The Federal Reserve System is set to reform how it identifies and hires key officials at its 12 regional reserve banks, following an investigation that uncovered conflicts of interest and inconsistent practices across the system.
The report, released Wednesday by the central bank’s Office of the Inspector General, examined hiring practices at reserve banks between 2021 and 2024. It identified five key findings and recommended 10 policy changes, most aimed at standardizing processes across the system.
Key Findings from the Inspector General's Report
The report highlighted several issues, including a lack of screening for prohibited investments, the role that bankers sometimes play in recruiting members for regional Fed bank boards, and conflicts of interest during presidential searches.
One notable finding was that nine of the 12 reserve banks allowed bank-appointed directors to participate in the search process for community representatives. The report also noted the absence of a policy requiring presidential search firms to disclose conflicts of interest.
“The board’s lack of written guidance has led to reserve banks developing varied selection processes and [the Federal Reserve Board’s Office of the Secretary] not being fully aware of those processes,” the report states.
Understanding the Reserve Bank Board Structure
Each reserve bank has nine directors divided into three categories:
- Class A: Appointed by member commercial banks to represent their interests.
- Class B: Appointed by member banks to represent community interests.
- Class C: Appointed by the Board of Governors to represent community interests.
This structure is designed to ensure that reserve banks are accountable to both their member banks and the broader public. However, because Class C director candidates are identified by reserve bank staff and recommended to the board in Washington, different approaches have emerged, some of which created openings for conflicts of interest.
Concerns About Class A Director Involvement
The report specifically flagged the involvement of Class A directors in the selection of Class C directors. In nine of the 12 reserve banks, Class A directors were involved in recruiting or approving the Reserve Bank president’s nomination of Class C directors to the Board of Governors.
“[T]he involvement of Class A directors in the selection of Class C directors may give member banks undue influence over the composition of the entire board of directors, rather than reinforcing the Federal Reserve Act’s mandate that the board of governors appoint Class C directors,” the report reads.
The report did not call for a ban on Class A directors participating in Class C searches, but recommended that officials in Washington evaluate the practice. It also suggested that the Fed governor who chairs the board’s Bank Affairs Committee—currently Gov. Christopher Waller—should have a more clearly defined role in Class C search processes system-wide.
Lack of Screening for Conflicts and Eligibility
The report also found that Class C directors are not always screened for eligibility or prohibited financial interests. It called for a disclosure policy to address such conflicts before individuals are appointed.
Additionally, the report noted that the board in Washington does not require external executive search firms hired by reserve banks to disclose potential conflicts of interest with prospective candidates.
Case Example: The Goolsbee Appointment
This issue came to light in 2023 after Austen Goolsbee was appointed president of the Federal Reserve Bank of Chicago. He was identified by Diversified Search Group, where his wife, Robin Goolsbee, works as a managing director. The report did not mention Goolsbee by name but noted that during its inquiry, “one appointed reserve bank president’s spouse was a managing director at the external search firm leading the candidate selection process.”
The report stated that the reserve bank was unaware of the conflict until four months after Goolsbee applied. When the Chicago Fed learned of it, it did not alert the Board of Governors in Washington.
“Board Ethics reviewed the situation with the reserve bank’s general counsel and decided against further follow-up because the spouse had not been involved in the search,” the report states. “The search committee ultimately submitted the candidate as the preferred selection to the board of governors, whose approval of the candidate resulted in negative media attention for the System.”
Recommended Policy Changes
The report calls for a new policy on conflict disclosure requirements for search firms and a requirement for reserve banks to disclose conflicts to the board. It also recommends setting clearer standards for other executive appointments, including chief financial officers, general auditors, and senior supervisory officers.
Federal Reserve Board's Response
The Federal Reserve Board in Washington concurred with the majority of the findings and agreed to implement most of the recommendations. It contested assertions from the inspector general that Class C directors could access confidential information about monetary policy, but agreed that a more robust screening process would be appropriate.
The board committed to implementing the recommended changes by the second quarter of 2027.
