Fed Conflict of Interest Threatens Reputation: GAO Report

Role of banking industry in key decisions questioned

The Federal Reserve building in Washington. (Photo: AP) The Federal Reserve building in Washington. (Photo: AP)

More On Legal & Compliance

from The Advisor's Professional Library
  • The New and Improved Form ADV Whether an RIA is describing its investment strategy in advertisements or in the new Form ADV Part 2, it is important the firm articulates material risks faced by advisory clients and avoids language that might be construed as a guarantee.
  • How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in place—and to recognize that examiners are not the enemy.

A new report from the Government Accountability Office, which details potential conflict of interest within the Federal Reserve, finds that the Fed is taking on additional risks to its reputation by allowing the banking industry to participate in choosing board members at the 12 regional Fed banks.

The report notes that while “the Federal Reserve System recently has made changes to Reserve Bank governance, it can take additional steps to strengthen controls designed to manage conflicts of interest involving Reserve Bank directors and increase public disclosure of directors' roles and responsibilities.

As such, to enhance transparency in its leadership, the chairman of the Federal Reserve Board should “direct the Reserve Banks to make key governance documents, such as such as board of director bylaws, committee charters and membership, and Federal Reserve Board director eligibility policy and ethics policy, available on their websites or otherwise easily accessible to the public.”

"Failing to make the process and decisions more transparent can decrease confidence in the Federal Reserve System and has resulted in questions about the integrity of Reserve Banks' operations and the appearance of conflicts of interest," the GAO said.

"The most powerful entity in the United States is riddled with conflicts of interest," Sen. Bernie Sanders, I-Vt., said in a statement Friday.

The report follows a call from Rep. Barney Frank, D-Mass., the top Democrat on the House Financial Services Committee, to give the president the authority to choose Fed leaders, while at the same time limiting the voting rights of those regional Fed presidents on central bank interest rate decisions.

Frank told Bloomberg TV’s Lisa Murphy in September that “Giving nonelected officials picked by nonelected people, private citizens, who come from the financial community, the right to vote on an important national policy is inconsistent with democracy.”

A bill submitted by the congressman on Sept. 13 would authorize the president to appoint four Federal Reserve presidents, in addition to the Federal Reserve chairman, to ensure you have “geographic diversity.”

Reprints Discuss this story
This is where the comments go.