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Fed Raises Stakes for Directors with New Governance Rules

by Yoko Goto
Eyes On Wall Street |

Surprising new proposals for corporate governance reforms are being issued by an agency not generally associated with investor protection-the Federal Reserve.

On December 20, 2011, the Federal Reserve Board issued proposed rules to strengthen regulation and supervision of large bank holding companies and systemically important non-bank financial firms. The proposal, which applies to U.S. bank holding companies with consolidated assets of $50 billion or more, addresses issues such as capital, liquidity, credit exposure, stress testing, risk management and early remediation requirements.

However, the new rules also provide for a series of significant corporate governance reforms. The new rules would require better oversight of any covered company's liquidity risk management by its board of directors, who, together with senior management, would be ultimately responsible for the liquidity risk assumed by the company.

Under the proposed rules, senior management of a covered company would be required to establish and implement liquidity risk management strategies, policies and procedures, and the board of directors would be required to review and approve them. In addition, the company would be required to establish and maintain an independent review function to review and evaluate the adequacy and effectiveness of the company's liquidity risk management processes.