Selection and Compensation of Federal Home Loan Bank Employees; Selection of the Director of the Office of Finance and Compensation of the Employees of the Office of Finance

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 932 and 941

[No. 96-55]

Selection and Compensation of Federal Home Loan Bank Employees;

Selection of the Director of the Office of Finance and Compensation of

the Employees of the Office of Finance

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Board) is proposing to

amend the provisions of its regulations governing the selection and

compensation of employees of the Federal Home Loan Banks (Banks) in

order to streamline regulatory requirements and transfer specific

functions currently performed by the Board to the board of directors of

each Bank, including the establishment of incentive payment measures

for Bank Presidents based on each Bank's fulfillment of its mission.

The Board is proposing also to amend its regulation governing the

Federal Home Loan Bank System's Office of Finance (OF) to provide for

the annual appointment of the Director of the OF and for the

compensation of the Director and the other employees of the OF.

DATES: Comments on this proposed rule must be received in writing on or

before October 15, 1996.

ADDRESSES: Mail comments to Elaine Baker, Executive Secretariat,

Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.

20006.

FOR FURTHER INFORMATION CONTACT: Barbara Fisher, Director, Office of

Resource Management, (202) 408-2586; or David Guy, Associate General

Counsel, (202) 408-2536, Federal Housing Finance Board, 1777 F Street,

N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

A. Selection of Employees

1. Bank Employees. -Section 12(a) of the Federal Home Loan Bank Act

(Bank Act) provides that each Bank may select, employ, and fix the

compensation of Bank employees, subject to the approval of the Board.

See 12 U.S.C. 1432(a). Section 932.40 of the Board's regulations, which

governs the selection of Bank employees, provides that officers, legal

counsel, and employees of a Bank shall be elected or appointed in

accordance with the Bank's bylaws. See 12 CFR 932.40. Each Bank's

bylaws are subject to the approval of the Board. See 12 U.S.C. 1432(a).

Under each Bank's bylaws, the Bank elects or appoints its President

subject to Board approval.

Section 932.40 also sets forth conflicts of interest prohibitions

applicable to full-time officers or employees of a Bank, and to counsel

retained by a Bank. See 12 CFR 932.40. These provisions generally

prohibit a Bank employee from acting on behalf of a member or other

institution insured by the former Federal Savings and Loan Insurance

Corporation (FSLIC), except under specified circumstances and with the

consent of the FSLIC. Existing Sec. 932.40 extends this prohibition to

counsel and attorneys of any Bank, whether employed on a salary, fee,

retainer, or other basis, unless the Board consents to such

representation. See id.

2. OF employees. The current regulation regarding OF provides only

that the Director has responsibility for the overall daily management

of OF, including the employment and management of personnel. See 12 CFR

941.6(a)(3). It also provides that the board of directors of OF shall,

subject to Finance Board approval, select and employ the Director under

an annual contract of employment. See id. Sec. 941.9(b)(6).

B. Compensation

1. Bank Presidents and the Director of OF. Under section 12(a) of

the Bank Act, the compensation of all Bank employees is subject to

Board approval. See 12 U.S.C. 1432(a). However, under its existing

regulation on Bank employee compensation, prior Board approval is

required only for compensation of a Bank's President. See 12 CFR

932.41(a). Section 932.41 of the Board's existing compensation

regulation requires the board of directors of each Bank annually to

adopt and submit to the Board for its approval an appropriate

resolution showing the contemplated compensation of its President. Id.

In setting the compensation of their Presidents, the Banks are

governed by the Bank Presidents' Compensation Plan (Compensation Plan),

adopted by the Board on November 19, 1991, as amended from time to

time. See Bd. Res. No. 91-565 (as amended). The Compensation Plan

establishes base salary guidelines, merit increase (to base salary)

guidelines, and criteria for incentive payments for Bank Presidents.

The Compensation Plan requires each Bank annually to submit for Board

approval recommendations for merit increases to its President's base

salary and proposed incentive payments. The Director of OF also is

subject to the Compensation Plan. See, e.g,. Bd. Res. No. 95-33 (Oct.

5, 1995).

2. Other bank employees. Section 932.41(b) of the Board's existing

compensation regulation permits a Bank to fix the compensation of

officers other than the President without prior Board approval,

provided that such compensation is within ranges established by the

Board and the total limits for such compensation in the Bank's approved

budget. See 12 CFR 932.41(b). Each Bank may establish the amount and

form of compensation for all other employees (including legal counsel)

within the limits set forth in the Bank's approved budget. See id.

Section 932.41(b) also prohibits a Bank from paying a bonus to any

director, officer, employee, or other person. See id.

In Resolution No. 84-390, dated July 25, 1984, the Board's

predecessor agency, the Federal Home Loan Bank Board (FHLBB),

established a cap on compensation of Bank employees other than the

President, providing that the salary of the second-highest-paid Bank

officer may not exceed 80 percent of the Bank President's salary. This

resolution currently remains in effect. See 12 U.S.C. 1437 note.

3. OF employees. The current regulations provide no guidance on the

compensation of OF employees.

4. Benefits. Existing Sec. 932.41(b) does not specifically address

benefits provided by the Banks to their employees. It has been the

Board's practice to require the Banks to obtain prior Board approval

for any compensation of Bank Presidents, whether direct or indirect,

and whether payable in current periods or during future periods. This

may include a variety of benefits plans in which Bank Presidents are

participants, exclusive of other employees. It has been the Board's

practice to permit the Banks to adopt non-discriminatory qualified

benefits plans for their employees without Board approval.

II. Analysis of the Proposed Rule

As part of its continuing effort to transfer to the Banks those

functions currently performed by the Board that are related to Bank

management and governance, the Board proposes to amend Secs. 932.40 and

932.41 of its regulations to clarify the scope of the Banks' discretion

in selecting and fixing the compensation of Bank Presidents and other

Bank employees. The Board also proposes to amend Sec. 941.9 of its

regulations to codify the Board's existing practice regarding the

annual appointment and compensation of the Director of OF. In making

these proposals, the Board reiterates its position that,

notwithstanding the Board's broad statutory authority to approve all

aspects of the selection and compensation of Bank and OF employees, the

Banks' boards of directors and the board of directors of OF are

ultimately responsible for the effective and prudent management of the

Banks and OF, respectively, including the selection and compensation of

their officers and other employees.

A. Selection of Employees

1. Bank Presidents. The Board proposes to amend Sec. 932.40 to

clarify

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the rules governing the appointment of Bank Presidents. Proposed

Sec. 932.40(a)(1) restates the Banks' statutory authority to appoint

their Presidents, and makes clear that such appointments are subject to

prior Board approval. Proposed Secs. 932.40(a)(2) and (3) codify the

Board's existing practice of approving the appointments of Bank

Presidents for one-year terms. Under these provisions, all appointments

expire on December 31 of the year for which the President is appointed,

without opportunity for holdover. To the extent that a Bank's by-laws

are inconsistent with this requirement, the by-laws are superseded by

Sec. 932.40(a)(2). Furthermore, the Board intends these provisions to

make clear that a Bank President appointed to fill a mid-term vacancy

is appointed to serve out the remainder of the one-year term of his or

her predecessor, and is not appointed for a full one-year term.

Proposed Sec. 932.40(a)(4) codifies the Board's existing procedure for

approval of appointments of the Bank Presidents. By November 1 of each

year, the board of directors of each Bank must adopt and submit to the

Board a resolution appointing or reappointing its President for the

following year. Section 932.40(a)(5) makes clear that no appointment of

a Bank President is effective until approved by the Board.

2. Other bank employees. Section 932.40(b) of the proposed rule

restates the Banks' statutory authority to appoint or elect officers

other than the President and to hire other employees of the Bank, and

makes clear that these activities do not require prior Board approval.

3. Conflicts of interests. Proposed Sec. 932.40(c) is intended to

update the conflicts of interest provisions in existing Sec. 932.40 by

eliminating references to the FSLIC, which was abolished by Congress in

1989. See 12 U.S.C. 1437 note. However, the Board is retaining, in

substance, the existing requirement that a Bank employee shall not act

in any capacity for certain specified institutions whose interests are

likely to be in conflict with the interests of the Bank. Specifically,

proposed Sec. 932.40(c) prohibits a Bank employee from being employed

by, or acting in any other capacity for, a Bank member or an

institution eligible to make application to become a Bank member.

In addition, the Board proposes to eliminate the final sentence in

existing Sec. 932.40, which extends the conflicts of interest provision

discussed above to outside counsel hired by a Bank and to other

attorneys acting on behalf of a Bank who are not Bank employees, except

in cases specifically approved by the Board. See 12 CFR 932.40. The

Board believes that the determination of whether outside counsel may

have a conflict of interest in a matter in which it is representing a

Bank is a decision that is properly within the purview of each Bank.

Further, the existing conflicts of interest provisions, as applied to

outside counsel, are duplicative of applicable requirements of state

codes of professional conduct and other ethics rules. Attorneys who

work for a Bank as salaried employees would continue to be subject to

the conflicts of interest provisions in proposed Sec. 932.40(c), since

those provisions continue to apply to all Bank employees.

4. The Director of the OF. The Board proposes to amend

Sec. 941.9(b)(6) by deleting the language regarding an annual contract

of employment for the Director of the OF, and adding a requirement for

the annual appointment of the Director of the OF, subject to prior

approval of the Board.

B. Compensation of Bank Employees and OF Employees

The Board proposes to amend existing Sec. 932.41 to increase the

amount of discretion the Banks may exercise in fixing the compensation

of their employees. The Board proposes to eliminate its Compensation

Plan for the Bank Presidents and to amend existing Sec. 932.41 to

permit each Bank to approve the base salaries, incentive payments, and

benefits for its President, within regulatory limitations approved by

the Board. Proposed Sec. 932.41 also clarifies the conditions under

which the Banks can fix the compensation of employees other than the

President, without prior Board approval.

The Board proposes to amend its regulation governing OF to permit

the board of directors of OF to establish the base salary of the

Director of OF under the same rules governing the base salaries of the

Bank Presidents, and to make incentive payments for the Director,

subject to prior Board approval. The Board also proposes to amend its

regulation to provide guidance regarding the compensation of other OF

employees that is consistent with the guidance for Bank employees.

The Board has not approved any change-of-control arrangements

between a Bank and its President or other officers providing for

payments as a result of a merger or other event qualifying as a change

of control. The Board requests detailed comments on whether the Banks

should be permitted to enter into change-of-control arrangements with

certain senior officers. Comments should include a detailed description

of the terms of any such arrangements and a supporting rationale.

1. Base salaries. Under proposed Sec. 932.41(b)(1), each Bank shall

establish the base salary of its President within the following salary

ranges, which ranges may be adjusted annually by the Board. The Board

shall publish a notice in the last quarter of the year preceding the

year in which adjustments are to take effect setting forth the

adjustments to these ranges for the next calendar year. Proposed

Sec. 932.4(b)(1)(i) codifies the 1996 salary ranges established by the

Board in Bd. Res. No. 95-33 (Oct. 5, 1995), as follows: 1) a Bank with

total assets as of December 31 of the prior year equal to or greater

than $40 billion shall have a base salary range for its President

beginning January 1, 1996, consisting of a minimum, mid-point, and

maximum dollar amount of $240,000, $305,000 and $385,000, respectively;

and 2) a Bank with total assets as of December 31 of the prior year

less than $40 billion shall have a base salary range for its President

beginning January 1, 1996, consisting of a minimum, mid-point, and

maximum dollar amount of $195,000, $245,000, and $310,000,

respectively. A newly appointed Bank President may not receive a base

salary higher that the mid-point of the applicable base salary range.

Beginning January 1, 1997, and annually thereafter, a Bank may

adjust the base salary of its President based on a merit increase rate.

The maximum merit increase rate shall be determined by the Board on an

annual basis. Any annual increase in a Bank President's base salary

shall not exceed the merit increase rate established by the Board, nor

shall such annual increase result in a Bank President's base salary

exceeding the maximum dollar amount of the applicable base salary

range. No other adjustment may be made to a President's base salary

during the year without prior Board approval. By January 2 of each

year, a Bank must report to the Board the approved base salary of its

President.

The Board is proposing to amend Sec. 941.9 of its regulations to

authorize the board of directors of OF to establish the compensation of

the Director according to the base salary ranges and the merit increase

rate governing the salaries of the Bank Presidents, subject to prior

Board approval. For purposes of determining the applicable base salary

range, OF is deemed to have assets of less than $40 billion.

The Board currently determines the salary ranges for Bank

Presidents using a comparability model based on the salaries of the

chief operating officers of

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private financial subsidiaries of similar asset size and geographic

location, offset by staff size. The Board specifically requests comment

on whether there is a more appropriate universe of entities that should

be used in establishing the comparability of the Bank Presidents'

salaries. For instance, it has been suggested that the salaries of the

Bank Presidents should be comparable to the salaries of the Presidents

(or their equivalent) of the Federal Reserve Banks, other segments of

the financial services industry, or other federally or state-created

entities with similar size, functions, and mission. Comments should

include specific examples of government entities on which comparability

should be based and a rationale for including such entities in the

universe.

In regulating the salary levels of the Bank Presidents and other

Bank employees, one of the Board's objectives is to attract and retain

competent individuals to the Bank System. The Board recognizes that, in

setting the salary levels for the Bank Presidents, it also is affecting

the salary levels of other Bank employees.

Under proposed Sec. 932.41(b)(2), each Bank generally may establish

base salaries for Bank employees other than the President without prior

Board approval, provided such salaries are reasonable and comparable

with the base salaries of employees of the other Banks and other

similar businesses, such as similar financial institutions, with

similar duties and responsibilities. Banks must maintain documentation

supporting the reasonableness and comparability of their employees'

base salaries. Similar provisions regarding OF employees are contained

in proposed Sec. 941.9(c).

Upon adoption of the proposed rule in final form, the Board intends

to rescind FHLBB Resolution No. 84-390, which requires the annual base

salary of the highest paid Bank employee other than the Bank President

to be less than or equal to 80 percent of the annual base salary of

that Bank President. See FHLBB Res. No. 84-390 (July 25, 1984).

However, a Bank would be required to report to the Board the approved

salary of the highest paid employee other than the Bank President by

January 2 of each year.

2. Incentive payments. Proposed Sec. 932.41(c) governs payments

made to Bank Presidents based on the quality of their on-the-job

performance. Such payments are defined in Sec. 932.41(a)(3) as

``incentive payments.'' As discussed below, Sec. 932.41(c) is intended

to preclude a Bank from making an incentive payment to a Bank President

based on the President's individual performance without regard to the

performance of the Bank. A Bank is prohibited from making any incentive

payment to its President if the most recent examination of the Bank by

the Board identified an unsafe or unsound practice or condition with

regard to the Bank. The Board specifically requests comment on whether

there are other events or conditions that should result in a

prohibition on incentive payments to Bank Presidents.

At least 20 percent of any incentive payment for a Bank President

must be based on the following criteria illustrating the Bank's

emphasis on the portion of its mission involved with support for member

credit activities: (1) average annual advances outstanding; and (2)

average annual letters of credit outstanding and average annual

notional principal outstanding in swap and option contracts with

members. At least 30 percent of any incentive payment must be based on

the following criteria illustrating the Bank's emphasis on additional

support for housing and community development finance: (1) average

annual Community Investment Program (CIP) advances outstanding, which

are provided in support of new CIP lending activity, not as

refinancings of existing CIP-eligible loans originated more than 30

days prior to the CIP financing request, nor for the purpose of

borrower balance sheet restructuring; (2) average annual consolidated

obligation principal customized for and issued to state or local

government agencies, non-profits, foundations, and other entities, the

proceeds of which serve unmet needs; and (3) average annual balances

outstanding of investments identified as fulfilling unmet needs by the

Board, where such investments are in accordance with items 11 and 12 of

section IIB of the Financial Management Policy for the Federal Home

Loan Bank System, and other investments approved by the Board. The

Bank's board of directors must assign a weight greater than zero to

each of the five above-described criteria as it deems appropriate,

based upon the board's view of the importance of each of these criteria

in the Bank's fulfillment of its mission.

Any portion (up to 50 percent) of the incentive payment that is not

based on the above-described criteria must be based on the Bank's

performance in achieving other objectives established by the Bank's

board of directors.

The Bank's board of directors must establish reasonable numerical

measures of performance and reasonable numerical targets for the

achievement of the performance criteria discussed above. Performance

targets must be set at such a level as to show an improvement in the

Bank's performance over the prior year or an extraordinary achievement

in attaining the designated target.

By January 1 of each year, the board of directors of each Bank that

intends to make any incentive payment to its President for such year

shall adopt and submit to the Board a resolution establishing the

performance measures and targets on which such incentive payment will

be based.

Proposed Secs. 932.41(c)(8) and (9) set forth the manner in which a

Bank President's incentive payment is to be calculated, based on the

Bank's achievement of the performance targets set by the board of

directors. Under the Compensation Plan, prior to the most recent

amendment, the maximum incentive payment payable to a Bank President

was 37.5 percent of base salary. The Plan was amended on July 25, 1996,

by Resolution Number 96-54, to limit an incentive payment to 31.25

percent of base salary. The Board specifically requests comment on the

appropriateness of and reasons for setting the maximum percentage at

some point in the range between zero and 37.5 percent.

Proposed Secs. 932.41(c)(10) provides that by March 1 of each year,

the board of directors of each Bank making any incentive payment to its

President for the prior year shall adopt and submit to the Board a

resolution showing the results for the individual performance measures

and the amount of the incentive payment to the Bank President. Such

incentive payment shall be deemed approved by the Board and payable to

a Bank President only if determined in accordance with the requirements

of Sec. 932.41(c).

The Board is proposing to authorize the board of directors of OF to

make incentive payments to the Director of OF, subject to prior Board

approval. Proposed Sec. 941.9(c)(2) authorizes OF board of directors to

establish the criteria, performance measures, and targets on which any

such incentive payment is based. OF is prohibited from making any

incentive payment to the Director if the most recent examination of OF

identified an unsafe or unsound practice or condition with regard to

OF.

The Board wishes to make clear that the proposed rule does not

require a Bank or OF to make an incentive payment, but if a Bank or OF

chooses to make such a payment, it must meet the requirements of

proposed Sec. 932.41(c) or Sec. 941.9(c)(2), respectively.

Proposed Sec. 932.41(d) carries forward the Board's current

practice of

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permitting the Banks to make incentive payments to employees other than

the President without prior Board approval, and adds the requirement

that such incentive payments must be reasonable and comparable with

incentive payments made to employees of the other Banks and other

similar businesses (including financial institutions) with similar

duties and responsibilities. Banks must maintain documentation

supporting the reasonableness and comparability of their employees'

incentive payments. Similar provisions regarding OF employees are

contained in proposed Sec. 941.9(c).

3. Benefits. Proposed Sec. 932.41(e) is intended to permit the

Banks to establish certain kinds of benefits plans for their employees,

and to provide benefits pursuant to such plans, without prior Board

approval. This section provides that a Bank may make payments in the

nature of benefits to its President and other Bank employees only

pursuant to a ``benefit plan'' or a ``bona fide deferred compensation

plan or arrangement,'' which are specifically defined in proposed

Secs. 932.41(a)(1) and (2). Proposed Sec. 932.41(e) codifies the

Board's current practice of permitting the Banks to adopt benefit plans

without prior Board approval if such plans are open for participation

by all Bank employees. However, this section changes the Board's

current practice of requiring the Banks to obtain prior Board approval

of plans that limit participation to a Bank's President and other

selected officers. Similar provisions regarding OF employees are

contained in proposed Sec. 941.9(c).

4. Severance. Proposed Sec. 932.41(f) is intended to permit the

Banks to establish severance plans for their employees without prior

Board approval. Similar provisions regarding OF employees are contained

in proposed Sec. 941.9(c).

5. General Limits on Payments. Proposed Sec. 932.41(g)(1) is

intended to clarify that the provisions of Sec. 932.41 govern all

payments, as that term is defined in Sec. 932.41(a)(5), to Bank

employees, and any payments made to a Bank employee that are not in

accordance with Sec. 932.41 are prohibited. Proposed Sec. 932.41(g)(2)

requires the total amount of base salaries, incentive payments, and

benefits paid to Bank employees to be within the limit set forth in the

Bank's approved budget. The board of directors of each Bank must review

annually the compensation plan for its employees, including appropriate

documentation, prior to approving the Bank's annual budget. Proposed

Sec. 932.40(h) carries forward the existing prohibition on the payment

of bonuses to Bank employees and other persons. A bonus is defined as a

payment to an employee, other than base salary, benefits and severance,

that is not based on performance. Similar provisions regarding OF

employees are contained in proposed Sec. 941.9(c).

III. Regulatory Flexibility Act

The proposed rule applies only to the twelve Banks, which do not

come within the meaning of ``small entities,'' as defined by the

Regulatory Flexibility Act (RFA). 5 U.S.C. 601. Therefore, in

accordance with the RFA, the Board hereby certifies that the proposed

rule, if promulgated as a final rule, will not have a significant

economic impact on a substantial number of small entities.

List of Subjects

12 CFR Part 932

Conflict of interests, Federal home loan banks.

12 CFR Part 941

Organization and functions (Government agencies).

Accordingly, chapter IX, title 12, subchapter B, Code of Federal

Regulations, is hereby proposed to be amended as follows:

SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM

PART 932--ORGANIZATION OF THE BANKS

1. The authority citation for part 932 is revised to read as

follows:

Authority: 12 U.S.C. 1422a, 1422b, 1426, 1427, 1432; 42 U.S.C.

8101 et seq.

2. Section 932.40 is revised to read as follows:

Sec. 932.40 Selection.

(a) Bank Presidents. (1) Each Bank may appoint or reappoint a

President, subject to prior Board approval.

(2) A President of a Bank shall be appointed initially for a term

not to exceed one calendar year, expiring on December 31 of the year in

which the President takes office.

(3) A President may be reappointed to succeeding one-year terms,

each expiring on December 31 of the year for which the President is

reappointed.

(4) By November 1 of each year, the board of directors of each Bank

shall adopt and submit to the Board a resolution appointing or

reappointing its President for the following year.

(5) No appointment or reappointment of a Bank President shall be

effective until approved by the Board.

(b) Bank employees other than the President. Each Bank may appoint

or elect officers other than the President and may hire other employees

of the Bank without prior Board approval.

(c) Conflicts of interest. A Bank employee shall not also be

employed by, or otherwise act in any capacity for, a member or an

institution eligible to make application to become a member.

3. Section 932.41 is revised to read as follows:

Sec. 932.41 Compensation.

(a) Definitions. The following definitions apply for purposes of

this section:

(1) Benefit plan. Benefit plan means any plan, contract, agreement,

or other arrangement which is an ``employee welfare benefit plan,'' as

that term is defined in section 3(1) of the Employee Retirement Income

Security Act of 1974 (as amended) (29 U.S.C. 1002(1)), or other usual

and customary plans such as dependent care, tuition reimbursement,

group legal services or cafeteria plans.

(2) Bona fide deferred compensation plan or arrangement. (i) Bona

fide deferred compensation plan or arrangement means:

(A) Any plan, contract, agreement, or other arrangement whereby a

Bank employee voluntarily elects to defer all or a portion of the base

salary or incentive payment paid for services rendered which otherwise

would have been paid to such employee at the time the services were

rendered (including a plan that provides for the crediting of a

reasonable investment return on such elective deferrals) and the Bank

either:

(1) Recognizes compensation expense and accrues a liability for the

benefit payments according to generally accepted accounting principles

(GAAP); or

(2) Segregates or otherwise sets aside assets in a trust which may

only be used to pay plan and other benefits, except that the assets of

such trust may be available to satisfy claims of the Bank's creditors

in the case of insolvency; or

(B) A nonqualified deferred compensation or supplemental retirement

plan established by a Bank, other than an elective deferral plan

described in paragraph (a)(2)(i)(A) of this section:

(1) Primarily for the purpose of providing benefits for certain

employees in excess of the limitations on contributions and benefits

imposed by sections 415, 401(a)(17), 402(g) or any other applicable

provision of the Internal Revenue Code of 1986 (26 U.S.C. 415,

401(a)(17), 402(g)); or

(2) Primarily for the purpose of providing supplemental retirement

benefits or other deferred compensation for a select group of

management or

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highly compensated employees (excluding payments under a severance plan

described in paragraph (a)(6) of this section).

(ii) The following requirements shall apply to any nonqualified

deferred compensation or supplemental retirement plans as described in

paragraph (a)(2)(i)(B) of this section:

(A) The plan must have been in effect at least one year prior to a

payment of benefits under the plan;

(B) Any payment made pursuant to such plan must be made in

accordance with the terms of the plan and any amendments to such plan

made during such one year period that do not increase the benefits

payable thereunder;

(C) The employee must have a vested right, as defined under the

applicable plan document, at the time of termination of employment, to

payments under such plan;

(D) Benefits under such plan must be accrued each period only for

current or prior service rendered to the employee;

(E) The Bank must have previously recognized compensation expenses

and accrued a liability for the benefit payments according to GAAP or

segregated or otherwise set aside assets in a trust which may only be

used to pay plan benefits, except that the assets of such trust may be

available to satisfy claims of the Bank's creditors in the case of

insolvency; and

(F) Payments pursuant to such plans shall not be in excess of the

accrued liability computed in accordance with GAAP.

(3) Incentive payment. Incentive payment means a direct or indirect

transfer of funds by a Bank to a Bank employee, in addition to base

salary, based on the employee's on-the-job performance.

(4) Nondiscriminatory. Nondiscriminatory means that the plan,

contract or arrangement in question applies to all employees of a Bank

who meet reasonable and customary eligibility requirements applicable

to all employees, such as minimum length of service requirements. A

nondiscriminatory plan, contract, or arrangement may provide different

benefits based only on objective criteria such as base salary, total

compensation, length of service, job grade or classification, which are

applied on a proportionate basis.

(5) Payment. Payment means:

(i) Any direct or indirect transfer of any funds or any asset;

(ii) Any forgiveness of any debt or other obligation;

(iii) The conferring of any benefit; and

(iv) Any segregation of any funds or assets, the establishment or

funding of any trust or the purchase of, or arrangement for, any letter

of credit or other instrument for the purpose of making, or pursuant to

any agreement to make, any payment on or after the date on which such

funds or assets are segregated, or at the time of or after such trust

is established or letter of credit or other instrument is made

available, without regard to whether the obligation to make such

payment is contingent on:

(A) The determination, after such date, of the liability for the

payment of such amount; or

(B) The liquidation, after such date, of the amount of such

payment.

(6) Severance plan. A nondiscriminatory pay plan or arrangement

which provides for payment of severance benefits to all eligible

employees upon involuntary termination other than for cause, voluntary

resignation, or early retirement; provided, however, that no employee

shall receive any such payment which exceeds the base compensation paid

to such employee during the 12 months immediately preceding termination

of employment, resignation or early retirement.

(b) Base salary--(1) Bank President. (i) Each Bank shall establish

the base salary of its President within the following salary ranges,

which ranges may be adjusted annually by the Board:

(A) A Bank with total assets as of December 31 of the prior year

equal to or greater than $40 billion shall have a base salary range for

its President beginning January 1, 1996, consisting of a minimum, mid-

point, and maximum dollar amount of $240,000, $305,000 and $385,000,

respectively; and

(B) A Bank with total assets as of December 31 of the prior year

less than $40 billion shall have a base salary range for its President

beginning January 1, 1996, consisting of a minimum, mid-point, and

maximum dollar amount of $195,000, $245,000, and $310,000,

respectively.

(ii) A newly appointed Bank President may not receive a base salary

higher than the mid-point of the applicable base salary range.

(iii) Beginning January 1, 1997, and annually thereafter, a Bank

may adjust the base salary of its President based on a merit increase

rate. The maximum merit increase rate shall be determined by the Board

on an annual basis. Any annual increase in a Bank President's base

salary shall not exceed the merit increase rate established by the

Board, nor shall such annual increase result in a Bank President's base

salary exceeding the maximum dollar amount of the applicable base

salary range under paragraph (b)(1)(i)(A) or (B) of this section. No

other adjustment may be made to a President's base salary during the

year without prior Board approval.

(iv) By January 2 of each year, a Bank must report to the Board the

approved base salary of its President.

(2) Other Bank employees. (i) Each Bank may establish base salaries

for employees other than the President without prior Board approval,

provided that such base salaries are reasonable and comparable with the

base salaries of employees of the other Banks and other similar

businesses (including financial institutions) with similar duties and

responsibilities. Banks shall maintain documentation supporting the

reasonableness and comparability of their employees' base salaries.

(ii) By January 2 of each year, a Bank must report to the Board the

approved salary of the highest paid employee other than the Bank

President.

(c) Incentive payments for Bank President. (1) Any incentive

payment made to a Bank President shall be based solely on the

performance of the Bank during the year in which the incentive payment

is earned, and shall be determined in accordance with the requirements

of this paragraph (c). A Bank shall not make any incentive payment to

its President if the most recent examination of the Bank by the Board

identified an unsafe or unsound practice or condition with regard to

the Bank.

(2) At least 20 percent of a Bank President's incentive payment

shall be based on the following criteria:

(i) Average annual advances outstanding; and

(ii) Average annual letters of credit outstanding and average

annual notional principal outstanding in swap and option contracts with

members.

(3) At least 30 percent of a Bank President's incentive payment

shall be based on the following criteria:

(i) Average annual Community Investment Program (CIP) advances

outstanding, which are provided in support of new CIP lending activity,

not as refinancings of existing CIP-eligible loans originated more than

30 days prior to the CIP financing request, nor for the purpose of

borrower balance sheet restructuring;

(ii) Average annual consolidated obligation principal customized

for and issued to state or local government agencies, non-profits,

foundations, and other entities, the proceeds of which serve unmet

needs; and

(iii) Average annual balances outstanding of investments identified

as fulfilling unmet needs by the Board,

[[Page 42576]]

where such investments are in accordance with items 11 and 12 of

section IIB of the Financial Management Policy for the Federal Home

Loan Bank System, and other investments approved by the Board.

(4) Up to 50 percent of a Bank President's incentive payment may be

based upon criteria identified by the Bank's board of directors,

provided such criteria reflect the Bank's performance in achieving its

mission during the year for which the incentive payment is being made.

(5) A Bank board of directors shall assign a weight greater than

zero for each of the criteria in paragraphs (c)(2) and (4) of this

section, as it deems appropriate based upon its view of the importance

of each of these activities in enabling the FHLBank to fulfill its

mission.

(6) The Bank's board of directors shall establish reasonable

numerical measures of performance under the performance criteria listed

in paragraphs (c) (2) and (3) of this section, as well as for any

criteria identified by the Bank's board of directors pursuant to

paragraph (c)(4) of this section, and shall establish reasonable

numerical targets for the achievement of such criteria. Performance

targets shall be set at such a level as to show an improvement in the

Bank's performance over the prior year or an extraordinary achievement

in attaining the designated target.

(7) By January 1 of each year, the board of directors of each Bank

that intends to make any incentive payment to its President for such

year shall adopt and submit to the Board a resolution establishing the

performance measures and targets on which such incentive payment will

be based.

(8) The amount of an incentive payment shall be based upon the

extent to which a Bank achieves the performance targets. A Bank must

achieve at least 100 percent of the target for a performance criterion

in order for any payment to be made based upon that criterion. A Bank

may increase the incentive payment to the extent that the Bank exceeds

the performance targets, as set forth in the following table [The

percentages in the right hand column of the table will be determined by

the Board, after review of public comments on this proposed rule.]:

Incentive Payment Level

------------------------------------------------------------------------

Bank performance as a percent of Total incentive payment as a

target percent of base salary

------------------------------------------------------------------------

150.0% -...........................

149.0% -...........................

148.0% -...........................

147.0% -...........................

146.0% -...........................

145.0% -...........................

144.0% -...........................

143.0% -...........................

142.0% -...........................

141.0% -...........................

140.0% -...........................

139.0% -...........................

138.0% -...........................

137.0% -...........................

136.0% -...........................

135.0% -...........................

134.0% -...........................

133.0% -...........................

132.0% -...........................

131.0% -...........................

130.0% -...........................

129.0% -...........................

128.0% -...........................

127.0% -...........................

126.0% -...........................

125.0% -...........................

124.0% -...........................

123.0% -...........................

122.0% -...........................

121.0% -...........................

120.0% -...........................

119.0% -...........................

118.0% -...........................

117.0% -...........................

116.0% -...........................

115.0% -...........................

114.0% -...........................

113.0% -...........................

112.0% -...........................

111.0% -...........................

110.0% -...........................

109.0% -...........................

108.0% -...........................

107.0% -...........................

106.0% -...........................

105.0% -...........................

104.0% -...........................

103.0% -...........................

102.0% -...........................

101.0% -...........................

100.0% -...........................

------------------------------------------------------------------------

(9) The total incentive payment earned by a Bank President for a

given year may not exceed [A percentage of base salary, to be

determined by the Board after review of public comments, from 0 to 37.5

percent.] of the President's base salary for that year.

(10) By March 1 of each year, the board of directors of each Bank

making any incentive payment to its President for the prior year shall

adopt and submit to the Board a resolution showing the results for the

individual performance measures and the amount of the incentive payment

to the Bank President. Such incentive payment shall be deemed approved

by the Board and payable to a Bank President only if determined in

accordance with the requirements of this paragraph (c).

(d) Incentive payment for other bank employees. Each Bank may make

incentive payments to employees other than the President without prior

Board approval, provided that such incentive payments are reasonable

and comparable with incentive payments made to employees of the other

Banks and other similar businesses (including financial institutions)

with similar duties and responsibilities. Banks shall maintain

documentation supporting the reasonableness and comparability of their

employees' incentive payments.

(e) Benefits. A Bank may make payments in the nature of benefits to

its President and to other Bank employees only pursuant to a benefit

plan and a bona fide deferred compensation plan or arrangement, as

defined in paragraphs (a)(1) and (2) of this section.

(f) Severance plans. A Bank may make payments in the nature of

severance to its President and to other Bank employees only pursuant to

a severance plan, as defined in paragraph (a)(6) of this section.

(g) General limits on payments. (1) No Bank shall make any payment

to a Bank employee, except as provided in this section.

(2) The total amount of base salaries, incentive payments, and

benefits paid to Bank employees shall be within the limit set forth in

the Bank's approved budget. The board of directors of each Bank shall

review annually the compensation plan for its employees, including

appropriate documentation, prior to approving the Bank's annual budget.

(h) Prohibition on bonuses. A Bank shall not pay any employee or

other person a bonus. For purposes of this paragraph (h), a bonus is a

payment to an employee, other than base salary, benefits, and severance

payments, that is not based on performance.

PART 941--OPERATIONS OF THE OFFICE OF FINANCE

4. The authority citation for Part 941 is revised to read as

follows:

Authority: 12 U.S.C. 1422b, 1431.

5. Section 941.9 is amended by revising paragraph (b)(6) and by

adding paragraph (c) to read as follows:

Sec. 941.9 Duties of the Office of Finance Board of Directors.

* * * * *

(b) * * *

(6) Select and employ the Director, subject to the following

requirements:

[[Page 42577]]

(i) The Director shall be appointed initially for a term not to

exceed one calendar year, expiring on December 31 of the year in which

the Director takes office;

(ii) A Director may be reappointed to succeeding one-year terms,

each expiring on December 31 of the year for which the Director is

reappointed;

(iii) By November 1 of each year, the OF Board of Directors shall

adopt and submit to the Finance Board a resolution appointing or

reappointing its Director for the following year; and

(iv) No appointment or reappointment of a Director shall be

effective until approved by the Finance Board;

* * * * *

(c) Compensation--(1) Definitions. The definitions which appear in

Sec. 932.41 of this chapter apply to this paragraph (c).

(2) The Director. (i) Subject to prior Finance Board approval, the

OF Board of Directors shall establish and pay the base salary of the

Director, including any merit increase, in accordance with the

provisions of Sec. 932.41(b) of this chapter. For purposes of

Sec. 932.41(b) of this chapter, the OF shall be deemed to have total

assets of less than $40 billion. By January 2 of each year, OF must

report to the Finance Board the approved base salary of its Director.

(ii) Any incentive payment made to the Director shall be based

solely on the performance of the OF during the year in which the

incentive payment is earned, and shall be determined in accordance with

the requirements of this paragraph (c)(2)(ii), subject to prior Finance

Board approval. The OF shall not make any incentive payment to the

Director if the most recent examination of OF by the Finance Board

identified an unsafe or unsound practice or condition with regard to

OF. The Director's incentive payment shall be based upon criteria

identified by OF Board of Directors, which must establish reasonable

numerical measures and targets for the achievement of such criteria.

Performance targets shall be set at such a level as to show an

improvement in the performance of OF over the prior year or an

extraordinary achievement in attaining the designated target.

(iii) By January 1 of each year, the OF Board of Directors shall

adopt and submit to the Finance Board for approval a resolution

establishing the performance measures and targets on which any

incentive payment will be based.

(iv) The amount of an incentive payment shall be calculated in

accordance with the provisions of Sec. 932.41(c)(8) and (9) of this

chapter.

(v) By March 1 of each year, the OF Board of Directors shall adopt

and submit to the Finance Board a resolution showing the results for

the individual performance measures and the amount of the proposed

incentive payment to the Director.

(3) Other OF Employees. (i) The OF Board of Directors may establish

base salaries for employees other than the Director without prior

Finance Board approval, provided that such base salaries are reasonable

and comparable with the base salaries of employees of the Banks and

other similar businesses (including financial institutions) with

similar duties and responsibilities. The OF Board of Directors shall

maintain documentation supporting the reasonableness and comparability

of OF employees' base salaries.

(ii) By January 2 of each year, the OF must report to the Finance

Board the approved salary of the highest paid employee other than the

Director.

(iii) The OF board of directors may make incentive payments to

employees other than the Director without prior Finance Board approval,

provided that such incentive payments are reasonable and comparable

with incentive payments made to employees of the Banks and other

similar businesses (including financial institutions) with similar

duties and responsibilities. The OF Board of Directors shall maintain

documentation supporting the reasonableness and comparability of their

employees' incentive payments.

(4) Benefits. The OF may make payments in the nature of benefits to

its Director and to other OF employees only pursuant to a benefit plan

and a bona fide deferred compensation plan or arrangement, as defined

in Sec. 932.41(a) of this chapter.

(5) Severance plans. The OF may make payments in the nature of

severance to its Director and to other OF employees only pursuant to a

severance plan, as defined in Sec. 932.41(a) of this chapter.

(6) General limits on payments. (i) The OF shall not make any

payment to any OF employee, except as provided in this section.

(ii) The total amount of base salaries, incentive payments, and

benefits paid to OF employees shall be within the limit set forth in

the OF's approved budget. The OF Board of Directors shall review

annually the compensation plan for its employees, including appropriate

documentation, prior to approving the OF annual budget.

(7) Prohibition on bonuses. The OF shall not pay any employee or

other person a bonus. For purposes of this paragraph (c)(7), a bonus is

a payment to an employee, other than base salary, benefits, and

severance payments, that is not based on performance.

Dated: August 6, 1996.

By the Board of Directors of the Federal Housing Finance Board.

Bruce A. Morrison,

Chairman.

[FR Doc. 96-20486 Filed 8-15-96; 8:45 am]

BILLING CODE 6725-01-U