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Fed action on Wells another sign companies' boards may face tougher expectations

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Fed action on Wells another sign companies' boards may face tougher expectations

The Federal Reserve's unprecedented action limiting Wells Fargo & Co.'s growth is a sign the U.S. central bank is making its expectations for boards of directors tougher and is ready to crack down on wrongdoing, even as it looks to loosen some rules for banks, observers say.

The Wells Fargo action comes amid proposals from Congress to ease some of the Dodd-Frank requirements that came out of the financial crisis, particularly rules for smaller banks, as well as efforts from regulators themselves to streamline their requirements. But the Fed's action against Wells Fargo, following revelations that the company had opened millions of unauthorized accounts, is a reminder that the regulator will not hold back from dropping the hammer on severe cases of mismanagement, observers say.

The move, they add, is also another sign the Fed thinks companies' boards of directors should be more responsible for oversight and spotting potential trouble spots. In a separate effort, the Fed is proposing standards for top company officials and boards, which new Fed Chairman Jerome Powell has said will help the Fed be "clear about our expectations."

"Oftentimes, it was the buck stopped at the CEO or other C-suite professionals," said Ed Mills, a Raymond James analyst. "This here clearly shows the Fed is also looking at the board and the decisions that they make."

One of the Fed's top supervisory officials, for example, sent a letter to Wells' board of directors saying their oversight "did not meet [the Fed's] supervisory expectations" and called on the board to ensure the company's managers are acting appropriately. The letter said Fed officials will "continue to closely monitor the performance" of the board in meeting the Fed's expectations. Wells' board members also had to sign the consent order.

Wells is replacing four board members by the end of the year, though those moves are not required under the consent order and the Fed said they were happening "concurrently" with its action.

Cornelius Hurley, a Boston University professor and former Fed lawyer, said the central bank laid out a template in its consent order that other companies "would be well-advised to follow."

Ian Katz, a Capital Alpha Partners analyst, also wrote in a research note that the Fed "just put the Fear of God into bank boardrooms across the country."

"Any finance executive thinking that getting onto a bank board would be a cushy, mail-it-in, part-time retirement hobby needs to think again," Katz wrote. "These jobs can be reputation killers."

The Fed's action was Janet Yellen's last move as Fed chair. Powell voted for the enforcement action, but Mills said the industry will wait for comments from him to see whether it was a loose end that Yellen wanted to tie up or whether it will be part of Powell's approach going forward.

"I think there will be a lot of debate in boardrooms on whether or not this was a one-off or a sign of things to come," said Mills of Raymond James.