) protection from 
examiner retaliation; (2) independence of the review panel; (3) who 
should decide the final appeal at the Board; (4) the need for 
additional, specific timeframes; and (5) procedural issues.

(1) Protection From Examiner Retaliation

    Thirteen comments raised concerns about examiner retaliation. 
Several comments suggested that the Ombudsman, which the Board is 
required to establish under section 309 of the Act, should play a role 
in addressing this issue, such as serving as an independent contact for 
institutions that believe they have been subject to some form of 
retaliation or ensuring that different examiners conduct examinations 
that commence after an appeal has been filed. Some comments suggested 
that greater Board involvement in the appeals process would protect 
institutions against retaliation, while others suggested that the 
guidelines include specific sanctions and disciplinary actions for 
examiners found to have engaged in retaliation due to an appeal.
    The Board acknowledges that some institutions may perceive that 
availing themselves of the appeals process may result in retaliatory 
action by examiners. As proposed, the guidelines require the Reserve 
Banks to establish safeguards to protect institutions that file appeals 
from retaliation. While the Board believes that this provides 
sufficient protection and meets the requirements of section 309, the 
Ombudsman is available to address such concerns and may be contacted by 
institutions who believe they may have suffered retaliation as a result 
of an appeal. The role of this official and his/her procedures for 
addressing these concerns will be outlined in the Board's Policy 
Statement for the Ombudsman.

(2) Independence of Review Panel

    Six comments suggested modifications to the part of the guidelines 
that addressed the independence of the review panel. Several stated 
that the appeals process cannot be independent so long as it remains an 
internal procedure and suggested that outside parties, such as a peer 
review panel or a panel appointed by the Federal Financial Institutions 
Examination Council, hear and decide all appeals. Another comment 
suggested that the review panel exclude not only persons who 
participated in, or who directly or indirectly report to the person(s) 
who participated in, the material supervisory determination under 
appeal, but anyone who directly or indirectly supervises the person(s) 
who made such determination.
    Section 309 of the Act reflects a Congressional conclusion that an 
intra-agency appeals process will provide institutions with an adequate 
means to redress adverse material supervisory determinations. The Board 
does not believe that it is necessary to expand the guidelines beyond 
what is required by the statute. Similarly, section 309 requires that 
the person hearing the appeal not directly or indirectly report to the 
person who initially made the supervisory decision under review. 
Consequently, the composition of the review panel has not been modified 
in the final guidelines.

(3) Who Decides the Final Appeal at the Board

    The proposed guidelines provided for an appeal of an adverse 
decision by a Reserve Bank President to the appropriate Board division 
director, who would consult with the appropriate Governor of the 
Board's oversight committee for that division. Three comments suggested 
that it would be more suitable for a Governor to review a decision by a 
Reserve Bank President. The final guidelines have been modified so that 
an appeal of a Reserve Bank President's decision will be to the 
Governor who serves as chairman of the appropriate oversight committee, 
who will consult with that division's director.

(4) Need for Additional Timeframes

    The proposed guidelines required institutions to file an appeal 
within 30 days of the material supervisory determination and the review 
panel to decide the appeal within 30 days of its receipt. The proposed 
guidelines also required Reserve Bank Presidents to make a decision on 
any matter appealed to them within 30 days of receipt. Several comments 
noted that the proposed guidelines did not contain timeframes for other 
actions, such as the time in which an appeal should be filed with a 
Reserve Bank President or the Board, or the time in which the Board 
would make a decision on an appeal.
    The Board agrees with these comments on the need for additional 
timeframes. Consequently, the final guidelines require that an appeal 
to a Reserve Bank President or the Board to be filed within 30 days of 
receipt of an adverse decision by the review panel or the Reserve Bank 
President, respectively. The final guidelines also require that the 
Board decide any appeal within 60 days of its receipt.
[[Page 16472]]

(5) Procedural Issues

    Several comments suggested that the Board's guidelines include some 
additional procedures in order to ensure that the internal appeal 
process works smoothly. One comment suggested that the guidelines 
explicitly provide that the material supervisory determination remain 
in effect while it is under appeal, while another comment suggested 
that the determination be stayed pending the completion of the appeal. 
The Board believes that it is appropriate for the determination to 
remain in effect while it is under appeal, and the final guidelines 
have been modified to state this explicitly. The Board does not believe 
that section 309 of the Act is intended to stay the Board's supervisory 
decisions, but rather is designed to provide institutions with a 
procedure by which to voice objections to supervisory determinations 
for which no other formal appeals procedures exist.
    Another comment suggested that institutions that consent to the 
issuance of a formal enforcement action, such as a cease and desist 
order, be allowed to use the internal appeals process to challenge the 
material supervisory determinations that led to the enforcement action. 
This suggestion seems inconsistent with the intent of section 309 of 
the Act, which is to provide an avenue for the review of material 
supervisory determinations and not to contest enforcement actions for 
which an alterative appeals mechanism exists. Therefore, the Board has 
not adopted this suggestion. Another comment suggested that the record 
be expunged of any material supervisory decisions that have been 
modified or overturned on appeal. The Board believes that it is 
appropriate to maintain all records of its supervisory actions, 
including those relating to a decision that is modified or overturned 
as a result of an internal appeal. Nonetheless, the Reserve Banks are 
expected to maintain complete records of any appeal, including updating 
all files, both hard copy and electronic, to reflect the results of all 
appeals.
    One comment suggested that the board of directors of an institution 
only be required to approve the initiation of an appeal, but that 
management be allowed to decide on any subsequent appeals to a Reserve 
Bank President or the Board. Another comment noted that getting 
approval of the board of directors of a foreign bank would be extremely 
difficult in order for its U.S. agency or branch to file timely 
appeals. The Board continues to believe that the board of directors 
should be involved in each step of the appeals process; therefore, the 
final guidelines still require board approval for each step in the 
appeals process. On the other hand, the final guidelines have been 
modified to allow the senior management person(s) with authority for 
U.S. operations of a foreign bank to approve appeals; however, he or 
she must approve each step of the appeal.
    The Board has decided to adopt several other procedural 
suggestions. The final guidelines provide that any appeal filed must 
contain all of the facts and arguments that the institution would like 
to present to the review panel, the Reserve Bank President or the 
Board, as the case may be, and that the review panel, the Reserve Bank 
President or the Board may reject the appeal for lack of clarity or 
information. In such a case, an institution would have 30 days in which 
to refile a rejected appeal. Last, the final guidelines make explicit 
that the internal appeals process does not give the appealing 
institutions any discovery or other similar rights.

Guidelines for Appeals of Material Supervisory Determinations

    Section 309 of the Riegle Community Development and Regulatory 
Improvement Act of 1994, 12 U.S.C. 4806, requires the Board and the 
other Federal banking agencies to establish an independent, intra-
agency process to review appeals of material supervisory 
determinations.
    The purpose of these guidelines is to allow each Reserve Bank to 
administer its own appellate process, but to establish procedures under 
which all Reserve Banks' appellate process must operate. Doing so will 
ensure that each Reserve Bank's process is consistent with section 309 
and that institutions will be granted the same appellant rights 
regardless of the Federal Reserve district in which they reside.
    Procedures for Appealing a Material Supervisory Determination. Any 
appeal of a material supervisory determination pursuant to section 309 
shall be filed and considered pursuant to the following procedures.
    (1) Any appeal shall be approved by the board of directors of the 
institution, or in the case of a U.S. agency or branch of a foreign 
bank, the senior management person(s) responsible for the bank's U.S. 
operations, and filed in writing with the Secretary of the Reserve Bank 
or other appropriate Reserve Bank official within 30 calendar days of 
receipt of the written material supervisory determination, unless the 
time for filing is extended by the Reserve Bank. The Reserve Bank shall 
promptly provide a copy of the appeal to the appropriate division 
director of the staff of the Board of Governors.
    (2) Any appeal shall contain all the facts and arguments that the 
institution wishes to present. The appeal may be rejected for lack of 
clarity or information. In such case, the institution may refile the 
appeal within 30 calendar days of receipt of written notice of the 
rejection of any filing.
    (3) The appeal shall be considered in the first instance by a 
person or persons selected by the Reserve Bank (the review panel) who--
--
    (A) did not participate in the material supervisory determination;
    (B) do not directly or indirectly report to the person who made the 
material supervisory determination under review; and
    (C) are qualified to review the material supervisory determination.
    (4) The appellant institution may appear before the review panel in 
order to present testimony and, with the consent of the review panel, 
witnesses. The review panel shall also solicit the views of the Reserve 
Bank staff involved in the determination under appeal, Board staff, 
and, where appropriate, the staff of other supervisory agencies (for 
example, in case of joint examinations or inspections). Nothing in this 
appeals process shall create any discovery or other such rights.
    (5) Any appeal shall be decided, in writing, by the review panel 
within 30 calendar days of the filing of an informationally complete 
appeal, unless the appellant and the review panel jointly agree to 
extend the time for decision.
    (6) Any appellant institution dissatisfied with the decision of the 
review panel may, with the consent of its board of directors of the 
institution, or in the case of a U.S. agency or branch of a foreign 
bank, the senior management person(s) responsible for the bank's U.S. 
operations, appeal that decision to the Reserve Bank President by 
filing a written appeal with the Secretary of the Reserve Bank or other 
appropriate Reserve Bank official within 30 calendar days of receipt of 
the review panel's written decision. The appeal shall contain all facts 
and arguments that the institution wishes to be considered. The appeal 
may be rejected for lack of clarity or information. In such case, the 
institution may refile the appeal within 30 calendar days of receipt of 
written notice of the rejection. The appeal shall be decided by the 
Reserve Bank President, in writing, within 30 calendar days of the 
filing of an informationally complete appeal. [[Page 16473]] 
    (7) Any appellant institution dissatisfied with the decision of the 
Reserve Bank President may, with the consent of its board of directors 
of the institution, or in the case of a U.S. agency or branch of a 
foreign bank, the senior management person(s) responsible for the 
bank's U.S. operations, appeal that decision to the appropriate 
Governor by filing a written appeal with the Secretary of the Board 
within 30 calendar days of receipt of the Reserve Bank President's 
written decision. The appeal may be rejected for lack of clarity or 
information. In such case, the institution may refile the appeal within 
30 calendar days of receipt of written notice of the rejection. The 
appeal shall be decided, in writing, by the appropriate Governor, who 
shall consult with the director of the appropriate division of the 
Board of Governors, within 60 calendar days of the filing of an 
informationally complete appeal.
    Safeguards Against Retaliation. Each Reserve Bank shall establish 
appropriate safeguards to protect appellants from retaliation. The 
Board's Ombudsman will periodically contact institutions after their 
appeals have been decided in order to make certain that no retaliation 
has occurred. In addition, institutions who believe they have suffered 
retaliation as the result of an appeal may contact the Board's 
Ombudsman.
    Availability of Procedures. Each Reserve Bank shall make these 
guidelines and the Reserve Bank's process for selecting a review panel 
available to each institution in its district, any institution 
appealing a material supervisory determination, and any member of the 
public who requests them.
    Eligible Institutions. Any institution about which the Federal 
Reserve makes a material supervisory determination is eligible for the 
appeal process. This includes state member banks, bank holding 
companies and their nonbank subsidiaries, U.S. agencies and branches of 
foreign banks, Edge and agreement corporations, third party EDP 
servicers, and other entities examined or inspected by a Reserve Bank.
    Material Supervisory Determination Defined. Whether an appealed 
action constitutes a ``material supervisory determination'' eligible 
for the appeals process shall be decided by the person or persons 
hearing the appeal, and a determination that the action is not 
appealable under these guidelines may be further appealed to the 
Reserve Bank President or the appropriate oversight Governor in the 
same manner as any other adverse decision.
    The term ``material supervisory determination'' includes, but is 
not limited to, material determinations relating to examination or 
inspection composite ratings, the adequacy of loan loss reserves and 
significant loan classifications. The term does not include any 
supervisory determination for which an independent right of appeal 
exists. Such actions include prompt corrective action directives issued 
pursuant to section 38 of the Federal Deposit Insurance Act, as amended 
(the FDI Act), actions to impose administrative enforcement actions 
under the FDI Act and the Bank Holding Company Act of 1956, as amended 
(the BHC Act), capital directives, and orders issued pursuant to 
applications under the BHC Act.
    Effect of Appeal on Material Supervisory Determinations. A material 
supervisory determination shall remain in effect while under appeal and 
until such time it is modified or overturned through the appeals 
process. The appeal of a material supervisory determination does not 
prevent the Federal Reserve from taking any supervisory or enforcement 
action--formal or informal--it deems appropriate to discharge the 
Federal Reserve's supervisory responsibilities.
    Savings Provision. Section 309 expressly provides that it shall not 
affect the authority of the Board or any other agency to take 
enforcement or supervisory action against an institution. In such 
cases, the rights of appeal provided for in the statutes and 
regulations concerning these actions shall govern.

    By order of the Board of Governors of the Federal Reserve 
System, March 24, 1995.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 95-7795 Filed 3-29-95; 8:45 am]
BILLING CODE 6210-01-P