Ethics Metrics provides independent ratings and reports on the effectiveness of audit committees and senior management of financial holding companies (“FHCs”) in overseeing governance risks that directly impact investment values.  For more information on FHC governance risks, please see our May, 2011 white paper, “How Ethical Corporate Governance Drives Sustainability and Fights Fraud”.

Federal Reserve’s Supervisory Letter

SR 11-7

April 4, 2011

Guidance on Model Risk Management

Board of Directors and Senior Management

Model risk governance is provided at the highest level by the board of directors and senior management when they establish a bank-wide approach to model risk management. As part of their overall responsibilities, a bank’s board and senior management should establish a strong model risk management framework that fits into the broader risk management of the organization. That framework should be grounded in an understanding of model risk—not just for individual models but also in the aggregate. The framework should include standards for model development, implementation, use, and validation.

While the board is ultimately responsible, it generally delegates to senior management the responsibility for executing and maintaining an effective model risk management framework. Duties of senior management include establishing adequate policies and procedures and ensuring compliance, assigning competent staff, overseeing model development and implementation, evaluating model results, ensuring effective challenge, reviewing validation and internal audit findings, and taking prompt remedial action when necessary. In the same manner as for other major areas of risk, senior management, directly and through relevant committees, is responsible for regularly reporting to the board on significant model risk, from individual models and in the aggregate, and on compliance with policy. Board members should ensure that the level of model risk is within their tolerance and direct changes where appropriate. These actions will set the tone for the whole organization about the importance of model risk and the need for active model risk management.

http://www.federalreserve.gov/boarddocs/srletters/2011/sr1107.htm

Washington, DC, March 31, 2011—Ethics Metric LLC, a company that provides independent ratings and reports on the actual compliance of U.S. financial holding companies, has issued 10 questions about corporate governance that fiduciaries of financial companies should be asking today. Ethics Metrics offers the 10 questions, as part of the duty of care standard, to bring to light undisclosed material facts about financial holding companies that have a direct impact on their investment values and executive compensation levels.  The questions are designed for boards of directors of financial holding companies and registered investment advisors, investors of all types of financial holding companies, federal financial regulators, auditing firms, and other parties having an interest in accurate, transparent financial information.

Ethics Metrics is releasing the 10 questions in conjunction with CEO Beckwith B. Miller’s speaking appearance on the panel “The Board: Asking the Right Questions” at the Dow Jones Global Compliance Symposium being held March 31 – April 1 in Washington, DC.

Ethics Metrics’ questions focus on ethical and fiduciary governance standards. These standards require oversight of audit risks, internal controls over financial reporting, risk management, regulatory and ethical compliance, disclosure and compliance with the corporate governance listing standards of securities exchanges. These rules are in place to promote ethical standards and to prevent misleading and fraudulent disclosures to investors.

“A financial holding company is defined as an institution that is ‘well managed’ and ‘well capitalized.’ The market has been focusing on the ‘well capitalized’ side but few people have been addressing the ‘well managed’ side,” said Miller. “Our 10 questions are designed to elicit basic information that directly impacts governance and the valuation of the enterprise.”

Ethics Metrics promotes disclosure, transparency and accountability to help boards of financial companies meet their fiduciary obligations to investors.

Asking Ethics Metrics’ 10 questions enables fiduciaries, including responsible investors and investment advisers, to have a true understanding of investment worth and meet their duty of care in conducting in-depth due diligence on governance risks to determine if there are material omissions that can have a direct impact on the investments they have for themselves or their clients.

Additionally, the Dodd-Frank Act includes a number of provisions focused on transparency and accountability.  Ethics Metrics’ 10 questions address provisions that require registered investment advisors to report on their exposure to systemic risk and counterparty credit risks. Investors are challenged by the lack of meaningful information from financial holding companies.

“Dodd-Frank is all about bringing transparency to critical corporate governance issues and enabling the market to reallocate capital based on the true financial condition of financial holding companies,” added Miller. “The power of these 10 questions is their specific focus on uncovering the true financial condition of financial holding companies that currently have $3 trillion of debt and equity securities issued and outstanding.”

Ethics Metrics’ 10 questions are:

[Note: “No” answers indicate that there are material facts that merit disclosure of underlying risks to investors.]

1. Is your financial holding company (FHC) in compliance as a FHC under the Gramm-Leach-Bliley Act (GLBA) and the Dodd-Frank Act (DFA)?

2. Is your FHC in compliance with the federal well-managed standards under GLBA and DFA?

3. Does your FHC tie compensation to compliance with safety and soundness standards?

4. Has your FHC disclosed, since it became a FHC, that your FHC is in compliance as a FHC and that it is also in compliance with the federal well managed standards?

5. Is your FHC in compliance with the compliance and ethics standards defined by the U.S. Sentencing Commission?

6. Is your FHC in compliance with the corporate governance listing standards of the U.S. securities exchanges with respect to compliance with laws and regulations, including effective internal controls over financial reporting?

7. If you answered “No” to questions #1, #2 and #4, has your FHC declared its internal controls over financial reporting are ineffective due to material weaknesses associated with undisclosed material compliance violations and related restatement risks?

8. Is your registered investment adviser prepared to report the market value of regulatory assets under management, including exposure to counterparty credit risk and systemic risk as required by DFA Sections 404 and 405, effective August 10, 2011 based on SEC Release No. IA-3110?

9. Is your private fund prepared to report the fair value of regulatory assets under management, including exposure to counterparty credit risk and systemic risk as required by DFA Sections 404 and 405, effective August 10, 2011 based on SEC Release No. IA-3110?

10. Is your security based-swap dealer prepared to report post-trade transactions on security-based swaps, effective October 11, 2011 based on SEC Release No. 34-63346?

About Ethics Metrics

Ethics Metrics LLC provides independent ratings and reports on the actual compliance of financial companies with United States’ ethical and fiduciary governance standards and the impact of compliance on related investment values, sustainability and systemic risk.  The firm is a member of the United Nations Principles of Responsible Investment and the International Corporate Governance Network. For more information on Ethics Metrics, please visit our web site at www.ethicsmetrics.com

Copyrighted by Ethics Metrics LLC, All Rights Reserved. 2011