Fed tightens rules on conflict of interest

WASHINGTON -- The Federal Reserve on Wednesday tightened the conflict of interest restrictions governing the boards of directors of its 12 regional banks.

The new rules were passed to deal with potential conflicts such as one that involved Stephen Friedman, a former chairman of Goldman Sachs Group Inc. The requirements take effect immediately and spell out the obligations of directors with ties to financial institutions that change status while the official is serving on a Fed regional board.

Friedman got a waiver to continue serving as chairman of the board of directors of the New York Federal Reserve Bank even though Goldman Sachs had switched its status during the height of the financial crisis to become a bank holding company, which is regulated by the Fed. It had formerly been an investment bank.

Friedman ended up resigning from the Fed position in May after The Wall Street Journal raised questions about his ties to Goldman Sachs, including his large holdings of the company's stock.

"Although I have been in compliance with the rules, my public service ... on the reserve bank board is being mischaracterized as improper," Friedman said in his resignation letter.

Governing boards

The 12 Fed regional banks are governed by nine-member boards. Three of the board members are elected by the banks who belong to the Federal Reserve system in that particular district. The other six members are selected to represent the public and may not be officers, directors or employees of any bank.

The rules require that any board director serving in one of the positions representing the public sever any ties to a financial institution that comes under the central bank's jurisdiction, or resign from the Fed board within 60 days of that institution's change in status.

The Fed is facing increasing criticism from some members of Congress who believe it did an inadequate job regulating financial institutions and protecting consumers leading up to last year's financial crisis, the worst to hit the country since the 1930s.

The House Financial Services Committee last week adopted a proposal from longtime Fed critic Rep. Ron Paul, R-Texas, that would give the Government Accountability Office the authority to audit the Fed's balance sheet, credit facilities and all securities purchases.

The proposal has the support of more than 300 members of Congress who say it's needed to shine a greater light on the operations of an institution with enormous powers over the U.S. economy.

Both the House and Senate are putting together proposals to overhaul the nation's financial rule book in an effort to crack down on abuses that led to last year's banking crisis. A bill being pushed by Senate Banking Committee Chairman Christopher Dodd, D-Conn., would strip the Fed of its bank regulation powers.