[Federal Register Volume 63, Number 21 (Monday, February 2, 1998)]
[Notices]
[Pages 5381-5384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1968]
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FEDERAL HOUSING FINANCE BOARD
[No. 98-01]
Statement of Policy: Disclosures in the Combined Annual and
Quarterly Financial Reports of the Federal Home Loan Bank System
AGENCY: Federal Housing Finance Board.
ACTION: Proposed policy statement.
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SUMMARY: The Board of Directors of the Federal Housing Finance Board
(Finance Board) is proposing to adopt a statement of policy entitled
``Disclosures in the Combined Annual and Quarterly Financial Reports of
the Federal Home Loan Bank System.'' The policy statement will
generally require that the combined annual and quarterly financial
reports of the Federal Home Loan Bank (FHLBank) System be prepared in
accordance with the disclosure rules applicable to Securities and
Exchange Commission (SEC) registrants.
DATES: The Finance Board will accept comments through March 19, 1998.
[[Page 5382]]
ADDRESSES: Mail comments to Elaine L. Baker, Executive Secretary,
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.
20006. Comments will be available for public inspection at this
address.
FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Director,
Financial Analysis and Reporting Division, Office of Policy, 202-408-
2845, or Deborah F. Silberman, Acting General Counsel, Office of
General Counsel, 202-408-2570, Federal Housing Finance Board, 1777 F
Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION: The FHLBank Act (12 U.S.C. 1431(c))
authorizes the Finance Board to issue FHLBank consolidated obligations.
As issuer of the FHLBank System debt, the Finance Board prepares the
combined annual and quarterly financial reports that are used as
principal disclosure documents in conjunction with the offering of this
debt.
Until now, the Board of Directors of the Finance Board has
established no formal policies as to the scope and content of the
combined annual and quarterly financial reports of the FHLBank System.
Since the establishment of the Finance Board in 1989, the combined
annual report has grown in length as the disclosures have become more
detailed and more comprehensive. Current practices represent an
evolving consensus reached among Finance Board staff, FHLBank staff,
the independent outside accountant for the combined financial report,
and outside bond counsel. As generally accepted accounting principles
and industry disclosure standards have changed, so have the combined
annual and quarterly reports keep up with industry disclosure
standards.
In most but not all respects, the combined annual and quarterly
financial reports are similar in scope and content to reports that
registrants must file with the Securities and Exchange Commission (SEC)
under the Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., (1934
Act). The Finance Board staff prepares the combined financial reports
using financial and other information provided by the FHLBanks and the
Office of Finance. Office of Finance staff and outside bond counsel
review these combined reports. The independent outside accountant
audits the financial statements that appear in the combined annual
financial report. In addition, the independent outside accountant
reviews but does not issue an opinion on the combined quarterly
financial statements.
The Finance Board's proposed policy statement would require that
the combined annual and quarterly financial reports of the FHLBank
System follow existing SEC disclosure rules with certain specific
exceptions. For three reasons, the Finance Board is proposing the
adoption of this policy statement concerning financial and other
disclosures in the combined annual and quarterly financial reports. The
first reason is that Finance Board, as one of the largest issuers of
debt securities in the U.S. capital markets, believes it has an
obligation to provide adequate disclosures that generally agree with
industry standards.1 In addition, one of the statutory
responsibilities of the Finance Board is to ensure that the FHLBanks
remain able to raise funds in the capital markets (see 12 U.S.C.
1422a(a)(3)(b)(iii)). By adopting the proposed statement of policy, the
Finance Board will address a significant policy matter on how the
FHLBank System disclosure is provided to maintain the ability of the
FHLBanks to raise funds in the capital markets. The second reason is
that SEC disclosure rules represent ``best practice,'' and the
financial and other disclosures provided by the FHLBank System should
follow this standard.
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\1\ At September 30, 1997, consolidated obligations outstanding
were $284.5 billion, and the amount of consolidated obligations
issued in the first nine months of 1997 was $1.572 trillion.
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Thirdly, the proposed policy statement will address recent
Congressional actions that could have subjected the FHLBanks and the
Finance Board to the registration and reporting requirements of the
Securities Act of 1993, 15 U.S.C. 77c(a)(2)), (1933 Act), and the 1934
Act.
The proposed policy affirms existing practice generally to provide
disclosure that complies with SEC requirements. The Finance Board
solicits comments on the scope, adequacy, and usefulness of the
existing and proposed disclosures and whether the Finance Board should
provide any additional disclosures.
Disclosure Standards
Section 3(a)(2) of the 1933 Act exempts the Finance Board and the
FHLBanks from all SEC registration requirements under the 1933 Act. In
addition, publicly traded commercial banks and savings associations
that are not part of holding companies are exempt from SEC registration
under the 1933 Act, but must register and file reports with their
primary Federal regulators pursuant to 1934 Act. Further, the Office of
the Comptroller of the Currency (OCC) has adopted securities offering
disclosure policies for non-affiliated commercial banks that are almost
identical to SEC disclosure requirements. The Office of Thrift
Supervision (OTS) also has securities offering disclosure rules for its
regulated institutions that mirror SEC disclosure requirements. The
OCC, OTS, and Federal Deposit Insurance Corporation (FDIC) all require
their regulated institutions to file reports under the 1934 Act in
conformance with the forms and requirements promulgated by the SEC
under the 1934 Act or in accordance with forms and requirements adopted
by the agencies but modeled after SEC requirements and forms. The SEC
disclosure rules represent the industry standard, and the bank and
thrift regulators have largely adopted these standards.
The proposed policy statement would require as a general matter
that the combined annual and quarterly financial reports of the FHLBank
System meet the SEC disclosure standards, with noted exceptions. The
combined annual financial reports already generally comply with SEC
disclosure requirements, with several exceptions. These current
exceptions include biographical information about FHLBank directors,
executive compensation, capital stock holdings, and related-party
transactions. In addition, the 1996 combined annual report did not
provide disclosures about derivatives as comprehensive as that required
by new SEC derivative disclosure rules adopted in 1997. In following
the SEC disclosure rules, the combined annual financial report would,
under the proposed policy statement, include new disclosures on
compensation, capital stock holdings, related-party transactions, and
property and premises.
The SEC rules were broadly written, and thus contain disclosures
that were not intended for wholesale financial institutions such as the
FHLBanks. Furthermore, the FHLBanks are cooperatives where officers of
members serve on the boards of directors of the FHLBanks. As such,
related-party transactions are to be expected.
Exceptions to Following SEC Rules
The FHLBank System presents a number of unique institutional
factors. These include the cooperative nature of the System, the fact
that the FHLBanks are wholesale financial institutions, and the unusual
role of the Finance Board as issuing the debt and preparing the
financial report for combined 12 regulated entities. For these reasons,
[[Page 5383]]
some of the SEC disclosure rules are either inapplicable or
inappropriate for the FHLBank System.
The combined annual and quarterly financial reports would, under
the proposed policy statement, not follow the SEC rule in the following
areas:
Derivatives. On February 10, 1997, the SEC published a final rule
that established new required disclosures for derivative transactions
and holdings (Item 305, Regulation S-K, 17 CFR 229.305) (SEC rule). The
SEC rule applies to all filings made with the SEC after June 15, 1997,
and encompasses all types of derivatives--commodity, currency, equity,
and financial. The Finance Board believes that the only facet of the
FHLBanks' operations that meets the threshold test for disclosure in
the SEC rule is the interest-rate risk associated with financial
derivatives.
The rule presents only one issue unique to the FHLBank System. The
System combined financial report rolls up the financial information of
12 independent portfolios. Many complex financial organizations fall
within the scope of the rule, but these complex organizations
ultimately report to a single board of directors. The FHLBanks report
to 12 separate boards of directors, and each has differing investment
strategies, yet each FHLBank is jointly and severally liable for the
consolidated obligations of the FHLBank system issued by the Finance
Board.
Information for the System's quantitative disclosures would come
from simulation of interest-rate shocks in the asset-liability
management models of the FHLBanks. The FHLBanks use different modeling
software and assumptions. Any analysis that would roll up the results
from 12 separate models should first ensure some uniformity of
assumptions and methodology to make sure the results will be
meaningful.
In light of these complexities, the Finance Board proposes that the
FHLBanks provide the Finance Board the information required to make the
required qualitative disclosures about derivatives in the 1997 combined
financial report, but proposes a one-year delay in providing the
quantitative disclosures in the combined annual financial report.
Finance Board staff will work with FHLBanks' staff in developing a
methodology for arriving at a common set of assumptions for the
quantitative analysis that would appear in the 1998 combined financial
report.
Related-Party Transactions. SEC disclosure rules require the
disclosure of any transaction greater than $60,000 between a director
and a related party. Due to the cooperative nature of the System, it is
expected that the FHLBanks will have business dealings with members
whose officers also serve as directors of the FHLBank. It would be
unwieldy to present full disclosures of all credit relationships
between the FHLBanks and the members their directors represent in the
combined annual report. The FHLBanks may wish to consider making this
disclosure in their individual annual reports. However, the Finance
Board proposes that the combined annual report present an aggregate
disclosure about the percentage of advances to members whose officers
serve as directors of an FHLBank. In addition, it proposes that the
combined annual report disclose the amount of advances to individual
members if those advances amounted $1 billion or more and indicate
which of these members had an officer that also served as an FHLBank
director. The Finance Board specifically solicits comments on whether
the $1 billion threshold is appropriate or whether the threshold should
be higher, lower, or a different type of threshold.
Information about Directors and Officers. The SEC disclosure rules
require information about all directors and executive officers of the
registrant. The required information includes name, age, current and
previous positions with the registrant, terms of office, family
relationships with the registrant, business experience, and other
directorships. Presenting biographical information on all FHLBank
directors and all FHLBank executive officers in the combined annual
report would be unwieldy. The FHLBanks may wish to consider making this
disclosure in their individual annual reports. The Finance Board
proposes that the existing biographical information about members of
the Board of Directors of the Finance Board and FHLBank presidents be
expanded to include the age of those persons. In addition, the Finance
Board proposes to provide similar biographical information about the
managing director of the Office of Finance and the chairs and vice
chairs of the FHLBanks.
Submission of Matters to a Vote of Stockholders. The SEC disclosure
rule requires registrants to provide certain information about matters
submitted to stockholders for a vote. The only item that FHLBank
stockholders vote upon is the annual election of directors. For two
reasons, the Finance Board has determined to exclude election-of-
director information from the combined annual financial statements.
First, matters concerning election of directors can be handled more
expeditiously and efficiently by separate mailings to an FHLBank's
stockholders as a part of the election process. Second, election of
directors occurs in the fall, but the annual combined financial report
is published in late spring, making it impossible to provide timely
information about the election of directors in the combined annual
report.
Exhibits. The exhibits specified in the SEC disclosure rules are
generally not applicable.
The text of the proposed policy follows:
Federal Housing Finance Board--Statement of Policy
Disclosures in the Combined Annual and Quarterly Financial Reports of
the Federal Home Loan Bank System
1. Policy Objective
The Federal Housing Finance Board (Finance Board) policy on
Disclosures in the Combined Annual and Quarterly Financial Reports of
the Federal Home Loan Bank System provides that purchasers of Federal
Home Loan Bank (FHLBank) System consolidated obligations receive the
same types of disclosures that Securities and Exchange (SEC)
registrants must provide. As issuer of the debt for the FHLBank System,
the Finance Board provides many of the disclosures normally made in
conjunction with the offering of FHLBank System debt in the combined
annual and quarterly financial reports of the FHLBank System. The
Finance Board has the explicit statutory responsibility to ensure that
the FHLBanks are able to raise funds in the capital markets, and the
provision of industry-standard disclosures facilitates the issuance of
this debt.
2. General Policy
To the extent they are applicable to the FHLBank System, it is the
policy of the Finance Board that the combined annual and quarterly
financial reports of the FHLBank System present the disclosures
required by Regulations S-K and S-X of the SEC (see 17 CFR parts 229
and 210).
3. Exceptions to the General Policy
a. Derivatives. Item 305, Regulation S-K, 17 CFR 229.305, requires
certain registrants to present information about their derivatives
holdings and activities. The requirement includes a discussion of
accounting policy for derivatives, a qualitative discussion about
derivatives by management, and an analysis that presents quantitative
information about derivatives. The presentation of the required
quantitative information will
[[Page 5384]]
be deferred until the 1998 combined annual report of the FHLBank
System.
b. Related-Party Transactions. Item 404 of Regulation S-K, 17 CFR
229.404, requires the disclosure of certain relationships and related
transactions. In light of the cooperative nature of the FHLBank System,
related-party transactions are to be expected, and a disclosure of all
related-party transactions that meet the threshold would not be
meaningful. Instead, the combined annual report will provide
disclosures on (1) the percent of advances to members an officer of
which serves and an FHLBank director, (2) a listing of all members that
hold $1 billion or more of advances, with a further disclosure that
indicates which of these members has an officer that serves as an
FHLBank director, and (3) a general disclosure about equitable advances
pricing.
c. Biographical Information. The biographical information required
by Items 401 and 405 of Regulation S-K, 17 CFR 229.401, 229.405, will
be provided only for the members of the Board of Directors of the
Finance Board, FHLBank presidents, the managing director of the Office
of Finance, and FHLBank chairs and vice chairs.
d. Compensation. The information on compensation required by Item
402 of Regulation S-K, 17 CFR 229.402, will be provided only for
members of the Board of Directors of the Finance Board, FHLBank
presidents, and the managing director of the Office of Finance.
e. Submission of Matters to a Vote of Stockholders. No information
will be presented on matters submitted to shareholders for a vote, as
otherwise required by Item 4 of the SEC's form 10-K, 17 CFR 249.310.
The only item shareholders vote upon is the annual election directors.
f. Exhibits. The exhibits required by Item 601 of Regulation S-K,
17 CFR 229.601, are not applicable and will not be provided.
By the Board of Directors of the Federal Housing Finance Board.
Dated: January 21, 1998.
Bruce A. Morrison,
Chairperson.
[FR Doc. 98-1968 Filed 1-30-98; 8:45 am]
BILLING CODE 6725-01-U
