Conflicts of interest, both actual and potential, have become a subject of increasing concern to businesses, to the public and to legislative bodies. The nature of financial institutions is such that situations which could and sometimes do result in a conflict of interest are unavoidable. Some recent regulations, such as the Federal Deposit Insurance Corporation's regulations on insider transactions, the Comptroller of the Currency's ruling concerning use of credit life insurance income and his proposed policy on insider transactions, have resulted from recent regulatory and public concern in this area.

The Financial Institutions Bureau believes that the banking industry and its depositors, shareholders and creditors, as well as the general public, will be better served at this time by self-policing rather than by further legislation. In accordance with the intentions of Bank Bulletin No. 17, each Board of Directors is asked to examine its bank's individual concerns in this area and to adopt a conflict of interest policy for directors, officers and employees which will adequately reflect such concerns and outline a program for monitoring conflicts of interest. This policy should also be consistent with applicable laws and regulations.

Review of the Board's policy, and the degree of compliance with the policy, will be a part of normal examination procedures beginning June 30, 1978. The policy should be maintained in the bank's policy book. It should cover, at a minimum, the following areas:

1. General guidelines concerning conflicts of interest and reference to such specific areas as may be necessary.

2. Methods of identifying and procedures for reporting and resolving conflicts of interest.

3. A method of insuring that the policy is being followed.

4. Establishment of a review procedure for reported or discovered conflicts and for those conflicts in which a general policy or blanket judgment may not be sufficient.

Many areas in which conflicts of interest arise may already be addressed in current bank policies. This is particularly true of personnel policies, which generally cover such areas as the giving and receiving of gifts, the avoidance of speculative personal financial dealings, guidelines for outside employment and conduct while acting as an employee of the bank. Other areas, such as the strict confidentiality of customer data, may be tacitly understood as a major bank policy, but may not be in written form. Various laws also have a direct bearing on situations which may be considered as conflicts of interest. Both State and Federal statutes govern the political activities of a bank, as well as certain interactions of directors and officers with a bank. It is suggested that even though some duplication may exist and that some portions of a conflict of interest policy may seem to be so obvious as to not require written guidelines, that the policy adopted by the Board should cover all areas in order that all personnel have a clear understanding of the policies and procedures of the institution.

It is recognized that there will be some areas of value conflicts involving people associated with the bank which cannot be totally resolved to the satisfaction of all parties. The subject of conflicts of interest is elusive and broad, and may range from relatively minor and inconsequential actions to those which border on unsafe and unsound practices. It is difficult to draw exact lines between conflicts of interest, unsafe and unsound practices, and situations which are actually self-dealing, since each area has elements in common with the others. While we do not mean to imply that the Board's policy should exclude normal and arms-length transactions between a bank and persons or businesses associated with the bank, it should be remembered that a situation which has the appearance of being a conflict of interest may be as detrimental as a situation which is an actual and unresolved conflict. Bankers have long been characterized by ethical business practices and personal integrity. The conflict of interest policy adopted by the Board should be a further reflection of these characteristics.

Signed:	Richard J. Francis, Commissioner
	Gifford Knudsen, Director, Bank & Trust Division
Dated:	March 10, 1978