Evaluation Report 2023-FMIC-B-005: Risks Associated With Lending Facility Contracts (April 17, 2023)
Summary
Evaluation report 2023-FMIC-B-005, dated April 17, 2023, on vendor selection and management for the lending facilities operated by the Federal Reserve Bank of New York (FRB New York). For the 10 contracts directly negotiated with 5 vendors, the report states that FRB New York generally followed established vendor selection processes. It also states that FRB New York can clarify those processes, because its Acquisition Policy excludes lending facility acquisitions and gives no rationale for the exclusion. The report contains no recommendations. Its scope runs from March 2020 through September 2021.
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“Evaluation Report 2023-FMIC-B-005: Risks Associated With Lending Facility Contracts (April 17, 2023).”
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Evaluation Report
2023-FMIC-B-005
April 17, 2023
Board of Governors of the Federal Reserve System
Following Established Processes Helped
FRB New York and the Board Reduce Risks
Associated With Lending Facility Contracts
2023-FMIC-B-005 1 of 23
Executive Summary, 2023-FMIC-B-005, April 17, 2023
Following Established Processes Helped FRB New York and the Board
Reduce Risks Associated With Lending Facility Contracts
Findings Purpose
For the 10 contracts related to the emergency lending facilities established in The objective of our evaluation was
response to the COVID-19 pandemic that were directly negotiated with 5 vendors, to assess the Federal Reserve
the Federal Reserve Bank of New York (FRB New York) generally followed System’s vendor selection and
established vendor selection processes, and the Board of Governors of the Federal management processes related to
lending facilities operated by FRB
Reserve System’s Division of Reserve Bank Operations and Payment Systems New York. The scope of our
(RBOPS) provided oversight. Following established vendor selection processes evaluation included FRB New York’s
helped FRB New York reduce risks by fostering consistency and transparency in its vendor selection and management
vendor selection decisions and mitigating conflicts of interest arising from processes from March 2020 through
potential employee- and institutional-vendor relationships. In addition, for the September 2021 and RBOPS’s
17 contracts with the 8 vendors that supported the operations of these lending associated oversight activities. For
facilities, FRB New York generally followed established vendor management vendor selection testing, we
processes by confirming that it received the expected services and that associated included the 10 directly negotiated
contracts. For vendor management
risks and conflicts of interest were appropriately managed throughout the
testing, we included the 17 contracts
duration of the contracts. RBOPS provided oversight of FRB New York’s vendor
that supported the operations of the
management processes as well. lending facilities.
Although FRB New York generally followed established processes, it can clarify
vendor selection processes for lending facility acquisitions. Specifically, FRB New
Background
York excludes lending facility acquisitions from its Acquisition Policy, and that The COVID-19 pandemic disrupted
economic activity in the United
policy does not include a rationale for the exclusion. An FRB New York official
States and heightened the need for
acknowledged that the policy is not clear about whether vendor selection businesses and government
processes are applicable to lending facility acquisitions. Also, FRB New York has institutions to obtain credit to
not updated its policy to incorporate lessons learned related to maximizing the sustain operations. Under section
use of competitive contracts; rather, it is incorporating those lessons learned into 13(3) of the Federal Reserve Act and
facility-specific reference guides. Clarifying vendor selection processes for lending with approval of the U.S. treasury
facility acquisitions and incorporating lessons learned into policy or guidance can secretary, the Board authorized
help reduce risks associated with lending facility contracts, should future facilities 13 emergency lending programs to
be needed. support state and local governments
and businesses of all sizes. FRB New
York used vendors to support 5 of
Recommendations the 6 lending facilities it operated;
Our report does not contain any recommendations because FRB New York some of these vendors were
updated its Acquisition Policy to clarify that the policy applies to emergency selected through a noncompetitive
lending facility acquisitions. In addition, FRB New York documented its lessons procurement process.
learned from the COVID-19 pandemic response in facility-specific reference
guides. When our reports do not contain recommendations, providing an official
response is optional. We received an official response from the Board conveying
the Board’s appreciation for our conclusions that RBOPS’s oversight contributed to
reducing risks associated with the lending facility contracts. FRB New York chose
not to provide an official comment, but FRB New York management stated during
a March 6, 2023, meeting that they concur with the content of the report.
2023-FMIC-B-005 2 of 23
Recommendations, 2023-FMIC-B-005, April 17, 2023
Following Established Processes Helped FRB New York and the Board
Reduce Risks Associated With Lending Facility Contracts
Finding 1: Following Established Processes Helped FRB New York and RBOPS Reduce Risks Associated
With the Lending Facility Contracts
Number Recommendation Responsible office
No recommendations.
Finding 2: FRB New York Can Clarify Vendor Selection Processes for Lending Facility Acquisitions
Number Recommendation Responsible office
No recommendations.
2023-FMIC-B-005 3 of 23
MEMORANDUM
DATE: April 17, 2023
TO: Matthew J. Eichner
Director, Division of Reserve Bank Operations and Payment Systems
Board of Governors of the Federal Reserve System
Sushmita Shukla
First Vice President
Federal Reserve Bank of New York
FROM: Cynthia Gray
Deputy Associate Inspector General for Audits and Evaluations
SUBJECT: OIG Report 2023-FMIC-B-005: Following Established Processes Helped FRB New York and
the Board Reduce Risks Associated With Lending Facility Contracts
We have completed our report on the subject evaluation. We conducted this evaluation to assess the
Federal Reserve System’s vendor selection and management processes related to the Federal Reserve
Bank of New York’s (FRB New York) lending facilities.
We provided the Board of Governors of the Federal Reserve System and FRB New York with a draft of our
report for review and comment. Official comments were not required because our report did not contain
recommendations. In its written response, the Board appreciated our conclusions that the Division of
Reserve Bank Operations and Payment Systems’ oversight contributed to reducing risks associated with
the lending facility contracts and noted that the division remains committed to providing effective
oversight of the emergency lending facilities. We have included the response as appendix C to our report.
FRB New York chose not to provide an official response but verbally concurred with the report and
thanked the OIG for the collaborative effort.
We appreciate the cooperation that we received from the Board and FRB New York during our
evaluation. Please contact me if you would like to discuss this report or any related issues.
cc: Andreas Lehnert, Director, Division of Financial Stability, Board
Mark E. Van Der Weide, General Counsel, Board
Jeff Walker, Associate Director, Division of Reserve Bank Operations and Payment Systems, Board
2023-FMIC-B-005 4 of 23
Jason Hinkle, Deputy Associate Director, Division of Reserve Bank Operations and Payment
Systems, Board
Casey Clark, Deputy Associate Director, Division of Reserve Bank Operations and Payment Systems,
Board
Helen Mucciolo, Chief Financial Officer, Corporate Group, FRB New York
Katherine Landy, Acting Deputy General Counsel, FRB New York
Jennifer Wolgemuth, Acting Deputy General Counsel, FRB New York
Michelle Neal, Head of Markets, Markets, FRB New York
Raymond Testa, Chief Operating Officer, Markets, FRB New York
Susan McLaughlin, Policy & Market Monitoring Head, FRB New York
Andrew Danzig, Policy & Market Monitoring Advisor, FRB New York
Alex Leonard, Assistant General Counsel, FRB New York
Meghan McCurdy, Assistant General Counsel, FRB New York
Clive W. Blackwood, General Auditor, Audit, FRB New York
Isaac Smith, Jr., Audit Leader, Audit, FRB New York
2023-FMIC-B-005 5 of 23
Contents
Introduction 7
Objective 7
Background 7
Lending Facilities Operated by FRB New York 7
FRB New York’s Vendor Selection and Management Processes 8
RBOPS Oversight of Lending Facilities Operated by FRB New York 9
Finding 1: Following Established Processes Helped FRB New York and RBOPS Reduce
Risks Associated With the Lending Facility Contracts 10
FRB New York Generally Followed Established Vendor Selection Processes, and RBOPS
Provided Oversight 10
FRB New York Generally Followed Established Vendor Management Processes, and RBOPS
Provided Oversight 12
Management Response 13
Finding 2: FRB New York Can Clarify Vendor Selection Processes for Lending Facility
Acquisitions 14
FRB New York Does Not Clearly Define Vendor Selection Processes for Lending Facility
Acquisitions 14
Management Actions Taken During the Evaluation 16
Management Response 16
Appendix A: Scope and Methodology 17
Appendix B: Vendors and Contracts Included in Our Scope 19
Appendix C: Management Response 21
Abbreviations 22
2023-FMIC-B-005 6 of 23
Introduction
Objective
The COVID-19 pandemic disrupted economic activity in the United States, which affected many sectors of
the financial system. This economic disruption heightened the need for businesses and government
institutions to obtain credit to manage cash flows and sustain operations until economic conditions
normalized. In response, under section 13(3) of the Federal Reserve Act and with approval of the
U.S. treasury secretary, the Board of Governors of the Federal Reserve System authorized 13 emergency
lending programs, known as emergency lending facilities, to support state and local governments and
businesses of all sizes. The Federal Reserve Bank of New York (FRB New York) operated 6 emergency
lending facilities, 5 of which were supported by multiple vendors, and awarded some of its related
contracts noncompetitively.
The objective of this evaluation was to assess the Federal Reserve System’s vendor selection and
management processes related to the 6 lending facilities operated by FRB New York. The scope of our
evaluation included FRB New York’s vendor selection and vendor management processes from
March 2020 through September 2021 and the Board Division of Reserve Bank Operations and Payment
Systems’ (RBOPS) oversight of those activities. Our scope included 17 FRB New York contracts that related
to the operations of the lending facilities, 10 of which were directly negotiated.1 For vendor selection
testing, we focused on those 10 contracts with 5 vendors; for vendor management testing, we focused on
all 17 contracts with the 8 vendors included in our scope. For details on our scope and methodology, see
appendix A. Appendix B contains a list of the vendors included in our scope.
Background
Lending Facilities Operated by FRB New York
Section 13(3) of the Federal Reserve Act permits the Board, in “unusual and exigent circumstances” and
with approval of the U.S. treasury secretary, to authorize the Federal Reserve Banks to extend credit
through any program or facility with broad-based eligibility. In addition, the Coronavirus Aid, Relief, and
Economic Security (CARES) Act authorized, among other things, the U.S. Department of the Treasury’s
investment in certain lending facilities established by the Board. In response to the economic disruption
caused by the COVID-19 pandemic, the Board established 13 lending facilities to provide support for the
1 Awarding those 17 contracts resulted in fees of approximately $21.4 million as of December 31, 2022.
2023-FMIC-B-005 7 of 23
flow of credit to businesses. FRB New York operated 6 of the 13 lending facilities.2 The following 5 lending
facilities operated by FRB New York leveraged vendor support:3
1. Commercial Paper Funding Facility (CPFF)
2. Municipal Liquidity Fund (MLF)
3. Primary Market Corporate Credit Facility (PMCCF)
4. Secondary Market Corporate Credit Facility (SMCCF)
5. Term Asset-Backed Securities Loan Facility (TALF)
FRB New York’s Vendor Selection and Management Processes
FRB New York’s Acquisition Policy governs the acquisition of goods and services, ensuring that goods and
services procured meet FRB New York’s needs at the most favorable terms available. While the
Acquisition Policy excludes lending facilities, FRB New York voluntarily elected to follow the policy when
selecting vendors for the facilities. The policy includes vendor selection processes related to engaging in
noncompetitive (directly negotiated) procurement processes; assessing reputational, credit, and other
risks associated with vendors; reviewing the reasonableness of vendor prices; and identifying FRB New
York employees’ conflicts of interest with potential vendors.
Although the Acquisition Policy excludes lending facility acquisitions, FRB New York has several other
policies related to vendor selection and management processes that apply to lending facility acquisitions.
Specifically, FRB New York’s Vendor Management Policy establishes standards to manage vendor
performance and compliance with the terms and conditions of contracts. In addition, this policy includes
minimum requirements for managing critically important vendors (CIVs). FRB New York defines a CIV as a
vendor that would create significant financial, operational, reputational, or other risks if it fails to fulfill
product, service, or service-level requirements. FRB New York also has an Institutional Conflicts of Interest
Policy, which includes processes for managing actual and potential institutional conflicts of interest that
arise from relationships with vendors, and a Risk Event Management Policy, which establishes processes
to effectively address, communicate, and learn from risk events that may occur throughout the duration
of lending facilities.4 Further, supplemental guidance and considerations for FRB New York’s vendor
management practices are included in the Reserve Bank’s Vendor Risk Management Framework, which
includes practices to apply the Reserve Bank’s vendor management standards, tools, and controls using a
risk-based approach.
2 Four of FRB New York’s lending facilities received equity investments from the U.S. Department of the Treasury pursuant to the
CARES Act: the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Municipal Liquidity
Fund, and the Term Asset-Backed Securities Loan Facility.
3 FRB New York did not award any vendor contracts for its sixth lending facility, the Primary Dealer Credit Facility (PDCF). The
Board established several other lending facilities, namely, the Money Market Mutual Fund Liquidity Facility; the Paycheck
Protection Program Liquidity Facility; and the Main Street Lending Program, which itself comprised five lending facilities. Because
these lending facilities were administered by other Reserve Banks, they were outside the scope of our evaluation.
4 According to FRB New York’s Risk Event Management Policy, a risk event is an occurrence arising from a failure in the design or
operation of the system of controls or the absence of controls that leads to an actual or potential adverse effect.
2023-FMIC-B-005 8 of 23
RBOPS Oversight of Lending Facilities Operated by FRB New
York
The Federal Reserve Act authorizes the Board to oversee the Reserve Banks. Within the Board, RBOPS
assesses the Reserve Banks’ strategies, projects, policy compliance, and ongoing operations and engages
with Reserve Bank leadership to ensure efficient operations across the Reserve Banks.
To ensure that the Reserve Banks implemented and operated the lending facilities in a manner that
demonstrated appropriate accountability, RBOPS developed a three-phase Credit & Liquidity Programs
Oversight Framework:
• Phase 1: Provide assistance in quickly setting up the various lending facilities, including liaising
with credit program working groups.
• Phase 2: Review the established governance structures, process workflows, and internal control
design to assist in identifying any enhancements.
• Phase 3: Continue overseeing the lending facilities, focusing on identified risks.
In an April 17, 2020, memorandum, RBOPS communicated its oversight framework to FRB New York and
stated that it would work closely with the Reserve Bank during the establishment and throughout the
duration of each lending facility. RBOPS’s oversight framework also includes expectations related to FRB
New York’s use of vendors, such as receiving advance notice of the intent to establish vendor
relationships and timely notice of risk incidents related to the lending facilities.
2023-FMIC-B-005 9 of 23
Finding 1: Following Established Processes
Helped FRB New York and RBOPS Reduce
Risks Associated With the Lending Facility
Contracts
FRB New York generally followed established processes when selecting and managing vendors for its
lending facilities. In addition, RBOPS used its oversight framework to ensure that FRB New York followed
its established vendor selection and management processes. Through this approach, FRB New York and
RBOPS reduced risks associated with the lending facility contracts by fostering consistency and
transparency in vendor selection decisions, confirming that the Reserve Bank received the expected
services, and mitigating conflicts of interest arising from potential employee- and institutional-vendor
relationships.
FRB New York Generally Followed Established
Vendor Selection Processes, and RBOPS Provided
Oversight
We found that FRB New York generally followed the vendor selection processes outlined in its Acquisition
Policy for the 10 contracts that were directly negotiated with 5 vendors.5 FRB New York did not perform
certain vendor selection processes on 2 of the 10 contracts that it deemed to have low costs or were
limited in duration.6 In addition, RBOPS followed its three-phase oversight framework to oversee FRB
New York’s vendor selection processes. Specifically, FRB New York generally performed, and RBOPS
oversaw, the following vendor selection processes for the 10 directly negotiated contracts:
• Documented justifications for directly negotiated contracts. FRB New York documented its
justifications for directly negotiated contracts and obtained the approval of the first vice
president of FRB New York for the justifications. RBOPS reviewed FRB New York’s justifications
and did not object to the Reserve Bank initiating its directly negotiated contracts.
• Limited terms of contracts. To allow for subsequent competitive bidding of contracts, FRB New
York limited the initial term of the contracts to a maximum of 4 months; thereafter, the contracts
became month-to-month agreements. In addition, FRB New York included termination provisions
5 The scope of our evaluation included 17 FRB New York contracts; however, we focused our vendor selection testing on the
10 contracts that were directly negotiated.
6 For example, FRB New York did not perform a price reasonableness review on two contracts because of the low cost of those
contracts: One had incurred expenses of $420,667 as of September 30, 2022, and the total cost of the other was $28,000.
Further, FRB New York did not include termination provisions in one contract because the entire length of that contract was
limited to about 1 month.
2023-FMIC-B-005 10 of 23
in the contracts that could be exercised with 30 days’ notice by either party. RBOPS confirmed
that the directly negotiated contracts included limited initial terms of 4 months or less.
• Assessed the risks associated with vendors. FRB New York conducted vendor risk assessments
before awarding the contracts. These assessments included (1) credit reviews to assess the risk of
the vendor becoming insolvent and (2) integrity program screenings to determine whether the
vendor possessed the skill, ability, financial resources, and integrity necessary for the faithful
performance of an agreement. RBOPS did not identify any concerns with vendor risk
assessments.
• Reviewed the price reasonableness of contracts. Although the Acquisition Policy does not require
price reasonableness determinations for directly negotiated contracts, FRB New York assessed
the price reasonableness of the lending facility contracts during the negotiation process. For
example, FRB New York compared vendors’ current fees with industry benchmarks and fees
charged during the 2007–2009 financial crisis, as applicable. RBOPS did not identify any concerns
with vendor fees in its review of FRB New York’s fee reasonableness memorandums.
In addition, FRB New York conducted multiple assessments to evaluate the potential for conflicts of
interest that may arise out of potential employee- and institutional-vendor relationships, and RBOPS
followed its three-phase oversight framework for FRB New York’s conflict-of-interest processes.
Specifically, FRB New York conducted, and RBOPS oversaw, the following conflict-of-interest processes:
• Assessed the potential for employee conflicts of interest. In accordance with the Acquisition
Policy, 26 of the 30 employees in our sample completed conflict-of-interest certifications for the
acquisitions in which they participated.7 The remaining 4 employees were not required to
complete the certifications because they performed support functions. RBOPS did not identify
any concerns during its review of FRB New York’s policies related to employees’ conflicts of
interest.
• Assessed the potential for institutional conflicts of interest. As required by the Institutional
Conflicts of Interest Policy, FRB New York performed assessments to determine whether the
5 vendors for the 10 directly negotiated contracts would, among other things, have access to
sensitive information, benefit from sharing information with third parties, or provide services
related to financial stability or monetary policy work. As a result of the assessments, FRB New
York included conflict-of-interest provisions in the 10 directly negotiated contracts. For example,
some provisions required that vendors maintain conflict-of-interest policies and procedures,
safeguard and protect confidential information, and use designated employees for emergency
lending facilities to create information barriers. We also confirmed that FRB New York
coordinated with its relevant offices, including the Ethics Office, Legal, Procurement Value
Management, and the Markets Group, to develop the conflict-of-interest provisions included in
1 investment management services contract. Further, we confirmed that the conflict-of-interest
provisions in that contract were consistent with the conflict-of-interest provisions in the 2 other
directly negotiated contracts for similar services. RBOPS reviewed lending facility contracts and
determined that conflict-of-interest provisions were included to promote adherence to Reserve
Bank and System ethics rules.
7 FRB New York’s Acquisition Policy requires Reserve Bank employees who participate in acquisitions with an anticipated total
value of $100,000 or greater to certify that they do not have a conflict of interest with the vendor.
2023-FMIC-B-005 11 of 23
FRB New York’s decision to follow established vendor selection processes, even though the Acquisition
Policy excludes lending facility acquisitions, reduced risks associated with the lending facility contracts by
ensuring that selected vendors met the Reserve Bank’s needs at favorable terms and fostered consistency
and transparency in its vendor selection decisions. Additionally, FRB New York protected itself and its
employees against conflicts of interest arising from potential relationships with vendors. Further, RBOPS’s
oversight ensured that FRB New York followed established vendor selection processes during the
establishment of the lending facilities.
FRB New York Generally Followed Established
Vendor Management Processes, and RBOPS
Provided Oversight
FRB New York generally followed its established vendor management processes for the 8 vendors
associated with the 17 contracts in our scope. In addition, RBOPS followed its three-phase oversight
framework to oversee FRB New York’s vendor management processes. Specifically, FRB New York
conducted, and RBOPS oversaw, the following vendor management processes:
• Developed vendor management plans. In accordance with the Vendor Management Policy and
Vendor Risk Management Framework, FRB New York performed vendor tier assessments by
grouping vendors based on risk levels to determine which vendors were CIVs.8 For the four CIVs
identified, FRB New York completed onboarding risk assessments and developed management
plans that included a performance monitoring plan, a communication plan, a vendor substitution
plan, and a termination and offboarding plan. These plans helped FRB New York manage vendor
relationships, monitor vendor performance through monthly and quarterly scorecards, and
minimize a service disruption in the event a vendor was replaced. RBOPS did not identify any
concerns with FRB New York’s activities outlined in the vendor management plans, including
vendor scorecards, or with vendor offboarding activities.
• Followed risk event procedures. FRB New York did not identify any significant risk events
associated with the contracts in our scope. For one moderate risk event that had the highest
potential and actual impact rating and that FRB New York identified as having a potential minor
effect on its financial statements, we confirmed that FRB New York identified, escalated,
reported, and closed this risk event in accordance with its Risk Event Management Policy. RBOPS
inquired about all of FRB New York’s risk events involving vendors and confirmed that
appropriate actions were taken.
• Managed conflicts of interest. Although not required by policy, FRB New York hired a third party
to evaluate vendors’ conflict-of-interest policies, procedures, and practices. The reviews
concluded that vendors maintained policies and procedures that were reasonably designed to
ensure compliance with the contract requirements related to personal trading, safeguarding
nonpublic and confidential information, and mitigating conflicts of interest. FRB New York
followed up with vendors on the third-party review results by obtaining responses or
documentation related to actions taken to address observations. RBOPS reviewed and concurred
8 A vendor tier assessment provides the recommended level of risk mitigation and contingency planning, performance tracking,
and relationship management touch points based on the vendor’s risk level.
2023-FMIC-B-005 12 of 23
with the third party’s review of the vendors’ policies and procedures related to personal trading,
safeguarding nonpublic and confidential information, and mitigating conflicts of interest.
By following its established vendor management processes, FRB New York helped to ensure that
expected services were received and that associated risks and conflicts of interest were appropriately
managed throughout the duration of the contracts. Further, RBOPS’s oversight ensured that FRB New
York followed established vendor management processes when operating the lending facilities.
Management Response
Since our report does not contain recommendations, an official response was not required. We received
an official response from the RBOPS director conveying his appreciation for our conclusions that RBOPS’s
oversight contributed to reducing risks associated with the lending facility contracts, and noted that
RBOPS remains committed to providing effective oversight of the emergency lending facilities over their
remaining life. FRB New York management chose not to provide an official comment but stated during a
March 6, 2023, meeting that they concur with the content of the report and thanked the OIG for the
collaborative effort.
2023-FMIC-B-005 13 of 23
Finding 2: FRB New York Can Clarify
Vendor Selection Processes for Lending
Facility Acquisitions
FRB New York does not clearly define its vendor selection processes for lending facility acquisitions; these
acquisitions are specifically excluded from FRB New York’s Acquisition Policy. Despite this exclusion, FRB
New York generally complied with the policy’s requirements as a matter of due diligence. Further, FRB
New York, in coordination with RBOPS, identified vendor selection lessons learned to maximize the use of
competitive contracts but has not incorporated these lessons into policy. The U.S. Government
Accountability Office’s (GAO) Standards for Internal Control in the Federal Government highlights the
importance of establishing and updating policies. FRB New York’s Acquisition Policy does not include a
rationale for excluding lending facilities from the policy. Further, a Reserve Bank official stated that the
policy is not clear about whether vendor selection processes are applicable to lending facility acquisitions
and that lessons learned are being incorporated into facility-specific reference guides. Clarifying the
vendor selection processes applicable to lending facility acquisitions and incorporating lessons learned
into policy or guidance can reduce risks associated with lending facility contracts should future facilities
be needed.
FRB New York Does Not Clearly Define Vendor
Selection Processes for Lending Facility
Acquisitions
FRB New York does not clearly define vendor selection processes for lending facility acquisitions.
Specifically, FRB New York’s Acquisition Policy, which governs vendor selection activities, excludes lending
facility acquisition from its requirements. Nevertheless, as noted in finding 1, FRB New York generally
followed the Acquisition Policy requirements for these acquisitions during the COVID-19 pandemic
response.
In addition, FRB New York, in coordination with RBOPS, identified and documented lessons learned from
its COVID-19 pandemic response. Specifically, we found that during the establishment of the emergency
lending facilities, FRB New York awarded some vendor contracts through direct negotiations and publicly
announced plans to recompete those contracts at a later date. Since awarding the 10 directly negotiated
contracts, FRB New York competitively recompeted one part of a contract and brought services provided
2023-FMIC-B-005 14 of 23
under another contract in-house; the remaining
Lessons Learned From the COVID-19 Pandemic
8 directly negotiated contracts were not
Response Related to Vendor Selection
recompeted.9 Although FRB New York and RBOPS
identified and documented some lessons learned In July 2021, FRB New York, in consultation with
related to vendor selection (see text box), FRB New RBOPS, completed a lessons-learned exercise and
York has not updated its policy. noted that (1) FRB New York’s reliance on directly
negotiated contracts created reputational risk for
GAO’s Standards for Internal Control in the Federal the System, which created pressure to recompete
Government sets internal control standards for contracts, and (2) recompeting contracts
midprogram created operational risk and diverted
federal entities and outlines the importance of
some business resources from program
establishing and maintaining effective internal management.
control activities through policy.10 Specifically,
process-oriented policies should be documented To improve its operational readiness, FRB New York
and timely updated to ensure that processes are identified that it could better break down services
designed and implemented appropriately. Further, and only use direct negotiations for the services
to address lessons learned from the 2007–2009 most immediately needed. FRB New York also
noted that it could avoid recompeting contracts
financial crisis response, FRB New York updated its
midprogram to reduce risks and costs associated
Acquisition Policy, to include (1) limiting the duration with replacing vendors.
of directly negotiated contracts to the period in
which circumstances of unusual and compelling urgency exist and (2) including termination provisions in
directly negotiated contracts. Similar lessons learned were also incorporated into acquisition guidance
applicable to all Reserve Banks.
The Acquisition Policy does not include a rationale for excluding lending facilities from the policy.
Nonetheless, FRB New York officials elected to follow the policy as a matter of due diligence because they
anticipated that the lending facilities’ contracts would face a high level of scrutiny from the public and
oversight bodies, similar to the level of scrutiny for the acquisitions made in response to the
2007–2009 financial crisis. FRB New York officials acknowledged that the policy is not clear about
whether vendor selection processes are applicable to lending facility acquisitions. In addition, an FRB New
York official stated that lessons learned from the COVID-19 pandemic response related to vendor
selection (see text box) are being incorporated into facility-specific reference guides.
As stated in finding 1, following established vendor selection processes during the COVID-19 pandemic
response helped FRB New York reduce risks associated with the lending facility contracts by ensuring that
(1) selected vendors met the Reserve Bank’s needs at favorable terms, (2) vendor selection decisions
were consistent and transparent, and (3) FRB New York and its employees were protected against
conflicts of interest arising from potential employee- and institutional-vendor relationships. Clarifying
vendor selection processes in policy or guidance for lending facility acquisitions can help reduce risks
associated with the lending facility contracts, should future facilities be needed. In addition, including the
vendor selection lessons learned from the COVID-19 pandemic response in policy or guidance should
9 FRB New York did not recompete the remaining 8 contracts because of (1) the operational risks to the lending facilities by
changing from vendors that had already developed facility-specific business processes, (2) the high costs and length of time
associated with switching vendors, and (3) the winding down of operations for some of the lending facilities.
10 The U.S. Government Accountability Office, Standards for Internal Control in the Federal Government, September 2014.
2023-FMIC-B-005 15 of 23
result in FRB New York relying less on directly negotiated contracts during the establishment of future
lending facilities and further reduce reputational risk to the System.
Management Actions Taken During the Evaluation
In January 2023, after we had presented our draft findings to FRB New York and RBOPS officials, FRB New
York’s Corporate Group updated its Acquisition Policy to clarify that the policy applies to emergency
lending facility acquisitions and to encourage maximum use of competitive contracts. FRB New York also
documented its lessons learned—including ways to increase the use of competitive contracts—in facility-
specific reference guides. Based on our review of FRB New York’s actions and its related documentation,
we do not have a recommendation for this finding.
Management Response
Since our report does not contain recommendations, an official response was not required. We received
an official response from the RBOPS director conveying his appreciation for our conclusions that RBOPS’s
oversight contributed to reducing risks associated with the lending facility contracts, and noted that
RBOPS remains committed to providing effective oversight of the emergency lending facilities over their
remaining life. FRB New York management chose not to provide an official comment but stated during a
March 6, 2023, meeting that they concur with the content of the report and thanked the OIG for the
collaborative effort.
2023-FMIC-B-005 16 of 23
Appendix A: Scope and Methodology
Our objective was to assess the System’s vendor selection and management processes related to lending
facilities operated by FRB New York. The scope of our evaluation included FRB New York’s vendor
selection and vendor management processes from March 2020 through September 2021 and RBOPS’s
associated oversight activities, which occurred from March 2020 through December 2021.11 We reviewed
FRB New York’s processes and RBOPS’s oversight activities related to the 5 lending facilities operated by
the Reserve Bank that leveraged vendor support.12 Our scope included 17 FRB New York contracts that
related to the operations of the lending facilities but did not include contracts related to audit,
compliance, consulting, or legal services. The 17 contracts included 10 directly negotiated contracts. For
vendor selection testing, we focused on these 10 contracts and the associated 5 vendors; for vendor
management testing, we focused on all 17 contracts and the 8 vendors included in our scope. FRB New
York awarded those 17 contracts resulting in fees of approximately $21.4 million as of December 31,
2022. For a list of the vendors included in our scope, see appendix B.
We assessed the FRB New York’s vendor selection and management processes for the COVID-19 lending
facilities because the Board authorized the lending facilities and reports to Congress and the public in
accordance with sections 11(s) and 13(3) of the Federal Reserve Act as well as the CARES Act; the Board
authorized FRB New York to establish and operate the lending facilities. These facilities are subject to the
limitations, restrictions, and regulations of the Board.
To accomplish our objective, we reviewed applicable laws, policies, guidance, and RBOPS’s oversight
framework. We also interviewed various Board officials and FRB New York officials.
To assess FRB New York’s vendor selection processes and RBOPS’s oversight of these processes, we
tested the 10 directly negotiated contracts and the associated 5 vendors in our scope. Our testing
included reviewing FRB New York’s processes and RBOPS’s oversight of justifications and approvals for
noncompetitively bid contracts, limitations of contract terms, vendor credit reviews, integrity program
screenings, and price reasonableness assessments.
To assess FRB New York’s employee conflict-of-interest processes and RBOPS’s oversight of these
processes, we judgmentally selected a nonstatistical sample of 30 employees, composed of FRB New York
employees, contingent workers, and other System employees who worked on one or more of the
acquisition processes for the 17 contracts included in our scope. To make our sample selection, we used
training and conflict-of-interest certification lists manually created by FRB New York with a population of
230 employees and focused our sample selection on certain factors, such as employee type and the
number of acquisitions employees worked on. For each sample selected, we tested (1) the employees’
11 Our scope period for RBOPS’s oversight activities was 3 months longer than the scope for FRB New York’s vendor selection and
management activities because RBOPS issues interim reports about every 6 months, and the report that included FRB New York’s
activities through September 2021 covered FRB New York’s activities through December 2021.
12 The PDCF did not have any vendor contracts related to the COVID-19 pandemic response and was not included for vendor
selection and vendor management testing; however, we considered the PDCF in our overall assessment of how FRB New York
and RBOPS implemented lessons learned from the 2007–2009 financial crisis because the PDCF created an operational readiness
document after that crisis.
2023-FMIC-B-005 17 of 23
completion of conflict-of-interest training, (2) employees’ certification that they did not have conflicts of
interest with any vendor and that they understood the “Gifts, Meals and Entertainment Rule” contained
in FRB New York’s Code of Conduct, and (3) FRB New York’s resolution of any identified conflicts of
interest. Further, we confirmed RBOPS’s review of FRB New York’s conflict-of-interest policies for
employees.
To assess FRB New York’s institutional conflict-of-interest processes and RBOPS’s oversight, we
performed a walk-through of FRB New York’s process to develop conflict-of-interest contract provisions
and reviewed supporting documentation for one key contract—the BlackRock Financial Markets Advisory
contract with the SMCCF for investment management services. We selected this contract because of the
level of public scrutiny FRB New York faced for selecting BlackRock as a vendor. We also tested whether
conflict-of-interest provisions in the BlackRock contract for the SMCCF were consistent with two other
directly negotiated contracts for investment management services: (1) Pacific Investment Management
Company LLC’s Investment Management and Advisory Agreement with the CPFF and (2) BlackRock
Financial Markets Advisory’s Investment Management and Advisory Agreement with the PMCCF. Further,
we confirmed that RBOPS reviewed conflict-of-interest contract provisions.
To assess FRB New York’s vendor management processes and RBOPS’s oversight, we tested all 8 vendors
and the related 17 contracts in our scope. Specifically, for all 8 vendors and the related 17 contracts, we
reviewed FRB New York’s third-party report on vendor conflicts of interest. In addition, for the 4 CIVs, we
reviewed FRB New York’s vendor management plans and we tested whether FRB New York managed
vendors in accordance with its vendor management plans. For the 10 directly negotiated contracts with
5 vendors in our scope, we also reviewed vendor management onboarding risk assessments and risk
event contract provisions. Further, we confirmed RBOPS’s review of FRB New York’s vendor management
activities, including those related to conflicts of interest.
To assess FRB New York’s risk event escalation procedures and RBOPS’s oversight, we performed a walk-
through of FRB New York’s risk event management system to understand the processes and procedures
for documenting and escalating risk events. A system-generated report of 42 facility-related risk events
from March 2020 through September 2021 included none that had a significant risk event rating.
Therefore, we judgmentally selected 1 risk event from the report with the highest potential and actual
impact rating to test FRB New York’s risk escalation procedures. We selected a TALF-related risk event
with a moderate potential impact rating because FRB New York identified it as having a minor effect on
the Reserve Bank’s financial statements; we reviewed supporting documentation to determine whether
FRB New York analyzed and reported the risk event in accordance with FRB New York’s Risk Event
Management Policy and RBOPS’s expectations.
Further, we conducted interviews with various FRB New York and RBOPS officials and reviewed available
documentation related to lessons learned regarding FRB New York’s vendor selection and management
processes as well as RBOPS’s related oversight. Specifically, we sought to understand how lessons learned
from the 2007–2009 financial crisis response were implemented during the COVID-19 pandemic response
and whether FRB New York and RBOPS identified and documented actions that would address lessons
learned identified from the COVID-19 pandemic response.
We conducted this evaluation from September 2021 to February 2023. This evaluation was conducted in
accordance with the Council of the Inspectors General on Integrity and Efficiency’s Quality Standards for
Inspection and Evaluation.
2023-FMIC-B-005 18 of 23
Appendix B: Vendors and Contracts
Included in Our Scope
Our scope included 8 vendors and 17 contracts (see table).
Table. Vendors and Contracts Included in Scope
Vendor name and services Directly Effective Termination
Vendor CIV? Facility contracted negotiated? date date
State Street Yes CPFF State Street Bank & Trust Yes 04/06/2020 07/07/2021
Bank & Trust Company, administrative
Company services
CPFF State Street Bank & Trust Yes 04/06/2020 07/07/2021
Company, custodial services
PMCCF State Street Bank & Trust No 05/11/2020 12/16/2021
Company, custodial services
SMCCF State Street Bank & Trust No 05/11/2020 12/16/2021
Company, administrative and
custodial services
Bank of New Yes MLF BNY Mellon Capital Markets, Yes 05/26/2020 02/28/2021
York Mellon LLC, transaction/
Corp. settlement/underwriter/
bidding agent
MLF The Bank of New York No 05/26/2020 Ongoing
Mellon, administrative and
custodial services
MLF Mellon Investments No 05/26/2020 Ongoing
Corporation, investment
management and advisory
TALF The Bank of New York Yes 05/26/2020 Ongoing
Mellon, administrative and
custodial services
2023-FMIC-B-005 19 of 23
Vendor name and services Directly Effective Termination
Vendor CIV? Facility contracted negotiated? date date
Pacific Yes CPFF Pacific Investment Yes 04/06/2020 04/16/2021
Investment Management Company LLC,
Management investment management and
Company LLC advisory
TALF Pacific Investment Yes 05/21/2020 08/16/2021
Management Company LLC,
collateral monitoring
MLF Pacific Investment Yes 04/15/2020 05/06/2020
Management Company LLC,
pricing validation services
BlackRock Yes PMCCF BlackRock Financial Markets Yes 06/29/2020 02/05/2021
Financial Advisory, investment
Markets management
Advisory
SMCCF BlackRock Financial Markets Yes 05/11/2020 10/15/2021
Advisory, investment
management
BLX Group LLC No MLF BLX Group LLC, intake agent Yes 05/15/2020 Ongoing
Eaton Vance No MLF Eaton Vance Management, No 06/05/2020 Ongoing
Management credit risk services
PFM Financial No MLF PFM Financial Advisors LLC, No 04/22/2020 05/31/2020
Advisors LLC design services
Payden & No SMCCF Payden & Rygel, cash No 02/04/2021 11/29/2021
Rygel investment manager
Source: OIG compilation.
2023-FMIC-B-005 20 of 23
Appendix C: Management Response
2023-FMIC-B-005 21 of 23
Abbreviations
CARES Act Coronavirus Aid, Relief, and Economic Security Act
CIV critically important vendor
CPFF Commercial Paper Funding Facility
FRB New York Federal Reserve Bank of New York
GAO U.S. Government Accountability Office
MLF Municipal Liquidity Fund
PDCF Primary Dealer Credit Facility
PMCCF Primary Market Corporate Credit Facility
RBOPS Division of Reserve Bank Operations and Payment Systems
SMCCF Secondary Market Corporate Credit Facility
TALF Term Asset-Backed Securities Loan Facility
2023-FMIC-B-005 22 of 23
Report Contributors
Terese Blanchard, Project Lead
Jordan Keitelman, Senior Auditor
Alejandro Feliciano Morales, Auditor
Brian Maloney, Auditor
Katherine Medina, Auditor
Jennifer Venzor, Auditor
Benjamin Schmiedt, Audit Intern
Megan Taylor, OIG Manager, Financial Management and Internal Controls
Jackie Ogle, Senior OIG Manager for Financial Management and Internal Controls
Cynthia Gray, Deputy Associate Inspector General for Audits and Evaluations
Michael VanHuysen, Associate Inspector General for Audits and Evaluations
Contact Information
General Media and Congressional
Office of Inspector General OIG.Media@frb.gov
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Mail Center I-2322
Washington, DC 20551
Phone: 202-973-5000
Fax: 202-973-5044
OIG Hotline
Hotline OIG Hotline
Board of Governors of the Federal Reserve System
Report fraud, waste, and abuse. 20th Street and Constitution Avenue NW
Those suspecting possible Mail Center I-2322
Washington, DC 20551
wrongdoing may contact the
OIG Hotline by mail, Phone: 800-827-3340
web form, phone, or fax. Fax: 202-973-5044
2023-FMIC-B-005 23 of 23
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