Financial Disclosure by Federal Home Loan Banks

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 937

[No. 98-02]

Financial Disclosure by Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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

to amend its regulations to add a requirement that the Federal Home

Loan Banks (Banks) provide annual audited financial statements, and

quarterly unaudited financial statements, to their members, both in

conformance with the requirements promulgated by the Securities and

Exchange Commission (SEC). This amendment is intended to codify current

prevailing practice at the Banks, and to establish uniform financial

disclosure requirements and standards for the Banks.

DATES: Written comments must be received in writing on or before March

19, 1998.

ADDRESSES: Comments should be mailed to: Elaine L. Baker, Secretary to

the Finance Board, Federal Housing Finance Board, 1777 F Street, NW.,

Washington DC 20006. Comments will be available for public inspection

at this address.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Director,

Financial Analysis and Reporting Division, Office of Policy, 202/408-

2845, or Deborah F. Silberman, Acting General Counsel, Office of

General Counsel, 202/408-2570, Federal Housing Finance Board, 1777 F

Street, NW., Washington DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

The Federal Home Loan Bank Act (Bank Act), 12 U.S.C. 1421 et seq.,

authorizes the Finance Board to issue consolidated Bank obligations

that are the joint and several obligations of the Banks in order to

provide funds for the Banks, 12 U.S.C. 1431(b), (c). The Bank Act

further authorizes the individual Banks to issue debt securities

subject to rules and regulations adopted by the Finance Board, 12

U.S.C. 1431(a). The Finance Board has never adopted regulations

concerning the issuance of debt securities by the individual Banks, and

the Banks have never issued debt securities pursuant to this authority.

However, the Banks are corporate entities with both mandatory and

voluntary stockholders. Federal savings associations automatically

become members of the FHLBank in the district in which the Federal

savings association's principal office are located. See 12 U.S.C.

1464(f). Other eligible financial institutions may apply for and be

granted membership in a Bank if they meet the statutory and regulatory

membership eligibility criteria set forth in the Bank Act, see 12

U.S.C. 1424 and other regulatory requirements, see 12 CFR part 933. As

a condition of membership, all members are required to maintain a

minimum stockholding in their respective Banks. See 12 U.S.C. 1426. The

aggregate stockholder investments in the Banks range from $700 million

in the Bank of Topeka, to more than $3 billion in the Bank of San

Francisco.

Pursuant to section 3(a)(2) of the Securities Act of 1933, 15

U.S.C. 77c(a)(2)), (Securities Act), securities issued by both the

Finance Board and the Banks are exempt from the registration

requirements of the Securities Act. Section 3(a)(2) exempts from

registration and other requirements of the Securities Act, inter alia,

securities issued or guaranteed by ``any person controlled or

supervised by and acting as an instrumentality of the Government of the

United States pursuant to authority granted by the Congress of the

United States.'' 15 U.S.C. 77c(a)(2).

Classes of securities issued by the Finance Board and the Banks

similarly are exempt from the registration and reporting requirements

of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)

(Exchange Act) pursuant to section 3(a)(42) of the Exchange Act (15

U.S.C. 78c(a)(42)). Section 3(a)(42)(B) designates as securities exempt

from registration and reporting under the Exchange Act, ``government

securities,''

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including ``securities which are issued or guaranteed by corporations

in which the United States has a direct or indirect interest and which

are designated by the Secretary of the Treasury for exemption as

necessary or appropriate in the public interest or for the protection

of investors.'' Id., section 78c(a)(42)(B).

The applicable exemptions under both the Securities Act and the

Exchange Act are principally grounded in a presumption that the

securities activities of institutions acting as government entities, as

designated under the federal securities laws, will be conducted in the

public interest and for the protection of investors.

While securities issued by both the Finance Board and the Banks are

exempt from the registration and reporting requirements of both the

Securities Act and the Exchange Act, it is unclear whether the offer

and sale of such securities may be subject to certain of the antifraud

provisions of those Acts. The SEC's disclosure requirements prescribe

that an issuer of securities into the capital markets make full and

fair disclosure of all information material to an investment decision

in connection with the offer, sale, and other market transactions in

those securities. Generally, a securities issuer's compliance with SEC

disclosure regulations will reduce risk of and liability for potential

fraud. For a Bank, a material violation of the antifraud provisions of

the federal securities laws would constitute an unsafe and unsound

practice. In addition, the safety and soundness of the Bank system is

dependent upon maintaining the system's capital base and upon the

system's access to the capital markets. Indeed, one of the duties of

the Finance Board specified in the Bank Act is that it ensure that the

Banks remain adequately capitalized and able to raise funds in the

capital markets. See 12 U.S.C. 1422a(a)(3)(B)(iii).

All of the Banks provide annual reports, which include audited

financial statements prepared in accordance with generally accepted

accounting principles (GAAP), to their members. Some, but not all of

the Banks issue quarterly financial reports, and the form and content

of these quarterly reports varies widely. However, the Finance Board

has never addressed the scope and content of the financial reports

issued by individual Banks to their members. Because the Finance Board

has supervisory and examination authority over the Banks, it is the

Finance Board's responsibility to regulate the securities activities of

those institutions when it finds such regulation to be necessary or

appropriate for the protection of investors and the Bank system.

The Finance Board also wishes to address recent congressional

actions in connection with the issuance of Bank System debt. Several

months ago, the Subcommittee on Finance and Hazardous Materials of the

House Commerce Committee approved an amendment to H.R.10, the Financial

Services Act of 1997 that would have subjected both the Finance Board

and Banks to the registration and reporting requirements of the 1933

and 1934 Acts. All FHLBank provisions were ultimately deleted from the

version of H.R.10 that the Commerce Committee reported.

Because the disclosure provided by the Bank System already

generally complies with the applicable disclosures that the SEC

requires, the Finance Board believes that SEC registration would add an

unnecessary additional layer of regulatory scrutiny that would raise

the System's cost of funds. As discussed above, the proposed rule

largely would codify existing practice. The comment period will allow

the Congress and other interested parties to comment on the scope of

the existing and proposed new disclosures and to indicate to the

Finance Board any other disclosures that would be appropriate.

In order to fulfill its duties and achieve the above goals, the

Finance Board has adopted, simultaneously with this proposal, a policy

statement embodying the current practice of preparing the consolidated

reports issued for the Bank system by the Finance Board in connection

with the issuance of consolidated debt securities pursuant to section

11(c) of the Bank Act, 12 U.S.C. 1431(c), in accordance with the

disclosure requirements promulgated by the SEC. See Proposed Policy

Statement, Finance Board Res. No. 98-01, January 21, 1998. The Finance

Board also is proposing this regulation to ensure that Bank

stockholders receive timely, accurate and uniform financial information

about their respective Banks. The regulation would codify prevailing

practice at the Banks, which voluntarily prepare their reports

generally in accordance with SEC standards, by requiring each Bank to

file with the Finance Board and distribute to its members an annual

report containing financial statements prepared in accordance with the

requirements of the SEC's financial statement Regulation S-X, 17 CFR

part 210, as referenced in the financial statement requirement (Item 8)

of the annual report Form 10-K promulgated by the SEC, 17 CFR 249.310.

The proposed rule also would require each Bank to file with the

Finance Board and distribute to its members a quarterly report

containing unaudited financial statements prepared in accordance with

the financial statement requirement (Item 1) of the quarterly report

Form 10-Q promulgated by the SEC, 17 CFR 249.310, and the requirements

of rule 10-01 of the SEC's financial statement Regulation S-X, 17 CFR

210.10-01.

Nothing in the proposed rule is intended to subject the FHLBanks to

the jurisdiction of any other agency, nor to confer any private right

of action on any member or on any investor in FHLBank system

securities.

II. Analysis of the Proposed Rule

A. Definitions

Proposed section 937.1 sets forth definitions to be used in the

part. The definitions of ``Bank,'' ``Finance Board,'' and ``Member''

are consistent with the definitions of those terms as used throughout

the Finance Board's regulations. Definitions of ``SEC,'' ``Form 10-K,''

``Form 10-Q,'' and ``Regulation S-X'' refer to and are consistent with

regulations promulgated by the SEC under the Securities Act and the

Exchange Act.

Issuers having a class of securities registered with the SEC under

the Exchange Act (Registrant) are required to file with the SEC and

provide to their shareholders an annual report on Form 10-K, 17 CFR

249.310. The Form 10-K generally requires detailed disclosure of 15

items, including information about the business, structure and

operations of the Registrant, about ownership in and issuance of the

Registrant's securities, about the officers and directors of the

Registrant, and presentation of audited financial statements prepared

in accordance with GAAP.

Registrants also are required to file with the SEC and distribute

to shareholders a quarterly report on Form 10-Q, 17 CFR 249.308a. The 9

item requirements of the Form 10-Q focus primarily on abbreviated,

unaudited interim financial information.

The SEC employs a regulatory scheme of uniform disclosure called

``integrated disclosure.'' Under this scheme, all of the SEC's

accounting and financial disclosure requirements for forms required to

be filed under both the Securities Act and the Exchange Act are

centralized in Regulation S-X, 17 CFR part 210. Regulation S-X outlines

comprehensive financial statement disclosure requirements, both of

general applicability and of specific requirements tailored to the

myriad

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variety of SEC registrants. The regulation also prescribes standards

for the qualifications and independence of accountants and for the

content of accountant's reports. The regulation addresses such topics

as preparation of financial statements in accordance with GAAP;

principles of consolidation of financial statements, the form and line

item content of consolidated balance sheets, consolidated statements of

income and cash flows, age of financial statements, footnotes to the

financial statements, and specific requirements for financial

statements for financial institution holding companies, among other

industries.

B. Financial Statement Requirement

Section 937.2 of the proposed rule imposes a requirement that the

Banks file with the Finance Board for review, and distribute to their

shareholders, annual and quarterly financial statements as provided

further in the regulation. As discussed above, all of the Banks

currently provide annual financial statements to their shareholders.

However, not all of the Banks currently issue quarterly financial

statements. Section 937.2 also states that the fact that annual or

quarterly financial statements have been filed with the Finance Board

shall not be deemed a finding by the Finance Board about the accuracy

or adequacy of those financial statements.

The proposed rule would require filing and distribution only of

financial statements. Comments are solicited on whether the Banks

should be required to disclose other information in their annual and

quarterly reports similar to that required by SEC Registrants, such as

information regarding stockholdings by members, composition of the

board, compensation, related transactions, etc.

The Finance Board also solicits specific comment on whether this

requirement would provide information of utility to the Banks'

shareholders and on whether the provision of this information would

impose an undue burden on the Banks.

C. Annual Financial Statements

Section 937.3 of the proposed rule requires that a Bank's annual

financial statements shall conform as to form and content to the

requirements of Regulation S-X as referenced in Item 8 of Form 10-K.

Item 8 of Form 10-K requires that financial statements meeting the

requirements of Regulation S-X be furnished. For purposes of the Form

10-K, Regulation S-X requires presentation of consolidated, audited

balance sheets as of the end of each of the two most recent fiscal

years and audited statements of income and cash flows for each of the

three fiscal years preceding the date of the most recent audited

balance sheet being filed, along with all related required footnote

disclosure.

Item 8 of Form 10-K also requires that the disclosure required by

Item 302 of the SEC's Regulation S-K, 17 CFR 229.302. Item 302 of

Regulation S-K requires disclosure of specific information by

Registrants engaged in oil and gas producing activities, and of

selected quarterly financial information by Registrants meeting a

number of criteria related to publicly held shares quoted on the

National Association of Securities Dealers' Automated Quotation system.

Because item 302 is entirely inapplicable to the Banks, disclosure of

this information is not being required in the proposed rule.

Proposed Sec. 937.3 also requires that the Banks' annual financial

statements shall be filed with the Finance Board and distributed to

each member of the Bank within 90 days after the end of the fiscal year

covered by the financial statements. This timing requirement is

identical to the requirements of the SEC in the Form 10-K. The Finance

Board solicits comments as to the utility of imposing a time period for

the filing and issuance of the annual financial statements, and on

whether the time period prescribed would impose an undue burden on the

Banks.

Finally, proposed Sec. 937.3 provides that a Bank shall indicate in

a transmittal letter accompanying the annual financial statements

whether the financial statements reflect a change from the preceding

year in any accounting principles or practices, or in the method of

applying any such principles or practices, and that, except where

information is required by the requirements of Regulation S-X to be

given for the fiscal year or as of specified date, it shall be given as

of the latest practicable date. These requirements are drawn from the

instructions to the Form 10-K and are consistent with SEC practice.

D. Quarterly Financial Statements

Proposed Sec. 937.4 requires a Bank's quarterly financial

statements to conform as to form and content to the requirements of

Item 1 of Form 10-Q and to the requirements of rule 10-01 of Regulation

S-X. Rule 10-01 requires disclosure of interim unaudited financial

statements for the quarter covered, including interim balance sheets

(i.e., an interim balance sheet as of the end of the most recent fiscal

quarter and a balance sheet as of the end of the preceding fiscal year;

an interim balance sheet as of the end of the corresponding fiscal

quarter of the preceding fiscal year may, but need not, be provided);

interim statements of income (i.e., for the period between the end of

the preceding fiscal year and the end of the most recent fiscal

quarter, and for the corresponding periods of the preceding fiscal

year); abbreviated interim statement of changes in financial position

(i.e., for the period between the end of the preceding fiscal year and

the end of the most recent fiscal quarter, and for the corresponding

period of the preceding fiscal year); and any footnotes desired. This

interim financial information need not be reviewed by an independent

public accountant prior to filing.

Again, given that not all of the Banks currently provide quarterly

financial statements to their members, and that even those that do

provide such information may not do so in the form required by the

proposed rule, the Finance Board solicits comment on whether this

requirement would provide information of utility to the Banks'

shareholders and on whether the provision of this information would

impose an undue burden on the Banks.

Proposed Sec. 937.4 also provides that the Bank's quarterly

financial statements shall be filed with the Finance Board and

distributed to each member of a Bank within 45 days after the end of

the fiscal quarter covered by the financial statements, and that no

financial statements need be filed or distributed for the fourth

quarter of any fiscal year. These provisions are drawn from the

instructions to the Form 10-Q and are consistent with SEC practice. The

Finance Board solicits comments as to the utility of imposing a time

period for the filing and issuance of the quarterly financial

statements, and on whether the time period prescribed would impose an

undue burden on the Banks.

III. Regulatory Flexibility Act

The proposed rule would apply only to the Banks, which do not come

within the meaning of ``small entities,'' as defined in the Regulatory

Flexibility Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance

with section 605(b) of the RFA, see id. section 605(b), the Finance

Board hereby certifies that the proposed rule would not have a

significant economic impact on a substantial number of small entities.

IV. Paperwork Reduction Act

This proposed rule does not contain any collections of information

pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et

seq. Consequently,

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the Finance Board has not submitted any information to the Office of

Management and Budget for review.

List of Subjects in 12 CFR Part 937

Federal home loan banks, Reporting and recordkeeping requirements.

Accordingly, the Federal Housing Finance Board hereby proposes to

amend title 12, chapter IX, of the Code of Federal Regulations, by

adding a new part 937, to read as follows:

PART 937--FINANCIAL STATEMENTS OF THE BANKS

Sec.

937.1 Definitions.

937.2 Financial statement requirement.

937.3 Annual financial statements.

937.4 Quarterly financial statements.

Authority: 12 U.S.C.1422a, 1422b, 1426, 1431, and 1440.

Sec. 937.1 Definitions.

As used in this part:

Bank means a Federal Home Loan Bank established under the authority

of the Federal Home Loan Bank Act, as amended (12 U.S.C. 1421 et seq.).

Finance Board means the agency established as the Federal Housing

Finance Board.

Form 10-K means the Annual Report on Form 10-K (17 CFR 249.310)

promulgated by the SEC pursuant to the provisions of the Securities

Exchange Act of 1934 (15 U.S.C. 78a et seq.).

Form 10-Q means the Quarterly Report on Form 10-Q (17 CFR 249.308a)

promulgated by the SEC pursuant to the provisions of the Securities

Exchange Act of 1934 (15 U.S.C. 78a et seq.).

Member means an institution that has been approved for membership

in a Bank and has purchased capital stock in the Bank in accordance

with Secs. 933.20 and 933.24 of this chapter.

Regulation S-X means the accounting rules promulgated by the SEC

(17 CFR part 210).

SEC means the agency established as the Securities and Exchange

Commission.

Sec. 937.2 Financial statement requirement.

(a) Each Bank shall prepare, file with the Finance Board for review

and distribute to its members annual and quarterly financial statements

as provided in this part.

(b) The fact that annual or quarterly financial statements have

been filed with the Finance Board shall not be deemed a finding that

the Finance Board has passed upon the accuracy or adequacy of those

financial statements.

Sec. 937.3 Annual financial statements.

(a) A Bank's annual financial statements shall conform as to form

and content to the requirements of Regulation S-X as referenced in Item

8 of Form 10-K.

(b) Annual financial statements shall be distributed to each member

of a Bank within 90 days after the end of the fiscal year covered by

the financial statements.

(c) At the time the Bank's annual financial statements are

distributed to the Bank's members, but no later than 90 days after the

end of the fiscal year covered by the financial statements, five copies

of the annual financial statements shall be filed with Elaine L. Baker,

Secretary to the Finance Board, Federal Housing Finance Board, 1777 F

Street, NW., Washington DC 20006. The annual financial statements will

be available for public inspection at this address.

(d) The Bank shall indicate in a transmittal letter accompanying

the annual financial statements whether the financial statements

reflect a change from the preceding year in any accounting principles

or practices, or in the method of applying any such principles or

practices.

(e) Except where information is required by the requirements of

Item 8 of Form 10-K or of Regulation S-X to be given for the fiscal

year or as of specified date, it shall be given as of the latest

practicable date.

Sec. 937.4 Quarterly financial statements.

(a) A Bank's quarterly financial statements shall conform as to

form and content to the requirements of Item 1 of Form 10-Q and to the

requirements of rule 10-01 of Regulation S-X (17 CFR 210.10-01).

(b) Quarterly financial statements shall be distributed to each

member of a Bank within 45 days after the end of the fiscal quarter

covered by the financial statements.

(c) At the time the Bank's quarterly financial statements are

distributed to the Bank's members, but no later than 45 days after the

end of the fiscal quarter covered by the financial statements, five

copies of the quarterly financial statements shall be filed with Elaine

L. Baker, Secretary to the Finance Board, Federal Housing Finance

Board, 1777 F Street, NW., Washington DC 20006. The quarterly financial

statements will be available for public inspection at this address.

(d) No financial statements need be filed or distributed for the

fourth quarter of any fiscal year.

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

Bruce A. Morrison,

Chairperson.

[FR Doc. 98-1969 Filed 1-30-98; 8:45 am]

BILLING CODE 6725-01-U ]