[Federal Register Volume 61, Number 78 (Monday, April 22, 1996)]
[Proposed Rules]
[Pages 17603-17606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9775]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Part 932
[No. 96-27]
Federal Home Loan Bank Directors' Compensation and Expenses
AGENCY: Federal Housing Finance Board.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing
to repeal its Directors' Fees and Allowances Policy (Policy) and amend
its regulation on the compensation of Federal Home Loan Bank (Bank)
directors to provide greater flexibility to the Banks in compensating
their directors and to set forth a clear standard of reasonableness for
such compensation under the Federal Home Loan Bank Act (Bank Act). The
current Finance Board regulation on the compensation of Bank directors
subjects the payment of fees and expenses to limits set by the Finance
Board. Those limits and other criteria are contained in the Policy,
which essentially imposes a uniform directors' compensation structure
on all Banks. The proposed rule would replace the current regulatory/
policy scheme with an amended regulation permitting each Bank, within
certain general guidelines, to devise its own compensation structure
for Bank directors, and allowing each Bank to pay its directors for
such expenses as are payable by the Bank to its senior officers.
The Finance Board is also proposing a rule requiring that meetings
of a Bank's board of directors be held within the United States. This
will codify an important provision of the Finance Board's Policy, which
would be rescinded simultaneously with the adoption of a final rule on
Bank directors' compensation and expenses.
DATES: Comments must be received on or before June 21, 1996.
ADDRESSES: Comments may be mailed to: Executive Secretariat, 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: Patricia L. Sweeney, Program Analyst,
District Banks Secretariat, (202) 408-2872; or Eric M. Raudenbush,
Attorney-Advisor, Office of General Counsel, (202) 408-2932; Federal
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
Subsection 7(i) of the Bank Act permits each Bank, with the
approval of the Finance Board, to pay its directors reasonable
compensation and necessary expenses for the time required of them in
the performance of their Bank-related duties, in accordance with
resolutions adopted by such directors. 12 U.S.C. 1427(i) (1994). A
general provision on Bank directors' compensation, which appears at
section 932.27 of the Finance Board's regulations, provides merely that
directors' fees shall be established by each Bank within limits set by
the Finance Board. See 12 CFR 932.27 (1995).
The Finance Board has exercised its statutory responsibility to
approve Bank director compensation and expenses largely through its
Directors' Fees and Allowances Policy, adopted by resolution of its
Board of Directors on February 23, 1993. See Finance Board Resolution
No. 93-12 (Feb. 23, 1993). The existing policy establishes a maximum
fee of $1,200 per day payable to the Chair of a Bank's board of
directors when presiding over meetings of the board or its executive
committee, and a maximum fee of $650 per day payable to all other
directors for attendance at board, committee, or other meetings for
which a fee is authorized. Under the Policy, daily meeting fees are the
only authorized source of compensation for Bank directors; the Policy
does not provide for payment of either a retainer, or non-cash benefits
to directors. The Policy also sets forth generally the categories of
expenses that are payable to Bank directors and identifies several
specific expense items the payment of which is either authorized or
prohibited.
The Banks first became subject to a formal policy on directors fees
and expenses in 1974, when the former Federal Home Loan Bank Board
(FHLBB) (the Finance Board's predecessor agency) adopted a policy that
revised, clarified and incorporated the various resolutions, minute
entries and interpretations on director compensation and expenses that
had been issued by the FHLBB since its creation in 1932. The FHLBB
policy was amended several times, lastly in 1986, when the current dual
$1200/$650 per day meeting fee caps were incorporated. When the Finance
Board succeeded the FHLBB as regulator of the Bank system in 1989, the
FHLBB's policy on Bank directors' fees and expenses remained in effect,
as provided by the Financial Institutions Reform, Recovery and
Enforcement Act's (FIRREA) provision on the continuation of orders,
resolutions, determinations and regulations of the FHLBB. See Public
Law 101-73, section 401(h), 103 Stat. 183 (1989) (codified at 12 U.S.C.
1437 note). The Policy is essentially identical to the FHLBB's 1986
policy.
The Bank Act currently vests in the Finance Board the
responsibility to supervise the Bank System, to regulate it for
financial safety and soundness, and to pass upon most matters of
corporate governance of the Banks. A series of studies and reports
mandated by the Housing and Community Development Act of 1992, Public
Law 102-550, section 1393, 106 Stat. 3672 (1992), including a report
prepared by the Finance Board in April 1993, concluded that the Finance
Board's authority over Bank corporate governance is in conflict with
the agency's primary role as Bank System regulator. Since the
completion of these studies, the Finance Board has been working closely
with the Banks to implement regulatory and policy changes designed to
devolve to the Banks the authority to set policy on matters of
corporate governance, to the extent permissible under the Bank Act. In
conjunction with these efforts, two separate task forces composed of
senior officials of the Banks have recommended that the Finance Board
rescind the Policy and establish broad
[[Page 17604]]
guidelines within which the Banks' boards of directors can set the
structure and limits for the compensation of their directors.
As part of its policy to devolve matters of corporate governance to
the Banks, the Finance Board is now proposing to rescind both its
current regulation on Bank directors' compensation and the Policy
adopted thereunder and to replace both with a comprehensive regulation
on Compensation and Expenses of Bank Directors. This proposed
regulation, though more detailed than the existing regulation, will
allow the Banks greater freedom to develop and implement their own
directors' compensation plans than is possible under the current
regulatory/policy scheme, while establishing clear and enforceable
regulatory limitations.
II. Analysis of the Proposed Rule
The proposed rule provides for the addition of a new Sec. 932.26 to
the Finance Board's regulations and for the revision of Sec. 932.27
thereof to contain entirely new text. Proposed Sec. 932.26 codifies
existing Finance Board policies requiring that most meetings of a
Bank's boards of directors and its committees be held within the
district served by that Bank and prohibiting Banks from holding any
such meetings outside the borders of the United States. This provision
is taken from the Finance Board's existing Policy and the codification
of these requirements as a regulation is intended merely to preserve
these important requirements when the Policy is rescinded.
The proposed rule also would replace Sec. 932.27 of the Finance
Board's regulations, entitled ``Compensation,'' with a new regulation
entitled ``Compensation and Expenses of Bank Directors.'' As a whole,
proposed Sec. 932.27 is intended to limit the total dollar pool
available to each Bank to compensate its directors to an appropriate
level, while providing the Banks with maximum flexibility to devise
their own directors' compensation schemes within the dollar limit. The
proposed regulation is not designed to answer specific compensation
issues; rather, it is intended to empower each Bank to exercise its
reasonable discretion to decide how to compensate its directors, and
thereby to allow many practices that are not authorized under the
Policy, including, without limitation: the payment of retainer fees,
the provision of non-cash benefits and the payment of meeting fees for
participation in telephonic meetings.
Paragraph (a) of the proposed regulation defines two terms--
''compensation'' and ``average compensation per director.''
Paragraph (b) of the proposed regulation is the operative provision
with respect to the compensation of directors. It requires each Bank to
adopt annually, by resolution of its board of directors, a written
policy to provide for the payment of ``reasonable compensation'' to its
directors for their work on Bank-related matters during the following
calendar year. In conjunction with the definition of ``compensation''
contained in paragraph (a), paragraph (b) is intended to permit the
Banks to remunerate their directors in a wide variety of fashions,
including through the use of daily meeting fees, retainer fees, cash or
non-cash fringe benefits, deferred payments, or combinations thereof.
Under proposed paragraph (b), the text of each Bank's policy must
detail the types of Bank-related meetings or other activities in which
its directors are required or expected to participate and for which
they may be compensated. In addition, the policy must explain fully the
methodology for determining the amounts and the circumstances under
which its directors may be paid, including, if applicable: setting
forth rates of compensation for participation in Bank-related
activities; setting forth any retainer fees payable to directors and
the circumstances under which they may be paid; explaining the
rationale behind any graduated meeting or retainer fee scales; and
detailing any non-cash fringe benefits to be provided to directors,
including the approximate cash value thereof. By requiring a detailed
written policy on director compensation, paragraph (b) is intended, in
part, to facilitate review of the Banks' director compensation
practices during the Finance Board's annual regulatory examination
process. The Finance Board specifically requests comment on whether to
include as part of the regulation a requirement that the Banks'
policies on director compensation be made available to the public
through either the Finance Board or the Banks individually and, if so,
whether the policies should be disseminated as a matter of course, or
merely made available upon request.
Paragraph (c) of the proposed regulation sets forth the substantive
limits on Bank directors' compensation that must be reflected in each
Bank's policy on director compensation. The requirements of this
subsection are designed to operate in tandem and are intended to
require each Bank to develop a compensation plan that, using a
reasonable pool of money, provides incentive for active director
participation in Bank-related affairs and rewards those directors who
assume greater responsibilities.
The introductory text to paragraph (c)(1) provides for a $28,000
cap on each Bank's annual ``average compensation per director'' (ACPD),
which is defined in paragraph (a) as the total amount the Bank pays in
compensation to all directors, divided by the total number of directors
designated by the Federal Housing Finance Board to serve on the Bank's
board for that year. By capping the ACPD, the proposed regulation
effectively would limit the total pool of money available to each Bank
to compensate its directors (to $28,000 times the total number of
directors), but, because each Bank has a different number of directors,
this has been expressed in terms of ``compensation per director''
instead of as a lump sum. Because the regulation caps only the average
amount paid to a Bank's directors, it would not prohibit a Bank from
paying one or more directors more than $28,000, as long as the average
compensation of all the Bank's directors does not exceed that amount.
In reaching the $28,000 figure, the board of directors of the
Finance Board has considered a number of factors, including: Bank
directors' earnings under the Policy; compensation of directors at
other Government Sponsored Enterprises (GSEs), including an analysis of
similarities and differences between the Banks and other GSEs that
might require different compensation levels; and the compensation of
board directors of Bank system member financial institutions. After
reviewing these factors, and considering the agency's statutory
responsibility to ``approve'' Bank directors' compensation, see 12
U.S.C. 1427(i), the Bank Act's requirement that such compensation be
``reasonable,'' see id., and the preference for providing a clear
regulatory standard, the board of directors of the Finance Board
concluded that an ACPD cap of $28,000 would be sufficient to allow the
Banks to attract high quality individuals to serve on their boards of
directors, yet is moderate enough, considering market rates, the Banks'
GSE status and the general duties of Bank directors, to qualify as
``reasonable compensation'' under the Bank Act.
As provided in paragraph (c)(2), the cap on ACPD will increase
automatically, beginning in 1997, to reflect the previous year's change
in the Consumer Price Index (CPI). Although paragraph (c)(2) requires
the Finance Board to communicate to the Banks each year's new ACPD cap
figure, the annual change in the regulatory ACPD
[[Page 17605]]
cap is not contingent upon such communication. It is understood that
the precise change in CPI will not be available until after the
beginning of the year to which it is to apply. However, the agency
views this provision as a mechanism for allowing the ACPD cap to keep
pace with the level of inflation over a number of years and does not
anticipate the need for Banks to make minute adjustments to their
compensation policies on an annual basis, although the proposed
regulation would not prohibit such adjustments.
Paragraph (c)(1)(i) requires that, keeping within stated cap on
ACPD, each Bank's policy on director compensation should be designed
such that, at year end, the total compensation paid to each director
reflects both the amount of time that the director has spent on Bank-
related business and the level of responsibility the director has
assumed with respect to his or her role on the Bank's board of
directors.
Specifically, the requirement that a directors' annual compensation
must reflect the amount of time spent on official Bank business is
intended to ensure that Bank directors are being paid for meetings they
actually attend and duties they actually perform for each Bank. For
example, a Bank's policy should ensure that, at year end, a director
who has attended every scheduled Bank-related meeting receives more in
compensation (all other factors being equal) than a director who has
missed more than a negligible amount of meetings. Although there are
many permissible ways for a Bank to implement this requirement, the one
method would be to incorporate into its policy a schedule of meeting
fees, the payment of which would be contingent upon directors'
attendance at appropriate Bank functions. While the proposed regulation
would not prohibit a Bank from paying a portion of its directors'
compensation in the form of a retainer fee, paragraph (c)(1)(i)
effectively would prohibit a Bank from paying its directors entirely
through retainer fees, unless their payment somehow was made contingent
on the fulfillment of Bank-related duties.
Paragraph (c)(1)(i) also requires that each director's total annual
compensation reflect the level of responsibility assumed by that
director. This requirement is aimed primarily at ensuring that
directors are rewarded appropriately for serving as committee Chair, or
for assuming other positions of responsibility. The provision leaves to
the discretion of the Bank the identification of the particular formal
or informal duties that warrant additional compensation. While the
provision also leaves to the discretion of the Bank the method of
incorporating such incentives into its director compensation policy,
the one method of doing so would be to provide for graduated scales of
meeting or retainer fees under which those assuming more responsibility
in general, or with respect to a particular meeting or function,
receive a higher sum than those who do not.
Paragraph (c)(1)(ii) requires each Bank to pay its Chair: (1) more
than any other director and (2) at least 125 percent of the Bank's
ACPD. Any plan under which a Bank's board Chair would not receive
significant additional compensation for assuming such duties would not
provide ``reasonable compensation,'' as required by subsection 7(i) of
the Bank Act. 12 U.S.C. 1427(i). Accordingly, although paragraph
(c)(1)(i) requires generally that a Bank stratify its compensation
based on the level of responsibility assumed by each director, the
Finance Board has determined that a requirement dealing specifically
with Bank Chairs is appropriate to ensure that statutory requirements
are being fulfilled. To avoid ambiguity in determining compliance with
the provision and to ensure that Bank Chairs are provided more than a
negligible premium for their additional service, the proposed rule
includes the specific ``125 percent'' minimum figure, arrived at after
reviewing the compensation practices of other GSEs and financial
institutions.
The Finance Board specifically requests comment on whether to
include as part of the regulation a provision under which a portion of
each Bank's directors' annual compensation would be contingent upon
that Bank's achievement of performance-related goals such as meeting
particular earnings targets, achieving a satisfactory regulatory
examination, or fulfilling the Bank's housing finance mission, and, if
so, whether these incentive goals should be set forth in the
regulation, or left to the discretion of the Banks.
Finally, paragraph (d) of the proposed regulation allows each Bank
to pay its directors such Bank-related travel, subsistence and other
related expenses as are payable to senior officers of the Bank under
the Bank's travel policy, except for gift or entertainment expenses.
This provision ties payment of directors' expenses to existing Bank
policies which are subject to regulatory examination and which may be
amended at the discretion of the Bank.
III. Regulatory Flexibility Act
The proposed rule applies only to the Banks, which do not come
within the meaning of ``small entities,'' as defined in the Regulatory
Flexibility Act. See 5 U.S.C. 601(6). Therefore, in accordance with 5
U.S.C. 605(b), the Finance Board hereby certifies that this proposed
rule, if promulgated as a 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, Reporting and
recordkeeping requirements.
Accordingly, part 932, chapter IX, title 12, Code of Federal
Regulations, is hereby amended as follows:
PART 932--ORGANIZATION OF THE BANKS
1. The authority citation for part 932 continues to read as
follows:
Authority: 12 U.S.C. 1442a, 1422b, 1426, 1427, 1464; 18 U.S.C.
207; 42 U.S.C. 8101 et seq.
2. Section 932.26 is added to read as follows:
Sec. 932.26 Site of board of directors and committee meetings.
Meetings of a Bank's board of directors and committees thereof
usually should be held within the district served by the Bank. No
meetings of a Bank's board of directors and committees thereof may be
held in any location that is not within the United States, including
its possessions and territories.
3. Section 932.27 is revised to read as follows:
Sec. 932.27 Compensation and expenses of Bank directors.
(a) Definitions. As used in this section:
(1) Compensation means any payment of money or provision of any
other thing of value (or the accrual of a right to receive money or a
thing of value in a subsequent year) in consideration of a director's
performance of official duties for the Bank, including, without
limitation, retainer fees, daily meeting fees and fringe benefits.
(2) Average compensation per director means the sum of the total
annual compensation paid to all directors serving on a Bank's board of
directors, divided by the total number of directors designated by the
Federal Housing Finance Board to serve on the Bank's board for that
year.
(b) Annual compensation. Each Bank's board of directors shall
adopt annually by resolution a written policy to provide for the
payment to Bank directors of reasonable compensation for the
performance of their duties as
[[Page 17606]]
members of the Bank's board for the following calendar year, subject to
the requirements set forth in paragraph (c) of this section. At a
minimum, such policy shall address the activities or functions for
which attendance is necessary and appropriate and may be compensated,
and shall explain and justify the methodology for determining the
amount of compensation to be paid to directors.
(c) Policy requirements. Each Bank's policy on director
compensation shall conform to the following requirements:
(1) The Average Compensation Per Director for each Bank shall not
exceed $28,000 for the year 1996. Within this limit:
(i) The total annual compensation for each director shall reflect
both the amount of time spent on official Bank business and the level
of responsibility assumed by that director; and
(ii) The total annual compensation for the chair of each Bank's
board of directors shall not be equaled or exceeded by the total annual
compensation of any other director and shall not be less than 125
percent of the Average Compensation Per Director for that Bank.
(2) For 1997 and subsequent years, the limit on Average
Compensation Per Director set forth in paragraph (c)(1) of this section
shall be adjusted annually to reflect the preceding year's change in
the Consumer Price Index (CPI) for all urban consumers, as published by
the Bureau of Labor Statistics. Each year, as soon as practicable after
the publication of the previous year's CPI, the Board shall publish
notice, by Federal Register, distribution of a memorandum, or
otherwise, of the CPI-adjusted limit on Average Compensation Per
Director.
(d) Expenses. Each Bank may pay its directors for such necessary
and reasonable travel, subsistence and other related expenses incurred
in connection with the performance of their official duties as are
payable to senior officers of the Bank under the Bank's travel policy,
except that directors may not be paid for gift or entertainment
expenses.
By the Board of Directors of the Federal Housing Finance Board.
Dated: April 10, 1996.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-9775 Filed 4-19-96; 8:45 am]
BILLING CODE 6725-01-U
