Devolution of Corporate Governance Responsibilities

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 932, 934, 935

[No. 99-62]

RIN 3069-AA89

Devolution of Corporate Governance Responsibilities

AGENCY: Federal Housing Finance Board.

ACTION: Interim final rule.

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

its regulations to devolve certain corporate governance

responsibilities from the Finance Board to the Federal Home Loan Banks

(Banks), pursuant to the requirements of the Federal Home Loan Bank

System Modernization Act of 1999.

DATES: This interim final rule shall be effective on December 21, 1999.

The Finance Board will accept written comments on the interim final

rule on or before January 20, 2000.

ADDRESSES: Mail comments to: Elaine L. Baker, Secretary to the Board,

Federal Housing Finance Board, 1777 F Street, NW, Washington, DC 20006.

Comments will be available for inspection at this address.

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Director, (202)

408-2821, or Scott L Smith, Deputy Director, (202) 408-2991, Office of

Policy, Research and Analysis; or Sharon B. Like, Senior Attorney-

Advisor, (202) 408-2930, or Eric M. Raudenbush, Senior Attorney-

Advisor, (202) 408-2932, Office of General Counsel, Federal Housing

Finance Board, 1777 F Street, NW, Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Bank System and Finance Board Roles and Responsibilities

Under the Federal Home Loan Bank Act (Bank Act), the Finance Board

is responsible for the supervision and regulation of the 12 Banks. See

12 U.S.C. 1422a(a)(3), 1422b(a)(1) (1994). Specifically, the Finance

Board's primary duty is to ensure that the Banks operate in a

financially safe and sound manner. Consistent with that primary duty,

the Finance Board also is responsible for ensuring that the Banks carry

out their housing finance and community lending mission, and that they

remain adequately capitalized and able to raise funds in the capital

markets. See id. 1422a(a)(3).

Historically, the Bank Act has required the Finance Board to be

involved in varying degrees in the corporate governance of the Banks,

typically by requiring Finance Board approval for a host of Bank

practices. However, the recently enacted Federal Home Loan Bank System

Modernization Act of 1999 (Modernization Act) \1\ repealed most of

those requirements, thereby removing most of the last vestiges of

governance responsibilities from the Finance Board. See Pub. L. No.

106-102, 604(a)(6); 606(d), (f), (g) (1999). Accordingly, the Finance

Board is amending its regulations to remove the corresponding Finance

Board approval requirements for such corporate governance functions,

consistent with the Modernization Act.

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\1\ The Modernization Act is Title VI of the Gramm-Leach-Bliley

Act, Pub. L. No. 106-102, 113 Stat. 1338, enacted into law on

November 12, 1999.

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II. Analysis of Interim Final Rule

A. Part 932-Directors, Officers and Employees of the Banks

1. Amendment of Bank Directors' Meeting and Compensation and Expenses

Regulations--Secs. 932.16, 932.17

Section 7(i) of the Bank Act formerly permitted each Bank, with the

approval of the Finance Board, to pay its directors reasonable

compensation for the time required of them, and their necessary

expenses, in the performance of their duties, in accordance with the

resolutions adopted by such directors. See 12 U.S.C. 1427(i) (1994).

Section 932.17 of the Finance Board's regulations permits each Bank,

within certain standards of reasonableness set forth in the regulation,

to implement its own policy on director compensation and allows each

Bank to pay its directors for such expenses as are payable by the Bank

to its senior officers. See 12 CFR 932.17 (1999). Payments made in

compliance with the regulation are deemed to be approved by the Finance

Board, as required by section 7(i).

The Modernization Act amended section 7(i) of the Bank Act by

imposing specific limits on annual compensation for the Chairperson,

Vice Chairperson and other members of the Bank's board of directors.

See Modernization Act, 606(b). These statutory limits on annual

directors' compensation are implemented by revised Sec. 932.17(c)(1) of

this interim final rule. Payments made in compliance with the limits

and standards are deemed to be approved by the Finance Board for

purposes of section 7(i).

The Finance Board understands that the new statutory limits

generally would result in most directors receiving less compensation

than that currently allowed pursuant to existing Sec. 932.17.

Nevertheless, that appears to be precisely what Congress intended.

Moreover, based on the Finance Board's consultations with Congress, it

is clear that Congress intended that no diminution in workload would

result as a consequence of the reduced directors' compensation.

Accordingly, for safety and soundness reasons, Sec. 932.16 is revised

to require that each Bank's board of directors continue to maintain its

level of oversight of the management of the Bank. Consistent with this

maintenance of effort standard, Sec. 932.16 requires each Bank's board

of directors to hold no fewer in-person meetings in any year than it

has held on average over the immediately preceding three years, but a

Bank may apply to the Finance Board for approval, upon a showing of

good cause, to hold in any year fewer than the required number of in-

person board meetings.

In addition, and consistent with Congressional intent, the Finance

Board believes that directors should be compensated only for the

performance of official Bank business and not simply for holding

office. Accordingly, Sec. 932.17 is revised to provide that, starting

in 2000, a Bank may not pay fees to a director, such as retainer fees,

that do not necessarily reflect actual performance by the director of

official Bank business. Thus, a director who regularly fails to attend

board or committee meetings may not be paid at all, and the Finance

Board would consider such failure a dereliction of the director's

fiduciary duties that would constitute cause for removal of the

director, pursuant to section 2B(a)(2) of the Bank Act. See 12 U.S.C.

1422b(a)(2) (1994).

2. Removal of Selection and Compensation of Bank Officers and Employees

Regulations--Secs. 932.18 and 932.19

Section 12(a) of the Bank Act formerly made the selection and

compensation of Bank officers and employees subject to Finance Board

approval. See 12 U.S.C.

[[Page 71276]]

1432(a) (1994). Sections 932.18 and 932.19 of the Finance Board's

regulations set forth requirements for the selection of Bank Presidents

and other Bank officers and employees, and for the payment of

compensation to Bank officers and employees. See 12 CFR 932.18, 932.19

(1999).

The Modernization Act amended section 12(a) of the Bank Act by

removing the requirement for Finance Board approval in connection with

the selection and compensation of Bank officers and employees. See

Modernization Act, Sec. 606(d)(1)(B). Accordingly, 932.18 and 932.19 of

the Finance Board's regulations are removed.

B. Part 934--Operations of the Banks

1. Amendment of Bank Budgets Regulation--Sec. 934.7

The Bank Act does not provide explicitly for Finance Board approval

of Bank budgets. However, pursuant to the Finance Board's supervisory

responsibilities under the Bank Act, see 12 U.S.C. 1422a(a)(3),

1422b(a)(1) (1994), Sec. 934.7 of the Finance Board's regulations

establishes specific requirements for the Banks' preparation and

reporting of budget and other financial information to the Finance

Board. In addition, section 12(a) of the Bank Act formerly required

prior Finance Board approval for a Bank to buy or erect a bank building

to house the Bank, or to lease a bank building under a lease with a

term of more than ten years. See 12 U.S.C. 1432(a) (1994). Section

934.7(a)(2) of the Finance Board's budget regulation implements this

provision by providing that, pursuant to the requirement of section

12(a) of the Bank Act, a Bank must obtain prior approval of the Finance

Board before purchasing or erecting, or leasing for a term of more than

10 years, a building to house the Bank. See 12 CFR 934.7(a)(2) (1999).

The Modernization Act amended section 12(a) of the Bank Act by

removing the requirement for Finance Board approval of such Bank

building transactions. See Modernization Act, 606(d)(1)(A).

Accordingly, the requirement in paragraph (a)(2) for Finance Board

approval of such transactions is removed from Sec. 934.7. In addition,

consistent with the devolution philosophy reflected in this interim

final rule, the Finance Board has determined that the Banks should no

longer be required to submit to the Finance Board the budget and other

financial reports required by Secs. 934.7(b) through (e). Accordingly,

Secs. 934.7(b) through (e) are removed.

2. Amendment of Bank Bylaws Regulation--Sec. 934.16

Section 12(a) of the Bank Act formerly provided that the Banks had

the power, by their boards of directors, to prescribe, amend, and

repeal bylaws governing the manner in which their affairs may be

administered, subject to the approval of the Finance Board. See 12

U.S.C. 1432(a) (1994). Section 934.16 of the Finance Board's

regulations allows the Banks to adopt, amend or repeal their bylaws

without Finance Board approval, as long as the bylaws or amendments are

consistent with applicable statutes, regulations and Finance Board

policies. See 12 CFR 934.16 (1999).

The Modernization Act amended section 12(a) of the Bank Act by

removing the requirement for Finance Board approval of Bank bylaws,

provided that the bylaws are consistent with applicable laws and

regulations, as administered by the Finance Board. See Modernization

Act, Sec. 606(d)(1)(C). The Finance Board believes that, as a matter of

sound corporate governance practice, the Banks should have bylaws

governing the manner in which the Banks' affairs are conducted.

Accordingly, Sec. 934.16 is revised to provide that a Bank's board of

directors shall have in effect at all times bylaws governing the manner

in which the Bank administers its affairs, and that such bylaws shall

be consistent with applicable laws and regulations as administered by

the Finance Board.

3. Amendment of Bank Dividends Regulation--Sec. 934.17

Section 16(a) of the Bank Act formerly provided generally that

dividends may be paid by the Banks out of previously retained earnings

or current net earnings only with the approval of the Finance Board.

See 12 U.S.C. 1436(a) (1994). Section 6(g) of the Bank Act provides

that all stock of any Bank shall share in dividend distributions

without preference. See 12 U.S.C. 1426(g) (1994). Section 934.17 of the

Finance Board's regulations implements these statutory provisions by

providing generally that the board of directors of each Bank, with the

approval of the Finance Board, may declare and pay a dividend from net

earnings, including previously retained earnings, on the paid-in value

of capital stock held during the dividend period. See 12 CFR 934.17

(1999). Section 934.17 also provides that dividends on such stock shall

be computed without preference and only for the period such stock was

outstanding during the dividend period. See id. In addition, dividend

payments by the Banks have been subject to a Finance Board Dividend

Policy, see Finance Board Res. No. 90-38 (Mar. 15, 1990), as well as

Board of Directors Resolutions approving specific Bank dividend

payments, that established specific conditions for approval of such

dividend payments, including that the dividend payment would not result

in a projected impairment of the par value of the capital stock of the

Bank.

The Modernization Act amended section 16(a) of the Bank Act by

removing the requirement for Finance Board approval of Bank dividend

payments. See Modernization Act, section 606(g)(1)(B). In addition,

under the Modernization Act, section 6(g) remains in effect during a

transition period until the Finance Board has adopted capital

regulations and approved the capital structure plans of the Banks,

after which period section 6(g) is repealed. See id. section 608.

Because the payment of dividends no longer requires the approval of

the Finance Board, the Finance Board believes the determination of the

applicable dividend period for such payments also should be a

discretionary decision of the Banks. Therefore, Sec. 934.17 of the

Finance Board's regulations is revised to eliminate references to the

dividend period during which capital stock is held. However, the

Finance Board believes that, for safety and soundness reasons, the

capital stock impairment restriction currently imposed pursuant to the

Dividend Policy should continue to apply. Accordingly, Sec. 934.17 of

the Finance Board's regulations is revised to provide that a Bank's

board of directors may declare and pay a dividend only from previously

retained earnings or current net earnings, and only if such payment

will not result in a projected impairment of the par value of the

capital stock of the Bank. Section 934.17 also provides that dividends

on such capital stock shall be computed without preference.

Consistent with these regulatory amendments, the Finance Board

intends to rescind by separate resolution its Dividend Policy as no

longer necessary.

C. Part 950--Bank Advances

1. Removal of Requirement for Finance Board Approval of Bank Forms for

Advances Applications, Advances Agreements and Security Agreements--

Sec. 935.4(d)(2)

Section 9 of the Bank Act formerly required that applications from

members for Bank advances must be ``in such form as shall be required

by the [Bank] with the approval of the [Finance] Board.'' See 12 U.S.C.

1429

[[Page 71277]]

(1994). In addition, section 10(d) of the Bank Act formerly required

that members enter into an obligation to repay the advance, ``in such

form as shall meet the requirements of the [B]ank and the approval of

the [Finance] Board.'' See id. section 1430(d). Section 935.4(d)(2) of

the Finance Board's regulations provides that each Bank's forms for all

advances applications, advances agreements and security agreements are

deemed approved by the Finance Board if such forms are consistent with

the requirements of part 935. See 12 CFR 935.4(d)(2) (1999). Section

935.4(d)(2) also requires each Bank to provide copies of its current

forms for all advances agreements and security agreements, and any

substantive revisions thereto, to the Finance Board. See id.

The Modernization Act amended section 9 of the Bank Act by removing

the requirement for Finance Board approval of Bank advances application

forms. See Modernization Act, section 606(f)(1)(A). In addition, the

Modernization Act amended section 10(d) of the Bank Act by removing the

requirement for Finance Board approval of Bank forms for the repayment

of advances. See id. section 606(f)(2)(B)(i). Accordingly, a

regulatory provision governing Finance Board approval of Bank forms for

advances applications, advances agreements and security agreements is

no longer necessary, and Sec. 935.4(d)(2) is removed.

2. Removal of Requirement for Finance Board Approval of Bank Approvals

of Conditional Advances--Sec. 935.5(a)(2)

Section 9 of the Bank Act formerly required that a Bank may,

subject to the approval of the Finance Board, grant an application for

advances on such conditions as the Bank may prescribe. See 12 U.S.C.

1429 (1994). Section 935.5(a)(2) of the Finance Board's regulations

implements this provision by providing that a Bank, in its discretion,

may approve a member's application for an advance subject to such

additional terms as the Bank may prescribe, pursuant to the provisions

of the Bank Act, part 935, and any policy guidelines of the Finance

Board. See 12 CFR 935.5(a)(2) (1999).

The Modernization Act amended section 9 of the Bank Act by removing

the requirement for Finance Board approval in connection with Bank

conditional advances. See Modernization Act, section 606(f)(1)(B).

Accordingly, a regulatory provision governing Finance Board approval of

Bank conditional advances is no longer necessary, and Sec. 935.5(a)(2)

is removed.

3. Removal of Requirement for Finance Board Approval of Bank Transfers

of Advances and Advance Participations--Sec. 935.16

Section 10(d) of the Bank Act formerly required that: ``[s]ubject

to the approval of the [Finance] Board, any [Bank] shall have power to

sell to any other [Bank], with or without recourse, any advance made

under the provisions of this chapter, or to allow to such [Bank] a

participation therein, and any other [Bank] shall have power to

purchase such advance or to accept a participation therein, together

with an appropriate assignment of security therefor.'' See 12 U.S.C.

1430(d) (1994). Section 935.16 of the Finance Board's regulations

allows the Banks to purchase and sell advance participations without

the approval of the Finance Board, subject to the approval of the

boards of directors of the relevant Banks. See 12 CFR 935.16 (1999).

The Finance Board currently approves proposed Bank transfers of whole

advances pursuant to Chairman's Orders that set forth certain

conditions for the approval. The Finance Board recently proposed

amending Sec. 935.16 to allow the Banks to approve the transfer of

whole advances, in addition to advance participations, without Finance

Board approval, subject to the transfers meeting certain conditions

derived in part from the Chairman's Orders. See 64 FR 44444 (Aug. 16,

1999).

The Modernization Act amended section 10(d) of the Bank Act by

removing the requirement for Finance Board approval in connection with

transfers of Bank advances and advance participations. See

Modernization Act, section 606(f)(2)(B)(ii). Accordingly, a regulatory

provision governing transfers of Bank advances and advance

participations is no longer necessary, and Sec. 935.16 is removed. The

Finance Board by separate action has withdrawn its proposed transfer of

advances regulation, see Docket # 99-63 (Dec. 14, 1999).

III. Regulatory Flexibility Act

Because no notice of proposed rulemaking is required for this

interim final rule, the provisions of the Regulatory Flexibility Act, 5

U.S.C. section 601 et seq., do not apply. Moreover, the interim final

rule applies only to the Banks, which do not come within the meaning of

``small entities,'' as defined in the Regulatory Flexibility Act. See

id. section 601(6).

IV. Paperwork Reduction Act

This interim final rule does not contain any collections of

information pursuant to the Paperwork Reduction Act of 1995. See 44

U.S.C. 3501 et seq. Therefore, the Finance Board has not submitted any

information to the Office of Management and Budget for review.

V. Notice and Public Participation

The Finance Board for good cause finds that the notice and public

comment procedure required by the Administrative Procedure Act is

impracticable, unnecessary or contrary to the public interest in this

instance, because the changes made by this interim final rule implement

recently enacted statutory amendments that rendered obsolete certain

provisions of the Finance Board's regulations. See 5 U.S.C.

553(b)(3)(B).

List of Subjects in 12 CFR Parts 932, 934, and 935

Community development, Credit, Federal home loan banks, Housing,

Reporting and recordkeeping requirements.

Accordingly, the Finance Board hereby amends title 12, chapter IX,

parts 932, 934, and 935, Code of Federal Regulations, as follows:

PART 932-DIRECTORS, OFFICERS, AND EMPLOYEES OF THE BANKS

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

follows:

Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1427, and

1432.

2. Revise Sec. 932.16 to read as follows:

Sec. 932.16 Site and frequency of board of directors and committee

meetings.

(a) Site. Meetings of a Bank's board of directors and committees

thereof usually should be held within the district served by the Bank.

No meetings of a Bank's board of directors and committees thereof may

be held in any location that is not within the United States, including

its possessions and territories.

(b) Maintenance of effort. (1) Notwithstanding the limits on annual

directors' compensation established by section 7(i) of the Act, as

amended, the board of directors of each Bank shall continue to maintain

its level of oversight of the management of the Bank, and, except as

provided in paragraph (b)(2), the board of directors shall hold no

fewer in-person meetings in any year than it has held on average over

the immediately preceding three years.

(2) A Bank may apply to the Finance Board for approval, upon a

showing of good cause, to hold in any year fewer than the number of in-

person board of

[[Page 71278]]

directors meetings required under paragraph (b)(1).

3. Amend Sec. 932.17 by:

a. Revising paragraphs (a) through (c); and

b. Adding paragraph (f), to read as follows:

Sec. 932.17 Compensation and expenses of Bank directors.

(a) Definition. As used in this section, compensation means any

payment of money or provision of any other thing of value (or the

accrual of a right to receive money or a thing of value in a subsequent

year) in consideration of a director's performance of official duties

for the Bank, including, without limitation, daily meeting fees,

incentive payments and fringe benefits.

(b) Annual compensation policy. Beginning in 2000 and annually

thereafter, each Bank's board of directors shall adopt by resolution a

written policy to provide for the payment to Bank directors of

reasonable compensation for the performance of their duties as members

of the Bank's board of directors, subject to the requirements set forth

in paragraph (c) of this section. At a minimum, such policy shall

address the activities or functions for which attendance is necessary

and appropriate and may be compensated, and shall explain and justify

the methodology for determining the amount of compensation to be paid

to directors.

(c) Policy requirements. Payment to directors under each Bank's

policy on director compensation may be based upon factors that the Bank

determines to be appropriate, but each Bank's policy shall conform to

the following requirements:

(1) Statutory limits on annual compensation. Pursuant to section

7(i) of the Act, as amended, for 2000, the following limits on

compensation shall apply: for a Chairperson--$25,000; for a Vice

Chairperson--$20,000; for any other member of the Bank's board of

directors--$15,000. Beginning in 2001 and for subsequent years, these

limits on annual compensation shall be adjusted annually by the Finance

Board to reflect any percentage increase in the preceding year's

Consumer Price Index (CPI) for all urban consumers, as published by the

Department of Labor. Each year, as soon as practicable after the

publication of the previous year's CPI, the Finance Board shall publish

notice by Federal Register, distribution of a memorandum, or otherwise,

of the CPI-adjusted limits on annual compensation.

(2) Compensation permitted only for performance of official Bank

business. The total compensation received by each director in a year

shall reflect the amount of time spent on official Bank business, such

that greater or lesser attendance at board and committee meetings

during a given year will be reflected in the compensation received by

the director for that year. A Bank shall not pay fees to a director,

such as retainer fees, that do not reflect the director's performance

of official Bank business.

* * * * *

(f) Approval. Payments made to directors in compliance with the

limits on annual directors' compensation and the standards set forth in

this section are deemed to be approved by the Finance Board for

purposes of section 7(i) of the Act, as amended.

4. Remove Secs. 932.18 and 932.19, and reserve subpart C.

PART 934-OPERATIONS OF THE BANKS

5. The authority citation for part 934 continues to read as

follows:

Authority: 12 U.S.C. 1422a, 1422b, 1431(g), 1432(a), and 1442.

6. Amend Sec. 934.7 by:

a. Removing the words ``and reporting requirements'' from the

heading;

b. Removing paragraphs (a)(2), (b), (c), (d) and (e); and

c. Redesignating paragraphs (a)(1), (3), (4) and (5) as paragraphs

(a), (b), (c) and (d), respectively.

7. Revise Sec. 934.16 to read as follows:

Sec. 934.16 Bank bylaws.

A Bank's board of directors shall have in effect at all times

bylaws governing the manner in which the Bank administers its affairs,

and such bylaws shall be consistent with applicable laws and

regulations as administered by the Finance Board.

8. Revise Sec. 934.17 to read as follows:

Sec. 934.17 Bank dividends.

A Bank's board of directors may declare and pay a dividend only

from previously retained earnings or current net earnings, and only if

such payment will not result in a projected impairment of the par value

of the capital stock of the Bank. Dividends on such capital stock shall

be computed without preference.

PART 935--ADVANCES

9. The authority citation for part 935 continues to read as

follows:

Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430,

1430b and 1431.

Sec. 935.4 [Amended]

10. Amend Sec. 935.4 by:

a. Removing paragraph designation (d)(1); and

b. Removing paragraph (d)(2).

Sec. 935.5 [Amended]

11. Amend Sec. 935.5 by:

a. Removing paragraph (a)(2); and

b. Redesignating paragraph (a)(3) as paragraph (a)(2).

Sec. 935.16 [Removed]

12. Remove Sec. 935.16.

Dated: December 14, 1999.

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

Bruce A. Morrison,

Chairman.

[FR Doc. 99-33069 Filed 12-20-99; 8:45 am]

BILLING CODE 6725-01-P