[Federal Register Volume 63, Number 142 (Friday, July 24, 1998)]
[Notices]
[Pages 39872-39875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19809]
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FEDERAL HOUSING FINANCE BOARD
[No. 98-27]
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: Final Policy Statement.
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SUMMARY: The Board of Directors of the Federal Housing Finance Board
(Finance Board) is adopting 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 a
manner that is consistent, in the judgment of the Finance Board, with
the financial and other disclosure requirements promulgated by the
Securities and Exchange Commission (SEC).
EFFECTIVE DATE: August 24, 1998.
FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Director,
Financial Analysis and Reporting Division, Office of Policy, 202-408-
2845, or Deborah F. Silberman, General Counsel, Office of General
Counsel, 202-408-2570, Federal Housing Finance Board, 1777 F Street,
NW, Washington, DC 20006.
SUPPLEMENTARY INFORMATION: The FHLBank Act (12 U.S.C. 1431(c))
authorizes the Finance Board to issue consolidated obligations (COs)
that are the joint-and-several obligations of the FHLBanks. As issuer
of the COs the Finance Board has assumed the responsibility of
preparing combined FHLBank System annual and quarterly financial
reports that are used in conjunction with the issuance of the COs.
Until now, the Finance Board has established no formal policies as
to the scope and content of the information presented in the FHLBank
System combined annual and quarterly financial reports. 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 disclosure practices represent an evolution
of generally accepted accounting principles (GAAP) and industry
disclosure standards, and reflect a consensus among Finance Board
staff, FHLBank staff, the independent outside accountant for the
combined financial report, and outside bond counsel.
The scope, form, and content of the combined FHLBank System annual
and quarterly financial reports closely resemble reports issued by both
corporate securities issuers that are required to register their
securities with the SEC under the Securities Exchange Act of 1934, 15
U.S.C. 78a et seq., (1934 Act), and by other Government Sponsored
Enterprises (GSEs) that are, like the FHLBank System, exempt from such
requirements.
The Finance Board is adopting this final policy statement about
financial and other disclosures in the combined annual and quarterly
financial reports for two reasons. First, the Finance Board will
address a significant policy matter on how the FHLBanks provide
disclosures and raise debt in the capital markets. The Finance Board
believes that, as one of the largest issuers of debt securities in the
U.S. capital markets, it has an obligation to provide purchasers of
FHLBank System debt with adequate and accurate financial disclosure
that is consistent with industry standards. 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)).\1\ The Finance Board believes that the rules
promulgated by the SEC pursuant to the Federal securities laws
represent ``best practice,'' and that financial and other disclosure
concerning the FHLBank System should conform to this standard to the
greatest extent practicable.
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\1\ At December 31, 1997, consolidated obligations outstanding
exceeded $304 billion, and the amount of consolidated obligations
issued in 1997 exceeded $2.1 trillion.
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Second, the Finance Board believes that adoption of the final
policy statement and final rule should address Congressional concerns
about FHLBank System disclosure, as described in the notice of the
proposed policy statement, 63 FR 5381 at 5382 (Feb. 2, 1998).
The Finance Board published the proposed policy statement for
notice and comment on February 2, 1998 (63 FR 5381, Feb. 2, 1998). In
response to this proposal and a related proposed regulation on
financial disclosures by the FHLBanks, the Finance Board received a
total of six comments. Four of the comments were from or on behalf of
FHLBanks, one comment was from a trade association, and one comment was
from a public accounting firm. With respect to the proposed policy
statement, the comments addressed the following major issues: the
method of applying SEC reporting and disclosure requirements;
disclosures about derivatives; Federal preemption of State securities
laws; and implementation date.
Analysis of Comments Received
Method of Applying SEC Reporting and Disclosure Requirements
The proposed policy statement provided that the combined annual and
quarterly reports of the FHLBank System would follow SEC requirements
with certain exceptions. Several commenters urged that, instead of
enumerating exceptions, the Finance Board specify the areas in which
the FHLBank System would follow the SEC requirements in place at the
time that the policy statement was adopted. The commenters expressed
concern that the Bank System would automatically be subject to yet-
unwritten SEC rules if the policy statement were adopted in the
proposed form. The commenters preferred the approach of formal adoption
by the Finance Board each time the SEC changes its reporting and
disclosure rules.
The Finance Board is adopting the procedure outlined in the
proposed policy statement without change. The final policy statement
enumerates areas for which no disclosure or modified disclosure will be
made of information that, in the judgment of the Finance Board, would
otherwise be required by the SEC's rules to be disclosed in a
particular way. This will make clear that the Finance Board fully
intends to provide disclosure on an ongoing basis that is consistent to
the extent practicable and in the judgment of the Finance Board with
the SEC's reporting and disclosure requirements, even if the SEC
changes its rules. In addition, the Finance Board will not have to take
formal action each time the SEC modifies its reporting and disclosure
requirements to render the Finance
[[Page 39873]]
Board's policies consistent with those of the SEC.
The policy statement makes it clear that consistency with the SEC's
reporting and disclosure rules as they affect the combined annual and
quarterly financial reports of the FHLBank System will be determined
solely by the Finance Board.
Derivatives
In February 1997, the SEC amended its rules by adding new
disclosure and reporting requirements about derivatives. These
requirements are codified as Item 305(b) of Regulation S-K (17 CFR
229.305) (Derivatives Rule). In general, the Derivatives Rule requires
registrants to provide qualitative information about their use of
derivatives, their strategies using derivatives, and any limits the
entity places on derivatives. In addition, Item 305(a) of Regulation S-
K requires registrants to present certain quantitative information
about derivatives. The Derivatives Rule gives registrants a number of
options on how best to present this information. The qualitative and
quantitative information about derivatives is not part of the entity's
financial statements, and, accordingly, the entity's independent
outside accountant does not have to attest to the statements made.
The proposed policy statement on financial disclosure indicated
that the Finance Board would provide the qualitative disclosures
required by the Derivatives Rule in the 1997 combined FHLBank System
annual financial report, but would defer making the quantitative
disclosures until the 1998 combined FHLBank System annual financial
report.
Two commenters recommended deferring the qualitative disclosures
until 1998 because of a concern that any disclosures made in 1997 may
not be consistent with disclosures made when the Finance Board fully
implements the rule in 1998. However, one of the commenters recommended
that the Finance Board ``consider enhancing the section 305-affected
disclosures [that appeared in the 1996 annual financial report] only
where they are not dependent on the yet to be determined quantitative
disclosures.''
The Finance Board has expanded the discussion of risk management
that appeared in the 1996 combined annual financial report, and this
expanded discussion appears in the 1997 combined annual financial
report. The Finance Board believes that this expanded discussion meets
all the qualitative derivative disclosure requirements by the
Derivatives Rule, but the disclosure is in no way dependent on the
prospective quantitative disclosures.
Federal Preemption
A number of commenters recommended that the Finance Board state
explicitly in both the policy statement and the regulation that the
FHLBank Act and any regulations promulgated by the Finance Board
thereunder occupy the field and preempt State law in matters related to
the issuance of CO's. These commenters expressed concern that the
Finance Board should explicitly express its intention to exercise its
preemptive authority over State law so that the Finance Board and the
FHLBanks may limit their liability and avoid attempts by States to
impose their laws or regulations on the Finance Board's issuance of
COs.
The Finance Board believes that such statements are unnecessary and
inappropriate for the purposes of the policy statement and the
regulation, and therefore has not included such a statement in either
the policy statement or the regulation.
Implementation Date. Two commenters recommended deferring all
derivatives disclosures until the 1998 combined FHLBank System annual
financial report. Two other commenters recommended deferring the
effective date of the policy statement to the end of 1999.
Disclosure Standards
In light of the comments received and based on further analysis,
the Finance Board is adopting the policy statement with several changes
that are addressed below. These changes do two things. First, the
changes clarify that consistency with the SEC's reporting and
disclosure rules as they affect the combined annual and quarterly
financial reports of the FHLBank System will be determined solely by
the Finance Board. Second, the final policy statement enumerates a
number of additional areas that the Finance Board will carve out from
disclosure in the combined FHLBank System reports because, in its
judgment, the Finance Board believes such disclosure is either
inapplicable or inappropriate for the FHLBank System.
The Finance Board believes that the combined FHLBank System annual
and quarterly financial reports are generally consistent with SEC
disclosure requirements, with several exceptions. The final policy
statement requires, as a general matter, that the combined FHLBank
System annual and quarterly financial reports be prepared in a manner
that is consistent, in the judgment of the Finance Board, with the
SEC's regulations to the greatest extent practicable, with certain
noted exceptions.
The Finance Board intends to comply with Statement of Financial
Accounting Standards No. 131, ``Disclosures about Segments of an
Enterprise and Related Information'' (FASB 131). For purposes of FASB
131, the Finance Board considers each FHLBank to be a segment. In
complying with FASB 131, the Finance Board will provide combining
schedules for the statement of condition and the statement of income in
the quarterly combined financial report of the FHLBank System. The
Finance Board already provides these combining schedules in the annual
combined financial report.
Exceptions to Following SEC Rules
Derivatives
On February 10, 1997, the SEC published the Derivatives Rule. It
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 Derivatives Rule is the interest-rate risk associated with
financial derivatives.
The Derivatives Rule presents only one issue unique to the FHLBank
System. The System combined financial report rolls up the financial
information of 12 independent portfolios and eliminates all material
transactions among the FHLBanks. 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 should first ensure some
uniformity of assumptions and methodology to make sure the results will
be meaningful and comparable. Furthermore, there are conceptual
difficulties in how the Finance Board could combine the results of
these 12 sets of simulations to present a System derivatives
disclosure.
[[Page 39874]]
It may not be possible to present a combined quantitative derivatives
disclosure, and the Finance Board instead may present separate
quantitative derivatives disclosures in 1998 for each of the FHLBanks.
In light of these complexities, the Finance Board is making the
qualitative disclosures about derivatives in the 1997 combined
financial report, but will make the quantitative disclosures in the
1998 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 regulations require the disclosure of any transaction greater
than $60,000 between a director and a related party. Due to the
cooperative nature of the FHLBank 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.
However, the Finance Board is including in the combined annual report
an aggregate disclosure about the percentage of advances to members
whose officers serve as directors of an FHLBank. In addition, the
Finance Board is including a disclosure in the annual financial report
that shows the 10 largest advance borrowers in the FHLBank System and
the 5 largest advance borrowers by FHLBank along with indicating which
of these members had an officer that also served as an FHLBank
director.
Information about Directors and Officers
The SEC's regulations require disclosure of a wide variety of
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. The Finance Board believes that presenting biographical
information on all FHLBank directors and all FHLBank executive officers
in the combined annual report would be unwieldy and not particularly
enlightening. The FHLBanks may wish to consider making this disclosure
in their individual annual reports. The Finance Board has expanded the
biographical information about members of the Board of Directors of the
Finance Board and FHLBank presidents by including the age of those
persons. In addition, the Finance Board is providing 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's regulations require 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. The combined
financial report is primarily a disclosure document for bond holders.
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.
Compensation
Item 402 of the SEC's Regulation S-K (17 CFR 229.402) sets forth
the requirements for disclosure of compensation for the chief executive
officer and the four next most highly compensated executive officers
other than the chief executive officer. The policy statement will
require disclosure of compensation information only for the presidents
of the 12 FHLBanks and the managing director of the Office of Finance.
Exhibits
The policy statement will not require the FHLBanks to file the
exhibits specified to be filed with the SEC by the SEC's regulations.
Per Share Information
The SEC has a number of requirements that certain financial
information be presented on a per-share basis. Per share disclosure is
not meaningful or appropriate for the FHLBank System, because stock in
the FHLBanks is not publicly traded and is based on statutory
requirements. The amount of shares expands and contracts as member
assets or advances change. Furthermore, members purchase FHLBank stock
at par and can redeem it at par.
Ownership of Capital Stock
Item 403 of the SEC's Regulation S-K (17 CFR 229.403) requires
certain disclosures about the beneficial ownership of capital stock.
The policy statement requires, and the annual FHLBank System 1997
combined financial report will provide instead, a listing of the top 10
holders of capital stock in the FHLBank System and a listing of the top
5 holders of capital stock by FHLBank. These listings will identify all
those members and officer of which serves and an FHLBank director.
Dates
SEC registrants are required to file their annual reports within 90
days from the end of their fiscal year, and quarterly reports are to be
filed within 45 days from the end of a fiscal quarter. Since the
Finance Board cannot begin preparing the combined financial reports
until the FHLBanks finish their annual and quarterly reports, the time
frames for the publication of the combined annual and quarterly reports
need to be adjusted accordingly. It is Finance Board's intention
generally to make the annual report available by June 30, and to make
the quarterly reports available within 90 days of the end of a quarter.
Distribution
While the SEC rules apply to entities with publicly traded stock,
the stock in the FHLBanks is not publicly traded, and minimum capital
stock holdings are set in statute. Furthermore, only members of an
FHLBank may own stock in that FHLBank. Members purchase stock at its
par value, and voluntary members may redeem stock at its par value.
Nevertheless, the Finance Board believes that disclosure to the
stockholders of an FHLBank is as important as disclosure to the
purchasers of FHLBank debt. Therefore, the Finance Board will
distribute a copy of the annual and quarterly combined financial
reports to each FHLBank member.
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
[[Page 39875]]
(FHLBank) System consolidated obligations receive information
consistent, in the judgment of the Finance Board and to the extent
practicable, with disclosures required to be made by Securities and
Exchange Commission (SEC) registrants. The Finance Board has the
explicit statutory responsibility to ensure that the FHLBanks are able
to raise funds in the capital markets, and assuring that it is
providing industry-standard disclosures facilitates the issuance of
this debt.
2. General Policy
It is the policy of the Finance Board that in preparing the
combined FHLBank System annual and quarterly financial reports the
Finance Board will maintain consistency to the extent practicable with
the requirements of the SEC's Regulations S-K and S-X (see 17 CFR Parts
229 and 210). With respect to the combined FHLBank System annual and
quarterly reports, consistency with the SEC's regulations will be
determined solely by the Finance Board.
The Finance Board will comply with Statement of Financial
Accounting Standards No. 131, ``Disclosures about Segments of an
Enterprise and Related Information'' (FASB 131). It will include in the
quarterly combined financial report the combining schedules required by
FASB 131.
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 quantitative
information will 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
party 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, and (2) a listing of the top 10
holders of advances in the FHLBank System and the top 5 holders of
advances by FHLBank, with a further disclosure that indicates which of
these members had an officer that served as an FHLBank.
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 FHLBank presidents and the managing director of the
Office of Finance. Since stock in each FHLBank trades at par, the
Finance Board will not include the performance graph specified in Item
402(l) of Regulation S-K, 17 CFR 229.402(l).
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.
g. Per Share Information. The statement of financial information as
required by Items 301 and 302 of Rule S-K , 17 CFR 229.301 and 302, is
inapplicable because the shares of the FHLBanks are subscription
capital that trades at par, and the shares expand or contract with
changes in member assets or advance levels.
h. Beneficial Ownership. Item 403 of Rule S-K, 17 CFR 229.403,
requires the disclosure of security ownership of certain beneficial
owners and management. The combined financial report will provide a
listing of the 10 largest holders of capital stock and a listing of the
5 largest holders of capital stock by FHLBank. This listing will also
indicate which members had an officer that served as a director of an
FHLBank.
i. Dates. The Finance Board generally intends to make the annual
combined financial report available within 180 days from the end of the
previous year. It plans to make quarterly reports available 90 days
from the end of the previous quarter.
4. Distribution
The Finance Board will distribute a copy of the annual and
quarterly combined financial reports to each FHLBank member.
Dated: June 24, 1998.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 98-19809 Filed 7-23-98; 8:45 am]
BILLING CODE 6725-01-P
