[Federal Register Volume 65, Number 2 (Tuesday, January 4, 2000)]
[Proposed Rules]
[Pages 324-338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-35]
[[Page 323]]
Part II
Federal Housing Finance Board
_______________________________________________________________________
12 CFR Parts 900, 910 and 941
Reorganization of the Office of Finance; Authority To Issue
Consolidated Obligations on Which the Federal Home Loan Banks Are
Jointly and Severally Liable; Proposed Changes to the Financial
Management Policy of the Federal Home Loan Bank System; Proposed Rule
and Notice
Federal Register / Vol. 65, No. 2 / Tuesday, January 4, 2000 /
Proposed Rules
[[Page 324]]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 900, 910 and 941
[No. 99-61]
RIN 3069-AA88
Reorganization of the Office of Finance; Authority To Issue
Consolidated Obligations on Which the Federal Home Loan Banks Are
Jointly and Severally Liable
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 regarding the Office of Finance (OF), a joint
office of the Federal Home Loan Banks (Bank or Banks). The proposed
rule would reorganize the OF and broaden its duties, functions and
responsibilities in two key respects: the OF would perform consolidated
obligation (CO) issuance functions, including preparation of combined
financial reports, for the Banks; and the OF would serve as a vehicle
for the Banks to carry out joint activities in a way that promotes
operating efficiency and effectiveness in achieving the mission of the
Banks.
With respect to the issuance of COs, i.e., bonds, notes or
debentures, the proposed rule would make the Banks, rather than the
Finance Board, the issuers of COs under section 11 of the Federal Home
Loan Bank Act (Act). As proposed, this action would not have a
substantive effect on the debt issuance process or on the joint and
several obligation of the Banks on the COs, but it would make the Banks
responsible for accessing the capital markets through the OF to fund
their own operations. This is consistent with devolutionary actions
taken by Congress to give the Banks greater autonomy over the
management of their business and to remove the Finance Board from
involvement in Bank management functions.
The proposed rule also is intended to provide the powers,
operational independence, and flexibility the OF needs to be available
for the Banks' use as a central management facility with respect to all
joint Bank asset activities, and to facilitate the issuance of COs by
the Banks or the Finance Board under section 11 of the Bank Act.
The Finance Board is also proposing to make certain conforming
amendments to its policy statement entitled ``Financial Management
Policy of the Federal Home Loan Bank System'' (FMP). A Notice
describing the proposed FMP changes in detail is published elsewhere in
this issue of the Federal Register.
DATES: The Finance Board will accept comments on the proposed rule in
writing on or before March 6, 2000.
ADDRESSES: Send comments to Elaine L. Baker, Secretary to the Board, by
electronic mail at bakere@fhfb.gov, or by regular mail at the 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, Deputy Chief
Economist, Office of Policy, Research and Analysis, 202/408-2845,
mckenziej@fhfb.gov, Charlotte A. Reid, Special Counsel, Office of
General Counsel, 202/408-2510, reidc@fhfb.gov, or Eric E. Berg, Senior
Attorney, Office of General Counsel, 202/408-2589, berge@fhfb.gov.
Staff also can be reached by regular mail at the Federal Housing
Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.
SUPPLEMENTARY INFORMATION:
I. Overview of Proposal
The proposed rule would establish a new structure for the OF to
accommodate additional functions proposed to address new challenges
faced by the Bank System. With respect to the issuance of COs, the
proposed rule would authorize the Banks, rather than the Finance Board,
to issue COs, as discussed more completely below. This action is
consistent with the Finance Board's ongoing efforts to remove itself as
much as it can legally do from involvement in the management of the
Banks, and with devolutionary actions taken by Congress to give the
Banks greater autonomy over the management of their business.
Notwithstanding the fact that the members of the Bank System know
their communities and customers' needs best, the mortgage market is no
longer the fragmented, localized market that it was when Congress
created the Bank System in 1932. Driven by technological improvements,
the mortgage market's delivery systems have become more national in
scope, and the mortgage market now plays a central role in the national
economy. The need for ``an appropriate vehicle for coordination of
System-wide business issues,'' such as a central facility to assist the
Banks in managing various aspects of their operations, including
mortgage-related assets, has grown in the ten years since Congress
confirmed the OF as a joint office of the Banks in the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).\1\
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\1\ See Pub. L. 101-73, tit. VII, sec. 702, 103 Stat. 183 (Aug.
9, 1989). A General Accounting Office (GAO) report commissioned by
Congress in section 1393 of the Housing and Community Development
Act of 1992, which was issued on December 8, 1993 (GAO/GGD-94-38)
(GAO Report), noted that FIRREA made ``many changes'' to the Bank
System that ``introduced significant cultural changes for the Banks
and their members.'' GAO Report at 19-20. Principally, after FIRREA,
the Banks were no longer involved in the oversight and supervision
of their members. The members henceforth only would view the Banks
as a credit facility, and this change would promote the cooperative
nature of the Bank System. GAO concluded, however, that to attract
new, voluntary members and retain members, the Banks ``must provide
sufficient value--through the products and services offered and the
dividends paid--to warrant the required stock investment for
membership.'' Id. at 21. The GAO Report noted the need for
coordination of System-wide business issues. Id. at 117.
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The Finance Board believes that the market has created an incentive
and a business need for a facility controlled by the Banks and their
members to provide economies and efficiencies of scale, as it has done
for the issuance of COs by the Finance Board, by giving the Banks the
flexibility to centralize certain of their common business functions.
The Finance Board anticipates that this need will become even more
critical as the Banks develop asset activities such as Member Mortgage
Assets as part of their core business.\2\ Not only would such a
facility provide operational benefits, it also would enhance the safety
and soundness of the operations by providing both expertise and a
mechanism for achieving risk management, and geographic diversity on a
joint asset portfolio basis. In light of the recent enactment of Title
VI of the Gramm-Leach-Bliley Act, the Federal Home Loan Bank System
Modernization Act of 1999,\3\ the Finance Board is taking this
opportunity to propose a reorganization of the OF that will allow this
joint office of the Banks to function in this way at the request of the
Banks and facilitate growth in the Bank System's business as the Banks
seek to provide their members with new credit products and respond to
changes in the marketplace and congressional mandates. The Finance
Board believes having the OF serve these functions is particularly
important because the OF is the only statutorily acknowledged and
sanctioned joint office for the Banks,
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and the legal authority for the Banks to establish other joint entities
is in question.\4\
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\2\ Indeed, GAO foresaw this need, stating that ``there may be a
need for a central coordinating mechanism * * * [that] should reside
in the [Bank] System itself.'' See GAO Report at 113. The GAO Report
observed that there were certain positive goals that could be
attained by relieving the Finance Board of certain Bank System
governance functions, including enhanced cost control and the
centralization of ``certain business functions.'' Id. at 114.
\3\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
\4\ See, e.g., section 304(a) of the Government Corporation
Control Act, codified at 31 U.S.C.A. Sec. 9102 (West 1994).
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A. Issuance of Consolidated Obligations
Since 1946, the operations of the Banks and member demand for
advances have been financed principally with the proceeds from COs
issued pursuant to section 11(c) of the Bank Act by the Finance Board,
or its predecessor agencies. See 12 U.S.C. 1431(c). The Banks,
individually and collectively, are the sole obligors on COs issued by
the Finance Board under section 11(c) of the Bank Act.\5\ The issuance
of COs by the Finance Board under section 11(c) of the Bank Act is
governed by Finance Board regulations set forth in 12 CFR parts 910 and
941, the FMP and an annual debt authorization. The Finance Board is
proposing to achieve the goal of continuing to give the Banks the
autonomy to manage and run their own businesses by authorizing the
Banks to issue joint debt pursuant to section 11(a) of the Bank Act
through the OF as agent for the Banks, which would still be called COs,
on which the Banks would be jointly and severally liable. See 12 U.S.C.
1422a(a)(3)(B)(iii), 1431(a) and (d). Section 11(a) of the Bank Act
provides that the Banks may issue bonds, debentures or other
obligations ``upon such terms and conditions'' as the Finance Board may
approve and ``subject to the rules and regulations prescribed by'' the
Finance Board. See id. 1431(a). Under the proposed rule, the same rules
governing the apportionment of joint-and-several liability with respect
to COs issued by the Finance Board through the OF as agent pursuant to
section 11(c) of the Bank Act would apply to COs issued by the Banks
through the OF as agent pursuant to section 11(a) of the Bank Act.\6\
To eliminate the potential for conflicts to the Finance Board in its
role as regulator of the OF and the Banks, the Finance Board is
removing itself from its role as issuer of the COs, and instead
allowing the Banks to raise funds in the capital markets to fund their
operations, a management function tied directly to member demand. While
the Finance Board has long been uncomfortable serving in both of these
capacities, the process, while awkward, has worked quite successfully.
However, the Finance Board's discomfort turned to concern over
potential liability for the United States as a result of litigation
arising from the bankruptcy of the County of Orange, California.
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\5\ Id. 1431(b)-(d). The Bank Act makes clear that obligations
of the Banks issued with the approval of the Finance Board are not
the obligations of, and are not guaranteed by, the United States.
See id. 1435. Congress underscored this precept in the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992,
which provides in pertinent part that none of the housing
government-sponsored enterprises' obligations or securities are
backed by the full faith and credit of the United States. See Pub.
L. 102-550, tit. XIII, sec. 1304, 106 Stat. 3944 (Oct. 28, 1992)
(codified at 12 U.S.C. 4503).
\6\ On October 12, 1999, the Finance Board published a final
rule clarifying for the Banks how their joint-and-several liability
on COs would operate, and elucidating for bondholders how they
benefit from the Banks' joint-and-several liability. See 64 FR 55125
(Oct. 12, 1999). The Bank System has been and remains financially
strong. As of September 30, 1999, there were over $477 billion in
COs outstanding. In the history of the Bank System, no Bank has ever
been delinquent or defaulted on a principal or interest payment on
any CO issued by the Finance Board or its predecessor agencies. The
joint-and-several liability of the Banks on the COs is an integral
part of investor confidence in Bank System debt.
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In the course of the Orange County litigation, (which has since
been settled with respect to the Banks, the OF and the United States),
the United States District Court for the Central District of California
held that Orange County had stated a claim for relief based on its
contention that the United States had violated the federal securities
laws in the issuance of certain COs. The District Court also found that
Orange County's claim for ``restitution'' against the United States
under the provisions of the Administrative Procedure Act was not barred
by the doctrine of sovereign immunity. The Finance Board does not
endorse these holdings, but has determined it is prudent to limit any
further risk to the United States from such suits. By taking the
proposed action, the Finance Board can accomplish this goal as well as
that of making the Banks responsible in name for this most central
aspect of their business.
As a natural and necessary adjunct to the issuance of COs, the
Banks also should be responsible for the preparation of the disclosure
documents that facilitate CO issuance and for the periodic combined
financial statements for the Bank System. Logic dictates that the OF,
as the only joint Bank System office and existing agent for CO
issuance, is the most appropriate entity to perform that function. The
OF already prepares the offering documents used in the sale of the Bank
System's COs, services the Bank System's debt, and possesses knowledge
of the Bank System's financial statements, operations and condition.
The Finance Board believes that transferring the function of preparing
combined Bank System annual and quarterly financial reports to the OF
is entirely appropriate and a provision making the transfer is included
in the proposed rule.
The proposed rule will codify the disclosure standards set forth in
the Finance Board's ``Statement of Policy: Disclosures in the Combined
Annual and Quarterly Financial Reports of the FHLBank System'' (Policy
Statement). See 63 FR 39872 (July 24, 1998). These standards generally
require the combined annual and quarterly financial reports of the Bank
System to be prepared in a manner that is, in the judgement of the
Finance Board, consistent with the disclosure requirements promulgated
by the Securities and Exchange Commission (SEC). While securities
issued by the Finance Board or the Banks are exempt from the
registration and reporting requirements of the Securities Exchange Act
of 1934, 15 U.S.C. 77c(a)42 (1934 Act), the Finance Board believes that
the disclosure requirements promulgated by the SEC pursuant to the
federal securities laws represent best practice, and that financial and
other disclosure concerning the Bank System should conform to this
standard to the greatest extent practicable. However, having determined
that certain areas of disclosure are either inapplicable or
inappropriate for the Bank System, the Finance Board has provided a
list of exceptions to the general standard in the Appendix to the
proposed rule. Preparation of combined Bank System annual and quarterly
financial reports should be greatly simplified by the codification of
uniform disclosure standards.
In the area of compensation disclosure, the Finance Board notes
that Item C of the proposed Appendix requires disclosure of
compensation information only for the 12 Bank presidents and the CEO of
the OF, whereas the SEC's regulations require that information for the
CEO, the 4 other most highly compensated executive officers who held
such offices during the last completed fiscal year, and up to 2
additional individuals for whom disclosure would have been provided but
for the fact that the individual was not serving as an executive
officer at the end of the last completed fiscal year. This exception
was adopted when the Finance Board regulated the compensation of Bank
employees, and was intended to avoid the volume of disclosure that
would result from applying the SEC standard to twelve Banks and the OF.
However, now that Bank employee compensation has been deregulated, the
Finance Board seeks comment on whether it should (1)
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expand the number of individuals for whom the required compensation
information would be provided and (2) change the triggering criteria
for compensation disclosure from title/position to income level, or
from individual Banks to the Bank System overall.
While the Finance Board is proposing that the OF prepare the Bank
System's annual and quarterly financial reports, the Finance Board will
continue to be responsible for oversight of the combined Bank System
financial reports' compliance with the applicable disclosure standards.
Accordingly, the proposed rule provides that the Finance Board in its
sole discretion will determine whether or not a combined annual or
quarterly report prepared by the OF meets the prescribed regulatory
standards. The proposed rule requires the OF to promptly comply with
any directive the Finance Board issues regarding the preparation,
filing, amendment or distribution of the combined annual or quarterly
financial reports.
B. Restructuring of the Office of Finance
The Finance Board long has recognized the importance of an
organizational structure for the OF that reflects its duties and
responsibilities. The Finance Board has re-evaluated the appropriate
organizational structure of the OF in light of the changes proposed
herein, with two key goals in mind. First, the Finance Board wants to
build on the governance model in the Bank Act, particularly after
enactment of the Gramm-Leach-Bliley Act, whereby the Banks should have
the autonomy to manage and run their own businesses. Second, the
Finance Board wants to give all of the Banks representation on the OF
Board of Directors to best achieve their operational goals.
Additionally, the Finance Board has considered that the members of the
OF Board of Directors should possess experience and qualifications to
enable the Board to be most effective in exercising business judgment
in its policy-making and decision-making roles. The proposed
reorganization is designed to provide the structure, additional
functions and operational capacity the OF must possess in order to
accommodate the evolving business needs of the Banks.
The Finance Board proposes to significantly alter both the size and
composition of the OF Board of Directors. Based on the considerations
described above, particularly the increased role being proposed for the
OF, the Finance Board believes that the Bank System would best be
served by an OF Board of Directors that includes representatives from
each Bank, members of the Bank System, and the general community.
Accordingly, the proposed rule would expand the OF Board of Directors
to a total of 24 members, 12 of whom would be appointed by the Banks, 6
of whom would be elected by Bank System members, and 6 of whom would be
appointed by the Finance Board. However, recognizing that this number
of directors may be unwieldy, the Finance Board invites comments
addressing alternative board structures for the OF that would preserve
an appropriate balance of representation by the Banks, the members and
the public, as discussed more completely below.
II. Statutory and Regulatory Background
A. The Office of Finance
The OF was one of a number of joint Bank offices established by
regulation of the former Federal Home Loan Bank Board (FHLBB),
predecessor agency to the Finance Board. Over time, the OF has evolved
to support the Banks in responding to changes in the financial markets
and Bank System member funding requirements. As originally enacted in
1932, the Bank Act permitted the Banks to issue bonds and debentures,
and established a trust registrar, which was the genesis of the OF.
From 1934 to 1948, the FHLBB directed the Banks collectively to employ
a fiscal agent to issue and sell consolidated obligations.\7\ In 1948,
the FHLBB promulgated a regulation that created the Office of the
Fiscal Agent of the Banks within the Bank System to facilitate the
issuance of COs.\8\
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\7\ In 1934, Section 503 of the National Housing Act of 1934
amended section 11 of the Bank Act to provide authority to the FHLBB
to issue COs on which the Banks are jointly and severally liable
under sections 11(b) and (c) of the Bank Act (12 U.S.C. 1431(b) and
(c)). See H.R. 9680, 73rd Cong., 2d. Sess. (Pub. No. 479) (enacted).
The contractual duties of the Fiscal Agent expanded to include
managing the Banks' investment portfolios.
\8\ See 13 FR 7447 and 8269 (1948) (codified at 24 CFR 122.80
(1949)) (repealed). The regulation provided for the appointment of
the Fiscal Agent, and expanded the duties of the Fiscal Agent to
include the sale and purchase of Bank System securities. After the
Federal Home Loan Mortgage Corporation (Freddie Mac) was created in
1970, the FHLBB created an Office of System Finance (as a separate
Bank System office) to manage Freddie Mac's investment portfolios
and reserves with those of the Federal Savings and Loan Insurance
Corporation (FSLIC) in coordination with the Office of Fiscal Agent.
The Banks since had ceased having the OF perform investment services
on their behalf.
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In 1972, the FHLBB promulgated a regulation that merged the Office
of System Finance with the Office of Fiscal Agent and created the OF as
a Joint Bank System office. See 37 FR 16864 (Aug. 22, 1972) (codified
at 12 CFR 522.80-82) (repealed). The regulation provided for the OF to
perform any ``function, duty or authority'' previously vested in the
Fiscal Agent. In addition to issuing COs under the delegated authority
of the FHLBB and servicing the debt as a fiscal agent of the Banks, the
OF was required to perform other duties as requested by a Bank or
Banks, or the FHLBB. During the 1980's, those duties included
purchasing investment securities on behalf of the Banks, researching
alternative investment vehicles and strategies and managing assets
acquired by the FSLIC.
As a part of the amendments to the Bank Act made by FIRREA, the
existing joint or collective offices of the Bank System other than the
OF were abolished, and the FHLBB regulation governing the OF was
transferred to the Finance Board's regulations. See 12 U.S.C.
1422b(b)(2); 12 CFR 932.56(a)(3) (repealed). The Finance Board
reorganized the OF as fiscal agent of the Finance Board in issuing COs
under section 11(c) of the Bank Act. See 57 FR 2832 (Jan. 24, 1992); 57
FR 11429 (Apr. 3, 1992) (codified at 12 CFR 941.9(b)(1)). The rule
instituted a three-member Board of Directors for the oversight of the
management of the OF, executing daily operations and implementing the
Board of Directors plans and policies.\9\
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\9\ From 1972 to 1992, the OF was headed by a Director. See 12
CFR 932.55 (1992) (repealed). Following the reorganization, the OF
Board of Directors consists of two Bank presidents and one private
citizen, all appointed by the Finance Board.
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B. Consolidated Obligations
The Bank Act always has authorized the Banks to issue debt, and
empowered the regulator to issue rules, regulations and orders
governing virtually every aspect of a Bank's debt issuance.\10\ Under
the original statutory scheme, the Banks were jointly and severally
liable for the debt of any Bank.\11\ In 1934,
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section 503 of the National Housing Act \12\ amended section 11 of the
Bank Act (1934 amendments) to give the Bank System more ready access to
the capital markets, and authorized the FHLBB to issue consolidated
obligations on which the Banks would be jointly and severally liable.
12 U.S.C. 1431(b) and (c). Certain constraints on the Banks' power to
issue debt were eliminated by the 1934 amendments: the requirement that
security deposits be not less than 190 percent of any consolidated
issue was replaced by provisions limiting consolidated debentures
issued by the FHLBB under section 11(b) to 5 times paid in capital. The
1934 amendments also replaced the requirement in section 11(f) that all
Banks would be jointly and severally liable for obligations issued by
any Bank, as well as the proviso, with the more broadly drawn
requirements in section (a), that the Banks' power to issue debt ``upon
such terms and conditions as the Board may approve'' is ``subject to
the rules and regulations prescribed by the Board.'' Thus, the 1934
revisions to section 11 of the Bank Act gave broad authority to the
Banks' regulator to determine the terms and conditions for the issuance
of obligations on which the Banks would be liable.
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\10\ As originally enacted in 1932, section 11(a) permitted the
Banks to issue debt. It provided that ``Each Federal Home Loan Bank
shall have power, subject to the approval of the Board, * * * to
issue bonds and debentures having such maturities as may be
determined by the board, secured by the transfer of eligible
obligations of borrowing institutions on advances made by the bank
to borrowing institutions and by the deposit of home mortgages.''
Sec. 11, c. 522, 47 Stat. 733 (July 22, 1932).
\11\ Section 11(f) mandated that ``the Federal Home Loan Banks
shall be jointly and severally liable for the payment when due of
all bonds and debentures, and of notes and other obligations issued
by any Federal Home Loan Bank.'' Various provisions in section 11
required the Board to prescribe rules and regulations governing the
issuance and security for the bonds, notes or debentures, and set
requirements for the security for the Banks' debt. Section 11(f)
also specified that the Banks were permitted to make agreements to
ensure the payment of such obligations, so long as the agreements
did not restrict in any way the Banks' joint and several liability.
Section 11(f), however, contained a limited proviso permitting a
Bank independently to borrow ``temporarily,'' if the Bank clearly
disclosed that the liability was limited to it as the sole issuer,
and obtained the express approval of the FHLBB. See id.
\12\ Pub. L. 479, c. 847, sec. 503, 48 Stat. 1261 (Jun. 27,
1934).
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In 1989, Congress authorized the Finance Board to maintain the OF,
a joint office of the Banks, and to delegate to the OF the ministerial
functions associated with issuance of COs. See 12 U.S.C. 1422b(b)(1)
and (2). Accordingly, the Finance Board delegated to the OF the
authority to issue COs under section 11 of the Bank Act subject to
Finance Board regulations, resolutions or policies. See 12 CFR 900.30.
The issuance of COs is governed by part 910 of the Finance Board's
regulations (12 CFR part 910), the FMP and an annual debt
authorization. The operations of the OF are governed by part 941 of the
Finance Board's regulations (12 CFR part 941). The Finance Board's
regulations and the FMP provide for a leverage limit on the issuance
COs. Section 910.1(b) prohibits the issuance of senior bonds where
immediately following such issuance the aggregate amount of senior
bonds and unsecured senior liabilities would exceed 20 times the total
paid-in capital stock, retained earnings and reserves (exclusive of
loss and deposit reserves required pursuant to section 1431(g)) of all
of the Banks). See 12 CFR 910.1(b).\13\ Additionally, Finance Board
regulations require the Banks to maintain certain assets at all times
free of lien or pledge (the negative pledge requirement) to ensure
sufficient collateralization of the consolidated obligations.\14\
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\13\ The following definitions apply to the leverage limit
provisions: `` (b) 'consolidated bonds'' means bonds or notes issued
on behalf of all Banks;'' ``(c) 'senior bonds'' means consolidated
bonds issued pursuant to 12 U.S.C. 1431 and this part and not
defeased, other than bonds specifically subordinated to any then
outstanding consolidated bonds;'' ``(d) 'unsecured, senior
liabilities'' means all obligations of the Banks recognized as a
liability under Generally Accepted Accounting Principles, except (1)
liabilities that are covered by a perfected security interest; (2)
consolidated bonds; (3) bonds issued pursuant to 12 U.S.C. 1431(a);
and (4) allowances for losses for off-balance sheet obligations.''
12 CFR 910.0(b)-(d) (1999).
\14\ The ``negative pledge requirement'' is the regulatory
requirement that the Banks maintain certain types of unpledged
assets in an amount equal to the amount of the Bank's senior bonds
outstanding. See 12 CFR 910.1(c) (1999). Section 910.1(c) provides
in pertinent part:
The Banks shall at all times maintain assets of the following
types, free from any lien or pledge, in a total amount at least
equal to the amount of senior bonds outstanding: (1) Cash; (2)
Obligations of or fully guaranteed by the United States; (3) Secured
advances; (4) Mortgages as to which one or more Banks have any
guaranty or insurance, or commitment thereof, by the United States
or any agency thereof; (5) Investments described in section 16(a) of
the Bank Act, as amended (12 U.S.C. 1436(a)); and (6) Other
securities which have been assigned a rating or assessment by a
major nationally recognized securities rating agency that is
equivalent to or higher than the rating or assessment assigned by
such agency or senior bonds outstanding. (Proviso omitted).
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C. FMP
The FMP generally provides a framework within which the Banks may
implement their financial management strategies in a prudent and
responsible manner. Specifically, the FMP identifies the types of
investments the Banks may purchase pursuant to their statutory
investment authority. The FMP also includes a series of guidelines
relating to the funding and hedging practices of the Banks, as well as
to the management of their credit, interest-rate and liquidity risks,
and establishes liquidity requirements in addition to those required by
statute, as noted above. See FMP secs. III-IV.
The FMP evolved from a series of policies and guidelines initially
adopted by the FHLBB in the 1970s and revised a number of times
thereafter. The Finance Board adopted the FMP in 1991, consolidating
into one document the previously separate policies on funds management,
hedging and interest rate swap, and adding new guidelines on management
of unsecured credit and interest-rate risks.
III. Analysis of Proposed Rule
A. Overview
The proposed rule would amend parts 910 and 941 of the Finance
Board's regulations governing operation of the OF and issuance of COs,
to enable the OF to issue debt on behalf of the Banks pursuant to
section 11(a) of the Bank Act, require the OF to prepare the quarterly
and annual combined financial reports of the Bank System, and provide
services at the request of two or more Banks related to joint asset
activities undertaken by the requesting Banks, including the
administration of Member Mortgage Asset programs and liquidity
management. With the additional functions and operational capacity
established for the OF under the proposed rule, the Banks will have the
ability to make the most efficient use of the OF and its services and
thereby to maximize mission achievement as they develop new joint asset
activities.
B. Amendments to 12 CFR 900.30
The proposed rule would amend Sec. 900.30 of the Finance Board
regulations to provide for the termination as of December 31, 2000, of
the OF's authority to act as agent for the Finance Board in the
issuance of COs under section 11(c) of the Bank Act. By this provision,
the Finance Board intends to transition itself out of, and the Banks
into, the debt issuance function under the provisions of section 11(a)
of the Bank Act as soon as practicable.
C. CO Issuance--Proposed Amendments to Part 910
1. Definitions
The proposed rule would delete Secs. 910.0(a) and (b), the
definitions of the terms ``Board'' and ``Bank,'' which have been
proposed to be defined for all Finance Board regulations in a previous
rulemaking, see 64 FR 52148 (Sept. 27, 1999), and the definition of the
term ``unsecured senior liabilities'' in Sec. 910.0(d). The proposed
rule would amend the definition of the term ``consolidated obligation''
to clarify that it includes bonds, notes or debentures issued by the
Banks through the OF under section 11(a) of the Bank Act. The proposed
rule also would add a new Sec. 910.1(b) to define the term ``Nationally
Recognized Statistical Rating Organizations.''
2. Section 910.2
Proposed Sec. 910.2(a) sets forth the types of liabilities
authorized for Bank business operations. It is intended to be an
exclusive list and the Banks' sole liability authority, replacing the
[[Page 328]]
Funding Guidelines section of the FMP. The Funding Guidelines of the
FMP, which set forth the parameters for the use by the Banks of
alternative sources and structures in funding their activities, are
proposed to be deleted in a separate notice published elsewhere in this
Federal Register, See FMP sec. IV. The Funding Guidelines differentiate
between Bank specific liabilities and COs, which are the joint-and-
several liabilities of the Banks. See id. at secs. IV.B. and C.
Under the FMP, authorized Bank specific liabilities generally
include: (1) Deposits from members, from any institution for which a
Bank is providing correspondent services, from another Bank, and from
other instrumentalities of the United States; (2) federal funds
purchased from any financial institution that participates in the
federal funds market; and (3) repurchase agreements, with the provision
that those requiring the delivery of collateral by a Bank may be only
with Federal Reserve Banks, U.S. government sponsored agencies and
instrumentalities, primary dealers recognized by the Federal Reserve
Bank of New York, eligible financial institutions,\15\ and states and
municipalities with a Moody's Investment Grade rating of 1 or 2.
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\15\ Eligible financial institutions include banks and Federal
Deposit Insurance Corporation (FDIC) insured financial institutions,
including U.S. subsidiaries of foreign commercial banks, whose most
recently published financial statements exhibit at least $100
million of Tier I (or tangible) capital if the institution is a
member of the investing Bank or at least $250 million of tangible
capital for all other FDIC-insured institutions, and which have been
rated at least a level III institution as defined in section VI.C of
the FMP.
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The FMP also prohibits a Bank from directly placing COs with
another Bank. See id. at sec. IV.C.4.
The proposed rule would incorporate certain provisions of section
IV of the FMP into regulation. Proposed Sec. 910.2(a)(1) sets forth
each Bank's authority to act as a joint-and-several obligor with other
Banks on COs, as authorized under part 910. Proposed Sec. 910.2(a)(2)
continues each Bank's authority to accept deposits from members, other
Banks and instrumentalities of the United States, but provides that the
deposit transaction may not be conducted in such a way as to result in
the offer or sale of a security in a public offering as those terms are
used in 15 U.S.C. 77b(3). In addition, recognizing the importance of
federal funds and repurchase agreements for the Banks' liquidity
management, proposed Sec. 910.2(a)(3) allows a Bank to purchase federal
funds and enter into repurchase agreements, but only in order to
satisfy the Banks' short-term liquidity needs.
Proposed Sec. 910.2(b) would retain the substance of existing
Sec. 910.1(a) concerning COs to be issued by the Finance Board through
the OF, but would expressly provide that the Finance Board may
terminate the delegation of authority to the OF to issue COs on behalf
of the Finance Board pursuant to section 11(c) of the Bank Act.
Proposed Sec. 910.2(b) and (c) continue the existing prohibition on
directly placing COs with another Bank. It is the opinion of the
Finance Board that such placements do not further the mission of the
Bank System. Proposed Sec. 910.2(c) would expressly authorize the OF to
undertake the issuance of joint Bank debt pursuant to section 11(a) of
the Bank Act as COs on which all of the Banks are jointly and severally
liable subject to Sec. 910.8, which governs the joint-and-several
liability of the Banks on COs issued under section 11(c) of the Bank
Act.
The proposed rule does not include the 20-to-1 leverage limit from
Sec. 910.1(b) of the existing regulations, or the 20-to-1 leverage
limit on each Bank contained in the FMP. Instead, as discussed in
detail in the Notice published elsewhere in this issue of the Federal
Register, the Finance Board is proposing to amend the FMP to require
each Bank to have and maintain total capital in an amount equal to at
least 4.76 percent of the Bank's total assets.
Neither the elimination of the System-wide leverage limit from the
Finance Board's regulations, nor the proposed revision to the leverage
limit contained in the FMP, would have any practical effect on the Bank
System or its bondholders. The Finance Board, as the regulator of the
Banks, would continue to monitor each Bank for compliance with the
individual leverage limit included in the FMP. The current FMP
prohibits a Bank from participating in COs if such transactions would
cause the Bank's liabilities to exceed 20 times the Bank's total
capital. The proposed revision to the FMP establishes an equivalent
leverage standard, stated as a percentage of assets, which would
require each Bank to maintain capital of at least 4.76 percent of its
total assets. The imposition of this standard on each Bank will ensure
that the Bank System itself stays within the leverage limit, rendering
any retention of a Bank System-wide leverage limit unnecessary.
Further, the Finance Board notes that with the recent passage of the
Gramm-Leach-Bliley Act, Banks will be subject to statutory leverage
limits and risk-based capital requirements. When implemented, the new
risk-based capital regime will provide an additional safeguard to the
Bank System and its bondholders by requiring Banks to hold capital in
proportion to the risks they assume.
As discussed above, the Finance Board, by incorporating COs issued
by the Banks under section 11(a) of the Bank Act into the definition of
the term ``consolidated obligations'' in part 910, intends that the
provisions of Sec. 910.8 pertaining to the joint-and-several liability
of the Banks on COs shall apply to such debt because it enhances
investor confidence in Bank System debt, and promotes the liquidity of
the bonds.
Proposed Sec. 910.2(d) amends existing Sec. 910.1(c), the negative
pledge requirement, by requiring each Bank to at all times maintain the
assets listed in an amount at least equal to the Bank's pro rata share
of the outstanding COs issued by the OF on behalf of the Finance Board
under section 11(c) and the COs issued by the OF on behalf of the Banks
under section 11(a) in which the Bank participated for purposes of the
negative pledge requirement. The proposed rule retains the negative
pledge requirement for debt previously issued by the OF on behalf of
the Finance Board under section 11(c), and expressly requires each Bank
to maintain the specified assets free of pledge in an amount equal to
the Bank's pro rata share in COs issued by the OF on behalf of the
Banks under section 11(a) in which the Bank participated. In connection
with these proposed amendments, it is the intention of the Finance
Board to preserve the existence of the special asset accounts at the
Banks established when the leverage limit in current part 910 was
raised in 1992 from 12-to-1 to 20-to-1. See Finance Board Res. No. 92-
751 (Dec. 21, 1992). The Finance Board has maintained these
requirements in the proposal to cause the least amount of change
possible to the current structure and thereby avoid disruptions of the
market. The Finance Board invites comment on this provision.
3. Sections 910.3 Through 910.7
Sections 910.3 through 910.6 are retained, as amended, by
substituting ``Finance Board'' for ``Board,'' ``Bank'' for ``Federal
home Loan Bank,'' and ``consolidated obligation'' for ``consolidated
bond.'' Current Sec. 910.6(b)(2), which purports to impose limitations
on the Finance Board's ability to change the leverage limit provision
in current Sec. 910.6(b), provides that current Sec. 910.1(b) may be
changed by the Finance Board if the Finance Board receives either: (1)
Written
[[Page 329]]
evidence from at least one major nationally recognized securities
rating agency that the proposed change will not result in the lowering
of that rating agency's then-current rating or assessment on senior
bonds outstanding or next to be issued; or (2) a written opinion from
an investment banking firm that the proposed change would not have a
materially adverse effect on the creditworthiness of senior bonds
outstanding or next to be issued. While the Finance Board will continue
to consult with the ratings agencies to preserve the triple-A rating of
Bank System COs, this provision is proposed to be deleted along with
the rest of the existing Sec. 910.6.
Proposed Sec. 910.7 provides the conditions under which the OF
Board of Directors may authorize the issuance of COs: the OF Board of
Directors shall authorize the offering for current and forward
settlement (not to exceed 12 months) or the reopening of COs as
necessary and authorize the maturities, rates of interest, terms and
conditions (subject to the provisions of 31 U.S.C. 9108) under certain
conditions, including the restriction that COs may be offered for sale
only to the extent that the Banks are committed to take the proceeds,
the OF Board of Directors shall implement investor suitability
standards and adopt a policy addressing the relationship between the
Banks and their members as debt issuers.
D. Powers, Duties, Responsibilities and Functions of the OF--Amendments
to Part 941
1. Section 941.1--Definitions
The definitions in Sec. 941.1 are proposed to be revised as
follows: the term ``Office of Finance'' becomes ``OF'' in the heading
and is added as a defined term; the term ``OF Board of Directors'' is
revised to mean the 24 member administrative body responsible for the
oversight of management of the OF; the terms ``Chief Executive
Officer'' and ``OF Operations Imprest Fund'' are added as new defined
terms. The definition of the term ``consolidated obligation'' is made
consistent with the proposed definition in Sec. 910.1(a). The
definitions of the terms ``Finance Board,'' ``Bank,'' and ``Bank Act''
which have been proposed to be defined for all Finance Board
regulations in a previous rulemaking, see 64 FR 52148 (Sept. 27, 1999),
and the definition of the term ``Director'' are deleted.
2. Section 941.2--Powers and Responsibilities of the OF
Proposed Sec. 941.2(a) states that the OF is a joint office of the
Banks under section 2B of the Bank Act. See 12 U.S.C. 1422b(b)(2).
Proposed Sec. 941.2(b) sets out the broadened purpose of the OF: to
facilitate the accomplishment of the mission of the Banks as set forth
in section 2A of the Bank Act. Id. 1422a(3)(A)(ii) and (iii). As a part
of its purpose to further the mission of the Banks, proposed
Sec. 941.2(b)(1) expressly provides that the OF shall issue COs on
which the Banks shall be jointly and severally liable, on behalf of the
Banks and the Finance Board under sections 11(a) and 11(c) of the Bank
Act, respectively. Id. 1431(a) and (c). The second prong of the OF's
purpose is to support the Banks upon the request of two or more Banks
undertaking joint asset activities that the Banks are otherwise
authorized by law to undertake individually.
Proposed Sec. 941.2(c) sets out the functions the OF is authorized
to undertake in support of the issuance of debt and the support to be
provided to Banks engaged in joint asset activities. Proposed
Sec. 941.2(c)(1) contains the specific parameters related to issuance
and servicing of COs: conducting negotiations relating to the offering
and sale of COs and other obligations of the Banks, and promoting
market discipline and making timely payments on the COs. Proposed
Sec. 941.2(c)(1)(iii) requires the OF to offer, issue and service COs
effectively and at the lowest all-in funding costs over time, with due
regard for prudent risk-management practices, prudential debt
parameters, short-and long-term market conditions, the cooperative
nature of the Bank System, and the Banks' role as government-sponsored
enterprises. The proposed rule further provides that such debt shall be
issued consistent with maintaining reliable access to the short-term
and long-term capital markets, by positioning the issuance of debt to
take advantage of current and future capital market opportunities, and
requires the OF to define and maintain appropriate investor suitability
standards. In considering the cooperative nature of the Bank System,
the OF specifically must take into account the relationship between the
Banks as debt issuers, and the members of the Bank System as retail
issuers of debt, such as certificates of deposit, and the potential for
competition between the Banks and their members.
As discussed, the OF currently issues debt on behalf of the Finance
Board. The Finance Board annually adopts a debt-issuance authorization
to the OF that includes parameters to which the debt must conform. If
the Banks are authorized to issue joint debt under section 11(a) of the
Bank Act, as proposed, the annual Finance Board authorization,
including the parameters to which debt must conform, would no longer be
required. However, the Finance Board continues to be responsible for
ensuring that the Banks are able to raise funds in the capital markets.
See 12 U.S.C. 1422a(a)(3)(B)(iii). Accordingly, the proposed rule
requires the OF Board of Directors to implement policies to access debt
markets according to an efficient and managed process that establishes
prudent debt parameters and risk-management practices. In particular,
this will involve establishing policies that may temporarily prevent a
Bank from accessing the capital markets or prevent a Bank from issuing
a specific type of security. In addition, the proposed rule requires
the OF to adopt, implement and maintain investor suitability standards.
As a part of its CO issuance function, proposed Sec. 941.2(c) would
assign to the OF the function of preparing the combined Bank System
annual and quarterly financial reports (financial reports). Proposed
Sec. 941.2(c)(1)(iv) would codify current Finance Board policy (Finance
Board Res. No. 98-27 (June 24, 1998)) and set forth the standards under
which the OF must prepare the financial reports, including requiring
that the scope, form and content of the disclosure contained in such
financial reports generally be consistent with the requirements of the
SEC's Regulations S-K (specific narrative disclosure requirements) and
S-X (accounting and financial statement disclosure requirements) (17
CFR parts 229 and 210) and be presented in accordance with the
Statement Of Financial Accounting Standards No. 131, ``Disclosures
about Segments of an Enterprise and Related Information'' (FAS 131).
While the FAS 131 standard only applies to public business enterprises,
and not, therefore, to a government-sponsored enterprise such as the
Bank System, the Finance Board continues to believe that presentations
resulting from compliance with FAS 131, with each Bank presented as a
separate segment, provide useful information to bondholders and Bank
members.
Proposed Sec. 941.2(c)(1)(iv)(C) references an Appendix to the
proposed rule that lists exceptions to the standards set forth in
Sec. 941.2(c)(1)(iv)(A) and (B). These exceptions stem from the Finance
Board's belief that the general standards may include disclosure
requirements that are inapplicable to, or inappropriate for, the Bank
System. The list of exceptions is similar to that contained in the
Finance Board's Policy
[[Page 330]]
Statement, and includes certain disclosures concerning related-party
transactions, biographical information, compensation, submission of
matters to a vote of shareholders, exhibits, per-share information and
beneficial ownership. Exceptions relating to derivatives and the filing
schedule for financial reports that are included in the Finance Board's
Policy Statement have been omitted from the Appendix since the Finance
Board intends the SEC standard to be met in each case. The Appendix
also expands the list of persons required to provide biographical
information to include members of the OF Board of Directors, in
recognition of the increased role assigned to that body by the proposed
reorganization of the OF.
References to the ``managing director of the OF'' in the Policy
Statement have been changed to the ``Chief Financial Officer of the
OF'' in the Appendix.
Proposed Sec. 941.2(c)(1)(iv)(D) provides that the OF will file and
distribute combined Bank System financial reports according to a
schedule that mirrors the filing requirements applicable to corporate
registrants under the 1934 Act (i.e., annual reports within 90 days
after the end of the fiscal year and quarterly reports within 45 days
after the end of each of the first three fiscal quarters). The Finance
Board believes that, just as disclosure concerning the Bank System
should conform to industry standards, so too should the Bank System
provide that information to interested parties within the timeframes
applicable in the industry. Proposed Sec. 941.2(c)(1)(iv)(D) would
require the OF to distribute financial reports to each Bank member
according to the same schedule to ensure prompt dissemination of
relevant information. Proposed Sec. 941.2(c)(1)(iv)(E) expressly
confirms the Finance Board's sole authority to determine compliance
with the standards of part 941, while proposed Sec. 941.2(c)(1)(iv)(F)
provides an explicit compliance mechanism by requiring the OF to
promptly comply with any Finance Board directive pertaining to the
preparation, filing, amendment or distribution of financial reports.
Proposed Secs. 941.2(c)(1)(v), (vi) and (vii) obligate the OF to
stay informed on issues and developments relating to capital markets
and COs, and to pass relevant information along to the Banks. Proposed
Sec. 941.2(c)(1)(v) expressly requires the OF to provide capital
markets information concerning debt to the Banks. Proposed
Sec. 941.2(c)(1)(vi) provides that the OF shall manage relationships
with Nationally Recognized Statistical Rating Organizations (NRSROs) in
connection with the NRSRO's ratings of COs, while Sec. 941.2(c)(1)(vii)
allows the OF to conduct research reasonably related to the issuance or
servicing of COs. These functions are intended to allow the OF to serve
as a centralized repository for information supporting the issuance of
COs for the benefit of the Bank System.
3. Joint Asset Activity Management
The Finance Board has determined that the Banks have incidental and
investment authority to undertake certain lending programs with their
members whereby a Bank may purchase or fund mortgages originated by
members, subject to certain conditions. On October 4, 1999, the Finance
Board adopted Resolution Number 99-50, which authorized the Banks to
``establish and operate Member Mortgage Assets programs, a generic
designation for programs that efficiently allocate mortgage risks so as
to best use the core competencies of the entities involved, provide
appropriate capital treatment to the participating financial
institution members, and provide capital market funding and risk
management alternatives, all for the ultimate benefit of consumers.''
See Finance Board Res. No. 99-50 (Oct. 4, 1999); see also 64 FR 60448
(Nov. 5, 1999). Finance Board Resolution Number 99-50 also includes the
terms and conditions applicable to the operation of member mortgage
assets programs. See Finance Board Res. No. 99-50 at 2.
These are not the only potential joint asset activities that the
Banks may choose to conduct. Certain advance participation programs or
investments, liquidity management and investments in housing finance
agency bonds present potential for joint activity among the Banks.
Any joint asset activities in which the Banks may engage may be
most efficiently administered on a joint basis through a central
facility. Administering joint assets through a centralized facility
offers the added safety and soundness benefits of better risk-
management capabilities and geographic diversity in the portfolio. The
latter is particularly important given the national nature of the
mortgage markets. This is an issue the Finance Board will continue to
study as this product develops and business therein increases.
Proposed Sec. 941.2(c)(2) is intended to authorize the OF, as the
only statutorily recognized joint office of the Banks, to operate in
the above capacity. It provides that, to the extent requested by two or
more Banks pursuant to any agreement or contract, the OF shall
facilitate or provide services to the Banks in connection with any Bank
joint asset activities authorized by law. With regard to the joint
asset activities of the Banks, the OF would be required to provide
administrative and technical support for the origination, purchase,
management, servicing or sale of any asset owned by one or more Banks
pursuant to any contract, including member mortgage assets; provide
market information to the Banks concerning member mortgage assets and
other assets or investments of the Banks; conduct and provide research
on such assets and investments; develop effective systems to monitor
credit exposure and manage counter-party risk; adopt procedures to
assist the Banks in managing their liquidity; and adopt procedures to
facilitate the inter-Bank sale of participation interests in advances
and investments. This section does not require the Banks to make use of
the OF in this capacity, but it does require the OF to provide the
services outlined if two or more Banks wish the OF to do so. The OF
may, of course, establish a reasonable fee structure or charge for its
services by contract or otherwise. It also may mediate among competing
Bank demands, in accordance with its specified duties and
responsibilities.
Proposed Sec. 941.2(c)(3) provides that, in accordance with
policies and procedures established by the OF Board of Directors, the
OF shall perform such duties and responsibilities for the Financing
Corporation (FICO) or the Resolution Funding Corporation (REFCorp) on
behalf of the Banks, as may be required. This section preserves a
current function of the OF as set forth in Sec. 941.5(b).
Proposed Sec. 941.2(d) provides that the OF may contract with a
Bank or Banks for the use of Bank facilities or personnel in order to
perform its functions, which is currently set forth in Sec. 941.7(b).
4. Finance Board Oversight
Proposed Sec. 941.3 provides that the Finance Board shall retain
the same regulatory oversight authority and enforcement powers over the
OF, the OF Board of Directors, the directors, officers, employees,
agents, attorneys, accountants or other OF staff, as it has over a Bank
and its respective board members, officers, employees, attorneys,
accountants, agents or other staff, which is broader than the existing
provision. The proposed rule deletes Sec. 941.3(a), which states that
the activities of the OF are subject to the approval of the Finance
Board. The Finance Board believes that Sec. 941.3 should be amended to
expressly state the Finance Board's
[[Page 331]]
supervisory role in the proposed expanded functions of the OF.
Additionally, the proposed rule states that, pursuant to Section 20 of
the Bank Act, 12 U.S.C. 1440, the Finance Board shall examine the OF,
all funds and accounts that may be established pursuant to this part,
and the operations and activities of the OF, as provided for in the
Bank Act or any regulations promulgated pursuant thereto. This is
somewhat broader in scope than the provisions of existing Sec. 941.3.
E. Organizational Structure--Amendments to Part 941
1. Section 941.4--the OF Board of Directors
Current Sec. 941.7(c) establishes an OF board of directors composed
of three members, two Bank presidents and one private citizen with
demonstrated expertise in financial markets, all appointed by the
Finance Board. This structure has served the OF and the Bank System
while the OF's only functions have been to issue COs on behalf of the
Finance Board and make CO principal and interest payments when due on
behalf of the Banks. The proposed rule contemplates that the OF will
undertake additional, varied responsibilities that would require
broader oversight by a board of directors possessing a wide range of
financial sector credentials. Accordingly, proposed Sec. 941.4(a) would
change the size and composition of the OF Board of Directors to reflect
the proposed expanded duties and functions of the OF. As revised, the
OF Board of Directors would consist of 24 individuals, 6 of whom would
be appointed by the Finance Board, 6 of whom would be elected by Bank
System members, and 12 of whom would be appointed by the Banks. The
Finance Board acknowledges that the size of the proposed OF Board of
Directors may seem unwieldy to some. The ratio and balance among Bank
representatives, System representatives and representatives of the
public is the principle most important to the Finance Board in this
provision. The quest to achieve the proper balance while providing
every Bank a seat and a role for members and the public on the OF Board
of Directors, leads to the number proposed. The Finance Board seeks
comment on and suggestions for alternative structures that might be
more workable in terms of number that that would still maintain the
appropriate mix and balance of representation on the OF Board of
Directors. For instance, if less than 12 Banks were to be represented
on the OF Board of Directors at any one time, the regulation could
provide for rotating Bank representation, or the elimination of the
requirement for an Executive Committee.
Under proposed Sec. 941.4(a)(1), directors appointed by the Finance
Board would have to be U.S. citizens with demonstrated experience in
financial markets or asset management, and could not be affiliated with
any Bank or broker-dealer under contract with the OF. The proposed rule
establishes no other eligibility criteria for Finance Board appointees
to the OF Board. This differs from the appointment standards for public
interest directors of the Banks, which require that two out of six
Finance Board appointees represent consumer or community interest
organizations, and prohibit any Finance Board appointee from serving as
an officer of a Bank, or as an officer or director of any member of a
Bank, or from holding shares or any other financial interest in any
member, during his or her tenure as a Bank director. See 12 U.S.C.
1427(a). The absence of such restrictions for OF Board appointees in
the proposed rule is intended to provide the Finance Board with maximum
flexibility in selecting persons it believes would best assist the OF
in fulfilling its mission. However, the Finance Board seeks comment on
whether the qualifications and restrictions applicable to appointed
Bank directors, or any others, should be included in the proposed rule
for Finance Board appointees to the OF Board.
Under proposed Sec. 941.4(a)(2), a director appointed by a Bank
must be an officer, employee, or director of the Bank. Pursuant to
proposed Sec. 941.4(a)(3), Bank System members would elect six
directors (two each year) through annual elections conducted by the OF.
Under proposed Sec. 941.4(a)(3)(i), to be eligible for a directorship,
nominees of members would have to be U.S. citizens with demonstrated
experience in financial markets or asset management, and could not be
associated with a broker-dealer under contract with the OF. A Bank
System member and its affiliates could not have more than one
representative on the OF Board of Directors at any time.
Proposed Sec. 941.4(a)(3)(ii) provides that each member of the Bank
System is entitled to nominate an eligible person for service on the OF
Board in each annual election. From such nominees, two member-elected
directorships would be filled each year by a plurality vote of Bank
System members. Each member would be permitted to cast a number of
votes equal to the number of shares of stock in such Bank the member
held at the end of the calendar year preceding the election, without
any limitation, including limits that would apply to voting in director
elections under section 7(b) of the Bank Act. See 12 U.S.C. 1427(b).
Under proposed Sec. 941.4(a)(3)(iii), the OF would prepare nomination
forms and transmit them to Bank System members no later than March 1st
of the election year. The nomination forms would state the director
eligibility requirements and restrictions. Members would have not less
than 30 calendar days to submit the nomination forms to the OF, which
would create acceptance and certification of eligibility forms and
provide them to the nominees no later than May 1st of the election
year. The nominees would have 30 days to accept or decline the
nomination and provide the written eligibility certification to the OF.
Under proposed Sec. 941.4(a)(3)(iv), the OF would prepare a ballot
for the OF Board of Directors election to be used in each Bank district
based on the acceptance and certification forms, and provide the ballot
to the Banks not later than July 1st of the election year. The Banks
would be required to transmit the ballot to their members with the
election ballots for the election of the Banks' respective boards of
directors. Bank System members would have a minimum of 30 days to vote
and return the OF Board of Directors election ballot to the OF. The OF
would tabulate the ballots and announce the slate of the OF Board of
Directors no later than November 1st of the election year.
Proposed Sec. 941.4(b) provides that the directors' terms would be
three years, and that initial terms would be staggered so that \1/3\ of
the terms expire each year. Under proposed Sec. 941.4(c), appointed
directorship vacancies would be filled in the manner in which the
appointment was originally made, while elected directorship vacancies
would be filled by majority vote of the remaining OF Board of
Directors. A director appointed or elected to fill a vacancy would
serve the remainder of the original term. Proposed Sec. 941.4(d), which
sets forth the means of selection and duties of the Chair and Vice
Chair of the OF Board of Directors, contains all of the substantive
provisions of current Sec. 941.7(e).
Proposed Sec. 941.4(e), ``Compensation,'' replaces the multiple
provisions of current Sec. 941.7(f) with a single standard that permits
members of the OF Board of Directors to receive compensation and
reimbursement for expenses incurred as a result of their service on the
OF Board of Directors.
[[Page 332]]
Proposed Sec. 941.4(f) is a new section that requires the OF Board
of Directors to establish an audit committee consistent with the
requirements set forth in part 917 (which is being proposed in a
separate notice of proposed rulemaking); an executive committee
comprised of member-elected directors, Bank-appointed directors, and
Finance Board-appointed directors, each represented in the same
proportions as they are on the full OF Board of Directors; and a
committee to coordinate the issuance and servicing of COs under part
910. The proposed rule provides authority for the OF Board of Directors
to establish additional committees as necessary and appropriate to
carry out the Board's duties and responsibilities. Additionally, the OF
Board of Directors is required to promulgate policies and define
respective roles and duties of any committees so established, which
shall be binding upon such committees.
Proposed Sec. 941.4(g) is a new section that sets the quorum
requirement for meetings of the OF Board of Directors and meetings of
committees of the OF Board of Directors at a simple majority of the
total directorships on the OF Board of Directors or the committee.
2. Section 941.5--Powers of the OF Board of Directors
Proposed Sec. 941.5, ``Powers of the OF board of directors,''
incorporates and revises the provisions of current Sec. 941.8. As is
true in Sec. 941.8(a) of the current rule, proposed Sec. 941.5(a)
provides that the OF Board of Directors shall have the incidental
powers under section 12(a) of the Bank Act as are necessary, convenient
and proper to accomplish the efficient operation and management of the
OF. Also, as is true under Sec. 941.8(b) of the current rule, proposed
Sec. 941.5(b) expressly empowers the OF Board of Directors to act as
the agent of the Finance Board in issuing COs pursuant to section 11(c)
of the Bank Act. It also empowers the OF Board of Directors to act as
agent for the Banks in issuing COs pursuant to section 11(a) of the
Bank Act and in making principal and interest payments on COs issued by
either entity.
Proposed Sec. 941.5(c) preserves the authority of the OF Board of
Directors to delegate powers to OF staff to carry out OF functions, and
proposed Sec. 941.5(d) retains the indemnification powers currently
provided in Sec. 941.8(d).
3. Section 941.6--Duties of the OF Board of Directors
Proposed Sec. 941.6, ``Duties of the OF board of directors'' would
substantially revise the provisions of current Sec. 941.9. Proposed
Sec. 941.6(a) retains intact the provisions of current Sec. 941.9(a),
which provides that the OF Board of Directors shall adopt bylaws,
consistent with applicable laws and regulations as administered by the
Finance Board, governing its operation and issue such guidance or
instruction as will promote the efficient operation of the OF and that
the OF Board of Directors shall conduct its business by majority vote
of its members convened at a meeting in accordance with its bylaws.
Proposed Sec. 941.6(b) enumerates the oversight responsibilities of
the OF Board of Directors. Importantly, proposed Sec. 941.6(b)(2)
requires the OF Board of Directors to set policies for management of
the OF, in particular a policy in connection with the issuance of debt
that would take into account the cooperative nature of the Bank System,
and the relationship of the Banks as issuers of debt to their members
as issuers of debt. Proposed Sec. 941.6(b) also requires the OF Board
of Directors to be responsible for the conduct and performance of all
duties, functions, operations and activities of the OF and for its
efficient and effective operation; approve a strategic business plan
for the OF and monitor the progress of its operations under such plan;
review, adopt, and monitor the annual operating budget of the OF
including any supplemental expenditure thereto; provide oversight for
the OF Board of Directors committee charged with directing the issuance
of COs; develop and implement the pricing mechanism by which the OF
will make private or public offerings of COs, subject to the
requirements of part 910; select, employ and define the duties of a
Chief Executive Officer of the OF (CEO), provided that the CEO, or his
designee, shall be the Fiscal Agent of the Banks, a member of the
Directorate of the Financing Corporation, pursuant to section
21(b)(1)(A) of the Bank Act, 12 U.S.C. 1441(b)(1)(A), and a member of
the Directorate of the Resolution Funding Corporation, pursuant to
section 21B(c)(1)(A) of the Bank Act, 12 U.S.C. 1441b(c)(1)(A).
Additionally, the OF Board of Directors would be required to approve
all contracts of the OF, and assume any other responsibilities that may
from time to time be delegated to it by the Finance Board. The proposed
rule also expressly provides that the OF Board of Directors would be
subject to and required to operate in accordance with Finance Board
policies and regulations applicable to the boards of directors of the
Banks, including proposed part 917.
Proposed Sec. 941.7 incorporates and revises the provisions of
current Sec. 941.11. It retains the requirement of current
Sec. 941.11(f) that the Banks are responsible for jointly funding the
OF. Under the proposed rule, at the direction of and pursuant to
policies and procedures adopted by the OF Board of Directors, the Banks
are required periodically to reimburse the OF Operations Imprest Fund
to maintain in such fund an amount approved by the OF Board of
Directors sufficient to fund the operations of the OF under a budget
approved by the OF Board of Directors. Each Bank's respective pro rata
share of the reimbursement must be based on the ratio of the total
paid-in value of its capital stock relative to the total paid-in value
of all capital stock in the Bank System. The proposed rule provides new
authority for the OF Board of Directors, with the prior approval of the
Finance Board, to devise an alternative formula for determining each
Bank's respective share of the OF expenses or, by contract with a Bank
or Banks, may choose to be reimbursed through a fee structure in lieu
of or in addition to assessment, for services provided to the Bank or
Banks for the issuance or servicing of COs or the management and
administration of joint asset activities.
Proposed Sec. 941.8 retains the savings clause contained in current
Sec. 941.12, which provides that all actions taken by the OF as it
existed prior to these amendments will continue to be valid as regards
the Finance Board and the Bank System. The rest of the provisions of
current Sec. 941.12 are not included in the proposed rule as they are
obsolete and no longer necessary.
IV. 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 (RFA). See 5 U.S.C. 601(6). Therefore, in accordance
with section 605(b) of the RFA, 5 U.S.C. 605(b), the Finance Board
hereby certifies that this proposed rule, if promulgated as a final
rule, will not have significant economic impact on a substantial number
of small entities.
V. Paperwork Reduction Act
This proposed rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995. See 33 U.S.C. 3501 et
seq. Therefore, the Finance Board has not submitted any information to
the Office of Management and Budget for review.
[[Page 333]]
List of Subjects
12 CFR Part 900
Organization and functions (Government agencies).
12 CFR Part 910
Banks, Consolidated bonds and debentures, Federal home loan banks,
Securities.
12 CFR Part 941
Consolidated bonds and debentures, Federal home loan banks,
Organization and functions (Government agencies), Securities.
For the reasons stated in the preamble, the Finance Board proposes
to amend 12 CFR parts 900, 910 and 941 as follows:
PART 900--DESCRIPTION OF ORGANIZATION AND FUNCTIONS
1. The authority citation for part 900 continues to read as
follows:
Authority: 5 U.S.C. 552; 12 U.S.C. 1422b(a) and 1423.
2. Amend Sec. 900.30 to add a new paragraph (a)(3) to read as
follows:
Sec. 900.30 Office of Finance Board of Directors.
(a) * * *
(3) The authority delegated under paragraphs (a)(1) and (2) of this
section expires on December 31, 2000, unless otherwise extended or
modified by the Finance Board.
* * * * *
3. Revise part 910 to read as follows:
PART 910--CONSOLIDATED OBLIGATIONS
Sec.
910.1 Definitions.
910.2 Authorized liabilities; Issuance of consolidated obligations.
910.3 Form of consolidated obligations.
910.4 Transactions in consolidated obligations.
910.5 Lost, stolen, destroyed, mutilated or defaced consolidated
obligations.
910.6 Administrative provision.
910.7 Conditions for issuance of consolidated obligations.
910.8 Joint and several liability.
Authority: 12 U.S.C. 1422a, 1422b and 1431.
Sec. 910.1 Definitions.
For purposes of this part:
(a) Consolidated obligations or CO means any bond, debenture, or
note issued jointly by the Banks pursuant to section 11(a) of the
Federal Home Loan Bank Act (Act), as amended (12 U.S.C. 1431(a)), or
any bond or note issued by the Finance Board on behalf of all Banks
pursuant to section 11(c) of the Act (12 U.S.C. 1431(c)), on which the
Banks are by statute or regulation jointly and severally liable.
(b) NRSRO means a credit rating organization regarded as a
Nationally Recognized Statistical Rating Organization by the Securities
and Exchange Commission.
(c) Senior bonds means COs issued pursuant to section 11 of the Act
and this part and not defeased, other than bonds specifically
subordinated to any then outstanding COs.
Sec. 910.2 Authorized liabilities; Issuance of consolidated
obligations.
(a) Authorized liabilities. As a source of funds for business
operations, each Bank is authorized to incur liabilities only by:
(1) Acting as joint and several obligor with other Banks on
consolidated obligations, as authorized under this part;
(2) Accepting time or demand deposits from members or any
institution for which the Bank is providing correspondent services,
other Banks, and instrumentalities of the United States, so long as the
deposit transaction is not conducted in such a way as to result in the
offer or sale of a security in a public offering as those terms are
used in 15 U.S.C. 77b(3); or
(3) Solely in order to satisfy the Bank's short-term liquidity
needs, by:
(i) Purchasing federal funds; and
(ii) Entering into repurchase agreements.
(b) Consolidated obligations issued by the Finance Board. The
Finance Board may issue consolidated obligations under section 11(c) of
the Act (12 U.S.C. 1431(c)), including the determination of the dates
of issue, maturities, rates of interest, terms and conditions thereof,
and the manner in which such consolidated obligations shall be issued,
subject to the provisions of 31 U.S.C. 9108. The Finance Board in its
discretion may delegate this responsibility, or terminate such
delegation. Consolidated obligations issued under this paragraph shall
not be directly placed with any Bank.
(c) Consolidated obligations issued by the Banks. (1) Pursuant to
the Banks' housing finance mission set forth in section 2A(a)(3)(B)(ii)
of the Act (12 U.S.C. 1422a(a)(3)(B)(ii)), pursuant to the Finance
Board's duty to ensure that the Banks carry out that mission and remain
adequately capitalized and able to raise funds in the capital markets
under section 2A(a)(3)(B)(ii) and (iii) of the Act (12 U.S.C.
1422a(a)(3)(B)(ii) and (iii)), and subject to such rules, regulations,
terms and conditions as the Finance Board may prescribe, the Banks are
authorized to issue joint debt under section 11(a) of the Act (12
U.S.C. 1431(a)), which shall be called consolidated obligations and on
which the Banks shall be jointly and severally liable under Sec. 910.7.
(2) Consolidated obligations shall be issued through the Office of
Finance, as agent of the Banks pursuant to this part 910.
(3) Consolidated obligations issued under this paragraph (c) shall
not be directly placed with any Bank.
(d) Negative pledge requirement. Each Bank shall at all times
maintain assets described in paragraphs (d)(1) through (d)(6) of this
section free from any lien or pledge, in an amount at least equal to a
pro rata share of the total amount of currently outstanding
consolidated obligations jointly issued by the Banks pursuant to
section 11(a) of the Act (12 U.S.C. 1431(a)) and by the Finance Board
pursuant to section 11(c) of the Act (12 U.S.C. 1431(c)) equal to such
Bank's participation in all such COs outstanding provided that any
assets that are subject to a lien or pledge for the benefit of the
holders of any issue of consolidated obligations shall be treated as if
they were assets free from any lien or pledge for purposes of
compliance with this paragraph (d). Eligible assets are:
(1) Cash;
(2) Obligations of or fully guaranteed by the United States;
(3) Secured advances;
(4) Mortgages as to which one or more Banks have any guaranty or
insurance, or commitment therefore, by the United States or any agency
thereof;
(5) Investments described in section 16(a) of the Act (12 U.S.C.
1436(a)); and
(6) Other securities that have been assigned a rating or assessment
by an NRSRO that is equivalent to or higher than the rating or
assessment assigned by an NRSRO to consolidated obligations
outstanding.
Sec. 910.3 Form of consolidated obligations.
Consolidated obligations shall be issued in series and all
consolidated obligations of the same series shall be of like date,
tenor, and effect except as to denominations, which shall be in such
amounts as may be authorized by the Finance Board. The Finance Board
shall prescribe the form of each consolidated obligation. Consolidated
obligations issued with maturities of one year or less may be
designated consolidated notes.
Sec. 910.4 Transactions in consolidated obligations.
The general regulations of the Department of Treasury now or
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hereafter in force governing transactions in United States securities,
except 31 CFR part 357 regarding book-entry procedure, are hereby
incorporated into this part 910, so far as applicable and as
necessarily modified to relate to consolidated obligations, as the
regulations of the Finance Board for similar transactions on
consolidated obligations. The book-entry procedure for consolidated
obligations is contained in part 912 of this subchapter.
Sec. 910.5 Lost, stolen, destroyed, mutilated or defaced consolidated
obligations.
United States statutes and regulations of the Department of
Treasury now or hereafter in force governing relief on account of the
loss, theft, destruction, mutilation, or defacement of United States
securities, so far as applicable and as necessarily modified to relate
to consolidated obligations, are hereby adopted as the regulations of
the Finance Board for the issuance of substitute consolidated
obligations or the payment of lost, stolen, destroyed, mutilated or
defaced consolidated obligations.
Sec. 910.6 Administrative provision.
The Secretary of the Treasury or the Acting Secretary of the
Treasury is hereby authorized and empowered, as the agent of the
Finance Board and the Banks to administer Secs. 910.4 and 910.5, and to
delegate such authority at their discretion to other officers,
employees, and agents of the Department of Treasury. Any such
regulations may be waived on behalf of the Finance Board and the Banks
by the Secretary of the Treasury or the Acting Secretary of the
Treasury or by an officer of the Department of Treasury authorized to
waive similar regulations with respect to United States securities, but
only in any particular case in which a similar regulation with respect
to United States securities would be waived. The terms ``securities''
and ``bonds'' as used in this section shall, unless the context
otherwise requires, include and apply to coupons and interim
certificates.
Sec. 910.7 Conditions for issuance of consolidated obligations.
The OF Board of Directors shall authorize the offering for current
and forward settlement (up to 12 months) or the reopening of COs, as
necessary, and authorize the maturities, rates of interest, terms and
conditions thereof, subject to the provisions of 31 U.S.C. 9801 and the
following conditions:
(a) COs may be offered for sale only to the extent that Banks are
committed to take the proceeds;
(b) The OF Board of Directors shall implement investor suitability
standards; and
(c) COs may be offered for sale only pursuant to a policy adopted
by the OF Board of Directors that addresses the relationship between
the Banks as issuers of debt and their members as issuers of debt.
Sec. 910.8 Joint and several liability.
(a) In general. (1) Each and every Bank, individually and
collectively, has an obligation to make full and timely payment of all
principal and interest on consolidated obligations when due.
(2) Each and every Bank, individually and collectively, shall
ensure that the timely payment of principal and interest on all
consolidated obligations is given priority over, and is paid in full in
advance of, any payment to or redemption of shares from any
shareholder.
(3) The provisions of this part shall not limit, restrict or
otherwise diminish, in any manner, the joint and several liability of
all of the Banks on all of the consolidated obligations issued by the
Finance Board pursuant to section 11(c) of the Bank Act (12 U.S.C.
1431(c) and by one or more Banks pursuant to section 11(a) of the Bank
Act (12 U.S.C. 1431(a).
(b) Certification and reporting. (1) Before the end of each
calendar quarter, and before declaring or paying any dividend for that
quarter, the President of each Bank shall certify in writing to the
Finance Board that, based on known current facts and financial
information, the Bank will remain in compliance with the liquidity
requirements set forth in section 11(g) of the Act (12 U.S.C. 1431(g)),
and the Finance Board's Financial Management Policy or any regulations,
(as the same may be amended, modified or replaced), and will remain
capable of making full and timely payment of all of its current
obligations, including direct obligations, coming due during the next
quarter.
(2) A Bank shall immediately provide written notice to the Finance
Board if at any time the Bank:
(i) Is unable to provide the certification required by paragraph
(b)(1) of this section;
(ii) Projects at any time that it will fail to comply with
statutory or regulatory liquidity requirements, or will be unable to
timely and fully meet all of its current obligations, including direct
obligations, due during the quarter;
(iii) Actually fails to comply with statutory or regulatory
liquidity requirements or to timely and fully meet all of its current
obligations, including direct obligations, due during the quarter; or
(iv) Negotiates to enter or enters into an agreement with one or
more other Banks to obtain financial assistance to meet its current
obligations, including direct obligations, due during the quarter; the
notice of which shall be accompanied by a copy of the agreement, which
shall be subject to the approval of the Finance Board.
(c) Consolidated obligation payment plans. (1) A Bank promptly
shall file a consolidated obligation payment plan for Finance Board
approval:
(i) If the Bank becomes a non-complying Bank as a result of failing
to provide the certification required in paragraph (b)(1) of this
section;
(ii) If the Bank becomes a non-complying Bank as a result of being
required to provide the notice required pursuant to paragraph (b)(2) of
this section, except in the event that a failure to make a principal or
interest payment on a consolidated obligation when due was caused
solely by a temporary interruption in the Bank's debt servicing
operations resulting from an external event such as a natural disaster
or a power failure; or
(iii) If the Finance Board determines that the Bank will cease to
be in compliance with the statutory or regulatory liquidity
requirements, or will lack the capacity to timely and fully meet all of
its current obligations, including direct obligations, due during the
quarter.
(2) A consolidated obligation payment plan shall specify the
measures the non-complying Bank will undertake to make full and timely
payments of all of its current obligations, including direct
obligations, due during the applicable quarter.
(3) A non-complying Bank may continue to incur and pay normal
operating expenses incurred in the regular course of business
(including salaries, benefits, or costs of office space, equipment and
related expenses), but shall not incur or pay any extraordinary
expenses, or declare, or pay dividends, or redeem any capital stock,
until such time as the Finance Board has approved the Bank's
consolidated obligation payment plan or inter-Bank assistance
agreement, or ordered another remedy, and all of the non-complying
Bank's direct obligations have been paid.
(d) Finance Board payment orders; Obligation to reimburse. (1) The
Finance Board, in its discretion and notwithstanding any other
provision in this section, may at any time order any Bank to make any
principal or interest
[[Page 335]]
payment due on any consolidated obligation.
(2) To the extent that a Bank makes any payment on any consolidated
obligation on behalf of another Bank, the paying Bank shall be entitled
to reimbursement from the non-complying Bank, which shall have a
corresponding obligation to reimburse the Bank providing assistance, to
the extent of such payment and other associated costs (including
interest to be determined by the Finance Board).
(e) Adjustment of equities. (1) Any non-complying Bank shall apply
its assets to fulfill its direct obligations.
(2) If a Bank is required to meet, or otherwise meets, the direct
obligations of another Bank due to a temporary interruption in the
latter Bank's debt servicing operations (e.g., in the event of a
natural disaster or power failure), the assisting Bank shall have the
same right to reimbursement set forth in paragraph (d)(2) of this
section.
(3) If the Finance Board determines that the assets of a non-
complying Bank are insufficient to satisfy all of its direct
obligations as set forth in paragraph (e)(1) of this section, then the
Finance Board may allocate the outstanding liability among the
remaining Banks on a pro rata basis in proportion to each Bank's
participation in all consolidated obligations outstanding as of the end
of the most recent month for which the Finance Board has data, or
otherwise as the Finance Board may prescribe.
(f) Reservation of authority. Nothing in this section shall affect
the Finance Board's authority to adjust equities between the Banks in a
manner different than the manner described in paragraph (e) of this
section, or to take enforcement or other action against any Bank
pursuant to the Finance Board's authority under the Act or otherwise to
supervise the Banks and ensure that they are operated in a safe and
sound manner.
(g) No rights created. (1) Nothing in this section shall create or
be deemed to create any rights in any third party.
(2) Payments made by a Bank toward the direct obligations of
another Bank are made for the sole purpose of discharging the joint and
several liability of the Banks on consolidated obligations.
(3) Compliance, or the failure to comply, with any provision in
this section shall not be deemed a default under the terms and
conditions of the consolidated obligations.
4. Revise part 941 to read as follows:
PART 941--OPERATIONS OF THE OFFICE OF FINANCE
Sec.
941.1 Definitions.
941.2 Powers and responsibilities of the OF.
941.3 Finance Board oversight.
941.4 The OF board of directors.
941.5 Powers of the OF board of directors.
941.6 Duties of the OF board of directors.
941.7 Funding of the OF.
941.8 Savings clause.
Appendix A to Part 941--Exceptions to the General Disclosure Standards
Authority: 12 U.S.C. 1422b(a) and 1431.
Sec. 941.1 Definitions.
For purposes of this part:
(a) Bank System means the 12 Banks and the OF.
(b) Chair means the Chairperson of the OF Board of Directors.
(c) Chief Executive Officer or CEO means the Chief Executive
Officer of the OF.
(d) OF means the Office of Finance.
(e) OF Board of Directors means the 24 member administrative body
responsible for management of the OF.
(f) OF Operations Imprest Fund means the checking account
established in a financial depository institution approved by the OF
Board of Directors to fund OF operations.
Sec. 941.2 Powers and responsibilities of the OF.
(a) Joint office. The OF is a joint office of the Banks pursuant to
section 2B of the Act (12 U.S.C. 1422b(b)(2)).
(b) Purpose. The role of the OF is to facilitate the accomplishment
of the mission of the Banks set forth in section 2A of the Act (12
U.S.C. 1422a(3)(A)(ii) and (iii)) by:
(1) Exclusively offering, issuing, and servicing consolidated
obligations on behalf of the Finance Board pursuant to section 11(c) of
the Act (12 U.S.C. 1431(c)) and the Banks pursuant to section 11(a) of
the Act (12 U.S.C. 1431(a)), on which the Banks are jointly and
severally liable; and
(2) At the request of two or more Banks, by undertaking on a joint
basis activities the requesting Banks are authorized by law to
undertake individually.
(c) Functions. The OF shall have the following functions:
(1) Subject to part 910 of this chapter, with respect to
consolidated obligations, the OF shall:
(i) Conduct or facilitate negotiations relating to the public or
private offering and sale of consolidated obligations in such a manner
as to promote the cooperative nature of the Bank System and assure that
suitability standards are met;
(ii) Issue and service (including making timely payments on
principal and interest due, subject to Sec. 910.7 of this chapter)
consolidated obligations pursuant to and in accordance with the
policies and procedures established by the OF Board of Directors under
this part, which shall govern the frequency and timing of issuance,
issue size, minimum denomination, bond concessions, underwriter
qualifications, currency of issuance, interest-rate change or
conversion features, call features, principal indexing features,
selection and retention of outside counsel, selection of clearing
organizations, and the selection and compensation of underwriters for
consolidated obligations, and shall be in accordance with the mission
of the OF as set forth in Sec. 941.2 and the requirements and
limitations set forth in paragraph (c)(1)(iii) of this section;
(iii) Discharge the function described in paragraphs (c)(1)(i) and
(ii) of this section effectively and at the lowest all-in funding costs
over time, with due regard for prudent risk-management practices,
prudential debt parameters, short and long-term market conditions, the
cooperative nature of the Bank System, and the Banks' role as
government-sponsored enterprises, and, consistent with:
(A) Maintaining reliable access to the short-term and long-term
capital markets;
(B) Positioning the issuance of debt to take advantage of current
and future capital market opportunities; and
(C) Defining and maintaining appropriate investor suitability
standards.
(iv) Prepare and issue the combined annual and quarterly financial
reports for the Bank System in accordance with the following
requirements:
(A) The scope, form and content of the disclosure generally shall
be consistent with the requirements of the Securities and Exchange
Commission's Regulations S-K and S-X (17 CFR parts 229 and 210);
(B) Information about each Bank shall be presented as a segment of
the Bank System as if Statement of Financial Accounting Standards No.
131, titled ``Disclosures about Segments of an Enterprise and Related
Information'' (FASB 131) applied to the combined annual and quarterly
financial reports of the Bank System.
(C) The standards set forth in paragraphs (c)(1)(iv)(A) and (B) of
this section are subject to the exceptions set forth in the Appendix to
this part 941.
(D) The OF shall file with the Finance Board and distribute to each
Bank and Bank member the combined Bank
[[Page 336]]
System annual report within 90 days after the end of the fiscal year,
and the combined Bank System quarterly report within 45 days after the
end of the first three fiscal quarters of each fiscal year.
(E) The Finance Board in its sole discretion shall determine
whether or not a combined Bank System annual or quarterly financial
report prepared by the OF pursuant to Sec. 941.8 complies with the
standards of this part 941.
(F) The OF shall promptly comply with any directive of the Finance
Board regarding the preparation, filing, amendment or distribution of
the combined Bank System annual or quarterly financial reports.
(v) Provide capital markets information concerning debt to the
Banks;
(vi) Manage relationships with the Nationally Recognized
Statistical Rating Organizations in connection with their rating of
consolidated obligations;
(vii) Conduct research reasonably related to the issuance or
servicing of consolidated obligations.
(2) The OF shall, to the extent requested by two or more Banks
pursuant to any agreement or contract, facilitate or provide services
for the management and administration of joint asset activities of the
Banks otherwise authorized by law and in accordance with this part,
including without limitation:
(i) Providing administrative and technical support for the
origination, purchase, management, servicing, or sale of any assets
acquired or to be acquired by two or more Banks pursuant to any
agreement or contract, including Member Mortgage Assets;
(ii) Providing market information to the Banks concerning joint
asset activities, or other assets or investments, as necessary from
time to time;
(iii) Conducting and providing to the Banks research reasonably
related to joint asset activities or other assets or investments of the
Banks, as necessary from time to time;
(iv) Developing, administering, and maintaining appropriate systems
for timely monitoring of each Bank's unsecured credit exposure to
individual counter-parties, and appropriate systems to manage Bank
System exposure to counter-party risk within Bank System limits;
(v) Adopting and administering procedures to enable the Banks to
jointly manage their liquidity; and
(vi) Adopting procedures to facilitate the sale or participation of
advances and other assets among the Banks.
(3) In accordance with policies and procedures established by the
OF Board of Directors, the OF shall perform such duties and
responsibilities for the Financing Corporation (FICO) or the Resolution
Funding Corporation (REFCorp) on behalf of the Banks, as may be
required.
(d) Use of facilities or personnel. The OF may contract with a Bank
or Banks for the use of Bank facilities or personnel in order to
perform its functions.
Sec. 941.3 Finance Board oversight.
(a) Oversight and enforcement actions. The Finance Board has the
same regulatory oversight authority and enforcement powers over the OF,
the OF Board of Directors, the directors, officers, employees, agents,
attorneys, accountants or other OF staff, as it has over a Bank and its
respective directors, officers, employees, attorneys, accountants,
agents or other staff.
(b) Examinations. Pursuant to section 20 of the Act (12 U.S.C.
1440), the Finance Board shall examine the OF, all funds and accounts
that may be established pursuant to this part 941, and the operations
and activities of the OF, as provided for in the Act or any regulations
promulgated pursuant thereto.
Sec. 941.4 The OF board of directors.
(a) Composition of the OF board of directors. The OF Board of
Directors shall consist of 24 members, 6 of whom shall be appointed by
the Finance Board, 6 of whom shall be elected by members of the Banks,
and 12 of whom shall be appointed by the Banks.
(1) Finance Board appointments. The Finance Board shall appoint a
total of six directors. Each director appointed by the Finance Board
shall be a citizen of the United States having demonstrated experience
in financial markets or asset management. An individual who is
affiliated with any consolidated obligation selling or dealer group
member under contract with the OF is not eligible to be appointed or
serve as a member of the OF Board of Directors.
(2) Bank appointments. Each Bank shall, by resolution of its board
of directors, appoint one director, who shall be an officer, director
or employee of the Bank.
(3) Member elections. Bank System Members shall elect six directors
through annual elections conducted by the OF.
(i) Eligibility requirements. To be eligible for nomination,
election, and service as a member of the OF Board of Directors, an
individual shall be a citizen of the United States with demonstrated
experience in financial markets or asset management. An individual who
is affiliated with any consolidated obligation selling or dealer group
member under contract with the OF is not eligible to serve as a member
of the OF Board of Directors. A Bank System member and its affiliates
may not have more than one representative on the OF Board of Directors
at any time.
(ii) Member-elected directorships and certain restrictions. Each
member of the Bank System is entitled to nominate an eligible person
for service on the OF Board of Directors in each annual election. Two
member-elected directorships shall be filled each year from such
nominees by a plurality of the votes which such members may cast in an
election held by the OF under this part 941. Each member may cast a
number of votes equal to the number of shares of stock in such Bank
held by the member at the end of the calendar year preceding the
election.
(iii) Nominations. The OF shall prepare the nomination forms and
transmit them to the Bank System members no later than March 1st of the
election year. The nomination forms shall state the director
eligibility requirements and the restrictions. Members shall have not
less than 30 calendar days to submit nomination forms to the OF. The OF
shall create acceptance and certification of eligibility forms, and
provide such forms to the nominees no later than May 1st of the
election year and the nominees shall have 30 days to accept or decline
the nomination and provide the written eligibility certification to the
OF.
(iv) Ballots. The OF shall prepare a ballot for the OF Board of
Directors election to be used in each Bank district based on the
acceptance and certification forms, and provide the ballot to the Banks
no later than July 1st of the election year. The Banks shall transmit
the ballot to their members with the election ballots for the election
of the Banks' respective boards of directors. Bank System members shall
have a minimum of 30 days to vote and return the OF Board of Directors
election ballot to the OF. The OF will tabulate the ballots and
announce the slate of the OF Board of Directors no later than November
1st of the election year.
(b) Terms. The term of each director shall be three years and
initial terms shall be staggered such that \1/3\ of the terms expire
each year.
(c) Vacancies. (1) In general. An OF director appointed or elected
to fill a vacancy shall be appointed or elected only for the remainder
of the term during which the vacancy occurred.
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(2) Appointed directors. Vacancies in directorships appointed by
the Finance Board or the Banks shall be filled in the manner in which
the original appointment was made.
(3) Elected directors. Vacancies in directorships elected by Bank
System members shall be filled by a majority vote of the remaining
directors.
(d) Chair and vice chair. (1) The Finance Board shall designate one
member of the OF Board of Directors as the chair, and another member as
the vice chair.
(2) The chair shall preside over meetings of the OF Board of
Directors. In the absence of the chair, the vice chair shall preside.
The chair is responsible for ensuring that the directives and
resolutions of the OF Board of Directors are drafted and maintained and
for keeping the minutes of all meetings.
(e) Compensation. Members of the OF Board of Directors may receive
compensation and reimbursement for expenses incurred as a result of
their service on the OF Board of Directors.
(f) Committees. (1) The OF Board of Directors shall establish an
audit committee consistent with the requirements set forth in part 917
of this chapter.
(2) The OF Board of Directors shall establish an executive
committee comprising member-elected directors, Bank-appointed
directors, and Finance Board-appointed directors, each represented in
the same proportions as they are on the full OF Board of Directors.
(3) The OF Board of Directors shall establish a committee to
coordinate the issuance and servicing of consolidated obligations under
part 910 of this chapter.
(4) The OF Board of Directors may establish additional committees
that are necessary and appropriate to carry out the duties and
responsibilities of the OF Board of Directors.
(5) The OF Board of Directors shall promulgate policies and define
the roles and duties of any committees so established, which shall be
binding upon such committees.
(g) Quorum. A quorum, for purposes of meetings of the OF Board of
Directors and of meetings of committees of the OF Board of Directors,
shall be a simple majority of the total directorships on the OF Board
of Directors or the committee.
Sec. 941.5 Powers of the OF board of directors.
(a) General. The OF Board of Directors shall enjoy such incidental
powers under section 12(a) of the Act (12 U.S.C. 1432(a)), as are
necessary, convenient and proper to accomplish the efficient operation
and management of the OF pursuant to this part, consistent with part
917 of this chapter.
(b) Agent. Subject to any limitations set by the Finance Board, the
OF Board of Directors, in the performance of its duties, shall have the
power to act on behalf of:
(1) The Banks in issuing consolidated obligations pursuant to
section 11(a) of the Act (12 U.S.C. 1431(a));
(2) The Finance Board in issuing consolidated obligations pursuant
to section 11(c) of the Act (12 U.S.C. 1431(c)); and
(3) The Banks in paying principal and interest due on the
consolidated obligations, or other obligations of the Banks.
(c) Delegation. The OF Board of Directors may delegate any of its
powers to any employee of the OF in order to enable the OF to carry out
its functions.
(d) Indemnification. (1) The OF Board of Directors may determine
the terms and conditions under which its members, the Chief Executive
Officer, and other officers and employees of the OF will be indemnified
by the OF, provided that such terms and conditions are consistent with
the terms and conditions of indemnification of directors, officers and
employees of the Bank System, generally.
(2) Such indemnification procedures, when duly adopted, may be
supplemented by a contract of insurance, and all expenses incident to
indemnification will be treated as an expense of the OF.
Sec. 941.6 Duties of the OF board of directors.
(a) General. (1) Bylaws. The OF Board of Directors shall adopt
bylaws, consistent with applicable laws and regulations as administered
by the Finance Board, governing its operation and issue such guidance
or instruction as will promote the efficient operation of the OF.
(2) Conduct of business. The OF Board of Directors shall conduct
its business by majority vote of its members convened at a meeting in
accordance with its bylaws.
(b) Oversight. The OF Board of Directors shall:
(1) Be responsible for the conduct and performance of all duties,
functions, operations and activities of the OF and for its efficient
and effective operation;
(2) Set policies for management of the OF, including a policy
addressing the relationship between the Banks as issuers of debt and
Bank System members as issuers of debt;
(3) Approve a strategic business plan for the OF and monitor the
progress of its operations under such plan;
(4) Review, adopt and monitor the annual operating and capital
budgets of the OF including any supplemental expenditure thereto;
(5) Select, employ and define the duties of a Chief Executive
Officer of the OF. The Chief Executive Officer, or the Chief Executive
Officer's designee, shall be:
(i) The Fiscal Agent of the Banks;
(ii) A member of the Directorate of the Financing Corporation,
pursuant to section 21(b)(1)(A) of the Act (12 U.S.C. 1441(b)(1)(A);
and
(iii) A member of the Directorate of the Resolution Funding
Corporation, pursuant to section 21B(c)(1)(A) of the Act (12 U.S.C.
1441b(c)(1)(A)).
(6) Review and approve all contracts of the OF; and
(7) Assume any other responsibilities that may from time to time be
delegated to it by the Finance Board.
(c) The OF Board of Directors shall be subject to and shall operate
in accordance with Finance Board policies and regulations as applicable
to the boards of directors of the Banks, including part 917 of this
chapter.
Sec. 941.7 Funding of the OF.
(a) General. The Banks are responsible for jointly funding the OF.
(b) Method. (1) At the direction of and pursuant to policies and
procedures adopted by the OF Board of Directors, the Banks shall
periodically reimburse the OF Operations Imprest Fund in order to
maintain in such fund an amount approved by the OF Board of Directors
sufficient to fund operations of the OF under a budget approved by the
OF Board of Directors.
(2) Each Bank's respective pro rata share of the reimbursement
described in paragraph (b)(1) of this section shall be based on the
ratio of the total paid-in value of its capital stock relative to the
total paid-in value of all capital stock in the Bank System. With the
prior approval of the Finance Board, the OF Board of Directors may
implement an alternative formula for determining each Bank's respective
share of the OF expenses or, by contract with a Bank or Banks, may
choose to be reimbursed through a fee structure in lieu of or in
addition to assessment, for services provided to the Bank or Banks for
the issuance or servicing of consolidated obligations or the management
and administration of joint asset activities.
Sec. 941.8 Savings clause.
All actions taken by the OF as it existed prior to the amendments
made
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to this part shall continue to be valid as regards the Finance Board
and the Bank System.
Appendix A to Part 941--Exceptions to the General Disclosure
Standards
A. 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 Bank 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 disclose the percent of advances to members an officer
of which serves as a Bank director, and list the top 10 holders of
advances in the Bank System and the top 5 holders of advances by
Bank, with a further disclosure indicating which of these members
had an officer that served as a Bank director.
B. Biographical Information. The biographical information
required by Items 401 and 405 of Regulation S-K, 17 CFR 229.401 and
405, will be provided only for the members of the Board of Directors
of the Finance Board, Bank presidents, chairs and vice chairs, and
the directors and Chief Executive Officer of the OF.
C. Compensation. The information on compensation required by
Item 402 of Regulation S-K, 17 CFR 229.402, will be provided only
for Bank presidents and the Chief Executive Officer of the OF. Since
stock in each Bank trades at par, the Finance Board will not include
the performance graph specified in Item 402(1) of Regulation S-K, 17
CFR 229.402(1).
D. 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 of directors.
E. Exhibits. The exhibits required by Item 601 of Regulation S-
K, 17 CFR 229.601, are not applicable and will not be provided.
F. Per Share Information. The statement of financial information
required by Items 301 and 302 of Rule S-K, 17 CFR 229.301 and 302,
is inapplicable because the shares of the Banks are subscription
capital that trades at par, and the shares expand or contract with
changes in member assets or advance levels.
G. 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 in the Bank System and a listing of
the 5 largest holders of capital stock by Bank. This listing will also
indicate which members had an officer that served as a director of a
Bank.
By the Board of Directors of the Federal Housing Finance Board.
Dated: December 14, 1999.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-35 Filed 1-3-00; 8:45 am]
BILLING CODE 6725-01-P
