Selection and Compensation of Federal Home Loan Bank Employees

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 932

[No. 96-97]

Selection and Compensation of Federal Home Loan Bank Employees

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

SUMMARY: The Federal Housing Finance Board (Finance Board) is amending

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 Finance Board to the board of

directors of each Bank. The final rule requires a Bank to obtain prior

Finance Board approval of the appointment of a new President, but

permits a Bank to reappoint an incumbent President without prior

Finance Board approval. The final rule also gives the Banks broad

authority to set Bank Presidents' salaries within established caps and

authorizes the Banks to make incentive payments to their Presidents

based on each Bank's performance and on fulfillment of its mission. The

devolution of authority to the Banks is consistent with the goals of

the Regulatory Reinvention Initiative of the National Performance

Review.

EFFECTIVE DATE: January 2, 1997.

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,

NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

A. Selection of 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 Finance Board. See 12 U.S.C.

1432(a). Section 932.40 of the Finance 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 Finance Board. See 12 U.S.C.

1432(a). Under each Bank's bylaws, a Bank elects or appoints its

President subject to Finance 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 Finance Board consents to such

representation. See id.

B. Compensation

1. Bank Presidents

Under section 12(a) of the Bank Act, the compensation of all Bank

employees is subject to Finance Board approval. See 12 U.S.C. 1432(a).

However, under its existing regulation on Bank employee compensation,

prior Finance Board approval is required only for compensation of a

Bank's President. See 12 CFR 932.41(a). Section 932.41 of the Finance

Board's existing compensation regulation requires the board of

directors of each Bank annually to adopt and submit to the Finance

Board for its

[[Page 5]]

approval an appropriate resolution showing the contemplated

compensation of its President. See id.

In setting the compensation of their Presidents, the Banks are

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

adopted by the Finance 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 Finance

Board approval recommendations for merit increases to its President's

base salary and proposed incentive payments.

2. Other Bank Employees

Section 932.41(b) of the Finance Board's existing compensation

regulation permits a Bank to fix the compensation of officers other

than the President without prior Finance Board approval, provided that

such compensation is within ranges established by the Finance 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 Finance 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.

II. Proposed Rulemaking

On August 16, 1996, the Finance Board published for public comment

a notice of proposed rulemaking, which proposed 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. See 61 FR 42570 (Aug. 16, 1996) (proposed

rule). The proposed rule also included amendments to Sec. 941.9 of the

Finance Board's regulations to codify the Finance Board's existing

practice regarding the annual appointment and compensation of the

Director of the Office of Finance (OF) and other OF employees. See id.

The proposed rule provided for a 60-day comment period.

The Finance Board received letters from a total of 49 commenters,

including all 12 Banks, a joint Bank committee on Bank Presidents'

compensation, 32 Bank members, 2 not-for-profit housing organizations,

one advocacy group, and one individual. The commenters generally

supported the concept of transferring to the individual Banks more

authority to determine the compensation of Bank employees and, in

particular, the Bank Presidents. However, various commenters stated

that the Banks should have more authority in this area than would be

allowed under the proposed rule. Commenters also generally supported

giving the Banks more control over the appointment of Bank Presidents

than would be permitted under the proposed rule.

A discussion of the relevant comments is included below in the

Analysis of the Final Rule. Where no comments were received on a

particular regulatory provision, or a provision was not considered

controversial, and the Finance Board has determined to adopt the

provision as proposed, the provision generally is not discussed in this

preamble. The Finance Board is deferring action on the portions of the

proposed rule pertaining to the selection and compensation of OF

employees and benefits until a later date.

III. Analysis of the Final Rule

A. Selection of Employees

1. Bank Presidents

Section 932.40(a) of the proposed rule codified the Finance Board's

existing practice of approving the appointments of Bank Presidents for

one-year terms. The preamble to the proposed rule interpreted the one-

year appointment requirement to prohibit a President from holding over

upon expiration of his or her term of office, and to supersede the

existing provisions in the Banks' by-laws allowing for the holdover of

Bank Presidents.

Twenty-two commenters opposed requiring Finance Board approval of

the initial appointment and the reappointment of Bank Presidents. Many

commenters believed that the Finance Board should rely on the boards of

the Banks to appoint the Bank Presidents, given that the boards are

duly elected by the members and appointed by the Finance Board, and the

Banks are for-profit, privately capitalized institutions owned by their

stockholders. According to some commenters, requiring Finance Board

approval of reappointment also may discourage qualified candidates from

seeking the Presidencies. Several commenters recommended that the

Bank's boards be permitted to enter into multi-year employment

contracts with their Presidents.

Ten commenters opposed requiring Finance Board approval of the

reappointment of Bank Presidents, but these commenters either supported

or would not necessarily object to the Finance Board having a role in

approving the initial appointment of Bank Presidents.

While the Banks may be characterized as for-profit, privately

capitalized institutions owned by their stockholders, the Banks exist

primarily to carry out a public purpose: the promotion and expansion of

housing finance. See 12 U.S.C. Sec. 1422a(a)(3)(B)(ii). Therefore, a

Bank's President is charged with representing and furthering not only

the interests of the Bank's stockholders but also the interests of the

public. The Bank Act provides that the primary duty of the Finance

Board is to ensure that the Banks operate in a financially safe and

sound manner. See id. Sec. 1422a(a)(3)(A). The other statutory duties

of the Finance Board are to: supervise the Banks; ensure that they

carry out their housing finance mission; and ensure that they remain

adequately capitalized and able to raise funds in the capital markets.

See id. Sec. 1422a(a)(3)(B).

The Finance Board believes that retaining approval authority over a

Bank's selection of its highest officer is necessary to carry out the

Finance Board's statutory duties. Therefore, Sec. 932.40(a) of the

final rule requires a Bank to obtain prior Finance Board approval of

the appointment of a new President. However, a Bank may reappoint an

incumbent President without prior Finance Board approval. For purposes

of clarity and completeness, Sec. 932.40(a) also restates the statutory

requirements in sections 2B(a)(2) and 12(a) of the Bank Act providing,

respectively, that: (1) a Bank President may be suspended or removed by

the Finance Board for cause, which shall be communicated in writing to

the President and the Bank, and (2) a Bank President serves at the

pleasure of the Bank. See id. Secs. 1422b(a)(2), 1432(a).

Twenty-four commenters opposed elimination of a Bank President's

ability to holdover on the ground that, among other things, this may

lead to a situation where a Bank is without leadership if the Finance

Board fails to approve a new President. By requiring prior

[[Page 6]]

Finance Board approval only of new Bank Presidents, the final rule

allows for the holdover of an incumbent Bank President.

2. Other Bank Employees

Section 932.40(b) of the final rule adopts the language of the

proposed rule providing that a Bank may appoint or elect officers other

than the President and may hire other employees of the Bank without

prior Finance Board approval.

3. Conflicts of Interests

Proposed Sec. 932.40(c) updated the conflicts of interest

provisions in existing Sec. 932.40 by eliminating references to the

FSLIC, which was abolished by Congress in 1989. See id. Sec. 1437 note.

The proposed rule retained, 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) prohibited

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. The final rule adopts proposed Sec. 932.40(c),

without change.

B. Compensation of Bank Employees

1. Base Salaries

a. Bank Presidents. The proposed rule permitted each Bank to

establish the base salary of its President within specific ranges,

based on the Bank's asset size, and to pay yearly merit increases, up

to a maximum rate set by the Finance Board. The general consensus of

the commenters was that the boards of directors of the Banks should be

permitted to set compensation for all Bank employees, including the

Presidents, provided such compensation is reasonable and comparable to

what is being paid in the marketplace. Commenters generally opposed

Finance Board control over the compensation of the Bank Presidents,

except to the extent that it relates to safety and soundness of the

Banks. Commenters made a variety of arguments in support of these

positions, including: (1) The establishment of detailed requirements

governing compensation for Bank Presidents is not necessary to ensure

that the Banks operate safely and soundly; (2) a Bank's strategic

advantage of being a regionally based entity able to experiment with

new ways to meet local housing needs is hindered by nationally mandated

compensation goals; (3) placing the compensation issue in the hands of

a regulator is contrary to the intent and mission of the Banks, which

are for-profit, shareholder-owned enterprises, and creates a conflict

of interest for the Finance Board in its capacity as a regulator; and

(4) codifying the Bank Presidents' salaries in regulation politicizes

the compensation process and treats the Presidents like public, rather

than private sector employees. Several commenters recommended that the

Finance Board adopt the approach of other federal bank regulatory

agencies that limit compensation only for executives of institutions

with safety and soundness problems.

The Finance Board finds merit in the ideas that detailed regulatory

requirements for the compensation of Bank Presidents do not necessarily

further the goal of ensuring the safe and sound operation of the Banks,

and that a Bank should have flexibility to establish compensation goals

that encourage the Bank to address local housing needs. The Finance

Board also agrees that management functions, such as the establishment

of employee compensation, should be in the hands of the Banks to the

maximum extent feasible.

However, the Finance Board disagrees with the idea that it should

approach the regulation of Bank employee compensation in the same

manner as regulators of private entities, such as commercial banks and

savings associations, which are not government chartered corporations.

Although the primary duty of the Finance Board is to ensure the

financial safety and soundness of the Banks, the Finance Board also has

a statutory mandate to ensure that the Banks carry out their

programmatic purposes in the area of housing finance. See id.

Sec. 1422a(a)(3)(A), (B)(ii). Unlike the institutions regulated by

other federal bank regulators, the Banks exist primarily to serve the

public interest. See id. Sec. 1422a(a)(3)(B)(ii). Consequently, the

Finance Board has an interest in exercising some control over the

compensation of Bank Presidents, not only to ensure the safety and

soundness of the Banks, but also to ensure that the programmatic goals

of the Banks are met.

The Finance Board currently determines the salary ranges for Bank

Presidents using a comparability model based on the salaries of the

chief operating officers (COO) of private financial subsidiaries of

similar asset size and geographic location, offset by staff size. The

preamble to the proposed rule specifically requested comment on the

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. The Bank Presidents' Compensation

Committee (Compensation Committee), which is comprised of persons

appointed from each of the 12 Banks, retained Hewitt Associates, LLC,

to review the proposed rule. The Hewitt Associates study (Hewitt study)

concluded, among other things, that the banking industry is the

appropriate comparator group for the Bank Presidents in setting

compensation, and that the chief executive officer (CEO) of a bank

subsidiary is a more appropriate match than a COO of a subsidiary.

Most of the Banks' comments on this issue are in accord with the

conclusions of the Hewitt study. Several Banks and the Hewitt study

concluded that an offset based on asset base and staff size should be

used in the development of compensation levels. The two Bank members

that addressed this issue believed that Bank Presidents' compensation

should be comparable with the salaries of CEOs of organizations of

similar size, scope, and risk.

In light of the public purpose of the Banks, the issue for the

Finance Board in determining comparability of compensation is not how

the Bank Presidents are different from comparable positions in the

private sector, but how the Bank Presidents are different from

comparable positions with governmental or quasi-governmental entities.

The Hewitt study concluded that the Federal Reserve Banks (FRBs)

are not an appropriate comparator group for the Banks because the Banks

are profit-driven in that they are owned by their members, who are

entitled to dividends. Further, the Banks operate in a competitive

environment and must market their services to members and prospective

customers. In addition, the Banks make statutorily mandated annual

payments of $300 million to the Resolution Funding Corporation, see 12

U.S.C. 1441b, and at least $100 million to the Affordable Housing

Program, see id. Sec. 1430(j).

In contrast to the Banks, the FRBs' primary mission is

governmental, and the FRBs do not manage an investment portfolio. One

Bank commenter stated that the FRBs are not appropriate

[[Page 7]]

comparators for the Banks on this issue because: (1) they carry out

governmental monetary and regulatory functions; (2) their boards are

advisory in nature; (3) their stock pays a fixed return; and (4) their

profits are returned to the Department of the Treasury.

In recognition of the expressed arguments against detailed

regulatory requirements for Bank Presidents' compensation, the final

rule does not adopt those provisions in the proposed rule prescribing

salary ranges and merit increase rates. The final rule provides for the

Finance Board, on an annual basis, to determine and publish by November

30 individual caps on the base salaries payable to each of the Banks'

Presidents for the subsequent calendar year. The base salary cap for

each Bank President shall be based on the average base salary of a CEO

of a subsidiary financial institution in the Bank's primary

metropolitan statistical area with an asset size comparable to that of

the Bank, as of June of the prior year, reduced by five percent and

rounded to the nearest $5,000. The five percent reduction is intended

to reflect the public purpose of the Banks. Each Bank shall establish,

on an annual basis, a reasonable base salary for its President, not to

exceed 100 percent of the applicable base salary cap published by the

Finance Board. However, those Bank Presidents whose currently approved

and recommended base salaries for 1997 exceed the 1997 cap will not

experience any reduction in base salary. These Presidents' base

salaries will be capped at their current levels until the annual cap

set by the Finance Board for the Bank exceeds the 1997 base salary

currently approved and recommended for the President by the Bank's

board of directors. By January 2 of each year, a Bank must report to

the Finance Board the approved base salary of its President for that

year.

b. Other Bank Employees. The proposed rule permitted each Bank to

establish base salaries for employees other than the President without

prior Finance 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. Section 932.41(b)(2) adopts the

provisions of the proposed rule, with the additional requirement that

no employee's base salary shall exceed the base salary of the Bank

President. This is intended to ensure the effectiveness of the cap on

the Bank President's salary.

2. Incentive Payments

a. Bank Presidents. The proposed rule required incentive payments

to Bank Presidents to be based solely on the performance of the Bank,

rather than on the President's individual performance. The proposed

rule established specific criteria on which a Bank President's

incentive payment is to be based, and required the boards of directors

of the Banks to establish numerical performance targets and measures to

be used in determining a Bank President's incentive payment.

Specifically, the proposed rule provided that at least 20 percent of

any incentive payment for a Bank President must be based on certain

specified criteria illustrating the Bank's emphasis on the portion of

its mission involved with support for member credit activities; at

least 30 percent of any incentive payment must be based on certain

specified criteria illustrating the Bank's emphasis on additional

support for housing and community development finance; and the

remaining portion of the incentive payment must be based on the Bank's

performance in achieving other objectives established by the Bank's

board of directors.

The proposed rule provided that 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. In order to obtain the maximum incentive payment,

the proposed rule required a Bank President to achieve 150 percent of

the performance target for a given incentive criterion.

Nine Banks specifically opposed the setting of standard criteria

for incentive payments throughout the Bank System. Commenters

recommended that each Bank's board of directors be permitted to

establish incentive payment criteria in order to ensure a complete

reflection of the issues the boards believe are critical. Several Banks

commented that there is no logical relationship between meeting 150

percent of a performance target and an outstanding level of

performance.

The final rule gives the Banks more flexibility to determine the

basis for incentive payments to Bank Presidents, but retains the

requirements that such payments be based solely on the performance of

the Bank and that they be based in part on the Bank's measured progress

in the achievement of its mission.

Section 932.41(c)(2) of the final rule provides that at least fifty

percent of the Bank President's incentive payment must be based on the

extent to which the Bank meets reasonable numerical performance targets

established by the Bank's board of directors related to the Bank's

achievement of its housing finance mission, which shall include

substantial consideration of growth in innovative products directed at

unmet credit needs, growth in pre-committed Community Investment

Program (CIP) advances, growth in non-advance credit support and risk

management products for members, as well as growth in advances,

including long-term advances. Pre-committed CIP advances means CIP

advances provided in support of new CIP lending activity, not

refinancings of existing CIP-eligible loans.

The remaining portion of the incentive payment must be based on the

extent to which the Bank meets reasonable numerical performance targets

related to the achievement of goals established by the Bank's board of

directors, in its discretion. By January 31 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 a resolution establishing the

performance measures and targets on which such incentive payment will

be based. Any incentive payment made to a Bank President shall be based

solely upon the extent to which a Bank achieves the performance targets

established by the board of directors.

The preamble to the proposed rule requested comments on the

appropriateness and the reasons for limiting a Bank President's total

incentive payment to a maximum percentage of base salary, at some point

in the range between zero and 37.5 percent. Under the existing Bank

President's 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 Compensation Plan was amended on July 25, 1996, to

limit an incentive payment to 31.25 percent of base salary. See Bd.

Res. 96-54 (July 25, 1996).

Eight Banks opposed the 31.25 percent and 37.5 percent limits on

incentive payments as arbitrary and not reflective of marketplace

conditions. Several Banks commented that their boards should be

permitted to set limits on incentive compensation based on the

industry-wide average. Commenters also stated that the Banks should be

permitted to determine the appropriate mix between base salary and

incentive compensation for their employees. The final rule attempts to

provide the added flexibility recommended by commenters.

[[Page 8]]

The final rule provides that a Bank may establish an incentive

payment program or programs for its employees. The maximum incentive

payment to a Bank President may not exceed the difference between that

President's base annual salary approved by the Bank and 125 percent of

the annual base salary cap, as published by the Finance Board. The

effect of this provision is to limit a Bank President's total cash

compensation payable in salary and incentive compensation to 125

percent of the amount of the base salary cap established by the Finance

Board for that Bank.

The proposed rule prohibited a Bank from making any incentive

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

the Finance Board identified an unsafe or unsound practice or condition

with regard to the Bank. The Finance Board specifically requested

comment on whether there are other events or conditions that should

result in a prohibition on incentive payments to Bank Presidents.

Several Banks opposed the prohibition on incentive payments based

on examination findings because such a practice would make the

examination process more adversarial and potentially could deny a

President an incentive payment based on an examination finding that may

be reversed upon appeal. One Bank and the Compensation Committee

recommended clarifying that if an examination finding of an unsafe or

unsound practice or condition is subsequently resolved in favor of the

Bank, the Bank's board will be allowed to pay a Bank President an

incentive payment retroactively. The final rule makes this

clarification.

The Finance Board wishes to make clear that the proposed rule does

not require a Bank to make incentive payments, but if a Bank chooses to

make such payments, it must meet the requirements of Sec. 932.41(c).

b. Other Bank Employees. The final rule adopts the provisions of

the proposed rule authorizing the Banks to make incentive payments to

employees other than the Bank Presidents that 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. The final rule also provides that

incentive payments for employees other than the Bank President shall be

based on the extent to which an employee meets objective performance

targets related to performance criteria established by the Bank's board

of directors under the Bank's incentive compensation program or

programs. The final rule limits the incentive payment opportunities for

employees other than the President such that the total incentive

payment opportunity, expressed as a percentage of base salary, for an

employee other than the Bank President shall not exceed the total

incentive payment opportunity, expressed as a percentage of base

salary, allowable for the Bank President.

3. Benefits

The proposed rule authorized the Banks to establish certain kinds

of benefits plans for their employees and to provide benefits pursuant

to such plans without prior Finance Board approval. The Finance Board

is deferring action on the portions of the proposed rule governing

benefits until a later date.

4. Severance Payment Plans

The proposed rule authorized the Banks to establish

nondiscriminatory severance plans that provide benefits upon

involuntary termination other than for cause, voluntary resignation, or

early retirement, provided that total benefits paid do not exceed one

year of employee base compensation.

Nine Banks believed that the Banks should be permitted to set their

own severance policies, without the limitation that severance payments

not exceed 12 months of base compensation. Commenters suggested that

severance payments to employees who are discharged for cause may be

warranted in some circumstances, and that the ``for cause'' exception

could result in litigation over whether a Bank had cause to terminate

an employee. One Bank objected to the denying severance to an employee

in the case of early retirement.

The final rule retains the 12-month rule as a reasonable limitation

on severance payments. In addition, the restriction on severance

payments to employees terminated for cause is removed. The final rule

provides for severance payments to be made in cases of involuntary

termination. Thus, the final rule continues the restriction on

severance payments for early retirees on the ground that severance

payment plans are intended to provide for income replacement in the

event of involuntary termination.

5. Change-of-Control Agreements

The Finance Board requested comments on whether the Banks should be

permitted to enter into change-of-control arrangements with certain

senior officers. Change-of-control agreements, so-called ``golden

parachutes,'' typically are entered into with senior management and

provide for guaranteed, and often enhanced, severance in the event of

termination of employment following some period after a change of

control.

All 12 Banks believed change-of-control agreements are important to

maintaining the safety and soundness of a Bank in cases where merger or

consolidation is imminent, and that the Banks' boards should be

permitted to enter into and determine the terms of change-of-control

agreements with Bank officers.

While the Finance Board is not opposed to the use of change-of-

control agreements in the appropriate situation, the Finance Board is

not authorizing the Banks to have such agreements with their employees

at this time. The Finance Board will take into consideration the need

for such agreements should events arise that would make change-of-

control agreements relevant.

IV. Effective Date

The Finance Board has approved this final rule to become effective

immediately upon publication, on the ground that, as described above,

the final rule relieves restrictions placed on the Banks by the

existing provisions of Secs. 932.40 and 932.41 of its regulations.

Therefore, the thirty-day delay in the effective date that otherwise

would be required by section 552 of the Administrative Procedures Act

is not applicable to this final rule. See 5 U.S.C. 553(d)(1).

V. Regulatory Flexibility Act

The final rule applies only to the 12 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 Finance Board hereby certifies that final rule will not have a

significant economic impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 932

Conflict of interests, Federal home loan banks.

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

Regulations, is hereby 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:

[[Page 9]]

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. Each Bank may appoint a President, subject to

the following limitations:

(1) No appointment of a new Bank President shall be effective until

approved by the Finance Board;

(2) A President shall serve at the pleasure of the Bank; and

(3) A President may be suspended or removed by the Finance Board

for cause, which shall be communicated in writing to the President and

the Bank.

(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 Finance Board approval.

(c) Prohibition on employment contracts. A Bank shall not enter

into an employment contract with an employee.

(d) 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:

Bonus means a payment to an employee, other than base salary and

benefits, that is not based on performance.

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.

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.

Payment. (1) the term payment means:

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

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

(iii) 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.

(2) The term payment does not mean:

(i) Reimbursement of an employee by the Bank for necessary and

customary expenses incurred by the employee in the scope of his or her

employment while carrying out the business of the Bank; or

(ii) Benefits.

Severance pay plan means a severance pay plan or arrangement as

that term is defined in the Employee Retirement Income Security Act of

1974 (as amended) (29 U.S.C. 1002(1)) (ERISA) and regulations

thereunder which is nondiscriminatory and which provides for payment of

severance benefits to all eligible employees upon involuntary

termination, provided that no employee shall receive any such payment

which exceeds the base compensation paid to such employee during the

twelve (12) months immediately preceding termination of employment.

(b) Base salaries of Bank employees.--(1) Bank President. (i) The

Finance Board annually will determine and publish by November 30 caps

on the base salary paid to the Bank President for the subsequent

calendar year for each of the 12 Banks.

(ii) The base salary cap for each Bank shall be based on the

average base salary of a chief executive officer of a subsidiary

financial institution in the Bank's primary metropolitan statistical

area with an asset size comparable to that of the Bank, as of June of

the prior year, reduced by five percent and rounded to the nearest

$5,000.

(iii) Each Bank shall establish, on an annual basis, a reasonable

base salary for its President, not to exceed 100 percent of the

applicable base salary cap published by the Finance Board, except that

for a Bank President whose approved base salary for the calendar year

1997 exceeds the cap published by the Finance Board for 1997, the Bank

shall establish, on an annual basis, a reasonable base salary not

exceeding the greater of the Bank President's approved base salary for

the calendar year 1997 or the base salary cap published by the Finance

Board for the year.

(iv) By January 31 of each year, a Bank must report to the Finance

Board the approved base salary of its President for that year.

(2) Other Bank employees. Each Bank shall establish base salaries

for employees other than the President that 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, provided that no employee's base

salary shall exceed the base salary of the Bank President.

(3) Documentation. Each Bank shall maintain documentation

supporting the reasonableness and comparability of their employees'

base salaries.

(c) Incentive payments for Bank employees.--(1) In general. A Bank

may establish an incentive payment program or programs for its

employees.

(2) Bank President. (i) The maximum incentive payment to a Bank

President may not exceed the difference between that President's base

annual salary approved by the Bank and 125 percent of the annual base

salary cap, as published by the Finance Board.

(ii) At least fifty percent of the Bank President's incentive

payment shall be based on the extent to which the Bank meets reasonable

numerical performance targets established by the Bank's board of

directors related to the Bank's achievement of its housing finance

mission, which shall include substantial consideration of growth in

innovative products directed at unmet credit needs, growth in pre-

committed Community Investment Program advances, growth in non-advance

credit support and risk management products for members, as well as

growth in advances, including long-term advances. The remaining portion

of the Bank President's incentive payment shall be based on the extent

to which the Bank meets reasonable numerical performance targets

established by the Bank's board of directors related to achievement of

goals established by the board of directors, in its discretion.

(iii) Any incentive payment made to a Bank President shall be based

solely upon the extent to which a Bank achieves the performance targets

established by the board of directors.

(iv) By January 31 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 a resolution establishing the performance

measures and targets on which such incentive payment will be based.

[[Page 10]]

(v) 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 Finance Board a resolution showing the results

for the individual performance measures and the amount of the incentive

payment to the Bank President for the prior year.

(vi) A Bank shall not make any incentive payment to its President

if the most recent examination of the Bank by the Finance Board

identified an unsafe or unsound practice or condition with regard to

the Bank, provided that if the finding of an unsafe or unsound practice

or condition subsequently is resolved in favor of the Bank by the

Finance Board, the Bank may pay its President the incentive payment

that he or she otherwise would have received.

(3) Incentive payments for other Bank employees. (i) Each Bank may

make incentive payments to employees other than the President, 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. Each Bank shall maintain documentation

supporting the reasonableness and comparability of their employees'

incentive payments.

(ii) The total incentive payment opportunity, expressed as a

percentage of base salary, for an employee other than the Bank

President shall not exceed the total incentive payment opportunity,

expressed as a percentage of base salary, allowable for the Bank

President.

(iii) An incentive payment for an employee other than the Bank

President shall be based on the extent to which the employee meets

objective performance targets related to performance criteria

established by the Bank's board of directors under the Bank's incentive

compensation program or programs.

(d) 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 pay plan.

(e) 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 for its employees, including

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

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

other person a bonus.

(g) Determination of employee status. A Bank shall not treat an

employee as an independent contractor in order to avoid complying with

the requirements of this section.

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

Dated: December 20, 1996.

Bruce A. Morrison,

Chairman.

[FR Doc. 96-33329 Filed 12-31-96; 8:45 am]

BILLING CODE 6725-01-U