[Federal Register Volume 62, Number 1 (Thursday, January 2, 1997)]
[Rules and Regulations]
[Pages 4-10]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-33329]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 932
[No. 96-97]
Selection and Compensation of Federal Home Loan Bank Employees
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending
the provisions of its regulations governing the selection and
compensation of employees of the Federal Home Loan Banks (Banks) in
order to streamline regulatory requirements and transfer specific
functions currently performed by the Finance Board to the board of
directors of each Bank. The final rule requires a Bank to obtain prior
Finance Board approval of the appointment of a new President, but
permits a Bank to reappoint an incumbent President without prior
Finance Board approval. The final rule also gives the Banks broad
authority to set Bank Presidents' salaries within established caps and
authorizes the Banks to make incentive payments to their Presidents
based on each Bank's performance and on fulfillment of its mission. The
devolution of authority to the Banks is consistent with the goals of
the Regulatory Reinvention Initiative of the National Performance
Review.
EFFECTIVE DATE: January 2, 1997.
FOR FURTHER INFORMATION CONTACT: Barbara Fisher, Director, Office of
Resource Management, (202) 408-2586; or David Guy, Associate General
Counsel, (202) 408-2536, Federal Housing Finance Board, 1777 F Street,
NW., Washington, DC 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
A. Selection of Employees
Section 12(a) of the Federal Home Loan Bank Act (Bank Act) provides
that each Bank may select, employ, and fix the compensation of Bank
employees, subject to the approval of the Finance Board. See 12 U.S.C.
1432(a). Section 932.40 of the Finance Board's regulations, which
governs the selection of Bank employees, provides that officers, legal
counsel, and employees of a Bank shall be elected or appointed in
accordance with the Bank's bylaws. See 12 CFR 932.40. Each Bank's
bylaws are subject to the approval of the Finance Board. See 12 U.S.C.
1432(a). Under each Bank's bylaws, a Bank elects or appoints its
President subject to Finance Board approval.
Section 932.40 also sets forth conflicts of interest prohibitions
applicable to full-time officers or employees of a Bank, and to counsel
retained by a Bank. See 12 CFR 932.40. These provisions generally
prohibit a Bank employee from acting on behalf of a member or other
institution insured by the former Federal Savings and Loan Insurance
Corporation (FSLIC), except under specified circumstances and with the
consent of the FSLIC. Existing Sec. 932.40 extends this prohibition to
counsel and attorneys of any Bank, whether employed on a salary, fee,
retainer, or other basis, unless the Finance Board consents to such
representation. See id.
B. Compensation
1. Bank Presidents
Under section 12(a) of the Bank Act, the compensation of all Bank
employees is subject to Finance Board approval. See 12 U.S.C. 1432(a).
However, under its existing regulation on Bank employee compensation,
prior Finance Board approval is required only for compensation of a
Bank's President. See 12 CFR 932.41(a). Section 932.41 of the Finance
Board's existing compensation regulation requires the board of
directors of each Bank annually to adopt and submit to the Finance
Board for its
[[Page 5]]
approval an appropriate resolution showing the contemplated
compensation of its President. See id.
In setting the compensation of their Presidents, the Banks are
governed by the Bank Presidents' Compensation Plan (Compensation Plan),
adopted by the Finance Board on November 19, 1991, as amended from time
to time. See Bd. Res. No. 91-565 (as amended). The Compensation Plan
establishes base salary guidelines, merit increase (to base salary)
guidelines, and criteria for incentive payments for Bank Presidents.
The Compensation Plan requires each Bank annually to submit for Finance
Board approval recommendations for merit increases to its President's
base salary and proposed incentive payments.
2. Other Bank Employees
Section 932.41(b) of the Finance Board's existing compensation
regulation permits a Bank to fix the compensation of officers other
than the President without prior Finance Board approval, provided that
such compensation is within ranges established by the Finance Board and
the total limits for such compensation in the Bank's approved budget.
See 12 CFR 932.41(b). Each Bank may establish the amount and form of
compensation for all other employees (including legal counsel) within
the limits set forth in the Bank's approved budget. See id. Section
932.41(b) also prohibits a Bank from paying a bonus to any director,
officer, employee, or other person. See id.
In Resolution No. 84-390, dated July 25, 1984, the Finance Board's
predecessor agency, the Federal Home Loan Bank Board (FHLBB),
established a cap on compensation of Bank employees other than the
President, providing that the salary of the second-highest-paid Bank
officer may not exceed 80 percent of the Bank President's salary. This
resolution currently remains in effect. See 12 U.S.C. 1437 note.
II. Proposed Rulemaking
On August 16, 1996, the Finance Board published for public comment
a notice of proposed rulemaking, which proposed to amend Secs. 932.40
and 932.41 of its regulations to clarify the scope of the Banks'
discretion in selecting and fixing the compensation of Bank Presidents
and other Bank employees. See 61 FR 42570 (Aug. 16, 1996) (proposed
rule). The proposed rule also included amendments to Sec. 941.9 of the
Finance Board's regulations to codify the Finance Board's existing
practice regarding the annual appointment and compensation of the
Director of the Office of Finance (OF) and other OF employees. See id.
The proposed rule provided for a 60-day comment period.
The Finance Board received letters from a total of 49 commenters,
including all 12 Banks, a joint Bank committee on Bank Presidents'
compensation, 32 Bank members, 2 not-for-profit housing organizations,
one advocacy group, and one individual. The commenters generally
supported the concept of transferring to the individual Banks more
authority to determine the compensation of Bank employees and, in
particular, the Bank Presidents. However, various commenters stated
that the Banks should have more authority in this area than would be
allowed under the proposed rule. Commenters also generally supported
giving the Banks more control over the appointment of Bank Presidents
than would be permitted under the proposed rule.
A discussion of the relevant comments is included below in the
Analysis of the Final Rule. Where no comments were received on a
particular regulatory provision, or a provision was not considered
controversial, and the Finance Board has determined to adopt the
provision as proposed, the provision generally is not discussed in this
preamble. The Finance Board is deferring action on the portions of the
proposed rule pertaining to the selection and compensation of OF
employees and benefits until a later date.
III. Analysis of the Final Rule
A. Selection of Employees
1. Bank Presidents
Section 932.40(a) of the proposed rule codified the Finance Board's
existing practice of approving the appointments of Bank Presidents for
one-year terms. The preamble to the proposed rule interpreted the one-
year appointment requirement to prohibit a President from holding over
upon expiration of his or her term of office, and to supersede the
existing provisions in the Banks' by-laws allowing for the holdover of
Bank Presidents.
Twenty-two commenters opposed requiring Finance Board approval of
the initial appointment and the reappointment of Bank Presidents. Many
commenters believed that the Finance Board should rely on the boards of
the Banks to appoint the Bank Presidents, given that the boards are
duly elected by the members and appointed by the Finance Board, and the
Banks are for-profit, privately capitalized institutions owned by their
stockholders. According to some commenters, requiring Finance Board
approval of reappointment also may discourage qualified candidates from
seeking the Presidencies. Several commenters recommended that the
Bank's boards be permitted to enter into multi-year employment
contracts with their Presidents.
Ten commenters opposed requiring Finance Board approval of the
reappointment of Bank Presidents, but these commenters either supported
or would not necessarily object to the Finance Board having a role in
approving the initial appointment of Bank Presidents.
While the Banks may be characterized as for-profit, privately
capitalized institutions owned by their stockholders, the Banks exist
primarily to carry out a public purpose: the promotion and expansion of
housing finance. See 12 U.S.C. Sec. 1422a(a)(3)(B)(ii). Therefore, a
Bank's President is charged with representing and furthering not only
the interests of the Bank's stockholders but also the interests of the
public. The Bank Act provides that the primary duty of the Finance
Board is to ensure that the Banks operate in a financially safe and
sound manner. See id. Sec. 1422a(a)(3)(A). The other statutory duties
of the Finance Board are to: supervise the Banks; ensure that they
carry out their housing finance mission; and ensure that they remain
adequately capitalized and able to raise funds in the capital markets.
See id. Sec. 1422a(a)(3)(B).
The Finance Board believes that retaining approval authority over a
Bank's selection of its highest officer is necessary to carry out the
Finance Board's statutory duties. Therefore, Sec. 932.40(a) of the
final rule requires a Bank to obtain prior Finance Board approval of
the appointment of a new President. However, a Bank may reappoint an
incumbent President without prior Finance Board approval. For purposes
of clarity and completeness, Sec. 932.40(a) also restates the statutory
requirements in sections 2B(a)(2) and 12(a) of the Bank Act providing,
respectively, that: (1) a Bank President may be suspended or removed by
the Finance Board for cause, which shall be communicated in writing to
the President and the Bank, and (2) a Bank President serves at the
pleasure of the Bank. See id. Secs. 1422b(a)(2), 1432(a).
Twenty-four commenters opposed elimination of a Bank President's
ability to holdover on the ground that, among other things, this may
lead to a situation where a Bank is without leadership if the Finance
Board fails to approve a new President. By requiring prior
[[Page 6]]
Finance Board approval only of new Bank Presidents, the final rule
allows for the holdover of an incumbent Bank President.
2. Other Bank Employees
Section 932.40(b) of the final rule adopts the language of the
proposed rule providing that a Bank may appoint or elect officers other
than the President and may hire other employees of the Bank without
prior Finance Board approval.
3. Conflicts of Interests
Proposed Sec. 932.40(c) updated the conflicts of interest
provisions in existing Sec. 932.40 by eliminating references to the
FSLIC, which was abolished by Congress in 1989. See id. Sec. 1437 note.
The proposed rule retained, in substance, the existing requirement that
a Bank employee shall not act in any capacity for certain specified
institutions whose interests are likely to be in conflict with the
interests of the Bank. Specifically, proposed Sec. 932.40(c) prohibited
a Bank employee from being employed by, or acting in any other capacity
for, a Bank member or an institution eligible to make application to
become a Bank member. The final rule adopts proposed Sec. 932.40(c),
without change.
B. Compensation of Bank Employees
1. Base Salaries
a. Bank Presidents. The proposed rule permitted each Bank to
establish the base salary of its President within specific ranges,
based on the Bank's asset size, and to pay yearly merit increases, up
to a maximum rate set by the Finance Board. The general consensus of
the commenters was that the boards of directors of the Banks should be
permitted to set compensation for all Bank employees, including the
Presidents, provided such compensation is reasonable and comparable to
what is being paid in the marketplace. Commenters generally opposed
Finance Board control over the compensation of the Bank Presidents,
except to the extent that it relates to safety and soundness of the
Banks. Commenters made a variety of arguments in support of these
positions, including: (1) The establishment of detailed requirements
governing compensation for Bank Presidents is not necessary to ensure
that the Banks operate safely and soundly; (2) a Bank's strategic
advantage of being a regionally based entity able to experiment with
new ways to meet local housing needs is hindered by nationally mandated
compensation goals; (3) placing the compensation issue in the hands of
a regulator is contrary to the intent and mission of the Banks, which
are for-profit, shareholder-owned enterprises, and creates a conflict
of interest for the Finance Board in its capacity as a regulator; and
(4) codifying the Bank Presidents' salaries in regulation politicizes
the compensation process and treats the Presidents like public, rather
than private sector employees. Several commenters recommended that the
Finance Board adopt the approach of other federal bank regulatory
agencies that limit compensation only for executives of institutions
with safety and soundness problems.
The Finance Board finds merit in the ideas that detailed regulatory
requirements for the compensation of Bank Presidents do not necessarily
further the goal of ensuring the safe and sound operation of the Banks,
and that a Bank should have flexibility to establish compensation goals
that encourage the Bank to address local housing needs. The Finance
Board also agrees that management functions, such as the establishment
of employee compensation, should be in the hands of the Banks to the
maximum extent feasible.
However, the Finance Board disagrees with the idea that it should
approach the regulation of Bank employee compensation in the same
manner as regulators of private entities, such as commercial banks and
savings associations, which are not government chartered corporations.
Although the primary duty of the Finance Board is to ensure the
financial safety and soundness of the Banks, the Finance Board also has
a statutory mandate to ensure that the Banks carry out their
programmatic purposes in the area of housing finance. See id.
Sec. 1422a(a)(3)(A), (B)(ii). Unlike the institutions regulated by
other federal bank regulators, the Banks exist primarily to serve the
public interest. See id. Sec. 1422a(a)(3)(B)(ii). Consequently, the
Finance Board has an interest in exercising some control over the
compensation of Bank Presidents, not only to ensure the safety and
soundness of the Banks, but also to ensure that the programmatic goals
of the Banks are met.
The Finance Board currently determines the salary ranges for Bank
Presidents using a comparability model based on the salaries of the
chief operating officers (COO) of private financial subsidiaries of
similar asset size and geographic location, offset by staff size. The
preamble to the proposed rule specifically requested comment on the
appropriate universe of entities that should be used in establishing
the comparability of the Bank Presidents' salaries. For instance, it
has been suggested that the salaries of the Bank Presidents should be
comparable to the salaries of the Presidents (or their equivalent) of
the Federal Reserve Banks, other segments of the financial services
industry, or other federally or state-created entities with similar
size, functions, and mission. The Bank Presidents' Compensation
Committee (Compensation Committee), which is comprised of persons
appointed from each of the 12 Banks, retained Hewitt Associates, LLC,
to review the proposed rule. The Hewitt Associates study (Hewitt study)
concluded, among other things, that the banking industry is the
appropriate comparator group for the Bank Presidents in setting
compensation, and that the chief executive officer (CEO) of a bank
subsidiary is a more appropriate match than a COO of a subsidiary.
Most of the Banks' comments on this issue are in accord with the
conclusions of the Hewitt study. Several Banks and the Hewitt study
concluded that an offset based on asset base and staff size should be
used in the development of compensation levels. The two Bank members
that addressed this issue believed that Bank Presidents' compensation
should be comparable with the salaries of CEOs of organizations of
similar size, scope, and risk.
In light of the public purpose of the Banks, the issue for the
Finance Board in determining comparability of compensation is not how
the Bank Presidents are different from comparable positions in the
private sector, but how the Bank Presidents are different from
comparable positions with governmental or quasi-governmental entities.
The Hewitt study concluded that the Federal Reserve Banks (FRBs)
are not an appropriate comparator group for the Banks because the Banks
are profit-driven in that they are owned by their members, who are
entitled to dividends. Further, the Banks operate in a competitive
environment and must market their services to members and prospective
customers. In addition, the Banks make statutorily mandated annual
payments of $300 million to the Resolution Funding Corporation, see 12
U.S.C. 1441b, and at least $100 million to the Affordable Housing
Program, see id. Sec. 1430(j).
In contrast to the Banks, the FRBs' primary mission is
governmental, and the FRBs do not manage an investment portfolio. One
Bank commenter stated that the FRBs are not appropriate
[[Page 7]]
comparators for the Banks on this issue because: (1) they carry out
governmental monetary and regulatory functions; (2) their boards are
advisory in nature; (3) their stock pays a fixed return; and (4) their
profits are returned to the Department of the Treasury.
In recognition of the expressed arguments against detailed
regulatory requirements for Bank Presidents' compensation, the final
rule does not adopt those provisions in the proposed rule prescribing
salary ranges and merit increase rates. The final rule provides for the
Finance Board, on an annual basis, to determine and publish by November
30 individual caps on the base salaries payable to each of the Banks'
Presidents for the subsequent calendar year. The base salary cap for
each Bank President shall be based on the average base salary of a CEO
of a subsidiary financial institution in the Bank's primary
metropolitan statistical area with an asset size comparable to that of
the Bank, as of June of the prior year, reduced by five percent and
rounded to the nearest $5,000. The five percent reduction is intended
to reflect the public purpose of the Banks. Each Bank shall establish,
on an annual basis, a reasonable base salary for its President, not to
exceed 100 percent of the applicable base salary cap published by the
Finance Board. However, those Bank Presidents whose currently approved
and recommended base salaries for 1997 exceed the 1997 cap will not
experience any reduction in base salary. These Presidents' base
salaries will be capped at their current levels until the annual cap
set by the Finance Board for the Bank exceeds the 1997 base salary
currently approved and recommended for the President by the Bank's
board of directors. By January 2 of each year, a Bank must report to
the Finance Board the approved base salary of its President for that
year.
b. Other Bank Employees. The proposed rule permitted each Bank to
establish base salaries for employees other than the President without
prior Finance Board approval, provided such salaries are reasonable and
comparable with the base salaries of employees of the other Banks and
other similar businesses, such as similar financial institutions, with
similar duties and responsibilities. Section 932.41(b)(2) adopts the
provisions of the proposed rule, with the additional requirement that
no employee's base salary shall exceed the base salary of the Bank
President. This is intended to ensure the effectiveness of the cap on
the Bank President's salary.
2. Incentive Payments
a. Bank Presidents. The proposed rule required incentive payments
to Bank Presidents to be based solely on the performance of the Bank,
rather than on the President's individual performance. The proposed
rule established specific criteria on which a Bank President's
incentive payment is to be based, and required the boards of directors
of the Banks to establish numerical performance targets and measures to
be used in determining a Bank President's incentive payment.
Specifically, the proposed rule provided that at least 20 percent of
any incentive payment for a Bank President must be based on certain
specified criteria illustrating the Bank's emphasis on the portion of
its mission involved with support for member credit activities; at
least 30 percent of any incentive payment must be based on certain
specified criteria illustrating the Bank's emphasis on additional
support for housing and community development finance; and the
remaining portion of the incentive payment must be based on the Bank's
performance in achieving other objectives established by the Bank's
board of directors.
The proposed rule provided that performance targets must be set at
such a level as to show an improvement in the Bank's performance over
the prior year or an extraordinary achievement in attaining the
designated target. In order to obtain the maximum incentive payment,
the proposed rule required a Bank President to achieve 150 percent of
the performance target for a given incentive criterion.
Nine Banks specifically opposed the setting of standard criteria
for incentive payments throughout the Bank System. Commenters
recommended that each Bank's board of directors be permitted to
establish incentive payment criteria in order to ensure a complete
reflection of the issues the boards believe are critical. Several Banks
commented that there is no logical relationship between meeting 150
percent of a performance target and an outstanding level of
performance.
The final rule gives the Banks more flexibility to determine the
basis for incentive payments to Bank Presidents, but retains the
requirements that such payments be based solely on the performance of
the Bank and that they be based in part on the Bank's measured progress
in the achievement of its mission.
Section 932.41(c)(2) of the final rule provides that at least fifty
percent of the Bank President's incentive payment must be based on the
extent to which the Bank meets reasonable numerical performance targets
established by the Bank's board of directors related to the Bank's
achievement of its housing finance mission, which shall include
substantial consideration of growth in innovative products directed at
unmet credit needs, growth in pre-committed Community Investment
Program (CIP) advances, growth in non-advance credit support and risk
management products for members, as well as growth in advances,
including long-term advances. Pre-committed CIP advances means CIP
advances provided in support of new CIP lending activity, not
refinancings of existing CIP-eligible loans.
The remaining portion of the incentive payment must be based on the
extent to which the Bank meets reasonable numerical performance targets
related to the achievement of goals established by the Bank's board of
directors, in its discretion. By January 31 of each year, the board of
directors of each Bank that intends to make any incentive payment to
its President for such year shall adopt a resolution establishing the
performance measures and targets on which such incentive payment will
be based. Any incentive payment made to a Bank President shall be based
solely upon the extent to which a Bank achieves the performance targets
established by the board of directors.
The preamble to the proposed rule requested comments on the
appropriateness and the reasons for limiting a Bank President's total
incentive payment to a maximum percentage of base salary, at some point
in the range between zero and 37.5 percent. Under the existing Bank
President's Compensation Plan, prior to the most recent amendment, the
maximum incentive payment payable to a Bank President was 37.5 percent
of base salary. The Compensation Plan was amended on July 25, 1996, to
limit an incentive payment to 31.25 percent of base salary. See Bd.
Res. 96-54 (July 25, 1996).
Eight Banks opposed the 31.25 percent and 37.5 percent limits on
incentive payments as arbitrary and not reflective of marketplace
conditions. Several Banks commented that their boards should be
permitted to set limits on incentive compensation based on the
industry-wide average. Commenters also stated that the Banks should be
permitted to determine the appropriate mix between base salary and
incentive compensation for their employees. The final rule attempts to
provide the added flexibility recommended by commenters.
[[Page 8]]
The final rule provides that a Bank may establish an incentive
payment program or programs for its employees. The maximum incentive
payment to a Bank President may not exceed the difference between that
President's base annual salary approved by the Bank and 125 percent of
the annual base salary cap, as published by the Finance Board. The
effect of this provision is to limit a Bank President's total cash
compensation payable in salary and incentive compensation to 125
percent of the amount of the base salary cap established by the Finance
Board for that Bank.
The proposed rule prohibited a Bank from making any incentive
payment to its President if the most recent examination of the Bank by
the Finance Board identified an unsafe or unsound practice or condition
with regard to the Bank. The Finance Board specifically requested
comment on whether there are other events or conditions that should
result in a prohibition on incentive payments to Bank Presidents.
Several Banks opposed the prohibition on incentive payments based
on examination findings because such a practice would make the
examination process more adversarial and potentially could deny a
President an incentive payment based on an examination finding that may
be reversed upon appeal. One Bank and the Compensation Committee
recommended clarifying that if an examination finding of an unsafe or
unsound practice or condition is subsequently resolved in favor of the
Bank, the Bank's board will be allowed to pay a Bank President an
incentive payment retroactively. The final rule makes this
clarification.
The Finance Board wishes to make clear that the proposed rule does
not require a Bank to make incentive payments, but if a Bank chooses to
make such payments, it must meet the requirements of Sec. 932.41(c).
b. Other Bank Employees. The final rule adopts the provisions of
the proposed rule authorizing the Banks to make incentive payments to
employees other than the Bank Presidents that are reasonable and
comparable with incentive payments made to employees of the other Banks
and other similar businesses (including financial institutions) with
similar duties and responsibilities. The final rule also provides that
incentive payments for employees other than the Bank President shall be
based on the extent to which an employee meets objective performance
targets related to performance criteria established by the Bank's board
of directors under the Bank's incentive compensation program or
programs. The final rule limits the incentive payment opportunities for
employees other than the President such that the total incentive
payment opportunity, expressed as a percentage of base salary, for an
employee other than the Bank President shall not exceed the total
incentive payment opportunity, expressed as a percentage of base
salary, allowable for the Bank President.
3. Benefits
The proposed rule authorized the Banks to establish certain kinds
of benefits plans for their employees and to provide benefits pursuant
to such plans without prior Finance Board approval. The Finance Board
is deferring action on the portions of the proposed rule governing
benefits until a later date.
4. Severance Payment Plans
The proposed rule authorized the Banks to establish
nondiscriminatory severance plans that provide benefits upon
involuntary termination other than for cause, voluntary resignation, or
early retirement, provided that total benefits paid do not exceed one
year of employee base compensation.
Nine Banks believed that the Banks should be permitted to set their
own severance policies, without the limitation that severance payments
not exceed 12 months of base compensation. Commenters suggested that
severance payments to employees who are discharged for cause may be
warranted in some circumstances, and that the ``for cause'' exception
could result in litigation over whether a Bank had cause to terminate
an employee. One Bank objected to the denying severance to an employee
in the case of early retirement.
The final rule retains the 12-month rule as a reasonable limitation
on severance payments. In addition, the restriction on severance
payments to employees terminated for cause is removed. The final rule
provides for severance payments to be made in cases of involuntary
termination. Thus, the final rule continues the restriction on
severance payments for early retirees on the ground that severance
payment plans are intended to provide for income replacement in the
event of involuntary termination.
5. Change-of-Control Agreements
The Finance Board requested comments on whether the Banks should be
permitted to enter into change-of-control arrangements with certain
senior officers. Change-of-control agreements, so-called ``golden
parachutes,'' typically are entered into with senior management and
provide for guaranteed, and often enhanced, severance in the event of
termination of employment following some period after a change of
control.
All 12 Banks believed change-of-control agreements are important to
maintaining the safety and soundness of a Bank in cases where merger or
consolidation is imminent, and that the Banks' boards should be
permitted to enter into and determine the terms of change-of-control
agreements with Bank officers.
While the Finance Board is not opposed to the use of change-of-
control agreements in the appropriate situation, the Finance Board is
not authorizing the Banks to have such agreements with their employees
at this time. The Finance Board will take into consideration the need
for such agreements should events arise that would make change-of-
control agreements relevant.
IV. Effective Date
The Finance Board has approved this final rule to become effective
immediately upon publication, on the ground that, as described above,
the final rule relieves restrictions placed on the Banks by the
existing provisions of Secs. 932.40 and 932.41 of its regulations.
Therefore, the thirty-day delay in the effective date that otherwise
would be required by section 552 of the Administrative Procedures Act
is not applicable to this final rule. See 5 U.S.C. 553(d)(1).
V. Regulatory Flexibility Act
The final rule applies only to the 12 Banks, which do not come
within the meaning of ``small entities,'' as defined by the Regulatory
Flexibility Act (RFA). 5 U.S.C. 601. Therefore, in accordance with the
RFA, the Finance Board hereby certifies that final rule will not have a
significant economic impact on a substantial number of small entities.
List of Subjects in 12 CFR Part 932
Conflict of interests, Federal home loan banks.
Accordingly, chapter IX, title 12, subchapter B, Code of Federal
Regulations, is hereby amended as follows:
SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM
PART 932--ORGANIZATION OF THE BANKS
1. The authority citation for Part 932 is revised to read as
follows:
[[Page 9]]
Authority: 12 U.S.C. 1422a, 1422b, 1426, 1427, 1432; 42 U.S.C.
8101 et seq.
2. Section 932.40 is revised to read as follows:
Sec. 932.40 Selection.
(a) Bank Presidents. Each Bank may appoint a President, subject to
the following limitations:
(1) No appointment of a new Bank President shall be effective until
approved by the Finance Board;
(2) A President shall serve at the pleasure of the Bank; and
(3) A President may be suspended or removed by the Finance Board
for cause, which shall be communicated in writing to the President and
the Bank.
(b) Bank employees other than the President. Each Bank may appoint
or elect officers other than the President and may hire other employees
of the Bank without prior Finance Board approval.
(c) Prohibition on employment contracts. A Bank shall not enter
into an employment contract with an employee.
(d) Conflicts of interest. A Bank employee shall not also be
employed by, or otherwise act in any capacity for, a member or an
institution eligible to make application to become a member.
3. Section 932.41 is revised to read as follows:
Sec. 932.41 Compensation.
(a) Definitions. The following definitions apply for purposes of
this section:
Bonus means a payment to an employee, other than base salary and
benefits, that is not based on performance.
Incentive payment means a direct or indirect transfer of funds by a
Bank to a Bank employee, in addition to base salary, based on the
employee's on-the-job performance.
Nondiscriminatory means that the plan, contract or arrangement in
question applies to all employees of a Bank who meet reasonable and
customary eligibility requirements applicable to all employees, such as
minimum length of service requirements. A nondiscriminatory plan,
contract, or arrangement may provide different benefits based only on
objective criteria such as base salary, total compensation, length of
service, job grade or classification, which are applied on a
proportionate basis.
Payment. (1) the term payment means:
(i) Any direct or indirect transfer of any funds or any asset;
(ii) Any forgiveness of any debt or other obligation; and
(iii) Any segregation of any funds or assets, the establishment or
funding of any trust or the purchase of, or arrangement for, any letter
of credit or other instrument for the purpose of making, or pursuant to
any agreement to make, any payment on or after the date on which such
funds or assets are segregated, or at the time of or after such trust
is established or letter of credit or other instrument is made
available, without regard to whether the obligation to make such
payment is contingent on:
(A) The determination, after such date, of the liability for the
payment of such amount; or
(B) The liquidation, after such date, of the amount of such
payment.
(2) The term payment does not mean:
(i) Reimbursement of an employee by the Bank for necessary and
customary expenses incurred by the employee in the scope of his or her
employment while carrying out the business of the Bank; or
(ii) Benefits.
Severance pay plan means a severance pay plan or arrangement as
that term is defined in the Employee Retirement Income Security Act of
1974 (as amended) (29 U.S.C. 1002(1)) (ERISA) and regulations
thereunder which is nondiscriminatory and which provides for payment of
severance benefits to all eligible employees upon involuntary
termination, provided that no employee shall receive any such payment
which exceeds the base compensation paid to such employee during the
twelve (12) months immediately preceding termination of employment.
(b) Base salaries of Bank employees.--(1) Bank President. (i) The
Finance Board annually will determine and publish by November 30 caps
on the base salary paid to the Bank President for the subsequent
calendar year for each of the 12 Banks.
(ii) The base salary cap for each Bank shall be based on the
average base salary of a chief executive officer of a subsidiary
financial institution in the Bank's primary metropolitan statistical
area with an asset size comparable to that of the Bank, as of June of
the prior year, reduced by five percent and rounded to the nearest
$5,000.
(iii) Each Bank shall establish, on an annual basis, a reasonable
base salary for its President, not to exceed 100 percent of the
applicable base salary cap published by the Finance Board, except that
for a Bank President whose approved base salary for the calendar year
1997 exceeds the cap published by the Finance Board for 1997, the Bank
shall establish, on an annual basis, a reasonable base salary not
exceeding the greater of the Bank President's approved base salary for
the calendar year 1997 or the base salary cap published by the Finance
Board for the year.
(iv) By January 31 of each year, a Bank must report to the Finance
Board the approved base salary of its President for that year.
(2) Other Bank employees. Each Bank shall establish base salaries
for employees other than the President that are reasonable and
comparable with the base salaries of employees of the other Banks and
other similar businesses (including financial institutions) with
similar duties and responsibilities, provided that no employee's base
salary shall exceed the base salary of the Bank President.
(3) Documentation. Each Bank shall maintain documentation
supporting the reasonableness and comparability of their employees'
base salaries.
(c) Incentive payments for Bank employees.--(1) In general. A Bank
may establish an incentive payment program or programs for its
employees.
(2) Bank President. (i) The maximum incentive payment to a Bank
President may not exceed the difference between that President's base
annual salary approved by the Bank and 125 percent of the annual base
salary cap, as published by the Finance Board.
(ii) At least fifty percent of the Bank President's incentive
payment shall be based on the extent to which the Bank meets reasonable
numerical performance targets established by the Bank's board of
directors related to the Bank's achievement of its housing finance
mission, which shall include substantial consideration of growth in
innovative products directed at unmet credit needs, growth in pre-
committed Community Investment Program advances, growth in non-advance
credit support and risk management products for members, as well as
growth in advances, including long-term advances. The remaining portion
of the Bank President's incentive payment shall be based on the extent
to which the Bank meets reasonable numerical performance targets
established by the Bank's board of directors related to achievement of
goals established by the board of directors, in its discretion.
(iii) Any incentive payment made to a Bank President shall be based
solely upon the extent to which a Bank achieves the performance targets
established by the board of directors.
(iv) By January 31 of each year, the board of directors of each
Bank that intends to make any incentive payment to its President for
such year shall adopt a resolution establishing the performance
measures and targets on which such incentive payment will be based.
[[Page 10]]
(v) By March 1 of each year, the board of directors of each Bank
making any incentive payment to its President for the prior year shall
adopt and submit to the Finance Board a resolution showing the results
for the individual performance measures and the amount of the incentive
payment to the Bank President for the prior year.
(vi) A Bank shall not make any incentive payment to its President
if the most recent examination of the Bank by the Finance Board
identified an unsafe or unsound practice or condition with regard to
the Bank, provided that if the finding of an unsafe or unsound practice
or condition subsequently is resolved in favor of the Bank by the
Finance Board, the Bank may pay its President the incentive payment
that he or she otherwise would have received.
(3) Incentive payments for other Bank employees. (i) Each Bank may
make incentive payments to employees other than the President, provided
that such incentive payments are reasonable and comparable with
incentive payments made to employees of the other Banks and other
similar businesses (including financial institutions) with similar
duties and responsibilities. Each Bank shall maintain documentation
supporting the reasonableness and comparability of their employees'
incentive payments.
(ii) The total incentive payment opportunity, expressed as a
percentage of base salary, for an employee other than the Bank
President shall not exceed the total incentive payment opportunity,
expressed as a percentage of base salary, allowable for the Bank
President.
(iii) An incentive payment for an employee other than the Bank
President shall be based on the extent to which the employee meets
objective performance targets related to performance criteria
established by the Bank's board of directors under the Bank's incentive
compensation program or programs.
(d) Severance plans. A Bank may make payments in the nature of
severance to its President and to other Bank employees only pursuant to
a severance pay plan.
(e) General limits on payments. (1) No Bank shall make any payment
to a Bank employee, except as provided in this section.
(2) The total amount of base salaries, incentive payments, and
benefits paid to Bank employees shall be within the limit set forth in
the Bank's approved budget. The board of directors of each Bank shall
review annually the compensation for its employees, including
appropriate documentation, prior to approving the Bank's annual budget.
(f) Prohibition on bonuses. A Bank shall not pay any employee or
other person a bonus.
(g) Determination of employee status. A Bank shall not treat an
employee as an independent contractor in order to avoid complying with
the requirements of this section.
By the Board of Directors of the Federal Housing Finance Board.
Dated: December 20, 1996.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-33329 Filed 12-31-96; 8:45 am]
BILLING CODE 6725-01-U
