Publication of the November 2003 update to the Commercial Bank Examination Manual.

The November 2003 update to the Commercial Bank Examination Manual (Supplement Nos. 19 and 20), has been published and is now available. The new update includes supervisory and examination guidance on the following subjects:

1. The Applicability of Corporate Governance Initiatives to Nonpublic Banking Organizations. The section on the internal control and audit function, oversight, and outsourcing has been revised to incorporate the May 5, 2003, Statement on Application of Recent Corporate Governance Initiatives to Nonpublic Banking Organizations. The statement (issued by the Federal Reserve, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision) responds to questions received regarding the way that small, nonpublic banking organizations are to comply with the corporate governance, auditing, and other requirements of the Sarbanes-Oxley Act. Although the act does not require small, nonpublic banking organizations to strictly adhere to its provisions, the agencies expect these banking organizations to ensure that their policies and procedures are consistent with applicable laws, regulations, and supervisory guidance and that they remain appropriate for the organization's size, operations, and resources. See SR letter 03-8.

2. The Appropriate Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management. The sections on asset and liability management have been revised to incorporate the July 25, 2003, Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management. The advisory presents information on the new Federal Reserve primary and secondary discount window programs. The advisory provides guidance on the appropriate use of primary credit in effective liquidity management. The board of directors and senior management of a depository institution are advised to consider the Federal Reserve's primary credit program as part of their contingency funding plans and to provide for adequate diversified potential sources of funds to satisfy liquidity needs, which includes planning for certain significant liquidity events. The examination procedures and internal control questionnaire were also revised. See SR letter 03-15.

3. Insurance Sales Activities and Consumer Protection in Sales of Insurance. New sections provide examiners' guidance for (1) conducting risk assessments of state member bank insurance and annuity sales activities in accordance with the Federal Reserve's risk-focused supervisory approach and (2) examining a state member bank's compliance with the Consumer Protection in Sales of Insurance (CPSI) regulation, Subpart H of the Board's Regulation H (12 CFR 208.81-86). Also discussed are a joint interpretation and joint statement regarding the CPSI regulation. The CPSI regulation (effective October 1, 2001) implements section 305 of the Gramm-Leach-Bliley Act (12 USC 1831x; the GLB Act). The regulation requires certain disclosures in connection with the retail sale or solicitation of insurance products and annuities by a bank, by any other person at bank offices where retail deposits are accepted from the public, or by any person "acting on behalf of the bank." The examination guidance provides a comprehensive review of insurance and annuity sales activities as they pertain to state member banks. Consistent with the GLB Act, the guidance incorporates applicable restrictions on examining a functionally regulated insurance subsidiary of a state member bank. A glossary of terms associated with insurance and annuity sales activities is provided. Examination objectives, examination procedures, and an internal control questionnaire are also provided.

4. Restrictions on Institutions in Troubled Condition. The section on formal and informal corrective actions has been revised to discuss the existing restrictions on, and requirements for, severance payments made to institution-affiliated-parties (so called "golden parachute payments"). The restrictions originated from the Crime Control Act of 1990, which added section 18(k) to the Federal Deposit Insurance Act (12 USC 1828(k); the FDI Act). The FDIC's regulations on golden parachute agreements are found in 12 CFR 359 and are discussed in this manual section. The thirty-day prior-notice requirement for appointing any new directors or senior executive officers of state member banks and bank holding companies is also discussed. (See section 32 of the FDI Act (12 USC 1831i) and Subpart H of Regulation Y (12 CFR 225.71). This notice requirement also applies to any change in the responsibilities of any current senior executive officer who proposes to assume a different position. See SR letter 03-6.

5. Transactions between Member Banks and Their Affiliates. The section on bank-related organizations is revised to incorporate the examples found in Regulation W, "Transactions between Member Banks and Their Affiliates," for the rule's quantitative limits, collateral requirements, valuations, exemptions, and timing of covered transactions. Additional interim examination procedures are also included.

6. Fiduciary Activities. The introduction of the section on fiduciary activities has been revised to provide more examination guidance on the industry standards and examiner responsibilities. For a state member bank's subsidiary that is engaged in fiduciary activities, the examiner should rely on the findings of the appropriate functional regulator that has the primary supervisory responsibility for evaluating risks, hedging, and risk management. See SR letter 00-13. A discussion is provided on the available reported supervisory information and analytical support tools that the examiner can use to evaluate a bank's fiduciary activities.

The public may obtain the Manual and the updates (including pricing information) from Publications Fulfillment, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or charge by facsimile at 202-728-5886). The Manual is also available on the Board's public web site at www.federalreserve.gov/boarddocs/ supmanual/.