New Rules Pass Regulating Conflict of Interest for Regional Federal Reserve Board of Directors

New rules were put into place to better handle conflicts of interest in regard to the board of directors of the 12 regional Federal Reserve banks. The new rules were put into immediate effect.

Much of this impetus behind the rules was when Goldman Sachs (NYSE:GS) became designated as a bank holding company while Goldman Chairman Stephen Friedman also served as chairman of the New York Federal Reserve Bank, creating the potential conflict of interest. Goldman Sachs has been cited by a growing number of industry watchers as having far too many current of former employees involved in government or Federal Reserve positions; wielding too much influence, possibly on behalf of Goldman.

Before their change, Goldman was an investment bank and not a bank holding company, which changed the game for them. At the time Friedman was serving as chairman of the board of directors of the New York Federal Reserve Bank, he was given a waiver to continue in the position, causing some to press the issue.

Eventually questions on the propriety of Friedman continuing on as chairman of the board of directors while continuing to work for Goldman Sachs pressured him to resign, although he said in a letter of resignation that his position was “being mischaracterized as improper,” even though he been “in compliance with the rules.”

Per the new rules, anyone with connections to a financial institution that moves into a position of being under the authority of the Federal Reserve will be required to server ties with the financial institution or resign from the Federal Reserve board within a 60-day period of that change.

How the Federal Reserve regional banking system works, as far as electing officers, are the nine-member boards of each regional bank have three officers elected from among the banks in the specific district represented, while the other six officers that make up the total nine are selected to be representatives of the public, and are not allowed to have any professional ties to banks.

Called ‘Class A’ directors, those representing the member banks of the region aren’t affected by the new rules, as requirements aren’t as tight as they are with other directors. Those identified as ‘Class B’ or ‘Class C’ directors will be, as they are supposed to represent the public.

While all of this is fine, in reality it seems this is just a move to placate the public and make it look like the Fed is governing itself. The regional Federal Reserve banks really have little power, although in the example I used of the New York regional bank, they are an exception to that statement.