(a)Establishment. The board of directors of each Bank shall establish an audit committee, consistent with the requirements set forth in this section.
(1) The audit committee shall comprise five or more persons drawn from the Bank's board of directors, each of whom shall meet the criteria of independence set forth in paragraph (c) of this section.
(2) The audit committee shall include a balance of representatives of:
(i) Community financial institutions and other members; and
(ii) Appointive and elective directors of the Bank.
(3) The terms of audit committee members shall be appropriately staggered so as to provide for continuity of service.
(4) At least one member of the audit committee shall have extensive accounting or related financial management experience.
(c)Independence. Any member of the Bank's board of directors shall be considered to be sufficiently independent to serve as a member of the audit committee if that director does not have a disqualifying relationship with the Bank or its management that would interfere with the exercise of that director's independent judgment. Such disqualifying relationships include, but are not limited to:
(1) Being employed by the Bank in the current year or any of the past five years;
(2) Accepting any compensation from the Bank other than compensation for service as a board director;
(3) Serving or having served in any of the past five years as a consultant, advisor, promoter, underwriter, or legal counsel of or to the Bank; or
(4) Being an immediate family member of an individual who is, or has been in any of the past five years, employed by the Bank as an executive officer.
(1) The audit committee of each Bank shall adopt, and the Bank's board of directors shall approve, a formal written charter that specifies the scope of the audit committee's powers and responsibilities, as well as the audit committee's structure, processes and membership requirements.
(2) The audit committee and the board of directors of each Bank shall:
(i) Review, assess the adequacy of and, where appropriate, amend the Bank's audit committee charter on an annual basis;
(ii) Amend the audit committee charter as appropriate; and
(iii) Re-adopt and re-approve, respectively, the Bank's audit committee charter not less often than every three years.
(3) Each Bank's audit committee charter shall:
(i) Provide that the audit committee has the responsibility to select, evaluate and, where appropriate, replace the internal auditor and that the internal auditor may be removed only with the approval of the audit committee;
(ii) Provide that the internal auditor shall report directly to the audit committee on substantive matters and that the internal auditor is ultimately accountable to the audit committee and board of directors; and
(iii) Provide that both the internal auditor and the external auditor shall have unrestricted access to the audit committee without the need for any prior management knowledge or approval.
(e)Duties. Each Bank's audit committee shall have the duty to:
(1) Direct senior management to maintain the reliability and integrity of the accounting policies and financial reporting and disclosure practices of the Bank;
(2) Review the basis for the Bank's financial statements and the external auditor's opinion rendered with respect to such financial statements (including the nature and extent of any significant changes in accounting principles or the application therein) and ensure that policies are in place that are reasonably designed to achieve disclosure and transparency regarding the Bank's true financial performance and governance practices;
(3) Oversee the internal audit function by:
(i) Reviewing the scope of audit services required, significant accounting policies, significant risks and exposures, audit activities and audit findings;
(ii) Assessing the performance and determining the compensation of the internal auditor; and
(iii) Reviewing and approving the internal auditor's work plan;
(4) Oversee the external audit function by:
(i) Approving the external auditor's annual engagement letter;
(ii) Reviewing the performance of the external auditor; and
(iii) Making recommendations to the Bank's board of directors regarding the appointment, renewal, or termination of the external auditor;
(5) Provide an independent, direct channel of communication between the Bank's board of directors and the internal and external auditors;
(6) Conduct or authorize investigations into any matters within the audit committee's scope of responsibilities;
(7) Ensure that senior management has established and is maintaining an adequate internal control system within the Bank by:
(i) Reviewing the Bank's internal control system and the resolution of identified material weaknesses and reportable conditions in the internal control system, including the prevention or detection of management override or compromise of the internal control system; and
(ii) Reviewing the programs and policies of the Bank designed to ensure compliance with applicable laws, regulations and policies and monitoring the results of these compliance efforts;
(8) Review the policies and procedures established by senior management to assess and monitor implementation of the Bank's strategic business plan and the operating goals and objectives contained therein; and
(9) Report periodically its findings to the Bank's board of directors.
(f)Meetings. The audit committee shall prepare written minutes of each audit committee meeting.