[Federal Register Volume 63, Number 21 (Monday, February 2, 1998)]
[Proposed Rules]
[Pages 5315-5318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1969]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 937
[No. 98-02]
Financial Disclosure by Federal Home Loan Banks
AGENCY: Federal Housing Finance Board.
ACTION: Proposed rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing
to amend its regulations to add a requirement that the Federal Home
Loan Banks (Banks) provide annual audited financial statements, and
quarterly unaudited financial statements, to their members, both in
conformance with the requirements promulgated by the Securities and
Exchange Commission (SEC). This amendment is intended to codify current
prevailing practice at the Banks, and to establish uniform financial
disclosure requirements and standards for the Banks.
DATES: Written comments must be received in writing on or before March
19, 1998.
ADDRESSES: Comments should be mailed to: Elaine L. Baker, Secretary to
the Finance Board, Federal Housing Finance Board, 1777 F Street, NW.,
Washington DC 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, NW., Washington DC 20006.
SUPPLEMENTARY INFORMATION:
I. Background
The Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421 et seq.,
authorizes the Finance Board to issue consolidated Bank obligations
that are the joint and several obligations of the Banks in order to
provide funds for the Banks, 12 U.S.C. 1431(b), (c). The Bank Act
further authorizes the individual Banks to issue debt securities
subject to rules and regulations adopted by the Finance Board, 12
U.S.C. 1431(a). The Finance Board has never adopted regulations
concerning the issuance of debt securities by the individual Banks, and
the Banks have never issued debt securities pursuant to this authority.
However, the Banks are corporate entities with both mandatory and
voluntary stockholders. Federal savings associations automatically
become members of the FHLBank in the district in which the Federal
savings association's principal office are located. See 12 U.S.C.
1464(f). Other eligible financial institutions may apply for and be
granted membership in a Bank if they meet the statutory and regulatory
membership eligibility criteria set forth in the Bank Act, see 12
U.S.C. 1424 and other regulatory requirements, see 12 CFR part 933. As
a condition of membership, all members are required to maintain a
minimum stockholding in their respective Banks. See 12 U.S.C. 1426. The
aggregate stockholder investments in the Banks range from $700 million
in the Bank of Topeka, to more than $3 billion in the Bank of San
Francisco.
Pursuant to section 3(a)(2) of the Securities Act of 1933, 15
U.S.C. 77c(a)(2)), (Securities Act), securities issued by both the
Finance Board and the Banks are exempt from the registration
requirements of the Securities Act. Section 3(a)(2) exempts from
registration and other requirements of the Securities Act, inter alia,
securities issued or guaranteed by ``any person controlled or
supervised by and acting as an instrumentality of the Government of the
United States pursuant to authority granted by the Congress of the
United States.'' 15 U.S.C. 77c(a)(2).
Classes of securities issued by the Finance Board and the Banks
similarly are exempt from the registration and reporting requirements
of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)
(Exchange Act) pursuant to section 3(a)(42) of the Exchange Act (15
U.S.C. 78c(a)(42)). Section 3(a)(42)(B) designates as securities exempt
from registration and reporting under the Exchange Act, ``government
securities,''
[[Page 5316]]
including ``securities which are issued or guaranteed by corporations
in which the United States has a direct or indirect interest and which
are designated by the Secretary of the Treasury for exemption as
necessary or appropriate in the public interest or for the protection
of investors.'' Id., section 78c(a)(42)(B).
The applicable exemptions under both the Securities Act and the
Exchange Act are principally grounded in a presumption that the
securities activities of institutions acting as government entities, as
designated under the federal securities laws, will be conducted in the
public interest and for the protection of investors.
While securities issued by both the Finance Board and the Banks are
exempt from the registration and reporting requirements of both the
Securities Act and the Exchange Act, it is unclear whether the offer
and sale of such securities may be subject to certain of the antifraud
provisions of those Acts. The SEC's disclosure requirements prescribe
that an issuer of securities into the capital markets make full and
fair disclosure of all information material to an investment decision
in connection with the offer, sale, and other market transactions in
those securities. Generally, a securities issuer's compliance with SEC
disclosure regulations will reduce risk of and liability for potential
fraud. For a Bank, a material violation of the antifraud provisions of
the federal securities laws would constitute an unsafe and unsound
practice. In addition, the safety and soundness of the Bank system is
dependent upon maintaining the system's capital base and upon the
system's access to the capital markets. Indeed, one of the duties of
the Finance Board specified in the Bank Act is that it ensure that the
Banks remain adequately capitalized and able to raise funds in the
capital markets. See 12 U.S.C. 1422a(a)(3)(B)(iii).
All of the Banks provide annual reports, which include audited
financial statements prepared in accordance with generally accepted
accounting principles (GAAP), to their members. Some, but not all of
the Banks issue quarterly financial reports, and the form and content
of these quarterly reports varies widely. However, the Finance Board
has never addressed the scope and content of the financial reports
issued by individual Banks to their members. Because the Finance Board
has supervisory and examination authority over the Banks, it is the
Finance Board's responsibility to regulate the securities activities of
those institutions when it finds such regulation to be necessary or
appropriate for the protection of investors and the Bank system.
The Finance Board also wishes to address recent congressional
actions in connection with the issuance of Bank System debt. Several
months ago, the Subcommittee on Finance and Hazardous Materials of the
House Commerce Committee approved an amendment to H.R.10, the Financial
Services Act of 1997 that would have subjected both the Finance Board
and Banks to the registration and reporting requirements of the 1933
and 1934 Acts. All FHLBank provisions were ultimately deleted from the
version of H.R.10 that the Commerce Committee reported.
Because the disclosure provided by the Bank System already
generally complies with the applicable disclosures that the SEC
requires, the Finance Board believes that SEC registration would add an
unnecessary additional layer of regulatory scrutiny that would raise
the System's cost of funds. As discussed above, the proposed rule
largely would codify existing practice. The comment period will allow
the Congress and other interested parties to comment on the scope of
the existing and proposed new disclosures and to indicate to the
Finance Board any other disclosures that would be appropriate.
In order to fulfill its duties and achieve the above goals, the
Finance Board has adopted, simultaneously with this proposal, a policy
statement embodying the current practice of preparing the consolidated
reports issued for the Bank system by the Finance Board in connection
with the issuance of consolidated debt securities pursuant to section
11(c) of the Bank Act, 12 U.S.C. 1431(c), in accordance with the
disclosure requirements promulgated by the SEC. See Proposed Policy
Statement, Finance Board Res. No. 98-01, January 21, 1998. The Finance
Board also is proposing this regulation to ensure that Bank
stockholders receive timely, accurate and uniform financial information
about their respective Banks. The regulation would codify prevailing
practice at the Banks, which voluntarily prepare their reports
generally in accordance with SEC standards, by requiring each Bank to
file with the Finance Board and distribute to its members an annual
report containing financial statements prepared in accordance with the
requirements of the SEC's financial statement Regulation S-X, 17 CFR
part 210, as referenced in the financial statement requirement (Item 8)
of the annual report Form 10-K promulgated by the SEC, 17 CFR 249.310.
The proposed rule also would require each Bank to file with the
Finance Board and distribute to its members a quarterly report
containing unaudited financial statements prepared in accordance with
the financial statement requirement (Item 1) of the quarterly report
Form 10-Q promulgated by the SEC, 17 CFR 249.310, and the requirements
of rule 10-01 of the SEC's financial statement Regulation S-X, 17 CFR
210.10-01.
Nothing in the proposed rule is intended to subject the FHLBanks to
the jurisdiction of any other agency, nor to confer any private right
of action on any member or on any investor in FHLBank system
securities.
II. Analysis of the Proposed Rule
A. Definitions
Proposed section 937.1 sets forth definitions to be used in the
part. The definitions of ``Bank,'' ``Finance Board,'' and ``Member''
are consistent with the definitions of those terms as used throughout
the Finance Board's regulations. Definitions of ``SEC,'' ``Form 10-K,''
``Form 10-Q,'' and ``Regulation S-X'' refer to and are consistent with
regulations promulgated by the SEC under the Securities Act and the
Exchange Act.
Issuers having a class of securities registered with the SEC under
the Exchange Act (Registrant) are required to file with the SEC and
provide to their shareholders an annual report on Form 10-K, 17 CFR
249.310. The Form 10-K generally requires detailed disclosure of 15
items, including information about the business, structure and
operations of the Registrant, about ownership in and issuance of the
Registrant's securities, about the officers and directors of the
Registrant, and presentation of audited financial statements prepared
in accordance with GAAP.
Registrants also are required to file with the SEC and distribute
to shareholders a quarterly report on Form 10-Q, 17 CFR 249.308a. The 9
item requirements of the Form 10-Q focus primarily on abbreviated,
unaudited interim financial information.
The SEC employs a regulatory scheme of uniform disclosure called
``integrated disclosure.'' Under this scheme, all of the SEC's
accounting and financial disclosure requirements for forms required to
be filed under both the Securities Act and the Exchange Act are
centralized in Regulation S-X, 17 CFR part 210. Regulation S-X outlines
comprehensive financial statement disclosure requirements, both of
general applicability and of specific requirements tailored to the
myriad
[[Page 5317]]
variety of SEC registrants. The regulation also prescribes standards
for the qualifications and independence of accountants and for the
content of accountant's reports. The regulation addresses such topics
as preparation of financial statements in accordance with GAAP;
principles of consolidation of financial statements, the form and line
item content of consolidated balance sheets, consolidated statements of
income and cash flows, age of financial statements, footnotes to the
financial statements, and specific requirements for financial
statements for financial institution holding companies, among other
industries.
B. Financial Statement Requirement
Section 937.2 of the proposed rule imposes a requirement that the
Banks file with the Finance Board for review, and distribute to their
shareholders, annual and quarterly financial statements as provided
further in the regulation. As discussed above, all of the Banks
currently provide annual financial statements to their shareholders.
However, not all of the Banks currently issue quarterly financial
statements. Section 937.2 also states that the fact that annual or
quarterly financial statements have been filed with the Finance Board
shall not be deemed a finding by the Finance Board about the accuracy
or adequacy of those financial statements.
The proposed rule would require filing and distribution only of
financial statements. Comments are solicited on whether the Banks
should be required to disclose other information in their annual and
quarterly reports similar to that required by SEC Registrants, such as
information regarding stockholdings by members, composition of the
board, compensation, related transactions, etc.
The Finance Board also solicits specific comment on whether this
requirement would provide information of utility to the Banks'
shareholders and on whether the provision of this information would
impose an undue burden on the Banks.
C. Annual Financial Statements
Section 937.3 of the proposed rule requires that a Bank's annual
financial statements shall conform as to form and content to the
requirements of Regulation S-X as referenced in Item 8 of Form 10-K.
Item 8 of Form 10-K requires that financial statements meeting the
requirements of Regulation S-X be furnished. For purposes of the Form
10-K, Regulation S-X requires presentation of consolidated, audited
balance sheets as of the end of each of the two most recent fiscal
years and audited statements of income and cash flows for each of the
three fiscal years preceding the date of the most recent audited
balance sheet being filed, along with all related required footnote
disclosure.
Item 8 of Form 10-K also requires that the disclosure required by
Item 302 of the SEC's Regulation S-K, 17 CFR 229.302. Item 302 of
Regulation S-K requires disclosure of specific information by
Registrants engaged in oil and gas producing activities, and of
selected quarterly financial information by Registrants meeting a
number of criteria related to publicly held shares quoted on the
National Association of Securities Dealers' Automated Quotation system.
Because item 302 is entirely inapplicable to the Banks, disclosure of
this information is not being required in the proposed rule.
Proposed Sec. 937.3 also requires that the Banks' annual financial
statements shall be filed with the Finance Board and distributed to
each member of the Bank within 90 days after the end of the fiscal year
covered by the financial statements. This timing requirement is
identical to the requirements of the SEC in the Form 10-K. The Finance
Board solicits comments as to the utility of imposing a time period for
the filing and issuance of the annual financial statements, and on
whether the time period prescribed would impose an undue burden on the
Banks.
Finally, proposed Sec. 937.3 provides that a Bank shall indicate in
a transmittal letter accompanying the annual financial statements
whether the financial statements reflect a change from the preceding
year in any accounting principles or practices, or in the method of
applying any such principles or practices, and that, except where
information is required by the requirements of Regulation S-X to be
given for the fiscal year or as of specified date, it shall be given as
of the latest practicable date. These requirements are drawn from the
instructions to the Form 10-K and are consistent with SEC practice.
D. Quarterly Financial Statements
Proposed Sec. 937.4 requires a Bank's quarterly financial
statements to conform as to form and content to the requirements of
Item 1 of Form 10-Q and to the requirements of rule 10-01 of Regulation
S-X. Rule 10-01 requires disclosure of interim unaudited financial
statements for the quarter covered, including interim balance sheets
(i.e., an interim balance sheet as of the end of the most recent fiscal
quarter and a balance sheet as of the end of the preceding fiscal year;
an interim balance sheet as of the end of the corresponding fiscal
quarter of the preceding fiscal year may, but need not, be provided);
interim statements of income (i.e., for the period between the end of
the preceding fiscal year and the end of the most recent fiscal
quarter, and for the corresponding periods of the preceding fiscal
year); abbreviated interim statement of changes in financial position
(i.e., for the period between the end of the preceding fiscal year and
the end of the most recent fiscal quarter, and for the corresponding
period of the preceding fiscal year); and any footnotes desired. This
interim financial information need not be reviewed by an independent
public accountant prior to filing.
Again, given that not all of the Banks currently provide quarterly
financial statements to their members, and that even those that do
provide such information may not do so in the form required by the
proposed rule, the Finance Board solicits comment on whether this
requirement would provide information of utility to the Banks'
shareholders and on whether the provision of this information would
impose an undue burden on the Banks.
Proposed Sec. 937.4 also provides that the Bank's quarterly
financial statements shall be filed with the Finance Board and
distributed to each member of a Bank within 45 days after the end of
the fiscal quarter covered by the financial statements, and that no
financial statements need be filed or distributed for the fourth
quarter of any fiscal year. These provisions are drawn from the
instructions to the Form 10-Q and are consistent with SEC practice. The
Finance Board solicits comments as to the utility of imposing a time
period for the filing and issuance of the quarterly financial
statements, and on whether the time period prescribed would impose an
undue burden on the Banks.
III. Regulatory Flexibility Act
The proposed rule would apply only to the Banks, which do not come
within the meaning of ``small entities,'' as defined in the Regulatory
Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance
with section 605(b) of the RFA, see id. section 605(b), the Finance
Board hereby certifies that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
IV. Paperwork Reduction Act
This proposed rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et
seq. Consequently,
[[Page 5318]]
the Finance Board has not submitted any information to the Office of
Management and Budget for review.
List of Subjects in 12 CFR Part 937
Federal home loan banks, Reporting and recordkeeping requirements.
Accordingly, the Federal Housing Finance Board hereby proposes to
amend title 12, chapter IX, of the Code of Federal Regulations, by
adding a new part 937, to read as follows:
PART 937--FINANCIAL STATEMENTS OF THE BANKS
Sec.
937.1 Definitions.
937.2 Financial statement requirement.
937.3 Annual financial statements.
937.4 Quarterly financial statements.
Authority: 12 U.S.C.1422a, 1422b, 1426, 1431, and 1440.
Sec. 937.1 Definitions.
As used in this part:
Bank means a Federal Home Loan Bank established under the authority
of the Federal Home Loan Bank Act, as amended (12 U.S.C. 1421 et seq.).
Finance Board means the agency established as the Federal Housing
Finance Board.
Form 10-K means the Annual Report on Form 10-K (17 CFR 249.310)
promulgated by the SEC pursuant to the provisions of the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.).
Form 10-Q means the Quarterly Report on Form 10-Q (17 CFR 249.308a)
promulgated by the SEC pursuant to the provisions of the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.).
Member means an institution that has been approved for membership
in a Bank and has purchased capital stock in the Bank in accordance
with Secs. 933.20 and 933.24 of this chapter.
Regulation S-X means the accounting rules promulgated by the SEC
(17 CFR part 210).
SEC means the agency established as the Securities and Exchange
Commission.
Sec. 937.2 Financial statement requirement.
(a) Each Bank shall prepare, file with the Finance Board for review
and distribute to its members annual and quarterly financial statements
as provided in this part.
(b) The fact that annual or quarterly financial statements have
been filed with the Finance Board shall not be deemed a finding that
the Finance Board has passed upon the accuracy or adequacy of those
financial statements.
Sec. 937.3 Annual financial statements.
(a) A Bank's annual financial statements shall conform as to form
and content to the requirements of Regulation S-X as referenced in Item
8 of Form 10-K.
(b) Annual financial statements shall be distributed to each member
of a Bank within 90 days after the end of the fiscal year covered by
the financial statements.
(c) At the time the Bank's annual financial statements are
distributed to the Bank's members, but no later than 90 days after the
end of the fiscal year covered by the financial statements, five copies
of the annual financial statements shall be filed with Elaine L. Baker,
Secretary to the Finance Board, Federal Housing Finance Board, 1777 F
Street, NW., Washington DC 20006. The annual financial statements will
be available for public inspection at this address.
(d) The Bank shall indicate in a transmittal letter accompanying
the annual financial statements whether the financial statements
reflect a change from the preceding year in any accounting principles
or practices, or in the method of applying any such principles or
practices.
(e) Except where information is required by the requirements of
Item 8 of Form 10-K or of Regulation S-X to be given for the fiscal
year or as of specified date, it shall be given as of the latest
practicable date.
Sec. 937.4 Quarterly financial statements.
(a) A Bank's quarterly financial statements shall conform as to
form and content to the requirements of Item 1 of Form 10-Q and to the
requirements of rule 10-01 of Regulation S-X (17 CFR 210.10-01).
(b) Quarterly financial statements shall be distributed to each
member of a Bank within 45 days after the end of the fiscal quarter
covered by the financial statements.
(c) At the time the Bank's quarterly financial statements are
distributed to the Bank's members, but no later than 45 days after the
end of the fiscal quarter covered by the financial statements, five
copies of the quarterly financial statements shall be filed with Elaine
L. Baker, Secretary to the Finance Board, Federal Housing Finance
Board, 1777 F Street, NW., Washington DC 20006. The quarterly financial
statements will be available for public inspection at this address.
(d) No financial statements need be filed or distributed for the
fourth quarter of any fiscal year.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 98-1969 Filed 1-30-98; 8:45 am]
BILLING CODE 6725-01-U ]
