Frequently Asked Questions
Click on a category below for FAQs on the respective topic. For frequently asked questions about YBS reporting, go to Frequently Asked Questions and Step-by-Step Instructions for Preparing the Young, Beginning, and Small Farmers and Ranchers Report (PDF).
General questions about FCA Risk identification Similar entity reporting Operating and strategic business planning for diversity and inclusion Flood insurance Borrower rights Collateral evaluations Disclosure and reporting rule Governance changes in 2006 Risk-weighting HVCRE exposuresGovernance changes in 2006
These FAQs are specific to the provisions of the governance rule and do not address all best governance practices. Farm Credit System (System) institutions are encouraged to use appropriate best governance practices in the full implementation of the rule.
- General
- Board Composition
- Financial Expert
- Outside Director
- Board Development
- List of Stockholders
- Director Elections and the AMIS
- Nominating Committees
- Compensation Disclosures
- Bank Director Compensation
- Audit Committees
- Compensation Committees
General
1. May members of management serve on institution boards?
No, institution boards are composed solely of directors. Management and outside advisors may participate in portions of board meetings. However, it is a good governance practice for boards at each meeting to hold "executive sessions" where no managers or advisors are present.
2. What does it mean to be an independent director in the Farm Credit System?
System directors must be independent of conflicts of interest that might interfere with exercising their judgment in a manner that is in the best interest of the institution. If a director has a real or potential conflict of interest in a matter before the board, the director should reveal the conflict to the Standards of Conduct official and recuse himself or herself from deliberations and votes on the matter.
3. If an institution's asset size changes in the middle of the year, will its compliance with the rule regarding the number of outside directors its board should have or the institution's ability to hire a financial advisor be affected that year?
No, the level of assets that an institution has as of January 1 determines whether an institution may have an exemption for a second outside director and whether it may hire a financial advisor. For example, if an institution has less than $500 million in assets on January 1 of this year but has more than $500 million in June, the institution does not have to increase the number of outside directors and may continue to use a financial advisor (instead of having a director who is a financial expert) for the remainder of the year. If the asset size of the institution is still more than $500 million on January 1 of the next year, then the institution will have to correct its board composition to comply with our rules.
4. Does the governance rule require changes to System institutions' bylaws?
The governance rule makes no direct requirement for bylaw changes; however, some changes may be necessary to conform to the rule. For example, if an institution has a bylaw provision specifying that outside directors serve for 2 years and elected directors serve for 3 years, then the bylaws would have to be changed because the governance rule requires outside directors to have the same term of office as stockholder-elected directors.
5. Does the governance rule apply to service corporations?
In general, the governance rule applies only to banks, associations, and, in limited areas, to the Funding Corporation. However, one provision of the governance rule does apply to service corporations. Technically, service corporations must conduct annual board self-evaluations as required by FCA regulation 618.8440, which applies to all FCS institutions. Because this is the only provision of the governance rule that affects service corporations, we are considering whether to exempt service corporations from conducting annual board self-evaluations. In the meantime, we encourage service corporations to continue to follow best practices in the governance of their operations.
Board Composition
6. What is the minimum composition requirement for a board of directors?
At a minimum, each bank and association board must consist of at least 60 percent stockholder-elected directors. Additionally, every board must have a financial expert and one outside director, but larger associations and all banks are to have two outside directors. Each board must also have an audit committee and a compensation committee.
7. Is the requirement that 60 percent of the board be "stockholder-elected directors" satisfied if an institution has the appropriate number of stockholder-elected director positions, but the positions are vacant?
No. The actual number of sitting stockholder-elected directors determines compliance. The 60 percent requirement was added to preserve the cooperative structure by ensuring stockholder-elected directors constitute more than a simple majority of the board. If we allowed vacant positions to be used when calculating the 60 percent, an institution could maintain unfilled "stockholder-elected" positions in satisfaction of the rule and have appointed directors as the majority of filled positions. Cooperative principles are not served if a majority of the board is not stockholder-elected directors.
8. May directors be appointed (rather than elected) to fill mid-term vacancies of elected positions under the 60 percent stockholder-elected directors requirement
Mid-term appointments are allowed as long as the remaining board members can satisfy the 60 percent requirement. It is up to the institution's board to determine whether a mid-term vacancy appointment will be for the duration of the vacated term of office or until the next scheduled election. However, the institution must forgo appointing a director and instead hold a special election if the number of stockholder-elected directors falls to fewer than 60 percent.
9. May an institution's board of directors include positions that are not full directorships, such as "associate directors" or "director emeriti" positions?
An institution's board may contain positions that are not full directorships, but we recommend that institutions remove "director" from any position that is not a full directorship; an alternate title, such as "advisor to the board" would be preferable. If someone serves on the board and his or her title includes the term "director," then stockholders, employees, and the FCA may be confused as to whether the person is a member of the board of directors with fiduciary responsibilities to the stockholders. It also raises the question of whether he or she is entitled to vote on all matters before the board and is subject to all our rules on director development, conflicts of interest, disclosures, and annual reporting. If an institution decides to retain "director" in titles for positions that are not full directorships, then the institution would have to make it clear to all stockholders, employees, and the FCA what the limitations of the position are as well as ensure the confidentiality of propriety information that may be shared with individuals occupying the positions.
10. May a director be appointed to an FCS bank or association board of directors if the director was a System institution salaried officer or employee within the past year?
Our rule at section 611.310(a) prohibits any person from serving on a Farm Credit bank or an association's board of directors if that person was a salaried officer or employee of any Farm Credit bank or association within 1 year preceding the date that the director's term of office commences. This provision applies to all directors, whether they are appointed by the board or elected by the bank or association's voting stockholders.
Financial Expert
11. How does a board determine who is a financial expert?
Each institution determines who is a financial expert based on that institution's own specific financial complexities. This approach should result in a higher level of expertise for institutions with more complex financial operations, as well as factor in the specific issues faced by each institution. To assist institutions in this decision making, we have developed a diagram of the process.
12. May a board member who believes he or she meets the definition of a financial expert volunteer as the board's financial expert?
An institution's board may use a volunteer system to identify possible financial experts, but the entire board must vote to designate who is a financial expert.
13. Must all directors be financial experts?
No. We do not require a board to be composed solely of financial experts. Institution boards are only required to have one financial expert. While all directors need some financial skills to carry out their fiduciary duties, institution boards need a broad mix of skills and expertise. The board is in the best position to determine the appropriate mix.
14. If more than one financial expert is identified, who serves on the audit committee?
If multiple directors qualify as financial experts and the board designates them as such, the board will have to identify which of those directors is the financial expert required to serve on the audit committee. This does not prevent any other director designated as a financial expert from being on the audit committee; it just limits his or her role to that of a committee member, not a financial expert. A board with more than one financial expert director may want to consider identifying an alternate financial expert for required service on the audit committee.
15. Are institutions required to disclose the identity of the financial expert in the annual report?
No. The rule does not require an institution to identify the financial expert in any institution report, but an institution may do so.
16. Does the financial expert have more liability than any other directors?
We do not believe that the designation as the financial expert imposes a greater degree of individual responsibility or obligation on that person than those held by other members of the audit committee or board of directors. Because liability (other than in the context of an enforcement action) is determined under federal securities and state corporate law, a director who is concerned that he or she has some specific liability given his or her individual circumstances should seek legal advice from his or her own, or the institution's, legal counsel.
17. What is the board meeting attendance requirement for a contracted "financial advisor" as opposed to that for the director designated as the financial expert?
The director who is the designated financial expert is expected to attend board and audit committee meetings consistent with the board's internal attendance requirements. The financial advisor, who has neither voting rights nor board membership, needs to be available for advice and counsel to the board to the same extent that a director designated as the financial expert would be. If the board decides to retain a financial advisor, institutions might want to establish parameters for attendance (either in person or by teleconference) as part of the contractual agreement used to hire the financial advisor. Since a financial advisor's attendance would not be included in the annual reporting of director attendance, institutions might want the board and audit committee meeting minutes to clearly reflect the attendance or absence of the financial advisor.
Outside Director
18. How is an outside director's independence different from that of other institution directors?
Outside directors must maintain independence from prohibited affiliations with the System to retain their standing as an outside director. Prohibited affiliations include serving as an officer, employee, director, agent, or stockholder in any System institution. (This does not prohibit an outside director from serving a consecutive term in the same institution.)
19. May outside directors have different terms of office than other directors? For example, may the first term of office for outside directors be shortened to facilitate staggering of terms for all directors?
Generally, all directors must have the same terms of office. However, we recognize certain events may cause a temporary difference in the terms of office for all directors. These events include a merger, consolidation and mid-term board vacancy. However, an institution may not shorten the term of office only for outside directors. Both elected and outside directors must be subject to the same adjustments to ensure equitable treatment and compliance with the governance rule.
20. Is a director appointed as an outside director entitled to vote on the selection of other appointed directors?
Yes. When a board of directors appoints additional directors, the board is exercising its authority as a board, not as individuals; therefore, no director sitting on the board at the time of the vote should be denied the opportunity to vote in the appointment of additional members. Outside directors have full voting rights on all matters that come before the board of directors. The only exception is that a director cannot vote in his or her own selection and removal action.
Board Development
21. Does a board self-evaluation require an evaluation of each individual board member?
No. Our rule only requires an evaluation of how the board is operating as a whole, not an evaluation of each individual board member. The goal of the evaluation is to help the board identify its strengths and weaknesses, as well as improve its collective performance. The evaluation is a useful planning tool for setting compensation, determining board committee membership, identifying training needs, and identifying desirable director qualifications.
22. How should a board of directors conduct a self-evaluation?
Our rule leaves it to each board to determine the best method for conducting self-evaluations and we do not recommend any one approach or resource. Board self-evaluations are a tool to help boards enhance their effectiveness and should be conducted in a manner that best supports the board's strategic planning and oversight responsibilities. Because board self-evaluations are a best corporate governance practice, there is considerable information publicly available to help guide a board through the process. The volume and variety of resources will require each institution's board to identify the resources or programs appropriate to their needs.
22a. How is the annual board self-evaluation incorporated into the institution’s operational and strategic business plan?
FCA regulation § 618.8440(a) requires that, within 30 days after the commencement of each calendar year, the board of directors of each FCS institution adopt an operational and strategic business plan (Plan) for at least the succeeding three years. Under § 618.8440(b), each institution must include in its Plan a review of the internal and external factors likely to affect the institution over the planning horizon, including an assessment of the needs of the board based on the annual self-evaluation of the board’s performance. The review must also include an assessment of management capabilities and strategies for correcting identified weaknesses. As stated in the preamble to the final governance rule (see 71 FR 5748), the regulation does not require that the business plan include the board’s self-evaluation, or a summary thereof. However, the board should document the required review and the board’s strategies for correcting identified weaknesses in background papers supporting the Plan. Also, the board should determine which, if any, of the strategies need to be included in the Plan due to their significance or materiality in the board’s planning for future events. Other strategies that the board determines are not significant or material, or are unrelated to business planning, could be addressed elsewhere, as appropriate (e.g., in the bylaws or board policies and procedures). Regardless, the results of the institution’s annual board self-evaluation must be considered in the board’s development of the institution’s Plan. The results must be supported by sufficient documentation to demonstrate compliance with the regulation.
23. Is management input into a board self-evaluation allowed?
A board self-evaluation is intended to be the board's assessment of its own performance. A board may choose to obtain additional input or feedback on its performance from management or stockholders to supplement the evaluation, but that input should not replace the board's own judgment.
24. How does the board decide what director qualifications are desirable and what additional training directors may need?
The annual board self-evaluation process should generate discussion on the skills, knowledge, abilities, and experience a director should possess; the conclusions reached in these discussions can form the basis for the board policy on desirable qualifications. The board self-evaluation will also help identify areas in which directors believe they need additional training either to correct existing weaknesses or to prepare directors for new business challenges.
25. Do all directors have to have the qualifications identified by their institution?
No. Director qualifications are those qualifications desired by the institution's board to provide needed knowledge, expertise, and skills to the board. Although the nominating committee should use the desired qualifications to guide them when identifying candidates, voting stockholders have the right to elect the directors they want to represent them. However, each board is responsible for using the desired qualifications when appointing directors to the board.
26. May institutions use director training to acquire the desired director qualifications for existing board members?
Yes. We encourage institutions to use director training to enhance the qualifications of existing board members. Coordinating director training with desired qualifications may help incumbent directors and young, beginning, and small (YBS) borrower-directors to more fully meet the desired qualifications. It may also increase the number of directors eligible to serve as financial experts.
27. May a director be trained to be the financial expert?
Yes. A board member can gain additional education or experience during his or her board service that would enable him or her to satisfy the definition of "financial expert" under our rule. However, it may be unreasonable to expect a board member with no foundation in finance or accounting and no experience in working with financial statements to qualify as a financial expert in just one term of office.
List of Stockholders
28. How should a list of stockholders be provided to requesting stockholder(s)?
Institutions must provide the list of stockholders in the format requested, if possible. For example, if a stockholder requests the list on a CD-Rom and the institution has the capability to "burn" a CD with the information, then it should do so. However, if a stockholder requests the list in a specific .PDF or software which the institution does not maintain, the institution does not have to acquire the software in order to provide the list. The institution may then provide the list in the most convenient manner available.
Director Elections and the Annual Meeting Information Statement (AMIS)
29. Do associations have to hold director elections at annual meetings?
Generally, yes. The Farm Credit Act and our rules are clear in requiring associations to hold annual meetings and to elect at least one director at each annual meeting. However, the stockholders vote on the election of a director does not have to actually occur at the annual meeting; stockholders may cast their ballots through the mail following an annual meeting.
30. Will institutions have to send more than one AMIS each year?
The AMIS must be issued at least 10 days before any director election or any annual meeting. Essentially, this means that any election that is not held in conjunction with an annual meeting will require a separate AMIS. Elections that are part of the annual meeting, but completed a month or two after the meeting because of mail balloting procedures, would only require one AMIS.
31. If a Farm Credit bank does not hold director elections in connection with an annual meeting, will the bank have to send out two AMIS's that year?
Unlike associations, banks are not required to hold annual meetings, though it is a good practice. If the bank holds director elections separate from the annual meeting, then two AMIS's will be issued-one for the annual meeting and one for the separate election. If a bank does not hold an annual meeting, then the bank will only need to send one AMIS for director elections that year.
32. Does an AMIS always have to include candidate disclosures?
An AMIS issued for election purposes only or for annual meetings where elections are held must include candidate disclosures. However, a Farm Credit bank AMIS issued solely for an annual meeting, where no elections are involved, does not require inclusion of candidate disclosures.
33. May a bank or association request more information from candidates than what is required by FCA rules?
Yes, an institution may request additional information to provide to voting shareholders in an effort to increase voter awareness and participation. An institution may request educational information on director candidates as long as it is requested from all candidates, serves a legitimate election purpose, and is not campaign material.
34. What kind of information may institutions distribute about director candidates?
On September 11, 2008, FCA issued a bookletter, “Distribution of Director Candidate Information” (BL 056), that provides guidance to institutions on supplemental information that can be provided on director candidates in addition to the required candidate disclosures. The supplemental information must be educational in nature. Institutions should review BL 056 for this guidance.
35. May institutions post candidate disclosures on their Web sites in lieu of mailing?
Maybe. While we encourage use of Web-based technology for communications, institutions must do so under our electronic commerce rules (e-commerce) at 12 C.F.R. part 609. Our e-commerce rules require institutions to have the consent of all parties to a transaction before using e-commerce in business transactions. We consider director elections to be business transactions; therefore, unless all voting stockholders have agreed to the use of e-commerce, it cannot replace written mailings of candidate disclosures. However, institutions may use Web-based posting of candidate disclosures as a supplement to the mailed disclosures. Institutions would need to give notice to all voting stockholders that candidate disclosures will also be available on its Web site. Then the institution may post the disclosures on the Internet after a reasonable amount of time has passed since the disclosures were mailed (to allow for receipt).
36. May institutions pay the travel expenses of director candidates to attend annual meetings?
Probably yes. This may be okay if the annual meeting includes director elections and all candidates, including floor nominations, are provided the same opportunity to receive reimbursements for expenses. Our rule at § 611.320(c) on impartiality in elections makes it clear that no resources of an institution may be used by a candidate unless the same resources are simultaneously made available, and made known, to all declared candidates. As such, the institution should include shareholder notice, in the AMIS or elsewhere, that candidates will be provided the opportunity to receive travel reimbursement. This advance notice to voting shareholders helps ensure fairness and equal access in case a shareholder wants to arrange a floor nomination.
37. May institutions provide director candidates time to give oral presentations at annual meetings?
Yes. However, as explained in the previous answer, no resources of an institution may be used by a candidate unless the same resources are simultaneously made available, and made known, to all declared candidates. Institutions should provide the same opportunity for all candidates, including floor nominees, and should notify shareholders in advance of the meeting that candidates will be provided the opportunity to make oral presentations. Voting shareholders should be told in advance that candidate statements may be made in case a shareholder wants to hear the statements or, as a floor nominee, make a statement.
38. If an institution conducted a live Webcast of its annual meeting and director candidates were allowed to make oral presentations regarding their candidacy at the meeting, may the institution post the Webcast on its Web site?
An institution may post on its Web site the unedited recording of its live annual meeting Webcast, even if director candidates were allowed to make statements at the meeting. However, the institution may not post only those portions of the recorded annual meeting containing the candidates' statements; that action is considered distribution of campaign material. Our rule at section 611.320(e) prohibits Farm Credit institutions from distributing campaign material in any form. This rule, which is part of the rules on institution impartiality in elections, is designed to preserve an institution's neutrality in the election process and avoid the perception that an institution is endorsing a particular candidate. Candidate statements, when offered in the context of an annual meeting, are generally not viewed as a specific effort by an institution to endorse a candidate or distribute campaign material, provided all candidates are given equal access. Once an institution expends resources editing the recorded Webcast to segregate the candidates' statements for the purpose of posting only those statements on its Web site, it has compromised its impartiality and begun "distributing" campaign material. We do not consider inserting electronic "bookmarks" or other similar user aids in lengthy Webcasts to be editing a recorded Webcast in a prohibited manner.
39. What type of detail should be given as part of the AMIS to meet the requirement that director candidates "identify" family relationships that would be reportable under FCA's Conflict of Interests rules?
We used the word "identify" rather than "report" in the rule to indicate that the disclosure of family relationships is a simple item and not intended to be a full listing of family members and their loans. For example, if a director candidate has a son living at home and the son has an equipment loan with the institution, the director candidate would have to disclose only that he or she has a child with an institution loan. The candidate would not have to disclose the name, loan terms, or status of the loan as part of the AMIS.
Nominating Committees
40. Is a nominating committee considered a committee of the institution's board?
No, the nominating committee is a committee of the voting stockholders. While the nominating committee relies on the board for administrative resources and, eventually, provides a written report to the board, it carries out its responsibilities independent of the board and is not under the board's control.
41. How are nominating committee members selected?
The voting stockholders of the institution elect other voting stockholders to serve on the nominating committee. Each institution determines the process for identifying potential committee members, including the use of floor nominations. However, Farm Credit Banks must use weighted voting procedures, with no cumulative voting permitted, when electing members to serve on the nominating committee.
42. May a nominating committee member serve for longer than 1 year or 1 term?
Yes. While the Farm Credit Act restricts members of association nominating committees to 1-year terms, nothing in the rule for either associations or banks prohibits nominating committee members from serving consecutive or multiple terms.
43. May nominating committee members receive pay or reimbursement from the institution?
Yes, but institutions should proceed with caution. Institutions may adopt nominating committee policies under § 611.320 that permit paying nominating committee members a reasonable fee or providing reimbursement for actual expenses. Institutions considering such payments are encouraged to address how the pay is determined and to ensure that payments are provided in a nondiscriminatory manner to all members. At a minimum, policies and procedures adopted under § 611.320 may not conflict with any impartiality in elections or Conflicts of Interest policies.
44. May a family member of a director candidate serve on the nominating committee?
The nominating committee is subject to the institution's written policies on impartiality in elections and Conflicts of Interest. Institutions may wish to address how nominating committee members should behave if a family member becomes a potential nominee; for example, the institution may provide recusal procedures for such instances.
45. May institution employees provide names of potential director candidates to the nominating committee?
Nominating committee policies and procedures that institutions adopt under § 611.320 may permit employees to provide names of prospective candidates to the nominating committee, but this opportunity must be available to any employee and not confined to senior officers. Use of the institution's Web site to solicit individuals who are eligible to serve as directors is another option for the nominating committee, as long as other means are available that do not require electronic access. If requested by the nominating committee, management might provide a list of the institution's advisory committee members or any others with grassroots' connections to the institution from which the nominating committee may identify potential candidates.
Compensation Disclosures
46. May a director serving on board committees or as a financial expert receive a higher level of compensation?
Yes. Each institution determines the compensation for its directors, and nothing in our rules prohibits directors who provide services beyond that of a regular board member from receiving a different level of compensation. Institutions making special compensation provisions for directors serving on board committees must disclose that in the annual report.
47. What level of noncash compensation is disclosed in the annual report?
All noncash compensation received by a director or senior officer above a de minimis level, such as a cup of coffee, is reportable when the total noncash compensation received for the reporting year (aggregate) exceeds $5,000. Once that threshold is reached, all of the noncash compensation, excluding de minimis items, received by that director or senior officer must be reported.
48. What does the aggregated reporting of senior officer compensation mean?
Each institution must disclose in the annual report the total compensation received by all employees identified as senior officers. The compensation is reported as one lump sum amount, not by individual, except for the Chief Executive Officer (CEO). The CEO compensation is separate from the lump sum aggregated amount and is disclosed as a separate item in the annual report. The lump sum amount also includes any officer, not defined as a senior officer, receiving one of the five highest salaries of the institution.
49. Does an institution have to disclose who was included in the reported aggregated lump sum amount of senior officer compensation?
When requested, an institution must provide to any requesting stockholder of the institution the breakdown of the aggregated lump sum amount included in the annual report. The breakdown must separately identify all the individuals included in the amount and each individual's compensation. We expect the institution to promptly provide the information without any limitations on how the information will be used.
50. Are institutions expected to re-calculate prior year compensation amounts included in the 3-year compensation "look back" section of the 2006 and 2007 annual reports?
No. Institutions do not have to recalculate the compensation information for 2004 and 2005 when preparing the 3-year "look back" section of the 2006 or 2007 annual reports. However, institutions must reflect the changes to reportable compensation and the definition of "senior officer" when developing compensation reporting information for 2006 and thereafter.
Bank Director Compensation
51. How are Farm Credit banks to report their use of the "exceptional circumstances" waiver (contained in FCA regulation § 611.400) for director compensation?
The annual report must identify each director receiving the compensation waiver, the amount of additional compensation received by that director under the waiver, and the justification for why that specific director merited receiving additional compensation. The justification must explain the extraordinary time and effort provided by the director and how that effort was given in the service of the bank and its shareholders. Activities outside of service to the bank and its shareholders should not be used to justify use of the waiver.
52. May a Farm Credit bank give all bank directors additional compensation under the "exceptional circumstances" waiver for the same reason?
Our rules do not specifically prohibit across-the-board waivers if given for a justifiable exceptional circumstance, but use of the waiver must be properly documented on an individual basis. In general, use of the waiver should be for activities of individual directors that are above and beyond the responsibilities held by all directors. However, unusual or one-time bank activities do occur that require additional efforts by the entire board, such as development and implementation of mergers, consolidations, or joint management proposals, as well as efforts in connection with joint strategic planning projects between banks or the hiring of a new chief executive officer.
Audit Committees
53. Who may serve on a bank or association audit committee?
All audit committee members must be directors of the institution. Each audit committee member is required to be free from any financial, family, or other material personal relationships that, in the opinion of the board, would interfere with the exercise of his or her independent judgment. Additionally, members must be financially literate and have a working familiarity with basic finance and accounting practices. Directors may meet these qualifications through board-sponsored training programs. The director who is the board designated financial expert must serve on the audit committee. In a small association that has hired a financial advisor in lieu of having a financial expert on the board, the advisor must provide advice to the committee but is not considered a member.
54. Are there special recordkeeping requirements if an institution's entire board serves as the audit committee?
If the full board functions as the audit committee, then the audit committee must be separately convened and have a separate agenda and separate meeting minutes. There may be no intermittent committee actions or votes during regular board meetings.
55. Does the audit committee function independent of the board?
The audit committee is a committee of the full board with authority to act on certain issues pursuant to the governance rule (e.g., hiring auditors, providing in-depth review of financial statements). The audit committee reports to the full board. However, the audit committee is not required to consult with, or obtain the concurrence of, the full board before exercising its authority.
56. Does the audit committee supervise the institution's internal auditor, and is the internal auditor subject to removal by the audit committee?
The audit committee oversees the system of internal financial controls, and the internal audit function is subject to the audit committee's review and supervision. The audit committee and the internal auditor are allowed to communicate directly with one another, without permission or involvement of the institution's managers, under the audit committee's authority to supervise the internal control functions. However, unlike with the external auditor, our rule does not give the audit committee regulatory authority to hire or remove an internal auditor, but an institution's board may choose to do so. Any additional authority given an audit committee should be reflected in the audit committee's charter.
57. How does the audit committee provide oversight?
The audit committee provides oversight by ensuring full and accurate financial disclosures and by ensuring that management properly develops and adheres to a sound system of internal financial controls. The audit committee also serves as a knowledgeable authority, other than management, with which internal and external auditors can discuss financial reporting issues and concerns. An audit committee's oversight of the financial reports of the institution is not a simple review of the reports. A simple review would not discharge all the board's responsibilities on financial reporting to stockholders, investors, and the public in general.
Compensation Committees
58. May a compensation committee operate under another name?
The name of the committee is not restricted to "compensation." The compensation committee may be incorporated into another existing committee, such as a Human Resources Committee or Executive Committee, as long as the committee charter clearly identifies the compensation committee functions and duties. Incorporating the compensation committee duties into another committee extends the requirements for the compensation committee to the committee taking on compensation duties; these requirements are that all committee members must be board directors, the committee must have at least three members, and the committee must maintain a 3-year record-keeping system.
