FRB Releases Guidance on Managing Outsourcing Risk (with Lofchie Comment)

The Board of Governors of the Federal Reserve System ("FRB") has issued the Guidance on Managing Outsourcing Risk to remind financial institutions supervised by the FRB to exercise appropriate risk management and oversight when using service providers.

According to the guidance, a "service provider" is defined as any organization or entity, such as a consultant, that enters into a contractual relationship with a financial institution to provide business functions or activities, such as accounting, auditing, loan review, compliance, or risk management. The guidance describes factors that financial institutions should consider when choosing a service provider, risks from the use of service providers, and how service providers should be overseen. Additionally, the guidance reminds financial institutions that the use of service providers does not relieve a financial institution's board of directors or senior managers of responsibility for the activities performed by service providers.

Lofchie Comment: The report provides a very solid overview of concerns pertaining to establishing outsourcing arrangements, including a checklist of areas that a firm should consider adding to an outsourcing contract. Although the report is directed at banks, broker-dealers and other regulated institutions will also find the report useful.

See: FRB Guidance on Managing Outsourcing Risk; FRB Supervision and Regulation Letter on the Guidance; FRB Press Release.See also: Lofchie's Guide to Broker-Dealer Regulation, Supervision Chapter, Outsourcing Discussion; NASD NTM 05-48.