01-27389. Maintenance of Effort-Minimum Number of Annual Bank Board of Directors Meetings

AGENCY:

Federal Housing Finance Board.

ACTION:

Final rule.

SUMMARY:

The Federal Housing Finance Board (Finance Board) is adopting as final, without change, the interim final rule that amended the maintenance of effort provision of its regulations to eliminate the three-year averaging requirement and to reduce the required minimum number of in-person board of directors meetings that a Federal Home Loan Bank (Bank) must hold annually to six meetings.

DATES:

This final rule shall become effective on November 30, 2001.

FOR FURTHER INFORMATION CONTACT:

Scott L. Smith, Acting Director, at [phone], Patricia L. Sweeney, Program Analyst, at [phone], Office of Policy, Research, and Analysis; or Sharon B. Like, Senior Attorney-Advisor, at [phone], or Thomas Hearn, Senior Attorney-Advisor, at [phone], Office of the General Counsel; or by regular mail at the Federal Housing Finance Board, 1777 F Street, NW., Washington, DC 20006. A telecommunications device for deaf persons (TDD) is available at [phone].

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

On December 21, 1999, the Finance Board published an interim final rule implementing the specific limits on annual compensation for the Chairperson, Vice Chairperson, and other members of a Bank's board of directors imposed by section 7(i) of the Federal Home Loan Bank Act, as amended by the Gramm-Leach-Bliley Act (GLB Act) (section 606(b)), Pub. L. No. 106-102, 113 Stat. 1338 (November 12, 1999). See 64 FR 71275 (December 21, 1999). The interim final rule required each Bank's board of directors, notwithstanding the compensation limits, to continue to maintain its level of oversight of the management of the Bank (maintenance of effort standard). Consistent with this maintenance of effort standard, the interim final rule required that each Bank's board of directors hold no fewer in-person meetings in any year than it held on average over the immediately preceding three years (three-year averaging requirement).

The Finance Board finalized the interim final rule on March 14, 2000. See 65 FR 13663 (March 14, 2000). The final rule revised the minimum meetings requirement in § 918.7(a) to the lesser of: (1) Nine; or (2) the three-year averaging requirement. See id. This change was made in order to avoid the vagaries of timing of the pure averaging requirement and reflect the operational reality at the Banks regarding the average number of meetings held over the preceding three years. In addition, § 918.7(b) of the final rule clarified that a Bank could apply to the Finance Board for a waiver of the minimum meetings requirement pursuant to the procedures of 12 CFR part 907. See id.

Based on subsequent experience with the minimum meetings requirement, on May 14, 2001, the Finance Board published a second interim final rule that further amended the maintenance of effort provision to eliminate the three-year averaging requirement and to reduce the required minimum number of in-person board of directors meetings that a Bank must hold annually to six meetings. See 66 FR 24263 (May 14, 2001). The May 2001 interim final rule also removed the waiver provision of § 918.7(b), because the ability to request a waiver of Finance Board regulatory provisions is already provided for in 12 CFR part 907. See id.

As discussed in the SUPPLEMENTARY INFORMATION section of the May 2001 interim final rule, these changes were made based on arguments by the Banks that they would be able to conduct their business more efficiently and effectively by holding only six annual in-person board meetings. The Banks indicated that they would be able to continue to maintain their level of oversight over the management of the Banks by conducting more business at fewer, but longer, board meetings, and/or placing greater reliance on board committees for the conduct of certain board business. The Banks noted that the three-year averaging requirement created a standard that varied among the Banks, with, for example, one Bank, based on the standard, already holding only six in-person board meetings annually.

The Finance Board also determined, based on a survey of the number of board of directors meetings held in 1999 by a number of financial institution holding companies and housing Government-Sponsored Enterprises (GSEs), that requiring at least six in-person Bank board of directors meetings in any year is within the range of the number of annual board meetings held by such holding companies and GSEs. Further, providing the boards of the Banks with greater discretion in determining the number of board meetings to hold annually is consistent with the GLB Act's emphasis on devolving governance issues to the Banks.

The May 2001 interim final rule provided for a 30-day comment period, which closed on June 13, 2001. The Finance Board received comment letters from two Banks, which are discussed below.

II. Analysis of Final Rule

The final rule adopts § 918.7 of the May 2001 interim final rule without change. Section 918.7 states:

Notwithstanding the limits on annual directors' compensation established by section 7(i) of the [Bank] Act, as amended, the board of directors of each Bank shall continue to maintain its level of oversight of the management of the Bank. In maintaining its level of oversight, the board of directors of a Bank shall hold at least six in-person meetings in any year.

12 CFR 918.7.

One commenter interpreted the changes to the maintenance of effort requirement as a conclusion by the Finance Board that six in-person board meetings each year will fully enable the directors of a Bank to fulfill their fiduciary duties to the Bank's members. This comment misinterprets the maintenance of effort requirement. Section 918.7 requires that, in maintaining its level of oversight of the management of the Bank, the Bank shall hold at least six in-person board meetings in any year. As the SUPPLEMENTARY INFORMATION section of the May 2001 interim final rule explains, if a Bank's board intends to hold fewer annual in-person board meetings than it has held in past years, it would be in the board's best interest to document how it will continue to meet the maintenance of effort standard and its fiduciary duties regarding the Bank's safety and soundness. If the Bank cannot continue to maintain its level of oversight over Bank management with six board meetings in a given year, then it would need to hold more board meetings per year. See 66 FR at 24264.

The other commenter contended that the Finance Board should only be concerned that a Bank's board of directors has established sound governing processes, and should not pre-determine what governance practices are absolutely required for all Banks in all circumstances. As discussed in the SUPPLEMENTARY INFORMATION section of the March 2000 final rule, the minimum meetings requirement was adopted for safety and soundness reasons. While the Finance Board acknowledges that decisions on the number of Bank board meetings generally should be within the purview of the corporate governance responsibilities of the Banks' boards, the Finance Board believes that its safety and soundness concerns with respect to the Bank boards' level of oversight of Bank management warrant a regulatory response. Accordingly, the Finance Board is retaining the minimum meetings requirement in the final rule.

III. Regulatory Flexibility Act

Because no notice of proposed rulemaking is required for this final rule, the provisions of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., do not apply. Moreover, the final rule applies only to the Banks, which do not come within the meaning of “small entities” as defined in the Regulatory Flexibility Act. See id. section 601(6).

IV. Paperwork Reduction Act

This final rule does not contain any collections of information pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et seq. Therefore, the Finance Board has not submitted any information to the Office of Management and Budget for review.

Accordingly, the interim final rule amending 12 CFR part 918, published at 66 FR 24263 (May 14, 2001), is adopted by the Federal Housing Finance Board as final without change.

Dated: October 24, 2001.

By the Board of Directors of the Federal Housing Finance Board.

J. Timothy O'Neill,

Chairman.