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In addition to mandating a host of governance and risk management changes, the Federal Reserve levied severe penalties on Wells Fargo while taking
the rare step of publicly releasing supervisory letters sent to
individual Wells Fargo Board Members admonishing them for failure to “initiate any serious
investigation or inquiry” into management’s cross-selling program. The Wells Fargo penalties by the Federal Reserve will require the company to replace three board
members by April and a fourth by year's end and cap firm total asset size “until it sufficiently improves
its governance and controls.” The penalties' severity indicates a growing view on the
part of financial regulators that the Board of Directors and the rigor of its oversight serve as a key piece in preventing scandals caused by lapses in risk
mitigation by management. The forced board turnover at Wells Fargo comes
even after the company took steps to appoint a former Federal
Reserve governor as the company’s independent chair, replaced several
independent directors, conducted a review of its governance and risk management, and begun to implement changes. Further, the Federal Reserve gave
specific orders to Wells Fargo’s Board, requiring a written plan to “improve
its effectiveness,” including developing a firm-wide strategy for risk tolerance
and more effectively overseeing management in carrying out the implementation
of that strategy. More notable, however, was the language in the letters
sent to the individual board members, which stated that the Board must “have
sufficient information from firm management to understand and assess problems
at the firm” and that this requires a “robust inquiry and demand for further
information.” Although the Federal Reserve’s emphasis on the
responsibilities of individual board members of financial services companies may
demonstrate a broader approach to enforcing responsible governance in the
industry, it is also a strong reminder to all company boards about their
responsibility for actively overseeing and holding management accountable for effective
risk management processes.
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