[Federal Register Volume 62, Number 103 (Thursday, May 29, 1997)]
[Rules and Regulations]
[Pages 28975-28978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14028]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
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Federal Register / Vol. 62, No. 103 / Thursday, May 29, 1997 / Rules
and Regulations
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
1 CFR Part 462
24 CFR Part 81
[Docket No. FR-4095-F-02]
RIN 2501-AC35
The Secretary of HUD's Regulation of the Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac): Book-Entry Procedures
AGENCY: Office of the Secretary, HUD.
ACTION: Final rule.
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SUMMARY: This final rule establishes final procedures that govern the
issuance, recordation, and transfer of Federal National Mortgage
Association (``Fannie Mae'') and Federal Home Loan Mortgage Corporation
(``Freddie Mac'') (collectively ``Government-Sponsored Enterprises'' or
``GSEs'') securities in the Book-entry System. The rule makes final,
with only minor changes, the interim rule published in the Federal
Register on December 2, 1996 (61 FR 63944).
EFFECTIVE DATE: June 30, 1997.
FOR FURTHER INFORMATION CONTACT: Janet Tasker, Director, Office of
Government-Sponsored Enterprises, Room 6154, telephone (202) 708-2224;
or, for legal questions, Kenneth A. Markison, Assistant General Counsel
for Government Sponsored Enterprises/RESPA, Office of the General
Counsel, Room 9262, telephone (202) 708-3137. The address for both of
these persons is: Department of Housing and Urban Development, 451
Seventh Street, SW, Washington, DC 20410. A telecommunications device
for deaf persons (``TTY'') is available at (202) 708-9300. (The
telephone numbers are not toll-free.)
SUPPLEMENTARY INFORMATION:
I. Background
Both Fannie Mae and Freddie Mac use the Book-entry System of the
Federal Reserve Banks to issue, record, and transfer ownership of
certain of their respective securities. Although the Book-entry System
was originally designed for Treasury securities, both GSEs have used
this system under separate sets of regulations dating back to the late
1970s. Treasury regulations govern the Book-entry System, known as the
commercial book-entry system, when it is used to issue, record,
transfer and maintain Treasury securities. Recently, Treasury
substantially modified its regulations governing Treasury securities
held in this system to reflect contemporary legal development of the
Uniform Commercial Code (``UCC''). Treasury's regulation was published
on August 23, 1996 (61 FR 43626).
On December 2, 1996, pursuant to its general regulatory authority
respecting the GSEs, HUD published in the Federal Register (61 FR
63944) an interim rule to revise the regulations governing the book-
entry of GSE securities. As explained in the preamble to the interim
rule, except as was necessary because of differences between the GSEs
and their securities and Treasury and Treasury securities, HUD's
revisions to its GSE book-entry regulations followed the revisions
Treasury made to its book-entry regulations. The preamble to HUD's
interim rule provided background information explaining HUD's process
in developing the interim rule, HUD's analysis of revisions to the
book-entry procedures, and a section-by-section comparison of the
interim rule with Treasury's model. Since the discussion in the
preamble to the interim rule remains applicable, HUD is not
republishing the discussion contained in the preamble to the proposed
rule.
II. Changes Contained in Today's Final Rule
HUD received only two public comments on the interim rule. Both of
those comments came from Fannie Mae. Fannie Mae suggested several
changes, all of which have been incorporated, in one form or another,
into the final rule.
1. Fannie Mae suggested inserting a definition of ``participant''
to clarify that a participant can include a GSE, rather than using the
definition of ``participant'' in Treasury's TRADES regulation. Using
the TRADES definition of participant would effectively exclude a GSE
from being a participant within the meaning in HUD's GSE book-entry
rule, since to be a participant under the TRADES definition, the entity
must be a ``person'' and under HUD's GSE book-entry rule a ``person''
does not include a GSE. The GSEs frequently hold GSE securities
directly through Federal Reserve Banks and act as participants. HUD has
added a definition of ``participant'' to section 81.2 which includes
the GSEs to clarify this point.
2. Fannie Mae suggested inserting a definition of ``entitlement
holder'' to clarify that an entitlement holder can include a GSE,
rather than using the definition of ``entitlement holder'' in
Treasury's TRADES regulation. Using the TRADES definition of
entitlement holder would effectively exclude a GSE from being an
entitlement holder within the meaning in HUD's GSE book-entry rule,
since to be an entitlement holder under the TRADES definition, the
entity must be a ``person'' and under HUD's GSE book-entry rule a
``person'' does not include a GSE. While the interim rule defined
``entitlement holder'' in Sec. 81.2, that definition did effectively
exclude a GSE. Since Fannie Mae and Freddie Mac frequently hold GSE
securities directly or indirectly through Federal Reserve Banks, they
could be entitlement holders just as they could be participants. HUD
agrees that the interim rule should be modified. HUD has revised the
definition of ``entitlement holder'' in Sec. 81.2 to include the GSEs
to clarify this point.
3. Fannie Mae suggested adding a sentence to the end of the
definition of ``Book-entry GSE Security'' to clarify that a book-entry
GSE Security also includes the separate interest and principal
components of a Book-entry GSE Security if such security has been
designated by the GSE as eligible for division into such components and
the components are maintained separately on the books of one or more
Federal Reserve Banks.
Fannie Mae requested that this language be inserted to ensure that
interest or principal ``strips'' relating to Fannie Mae securities are
accorded the same treatment as Fannie Mae securities if they are also
maintained on the books
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of a Federal Reserve Bank. Fannie Mae noted that the final rule
published by the Thrift Depositor Protection Oversight Board governing
book-entry Resolution Funding Corporation (``RFC'') securities included
similar language. See Thrift Depositor Protection Oversight Board
regulation governing book-entry RFC securities, Final rule,
Secs. 1511.1 (definition of ``Book-entry Funding Corporation
Security'') (61 FR 66874, December 19, 1996).
HUD agrees that such a clarification is appropriate and has
inserted language into the definition of ``Book-entry GSE Security''
addressing this point. HUD notes that the language in the final rule
departs from the language in the regulation governing book-entry RFC
securities because while the Securities Documentation for book-entry
RFC securities specifically addresses whether the division of the
separate interest and principal components is authorized, the
Securities Documentation for Book-entry GSE Securities does not address
this matter.
4. Fannie Mae suggested clarifying in Sec. 81.92(a) that any choice
of law provision in the Securities Documentation would be given effect
only to the extent it is not inconsistent with HUD's regulation. HUD
agrees with the comment. To the extent that the choice of law
provisions in the Securities Documentation conflict with HUD's book-
entry regulations, HUD's book-entry regulations would take precedence.
Thus, the parenthetical in Sec. 81.92(a) has been revised. This
revision makes this provision in HUD's regulation more similar to the
comparable provision in Treasury regulations applicable to Student Loan
Marketing Association (``Sallie Mae'') securities. See the Bureau of
the Public Debt, Fiscal Service, Treasury regulation governing book-
entry Sallie Mae securities, Final rule, Secs. 354.2(a) (62 FR 621,
623, January 6, 1997).
5. Fannie Mae also suggested several editorial changes, all which
have been incorporated into the final rule. These changes included
clarifying the definition of ``Eligible Book-entry GSE Security'' in a
manner consistent with the definition used by the Farm Credit
Administration in its book-entry rule. See Farm Credit Administration
regulation governing book-entry Farm Credit securities, Interim rule,
Sec. 615.5450 (definition of ``Eligible book-entry security'') (61 FR
67188, 67192, December 20, 1996).
In addition to these comments from Fannie Mae, during the comment
period, HUD continued to consult with Treasury on the development of a
final rule. Treasury suggested one change to the rule which HUD has
incorporated into this final rule.
The change suggested by Treasury is to delete the reference to
``the United States'' in the following four occurrences in the interim
rule:
1. Section 81.92(a)(1), which specified that the rights and
obligations of the United States with respect to a Book-entry GSE
Security or Security Entitlement and the operation of the Book-entry
System as it applies to GSE Securities are governed by the Book-entry
regulations contained in this subpart H, the Securities Documentation
(but not including any choice of law provisions in such documentation),
and Federal Reserve Bank Operating Circulars.
2. Section 81.92(a)(2), which specified that the rights of the
United States with respect to a Book-entry GSE Security or Security
Entitlement and the operation of the Book-entry System applicable to
GSE Securities are governed by the Book-entry regulations contained in
this subpart H, the Securities Documentation (but not including any
choice of law provisions in such documentation), and Federal Reserve
Bank Operating Circulars.
3. Section 81.93(c)(1), which specified that the United states has
no obligation to agree to act on behalf of any Person or to recognize
the interest of any transferee of a security interest or other limited
interest in favor of any Person except to the extent of any specific
requirement of Federal law or regulation or to the extent set forth in
any specific agreement with the Federal Reserve bank on whose books the
interest of the Participant is recorded.
4. Section 81.94(a), which specified that the United States is not
liable to a Person asserting or having an adverse claim to a Security
Entitlement or to a Book-entry GSE Security in a Participant's
Securities Account, including any such claim arising as a result of the
transfer or disposition of a Book-entry GSE Security by a Federal
Reserve Bank pursuant to a Transfer Message that the Federal Reserve
Bank reasonably believes to be genuine.
The reason for eliminating the references to the United States in
these four provisions is to avoid any unintended suggestion that there
is an express or implied United States guarantee of GSE securities.
Notwithstanding that the GSEs enjoy the financial market's assumption
that the Federal Government and, ultimately, the American taxpayer
would stand behind the obligations of the GSEs, the GSEs' obligations
explicitly are not guaranteed by the United States. See, e.g., section
1302(4), 1381(f) and 1382(n) of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (Title XIII of the Housing
and Community Development Act of 1992 (Pub. L. 102-550, approved
October 28, 1992, and codified, generally, at 12 U.S.C. 4501-4641)
(requiring each GSE to state in its obligations and securities that
such obligations and securities ``are not guaranteed by the United
States.'')).
This change to these four provisions conforms HUD's rule to the
book-entry rules published by other agencies with oversight of other
Government Sponsored Enterprises. See Federal Housing Finance Board
regulation governing book-entry Federal Home Loan Bank securities,
Interim rule, Secs. 912.2(a), 912.4(c)(1), 912.5(a) (61 FR 64021-64027,
December 3, 1996); Thrift Depositor Protection Oversight Board
regulation governing book-entry RFC securities, Final rule,
Secs. 1511.2(a)(1), 1511.2(a)(2), 1511.4(c)(1), 1511.5(a) (61 FR 66875-
66878, December 19, 1996); Bureau of the Public Debt, Fiscal Service,
Treasury regulation governing book-entry Sallie Mae securities, Final
rule, Secs. 354.2(a)(1), 354.2(a)(2), 354.4(c)(1), 354.5(a) (62 FR 621-
625, January 6, 1997); and Tennessee Valley Authority (``TVA'')
regulation governing book-entry TVA Power securities, Final rule,
Secs. 1314.4(a)(1), 1314.4(a)(2), 1314.5(c), 1314.6(a) (62 FR 920-923,
January 7, 1997).
Findings and Certifications
Public Reporting Burden
This rule contains no new information collection requirements that
would require review by the Office of Management and Budget under the
Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520).
Impact on Small Entities
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this interim rule, and in so
doing certifies that this rule will not have a significant economic
impact on a substantial number of small entities. This rule affects the
operation of two entities, Fannie Mae and Freddie Mac, neither of which
is a small entity.
Environmental Impact
This rule is exempt from the requirement for an environmental
assessment under section 102(2)(C) of the National Environmental Policy
Act of 1969 (42 U.S.C. 4332), in accordance with HUD regulations at 24
CFR 50.19(c)(1), as revised by a final rule on September 27, 1996 (61
FR 50919). In
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accordance with 24 CFR 50.19(a), other Federal environmental laws, as
described in 24 CFR 50.4, are not applicable to this rule.
Federalism Impact
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this rule's
preemption of State law to the extent that it applies the newly revised
Article 8 of the Uniform Commercial Code has sufficient effect on
States to require consideration of the impact of the rule under the
Order. The General Counsel has assessed this preemption in light of the
principles, criteria, and requirements of the Executive Order and
determined that it is not inconsistent with them. The policy does not
impose additional costs or burdens on the States and it does not affect
the States' ability to discharge traditional State governmental
functions.
This rule makes explicit the preemption applicable to the rights
and obligations of the Federal Reserve Banks and the GSEs that was
implicit under the prior rule. The rule continues to accommodate State
law, to the maximum extent possible, given market methodologies.
Ultimately, as States proceed to adopt the revised Article 8, the rule
will provide no greater preemption of State law than under the prior
rule.
The rule is justified, despite the preemption it effects, by the
fact that the preemption is no greater than necessary to accommodate
the nationwide application of the rule and the nationwide market for
the GSE Securities, as was the preemption under the book-entry rules
this rule replaces. It should be noted that section 304(d) of the
Fannie Mae Charter Act (12 U.S.C. 1719(d)) and section 306(g) of the
Freddie Mac Act (12 U.S.C. 1455(f)) specifically provide for the
exemption of GSE securities from State securities registration
requirements (as well as the registration requirements of the
Securities and Exchange Commission). See also 15 U.S.C. 77r-1.
Unfunded Mandates Reform Act
The Secretary, in accordance with the Unfunded Mandates Reform Act
of 1995, 2 U.S.C. 1532, has reviewed this rule before publication and
by approving it certifies that this rule does not impose a Federal
mandate that will result in the expenditure by State, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year.
Catalog
There is no Catalog of Federal Domestic Assistance number for the
program affected by this rule.
List of Subjects
1 CFR Part 462
Accounting, Banks, Banking, Securities.
24 CFR Part 81
Accounting, Federal Reserve System, Mortgages, Reporting and
recordkeeping requirements, Securities.
Accordingly, for the reasons set out in the preamble, under the
authority of 42 U.S.C. 3535(d), the amendments to part 462 of title 1
of the Code of Federal Regulations and part 81 of title 24 of the Code
of Federal Regulations published in the interim rule on December 2,
1996 are adopted as final with the following additional amendments:
TITLE 24--DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
PART 81--THE SECRETARY OF HUD'S REGULATION OF THE FEDERAL NATIONAL
MORTGAGE ASSOCIATION (FANNIE MAE) AND THE FEDERAL HOME LOAN
MORTGAGE CORPORATION (FREDDIE MAC)
1. The authority citation for Part 81 continues to read as follows:
Authority: 12 U.S.C. 1451 et seq., 1716-1723h, and 4501-4641; 42
U.S.C. 3535(d) and 3601-3619.
2. In Sec. 81.2(b), the definitions of ``Book-entry GSE Security'',
``Eligible Book-entry GSE Security'', ``Entitlement Holder'', and
``Securities documentation'' are revised and a new definition of
``Participant'' is added, in appropriate alphabetical order location,
to read as follows:
Sec. 81.2 Definitions.
* * * * *
Book-entry GSE Security means a GSE Security issued or maintained
in the Book-entry System. Book-entry GSE Security also means the
separate interest and principal components of a Book-entry GSE Security
if such security has been designated by the GSE as eligible for
division into such components and the components are maintained
separately on the books of one or more Federal Reserve Banks.
* * * * *
Eligible Book-entry GSE Security means a Book-entry GSE Security
issued or maintained in the Book-entry System which by the terms of its
Security Documentation is eligible to be converted from book-entry form
into definitive form.
Entitlement Holder means a Person or a GSE to whose account an
interest in a Book-entry GSE Security is credited on the records of a
Securities Intermediary.
* * * * *
Participant means a Person or GSE that maintains a Participant's
Securities Account with a Federal Reserve Bank.
* * * * *
Securities Documentation means the applicable statement of terms,
trust indenture, securities agreement or other documents establishing
the terms of a Book-entry GSE Security.
* * * * *
3. In Sec. 81.92, paragraph (a) is revised to read as follows:
Sec. 81.92 Law governing rights and obligations of Federal Reserve
Banks and GSEs; rights of any Person against Federal Reserve Banks and
GSEs; Law governing other interests.
(a) Except as provided in paragraph (b) of this section, the
following rights and obligations are governed solely by the book-entry
regulations contained in this subpart H, the Securities Documentation,
and Federal Reserve Bank Operating Circulars (but not including any
choice of law provisions in the Security Documentation to the extent
such provisions conflict with the Book-entry regulations contained in
this subpart H):
(1) The rights and obligations of a GSE and the Federal Reserve
Banks with respect to:
(i) A Book-entry GSE Security or Security Entitlement; and
(ii) The operation of the Book-entry System as it applies to GSE
Securities; and
(2) The rights of any Person, including a Participant, against a
GSE and the Federal Reserve Banks with respect to:
(i) A Book-entry GSE Security or Security Entitlement; and
(ii) The operation of the Book-entry System as it applies to GSE
Securities;
* * * * *
Sec. 81.93 [Amended]
4. In Sec. 81.93, paragraph (c)(1) is amended by removing the
phrase ``, the United States,''.
Sec. 81.94 [Amended]
5. In Sec. 81.94, paragraph (a) is amended by removing the phrase
``, the United States,''; and paragraph (b)(2) is amended by removing
the words ``principal and interest'' and by adding the words
``redemption proceeds'' in their place.
Sec. 81.96 [Amended]
6. In Sec. 81.96, paragraph (d) is amended by removing the words
``offering circular'' and by adding in their place the words
``Securities Documentation''.
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Dated: May 20, 1997.
Andrew Cuomo,
Secretary.
[FR Doc. 97-14028 Filed 5-28-97; 8:45 am]
BILLING CODE 4210-32-P
