[Federal Register Volume 64, Number 244 (Tuesday, December 21, 1999)]
[Rules and Regulations]
[Pages 71275-71278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33069]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 932, 934, 935
[No. 99-62]
RIN 3069-AA89
Devolution of Corporate Governance Responsibilities
AGENCY: Federal Housing Finance Board.
ACTION: Interim final rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending
its regulations to devolve certain corporate governance
responsibilities from the Finance Board to the Federal Home Loan Banks
(Banks), pursuant to the requirements of the Federal Home Loan Bank
System Modernization Act of 1999.
DATES: This interim final rule shall be effective on December 21, 1999.
The Finance Board will accept written comments on the interim final
rule on or before January 20, 2000.
ADDRESSES: Mail comments to: Elaine L. Baker, Secretary to the Board,
Federal Housing Finance Board, 1777 F Street, NW, Washington, DC 20006.
Comments will be available for inspection at this address.
FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Director, (202)
408-2821, or Scott L Smith, Deputy Director, (202) 408-2991, Office of
Policy, Research and Analysis; or Sharon B. Like, Senior Attorney-
Advisor, (202) 408-2930, or Eric M. Raudenbush, Senior Attorney-
Advisor, (202) 408-2932, Office of General Counsel, Federal Housing
Finance Board, 1777 F Street, NW, Washington, DC 20006.
SUPPLEMENTARY INFORMATION:
I. Bank System and Finance Board Roles and Responsibilities
Under the Federal Home Loan Bank Act (Bank Act), the Finance Board
is responsible for the supervision and regulation of the 12 Banks. See
12 U.S.C. 1422a(a)(3), 1422b(a)(1) (1994). Specifically, the Finance
Board's primary duty is to ensure that the Banks operate in a
financially safe and sound manner. Consistent with that primary duty,
the Finance Board also is responsible for ensuring that the Banks carry
out their housing finance and community lending mission, and that they
remain adequately capitalized and able to raise funds in the capital
markets. See id. 1422a(a)(3).
Historically, the Bank Act has required the Finance Board to be
involved in varying degrees in the corporate governance of the Banks,
typically by requiring Finance Board approval for a host of Bank
practices. However, the recently enacted Federal Home Loan Bank System
Modernization Act of 1999 (Modernization Act) \1\ repealed most of
those requirements, thereby removing most of the last vestiges of
governance responsibilities from the Finance Board. See Pub. L. No.
106-102, 604(a)(6); 606(d), (f), (g) (1999). Accordingly, the Finance
Board is amending its regulations to remove the corresponding Finance
Board approval requirements for such corporate governance functions,
consistent with the Modernization Act.
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\1\ The Modernization Act is Title VI of the Gramm-Leach-Bliley
Act, Pub. L. No. 106-102, 113 Stat. 1338, enacted into law on
November 12, 1999.
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II. Analysis of Interim Final Rule
A. Part 932-Directors, Officers and Employees of the Banks
1. Amendment of Bank Directors' Meeting and Compensation and Expenses
Regulations--Secs. 932.16, 932.17
Section 7(i) of the Bank Act formerly permitted each Bank, with the
approval of the Finance Board, to pay its directors reasonable
compensation for the time required of them, and their necessary
expenses, in the performance of their duties, in accordance with the
resolutions adopted by such directors. See 12 U.S.C. 1427(i) (1994).
Section 932.17 of the Finance Board's regulations permits each Bank,
within certain standards of reasonableness set forth in the regulation,
to implement its own policy on director compensation and allows each
Bank to pay its directors for such expenses as are payable by the Bank
to its senior officers. See 12 CFR 932.17 (1999). Payments made in
compliance with the regulation are deemed to be approved by the Finance
Board, as required by section 7(i).
The Modernization Act amended section 7(i) of the Bank Act by
imposing specific limits on annual compensation for the Chairperson,
Vice Chairperson and other members of the Bank's board of directors.
See Modernization Act, 606(b). These statutory limits on annual
directors' compensation are implemented by revised Sec. 932.17(c)(1) of
this interim final rule. Payments made in compliance with the limits
and standards are deemed to be approved by the Finance Board for
purposes of section 7(i).
The Finance Board understands that the new statutory limits
generally would result in most directors receiving less compensation
than that currently allowed pursuant to existing Sec. 932.17.
Nevertheless, that appears to be precisely what Congress intended.
Moreover, based on the Finance Board's consultations with Congress, it
is clear that Congress intended that no diminution in workload would
result as a consequence of the reduced directors' compensation.
Accordingly, for safety and soundness reasons, Sec. 932.16 is revised
to require that each Bank's board of directors continue to maintain its
level of oversight of the management of the Bank. Consistent with this
maintenance of effort standard, Sec. 932.16 requires each Bank's board
of directors to hold no fewer in-person meetings in any year than it
has held on average over the immediately preceding three years, but a
Bank may apply to the Finance Board for approval, upon a showing of
good cause, to hold in any year fewer than the required number of in-
person board meetings.
In addition, and consistent with Congressional intent, the Finance
Board believes that directors should be compensated only for the
performance of official Bank business and not simply for holding
office. Accordingly, Sec. 932.17 is revised to provide that, starting
in 2000, a Bank may not pay fees to a director, such as retainer fees,
that do not necessarily reflect actual performance by the director of
official Bank business. Thus, a director who regularly fails to attend
board or committee meetings may not be paid at all, and the Finance
Board would consider such failure a dereliction of the director's
fiduciary duties that would constitute cause for removal of the
director, pursuant to section 2B(a)(2) of the Bank Act. See 12 U.S.C.
1422b(a)(2) (1994).
2. Removal of Selection and Compensation of Bank Officers and Employees
Regulations--Secs. 932.18 and 932.19
Section 12(a) of the Bank Act formerly made the selection and
compensation of Bank officers and employees subject to Finance Board
approval. See 12 U.S.C.
[[Page 71276]]
1432(a) (1994). Sections 932.18 and 932.19 of the Finance Board's
regulations set forth requirements for the selection of Bank Presidents
and other Bank officers and employees, and for the payment of
compensation to Bank officers and employees. See 12 CFR 932.18, 932.19
(1999).
The Modernization Act amended section 12(a) of the Bank Act by
removing the requirement for Finance Board approval in connection with
the selection and compensation of Bank officers and employees. See
Modernization Act, Sec. 606(d)(1)(B). Accordingly, 932.18 and 932.19 of
the Finance Board's regulations are removed.
B. Part 934--Operations of the Banks
1. Amendment of Bank Budgets Regulation--Sec. 934.7
The Bank Act does not provide explicitly for Finance Board approval
of Bank budgets. However, pursuant to the Finance Board's supervisory
responsibilities under the Bank Act, see 12 U.S.C. 1422a(a)(3),
1422b(a)(1) (1994), Sec. 934.7 of the Finance Board's regulations
establishes specific requirements for the Banks' preparation and
reporting of budget and other financial information to the Finance
Board. In addition, section 12(a) of the Bank Act formerly required
prior Finance Board approval for a Bank to buy or erect a bank building
to house the Bank, or to lease a bank building under a lease with a
term of more than ten years. See 12 U.S.C. 1432(a) (1994). Section
934.7(a)(2) of the Finance Board's budget regulation implements this
provision by providing that, pursuant to the requirement of section
12(a) of the Bank Act, a Bank must obtain prior approval of the Finance
Board before purchasing or erecting, or leasing for a term of more than
10 years, a building to house the Bank. See 12 CFR 934.7(a)(2) (1999).
The Modernization Act amended section 12(a) of the Bank Act by
removing the requirement for Finance Board approval of such Bank
building transactions. See Modernization Act, 606(d)(1)(A).
Accordingly, the requirement in paragraph (a)(2) for Finance Board
approval of such transactions is removed from Sec. 934.7. In addition,
consistent with the devolution philosophy reflected in this interim
final rule, the Finance Board has determined that the Banks should no
longer be required to submit to the Finance Board the budget and other
financial reports required by Secs. 934.7(b) through (e). Accordingly,
Secs. 934.7(b) through (e) are removed.
2. Amendment of Bank Bylaws Regulation--Sec. 934.16
Section 12(a) of the Bank Act formerly provided that the Banks had
the power, by their boards of directors, to prescribe, amend, and
repeal bylaws governing the manner in which their affairs may be
administered, subject to the approval of the Finance Board. See 12
U.S.C. 1432(a) (1994). Section 934.16 of the Finance Board's
regulations allows the Banks to adopt, amend or repeal their bylaws
without Finance Board approval, as long as the bylaws or amendments are
consistent with applicable statutes, regulations and Finance Board
policies. See 12 CFR 934.16 (1999).
The Modernization Act amended section 12(a) of the Bank Act by
removing the requirement for Finance Board approval of Bank bylaws,
provided that the bylaws are consistent with applicable laws and
regulations, as administered by the Finance Board. See Modernization
Act, Sec. 606(d)(1)(C). The Finance Board believes that, as a matter of
sound corporate governance practice, the Banks should have bylaws
governing the manner in which the Banks' affairs are conducted.
Accordingly, Sec. 934.16 is revised to provide that a Bank's board of
directors shall have in effect at all times bylaws governing the manner
in which the Bank administers its affairs, and that such bylaws shall
be consistent with applicable laws and regulations as administered by
the Finance Board.
3. Amendment of Bank Dividends Regulation--Sec. 934.17
Section 16(a) of the Bank Act formerly provided generally that
dividends may be paid by the Banks out of previously retained earnings
or current net earnings only with the approval of the Finance Board.
See 12 U.S.C. 1436(a) (1994). Section 6(g) of the Bank Act provides
that all stock of any Bank shall share in dividend distributions
without preference. See 12 U.S.C. 1426(g) (1994). Section 934.17 of the
Finance Board's regulations implements these statutory provisions by
providing generally that the board of directors of each Bank, with the
approval of the Finance Board, may declare and pay a dividend from net
earnings, including previously retained earnings, on the paid-in value
of capital stock held during the dividend period. See 12 CFR 934.17
(1999). Section 934.17 also provides that dividends on such stock shall
be computed without preference and only for the period such stock was
outstanding during the dividend period. See id. In addition, dividend
payments by the Banks have been subject to a Finance Board Dividend
Policy, see Finance Board Res. No. 90-38 (Mar. 15, 1990), as well as
Board of Directors Resolutions approving specific Bank dividend
payments, that established specific conditions for approval of such
dividend payments, including that the dividend payment would not result
in a projected impairment of the par value of the capital stock of the
Bank.
The Modernization Act amended section 16(a) of the Bank Act by
removing the requirement for Finance Board approval of Bank dividend
payments. See Modernization Act, section 606(g)(1)(B). In addition,
under the Modernization Act, section 6(g) remains in effect during a
transition period until the Finance Board has adopted capital
regulations and approved the capital structure plans of the Banks,
after which period section 6(g) is repealed. See id. section 608.
Because the payment of dividends no longer requires the approval of
the Finance Board, the Finance Board believes the determination of the
applicable dividend period for such payments also should be a
discretionary decision of the Banks. Therefore, Sec. 934.17 of the
Finance Board's regulations is revised to eliminate references to the
dividend period during which capital stock is held. However, the
Finance Board believes that, for safety and soundness reasons, the
capital stock impairment restriction currently imposed pursuant to the
Dividend Policy should continue to apply. Accordingly, Sec. 934.17 of
the Finance Board's regulations is revised to provide that a Bank's
board of directors may declare and pay a dividend only from previously
retained earnings or current net earnings, and only if such payment
will not result in a projected impairment of the par value of the
capital stock of the Bank. Section 934.17 also provides that dividends
on such capital stock shall be computed without preference.
Consistent with these regulatory amendments, the Finance Board
intends to rescind by separate resolution its Dividend Policy as no
longer necessary.
C. Part 950--Bank Advances
1. Removal of Requirement for Finance Board Approval of Bank Forms for
Advances Applications, Advances Agreements and Security Agreements--
Sec. 935.4(d)(2)
Section 9 of the Bank Act formerly required that applications from
members for Bank advances must be ``in such form as shall be required
by the [Bank] with the approval of the [Finance] Board.'' See 12 U.S.C.
1429
[[Page 71277]]
(1994). In addition, section 10(d) of the Bank Act formerly required
that members enter into an obligation to repay the advance, ``in such
form as shall meet the requirements of the [B]ank and the approval of
the [Finance] Board.'' See id. section 1430(d). Section 935.4(d)(2) of
the Finance Board's regulations provides that each Bank's forms for all
advances applications, advances agreements and security agreements are
deemed approved by the Finance Board if such forms are consistent with
the requirements of part 935. See 12 CFR 935.4(d)(2) (1999). Section
935.4(d)(2) also requires each Bank to provide copies of its current
forms for all advances agreements and security agreements, and any
substantive revisions thereto, to the Finance Board. See id.
The Modernization Act amended section 9 of the Bank Act by removing
the requirement for Finance Board approval of Bank advances application
forms. See Modernization Act, section 606(f)(1)(A). In addition, the
Modernization Act amended section 10(d) of the Bank Act by removing the
requirement for Finance Board approval of Bank forms for the repayment
of advances. See id. section 606(f)(2)(B)(i). Accordingly, a
regulatory provision governing Finance Board approval of Bank forms for
advances applications, advances agreements and security agreements is
no longer necessary, and Sec. 935.4(d)(2) is removed.
2. Removal of Requirement for Finance Board Approval of Bank Approvals
of Conditional Advances--Sec. 935.5(a)(2)
Section 9 of the Bank Act formerly required that a Bank may,
subject to the approval of the Finance Board, grant an application for
advances on such conditions as the Bank may prescribe. See 12 U.S.C.
1429 (1994). Section 935.5(a)(2) of the Finance Board's regulations
implements this provision by providing that a Bank, in its discretion,
may approve a member's application for an advance subject to such
additional terms as the Bank may prescribe, pursuant to the provisions
of the Bank Act, part 935, and any policy guidelines of the Finance
Board. See 12 CFR 935.5(a)(2) (1999).
The Modernization Act amended section 9 of the Bank Act by removing
the requirement for Finance Board approval in connection with Bank
conditional advances. See Modernization Act, section 606(f)(1)(B).
Accordingly, a regulatory provision governing Finance Board approval of
Bank conditional advances is no longer necessary, and Sec. 935.5(a)(2)
is removed.
3. Removal of Requirement for Finance Board Approval of Bank Transfers
of Advances and Advance Participations--Sec. 935.16
Section 10(d) of the Bank Act formerly required that: ``[s]ubject
to the approval of the [Finance] Board, any [Bank] shall have power to
sell to any other [Bank], with or without recourse, any advance made
under the provisions of this chapter, or to allow to such [Bank] a
participation therein, and any other [Bank] shall have power to
purchase such advance or to accept a participation therein, together
with an appropriate assignment of security therefor.'' See 12 U.S.C.
1430(d) (1994). Section 935.16 of the Finance Board's regulations
allows the Banks to purchase and sell advance participations without
the approval of the Finance Board, subject to the approval of the
boards of directors of the relevant Banks. See 12 CFR 935.16 (1999).
The Finance Board currently approves proposed Bank transfers of whole
advances pursuant to Chairman's Orders that set forth certain
conditions for the approval. The Finance Board recently proposed
amending Sec. 935.16 to allow the Banks to approve the transfer of
whole advances, in addition to advance participations, without Finance
Board approval, subject to the transfers meeting certain conditions
derived in part from the Chairman's Orders. See 64 FR 44444 (Aug. 16,
1999).
The Modernization Act amended section 10(d) of the Bank Act by
removing the requirement for Finance Board approval in connection with
transfers of Bank advances and advance participations. See
Modernization Act, section 606(f)(2)(B)(ii). Accordingly, a regulatory
provision governing transfers of Bank advances and advance
participations is no longer necessary, and Sec. 935.16 is removed. The
Finance Board by separate action has withdrawn its proposed transfer of
advances regulation, see Docket # 99-63 (Dec. 14, 1999).
III. Regulatory Flexibility Act
Because no notice of proposed rulemaking is required for this
interim final rule, the provisions of the Regulatory Flexibility Act, 5
U.S.C. section 601 et seq., do not apply. Moreover, the interim final
rule applies only to the Banks, which do not come within the meaning of
``small entities,'' as defined in the Regulatory Flexibility Act. See
id. section 601(6).
IV. Paperwork Reduction Act
This interim final rule does not contain any collections of
information pursuant to the Paperwork Reduction Act of 1995. See 44
U.S.C. 3501 et seq. Therefore, the Finance Board has not submitted any
information to the Office of Management and Budget for review.
V. Notice and Public Participation
The Finance Board for good cause finds that the notice and public
comment procedure required by the Administrative Procedure Act is
impracticable, unnecessary or contrary to the public interest in this
instance, because the changes made by this interim final rule implement
recently enacted statutory amendments that rendered obsolete certain
provisions of the Finance Board's regulations. See 5 U.S.C.
553(b)(3)(B).
List of Subjects in 12 CFR Parts 932, 934, and 935
Community development, Credit, Federal home loan banks, Housing,
Reporting and recordkeeping requirements.
Accordingly, the Finance Board hereby amends title 12, chapter IX,
parts 932, 934, and 935, Code of Federal Regulations, as follows:
PART 932-DIRECTORS, OFFICERS, AND EMPLOYEES OF THE BANKS
1. The authority citation for part 932 is revised to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1427, and
1432.
2. Revise Sec. 932.16 to read as follows:
Sec. 932.16 Site and frequency of board of directors and committee
meetings.
(a) Site. Meetings of a Bank's board of directors and committees
thereof usually should be held within the district served by the Bank.
No meetings of a Bank's board of directors and committees thereof may
be held in any location that is not within the United States, including
its possessions and territories.
(b) Maintenance of effort. (1) Notwithstanding the limits on annual
directors' compensation established by section 7(i) of the Act, as
amended, the board of directors of each Bank shall continue to maintain
its level of oversight of the management of the Bank, and, except as
provided in paragraph (b)(2), the board of directors shall hold no
fewer in-person meetings in any year than it has held on average over
the immediately preceding three years.
(2) A Bank may apply to the Finance Board for approval, upon a
showing of good cause, to hold in any year fewer than the number of in-
person board of
[[Page 71278]]
directors meetings required under paragraph (b)(1).
3. Amend Sec. 932.17 by:
a. Revising paragraphs (a) through (c); and
b. Adding paragraph (f), to read as follows:
Sec. 932.17 Compensation and expenses of Bank directors.
(a) Definition. As used in this section, compensation means any
payment of money or provision of any other thing of value (or the
accrual of a right to receive money or a thing of value in a subsequent
year) in consideration of a director's performance of official duties
for the Bank, including, without limitation, daily meeting fees,
incentive payments and fringe benefits.
(b) Annual compensation policy. Beginning in 2000 and annually
thereafter, each Bank's board of directors shall adopt by resolution a
written policy to provide for the payment to Bank directors of
reasonable compensation for the performance of their duties as members
of the Bank's board of directors, subject to the requirements set forth
in paragraph (c) of this section. At a minimum, such policy shall
address the activities or functions for which attendance is necessary
and appropriate and may be compensated, and shall explain and justify
the methodology for determining the amount of compensation to be paid
to directors.
(c) Policy requirements. Payment to directors under each Bank's
policy on director compensation may be based upon factors that the Bank
determines to be appropriate, but each Bank's policy shall conform to
the following requirements:
(1) Statutory limits on annual compensation. Pursuant to section
7(i) of the Act, as amended, for 2000, the following limits on
compensation shall apply: for a Chairperson--$25,000; for a Vice
Chairperson--$20,000; for any other member of the Bank's board of
directors--$15,000. Beginning in 2001 and for subsequent years, these
limits on annual compensation shall be adjusted annually by the Finance
Board to reflect any percentage increase in the preceding year's
Consumer Price Index (CPI) for all urban consumers, as published by the
Department of Labor. Each year, as soon as practicable after the
publication of the previous year's CPI, the Finance Board shall publish
notice by Federal Register, distribution of a memorandum, or otherwise,
of the CPI-adjusted limits on annual compensation.
(2) Compensation permitted only for performance of official Bank
business. The total compensation received by each director in a year
shall reflect the amount of time spent on official Bank business, such
that greater or lesser attendance at board and committee meetings
during a given year will be reflected in the compensation received by
the director for that year. A Bank shall not pay fees to a director,
such as retainer fees, that do not reflect the director's performance
of official Bank business.
* * * * *
(f) Approval. Payments made to directors in compliance with the
limits on annual directors' compensation and the standards set forth in
this section are deemed to be approved by the Finance Board for
purposes of section 7(i) of the Act, as amended.
4. Remove Secs. 932.18 and 932.19, and reserve subpart C.
PART 934-OPERATIONS OF THE BANKS
5. The authority citation for part 934 continues to read as
follows:
Authority: 12 U.S.C. 1422a, 1422b, 1431(g), 1432(a), and 1442.
6. Amend Sec. 934.7 by:
a. Removing the words ``and reporting requirements'' from the
heading;
b. Removing paragraphs (a)(2), (b), (c), (d) and (e); and
c. Redesignating paragraphs (a)(1), (3), (4) and (5) as paragraphs
(a), (b), (c) and (d), respectively.
7. Revise Sec. 934.16 to read as follows:
Sec. 934.16 Bank bylaws.
A Bank's board of directors shall have in effect at all times
bylaws governing the manner in which the Bank administers its affairs,
and such bylaws shall be consistent with applicable laws and
regulations as administered by the Finance Board.
8. Revise Sec. 934.17 to read as follows:
Sec. 934.17 Bank dividends.
A Bank's board of directors may declare and pay a dividend only
from previously retained earnings or current net earnings, and only if
such payment will not result in a projected impairment of the par value
of the capital stock of the Bank. Dividends on such capital stock shall
be computed without preference.
PART 935--ADVANCES
9. The authority citation for part 935 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430,
1430b and 1431.
Sec. 935.4 [Amended]
10. Amend Sec. 935.4 by:
a. Removing paragraph designation (d)(1); and
b. Removing paragraph (d)(2).
Sec. 935.5 [Amended]
11. Amend Sec. 935.5 by:
a. Removing paragraph (a)(2); and
b. Redesignating paragraph (a)(3) as paragraph (a)(2).
Sec. 935.16 [Removed]
12. Remove Sec. 935.16.
Dated: December 14, 1999.
By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 99-33069 Filed 12-20-99; 8:45 am]
BILLING CODE 6725-01-P
