[Federal Register Volume 61, Number 160 (Friday, August 16, 1996)]
[Proposed Rules]
[Pages 42570-42577]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20486]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 932 and 941

[No. 96-55]


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

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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[[Page 42571]]

SUMMARY: The Federal Housing Finance Board (Board) is proposing to 
amend the provisions of its regulations governing the selection and 
compensation of employees of the Federal Home Loan Banks (Banks) in 
order to streamline regulatory requirements and transfer specific 
functions currently performed by the Board to the board of directors of 
each Bank, including the establishment of incentive payment measures 
for Bank Presidents based on each Bank's fulfillment of its mission. 
The Board is proposing also to amend its regulation governing the 
Federal Home Loan Bank System's Office of Finance (OF) to provide for 
the annual appointment of the Director of the OF and for the 
compensation of the Director and the other employees of the OF.

DATES: Comments on this proposed rule must be received in writing on or 
before October 15, 1996.

ADDRESSES: Mail comments to Elaine Baker, Executive Secretariat, 
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 
20006.

FOR FURTHER INFORMATION CONTACT: Barbara Fisher, Director, Office of 
Resource Management, (202) 408-2586; or David Guy, Associate General 
Counsel, (202) 408-2536, Federal Housing Finance Board, 1777 F Street, 
N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

A. Selection of Employees

    1. Bank Employees. -Section 12(a) of the Federal Home Loan Bank Act 
(Bank Act) provides that each Bank may select, employ, and fix the 
compensation of Bank employees, subject to the approval of the Board. 
See 12 U.S.C. 1432(a). Section 932.40 of the Board's regulations, which 
governs the selection of Bank employees, provides that officers, legal 
counsel, and employees of a Bank shall be elected or appointed in 
accordance with the Bank's bylaws. See 12 CFR 932.40. Each Bank's 
bylaws are subject to the approval of the Board. See 12 U.S.C. 1432(a). 
Under each Bank's bylaws, the Bank elects or appoints its President 
subject to Board approval.
    Section 932.40 also sets forth conflicts of interest prohibitions 
applicable to full-time officers or employees of a Bank, and to counsel 
retained by a Bank. See 12 CFR 932.40. These provisions generally 
prohibit a Bank employee from acting on behalf of a member or other 
institution insured by the former Federal Savings and Loan Insurance 
Corporation (FSLIC), except under specified circumstances and with the 
consent of the FSLIC. Existing Sec. 932.40 extends this prohibition to 
counsel and attorneys of any Bank, whether employed on a salary, fee, 
retainer, or other basis, unless the Board consents to such 
representation. See id.
    2. OF employees. The current regulation regarding OF provides only 
that the Director has responsibility for the overall daily management 
of OF, including the employment and management of personnel. See 12 CFR 
941.6(a)(3). It also provides that the board of directors of OF shall, 
subject to Finance Board approval, select and employ the Director under 
an annual contract of employment. See id. Sec. 941.9(b)(6).

B. Compensation

    1. Bank Presidents and the Director of OF. Under section 12(a) of 
the Bank Act, the compensation of all Bank employees is subject to 
Board approval. See 12 U.S.C. 1432(a). However, under its existing 
regulation on Bank employee compensation, prior Board approval is 
required only for compensation of a Bank's President. See 12 CFR 
932.41(a). Section 932.41 of the Board's existing compensation 
regulation requires the board of directors of each Bank annually to 
adopt and submit to the Board for its approval an appropriate 
resolution showing the contemplated compensation of its President. Id.
    In setting the compensation of their Presidents, the Banks are 
governed by the Bank Presidents' Compensation Plan (Compensation Plan), 
adopted by the Board on November 19, 1991, as amended from time to 
time. See Bd. Res. No. 91-565 (as amended). The Compensation Plan 
establishes base salary guidelines, merit increase (to base salary) 
guidelines, and criteria for incentive payments for Bank Presidents. 
The Compensation Plan requires each Bank annually to submit for Board 
approval recommendations for merit increases to its President's base 
salary and proposed incentive payments. The Director of OF also is 
subject to the Compensation Plan. See, e.g,. Bd. Res. No. 95-33 (Oct. 
5, 1995).
    2. Other bank employees. Section 932.41(b) of the Board's existing 
compensation regulation permits a Bank to fix the compensation of 
officers other than the President without prior Board approval, 
provided that such compensation is within ranges established by the 
Board and the total limits for such compensation in the Bank's approved 
budget. See 12 CFR 932.41(b). Each Bank may establish the amount and 
form of compensation for all other employees (including legal counsel) 
within the limits set forth in the Bank's approved budget. See id. 
Section 932.41(b) also prohibits a Bank from paying a bonus to any 
director, officer, employee, or other person. See id.
    In Resolution No. 84-390, dated July 25, 1984, the Board's 
predecessor agency, the Federal Home Loan Bank Board (FHLBB), 
established a cap on compensation of Bank employees other than the 
President, providing that the salary of the second-highest-paid Bank 
officer may not exceed 80 percent of the Bank President's salary. This 
resolution currently remains in effect. See 12 U.S.C. 1437 note.
    3. OF employees. The current regulations provide no guidance on the 
compensation of OF employees.
    4. Benefits. Existing Sec. 932.41(b) does not specifically address 
benefits provided by the Banks to their employees. It has been the 
Board's practice to require the Banks to obtain prior Board approval 
for any compensation of Bank Presidents, whether direct or indirect, 
and whether payable in current periods or during future periods. This 
may include a variety of benefits plans in which Bank Presidents are 
participants, exclusive of other employees. It has been the Board's 
practice to permit the Banks to adopt non-discriminatory qualified 
benefits plans for their employees without Board approval.

II. Analysis of the Proposed Rule

    As part of its continuing effort to transfer to the Banks those 
functions currently performed by the Board that are related to Bank 
management and governance, the Board proposes to amend Secs. 932.40 and 
932.41 of its regulations to clarify the scope of the Banks' discretion 
in selecting and fixing the compensation of Bank Presidents and other 
Bank employees. The Board also proposes to amend Sec. 941.9 of its 
regulations to codify the Board's existing practice regarding the 
annual appointment and compensation of the Director of OF. In making 
these proposals, the Board reiterates its position that, 
notwithstanding the Board's broad statutory authority to approve all 
aspects of the selection and compensation of Bank and OF employees, the 
Banks' boards of directors and the board of directors of OF are 
ultimately responsible for the effective and prudent management of the 
Banks and OF, respectively, including the selection and compensation of 
their officers and other employees.

A. Selection of Employees

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

[[Page 42572]]

the rules governing the appointment of Bank Presidents. Proposed 
Sec. 932.40(a)(1) restates the Banks' statutory authority to appoint 
their Presidents, and makes clear that such appointments are subject to 
prior Board approval. Proposed Secs. 932.40(a)(2) and (3) codify the 
Board's existing practice of approving the appointments of Bank 
Presidents for one-year terms. Under these provisions, all appointments 
expire on December 31 of the year for which the President is appointed, 
without opportunity for holdover. To the extent that a Bank's by-laws 
are inconsistent with this requirement, the by-laws are superseded by 
Sec. 932.40(a)(2). Furthermore, the Board intends these provisions to 
make clear that a Bank President appointed to fill a mid-term vacancy 
is appointed to serve out the remainder of the one-year term of his or 
her predecessor, and is not appointed for a full one-year term. 
Proposed Sec. 932.40(a)(4) codifies the Board's existing procedure for 
approval of appointments of the Bank Presidents. By November 1 of each 
year, the board of directors of each Bank must adopt and submit to the 
Board a resolution appointing or reappointing its President for the 
following year. Section 932.40(a)(5) makes clear that no appointment of 
a Bank President is effective until approved by the Board.
    2. Other bank employees. Section 932.40(b) of the proposed rule 
restates the Banks' statutory authority to appoint or elect officers 
other than the President and to hire other employees of the Bank, and 
makes clear that these activities do not require prior Board approval.
    3. Conflicts of interests. Proposed Sec. 932.40(c) is intended to 
update the conflicts of interest provisions in existing Sec. 932.40 by 
eliminating references to the FSLIC, which was abolished by Congress in 
1989. See 12 U.S.C. 1437 note. However, the Board is retaining, in 
substance, the existing requirement that a Bank employee shall not act 
in any capacity for certain specified institutions whose interests are 
likely to be in conflict with the interests of the Bank. Specifically, 
proposed Sec. 932.40(c) prohibits a Bank employee from being employed 
by, or acting in any other capacity for, a Bank member or an 
institution eligible to make application to become a Bank member.
    In addition, the Board proposes to eliminate the final sentence in 
existing Sec. 932.40, which extends the conflicts of interest provision 
discussed above to outside counsel hired by a Bank and to other 
attorneys acting on behalf of a Bank who are not Bank employees, except 
in cases specifically approved by the Board. See 12 CFR 932.40. The 
Board believes that the determination of whether outside counsel may 
have a conflict of interest in a matter in which it is representing a 
Bank is a decision that is properly within the purview of each Bank. 
Further, the existing conflicts of interest provisions, as applied to 
outside counsel, are duplicative of applicable requirements of state 
codes of professional conduct and other ethics rules. Attorneys who 
work for a Bank as salaried employees would continue to be subject to 
the conflicts of interest provisions in proposed Sec. 932.40(c), since 
those provisions continue to apply to all Bank employees.
    4. The Director of the OF. The Board proposes to amend 
Sec. 941.9(b)(6) by deleting the language regarding an annual contract 
of employment for the Director of the OF, and adding a requirement for 
the annual appointment of the Director of the OF, subject to prior 
approval of the Board.

B. Compensation of Bank Employees and OF Employees

    The Board proposes to amend existing Sec. 932.41 to increase the 
amount of discretion the Banks may exercise in fixing the compensation 
of their employees. The Board proposes to eliminate its Compensation 
Plan for the Bank Presidents and to amend existing Sec. 932.41 to 
permit each Bank to approve the base salaries, incentive payments, and 
benefits for its President, within regulatory limitations approved by 
the Board. Proposed Sec. 932.41 also clarifies the conditions under 
which the Banks can fix the compensation of employees other than the 
President, without prior Board approval.
    The Board proposes to amend its regulation governing OF to permit 
the board of directors of OF to establish the base salary of the 
Director of OF under the same rules governing the base salaries of the 
Bank Presidents, and to make incentive payments for the Director, 
subject to prior Board approval. The Board also proposes to amend its 
regulation to provide guidance regarding the compensation of other OF 
employees that is consistent with the guidance for Bank employees.
    The Board has not approved any change-of-control arrangements 
between a Bank and its President or other officers providing for 
payments as a result of a merger or other event qualifying as a change 
of control. The Board requests detailed comments on whether the Banks 
should be permitted to enter into change-of-control arrangements with 
certain senior officers. Comments should include a detailed description 
of the terms of any such arrangements and a supporting rationale.
    1. Base salaries. Under proposed Sec. 932.41(b)(1), each Bank shall 
establish the base salary of its President within the following salary 
ranges, which ranges may be adjusted annually by the Board. The Board 
shall publish a notice in the last quarter of the year preceding the 
year in which adjustments are to take effect setting forth the 
adjustments to these ranges for the next calendar year. Proposed 
Sec. 932.4(b)(1)(i) codifies the 1996 salary ranges established by the 
Board in Bd. Res. No. 95-33 (Oct. 5, 1995), as follows: 1) a Bank with 
total assets as of December 31 of the prior year equal to or greater 
than $40 billion shall have a base salary range for its President 
beginning January 1, 1996, consisting of a minimum, mid-point, and 
maximum dollar amount of $240,000, $305,000 and $385,000, respectively; 
and 2) a Bank with total assets as of December 31 of the prior year 
less than $40 billion shall have a base salary range for its President 
beginning January 1, 1996, consisting of a minimum, mid-point, and 
maximum dollar amount of $195,000, $245,000, and $310,000, 
respectively. A newly appointed Bank President may not receive a base 
salary higher that the mid-point of the applicable base salary range.
    Beginning January 1, 1997, and annually thereafter, a Bank may 
adjust the base salary of its President based on a merit increase rate. 
The maximum merit increase rate shall be determined by the Board on an 
annual basis. Any annual increase in a Bank President's base salary 
shall not exceed the merit increase rate established by the Board, nor 
shall such annual increase result in a Bank President's base salary 
exceeding the maximum dollar amount of the applicable base salary 
range. No other adjustment may be made to a President's base salary 
during the year without prior Board approval. By January 2 of each 
year, a Bank must report to the Board the approved base salary of its 
President.
    The Board is proposing to amend Sec. 941.9 of its regulations to 
authorize the board of directors of OF to establish the compensation of 
the Director according to the base salary ranges and the merit increase 
rate governing the salaries of the Bank Presidents, subject to prior 
Board approval. For purposes of determining the applicable base salary 
range, OF is deemed to have assets of less than $40 billion.
    The Board currently determines the salary ranges for Bank 
Presidents using a comparability model based on the salaries of the 
chief operating officers of

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private financial subsidiaries of similar asset size and geographic 
location, offset by staff size. The Board specifically requests comment 
on whether there is a more appropriate universe of entities that should 
be used in establishing the comparability of the Bank Presidents' 
salaries. For instance, it has been suggested that the salaries of the 
Bank Presidents should be comparable to the salaries of the Presidents 
(or their equivalent) of the Federal Reserve Banks, other segments of 
the financial services industry, or other federally or state-created 
entities with similar size, functions, and mission. Comments should 
include specific examples of government entities on which comparability 
should be based and a rationale for including such entities in the 
universe.
    In regulating the salary levels of the Bank Presidents and other 
Bank employees, one of the Board's objectives is to attract and retain 
competent individuals to the Bank System. The Board recognizes that, in 
setting the salary levels for the Bank Presidents, it also is affecting 
the salary levels of other Bank employees.
    Under proposed Sec. 932.41(b)(2), each Bank generally may establish 
base salaries for Bank employees other than the President without prior 
Board approval, provided such salaries are reasonable and comparable 
with the base salaries of employees of the other Banks and other 
similar businesses, such as similar financial institutions, with 
similar duties and responsibilities. Banks must maintain documentation 
supporting the reasonableness and comparability of their employees' 
base salaries. Similar provisions regarding OF employees are contained 
in proposed Sec. 941.9(c).
    Upon adoption of the proposed rule in final form, the Board intends 
to rescind FHLBB Resolution No. 84-390, which requires the annual base 
salary of the highest paid Bank employee other than the Bank President 
to be less than or equal to 80 percent of the annual base salary of 
that Bank President. See FHLBB Res. No. 84-390 (July 25, 1984). 
However, a Bank would be required to report to the Board the approved 
salary of the highest paid employee other than the Bank President by 
January 2 of each year.
    2. Incentive payments. Proposed Sec. 932.41(c) governs payments 
made to Bank Presidents based on the quality of their on-the-job 
performance. Such payments are defined in Sec. 932.41(a)(3) as 
``incentive payments.'' As discussed below, Sec. 932.41(c) is intended 
to preclude a Bank from making an incentive payment to a Bank President 
based on the President's individual performance without regard to the 
performance of the Bank. A Bank is prohibited from making any incentive 
payment to its President if the most recent examination of the Bank by 
the Board identified an unsafe or unsound practice or condition with 
regard to the Bank. The Board specifically requests comment on whether 
there are other events or conditions that should result in a 
prohibition on incentive payments to Bank Presidents.
    At least 20 percent of any incentive payment for a Bank President 
must be based on the following criteria illustrating the Bank's 
emphasis on the portion of its mission involved with support for member 
credit activities: (1) average annual advances outstanding; and (2) 
average annual letters of credit outstanding and average annual 
notional principal outstanding in swap and option contracts with 
members. At least 30 percent of any incentive payment must be based on 
the following criteria illustrating the Bank's emphasis on additional 
support for housing and community development finance: (1) average 
annual Community Investment Program (CIP) advances outstanding, which 
are provided in support of new CIP lending activity, not as 
refinancings of existing CIP-eligible loans originated more than 30 
days prior to the CIP financing request, nor for the purpose of 
borrower balance sheet restructuring; (2) average annual consolidated 
obligation principal customized for and issued to state or local 
government agencies, non-profits, foundations, and other entities, the 
proceeds of which serve unmet needs; and (3) average annual balances 
outstanding of investments identified as fulfilling unmet needs by the 
Board, where such investments are in accordance with items 11 and 12 of 
section IIB of the Financial Management Policy for the Federal Home 
Loan Bank System, and other investments approved by the Board. The 
Bank's board of directors must assign a weight greater than zero to 
each of the five above-described criteria as it deems appropriate, 
based upon the board's view of the importance of each of these criteria 
in the Bank's fulfillment of its mission.
    Any portion (up to 50 percent) of the incentive payment that is not 
based on the above-described criteria must be based on the Bank's 
performance in achieving other objectives established by the Bank's 
board of directors.
    The Bank's board of directors must establish reasonable numerical 
measures of performance and reasonable numerical targets for the 
achievement of the performance criteria discussed above. Performance 
targets must be set at such a level as to show an improvement in the 
Bank's performance over the prior year or an extraordinary achievement 
in attaining the designated target.
    By January 1 of each year, the board of directors of each Bank that 
intends to make any incentive payment to its President for such year 
shall adopt and submit to the Board a resolution establishing the 
performance measures and targets on which such incentive payment will 
be based.
    Proposed Secs. 932.41(c)(8) and (9) set forth the manner in which a 
Bank President's incentive payment is to be calculated, based on the 
Bank's achievement of the performance targets set by the board of 
directors. Under the Compensation Plan, prior to the most recent 
amendment, the maximum incentive payment payable to a Bank President 
was 37.5 percent of base salary. The Plan was amended on July 25, 1996, 
by Resolution Number 96-54, to limit an incentive payment to 31.25 
percent of base salary. The Board specifically requests comment on the 
appropriateness of and reasons for setting the maximum percentage at 
some point in the range between zero and 37.5 percent.
    Proposed Secs. 932.41(c)(10) provides that by March 1 of each year, 
the board of directors of each Bank making any incentive payment to its 
President for the prior year shall adopt and submit to the Board a 
resolution showing the results for the individual performance measures 
and the amount of the incentive payment to the Bank President. Such 
incentive payment shall be deemed approved by the Board and payable to 
a Bank President only if determined in accordance with the requirements 
of Sec. 932.41(c).
    The Board is proposing to authorize the board of directors of OF to 
make incentive payments to the Director of OF, subject to prior Board 
approval. Proposed Sec. 941.9(c)(2) authorizes OF board of directors to 
establish the criteria, performance measures, and targets on which any 
such incentive payment is based. OF is prohibited from making any 
incentive payment to the Director if the most recent examination of OF 
identified an unsafe or unsound practice or condition with regard to 
OF.
    The Board wishes to make clear that the proposed rule does not 
require a Bank or OF to make an incentive payment, but if a Bank or OF 
chooses to make such a payment, it must meet the requirements of 
proposed Sec. 932.41(c) or Sec. 941.9(c)(2), respectively.
    Proposed Sec. 932.41(d) carries forward the Board's current 
practice of

[[Page 42574]]

permitting the Banks to make incentive payments to employees other than 
the President without prior Board approval, and adds the requirement 
that such incentive payments must be reasonable and comparable with 
incentive payments made to employees of the other Banks and other 
similar businesses (including financial institutions) with similar 
duties and responsibilities. Banks must maintain documentation 
supporting the reasonableness and comparability of their employees' 
incentive payments. Similar provisions regarding OF employees are 
contained in proposed Sec. 941.9(c).
    3. Benefits. Proposed Sec. 932.41(e) is intended to permit the 
Banks to establish certain kinds of benefits plans for their employees, 
and to provide benefits pursuant to such plans, without prior Board 
approval. This section provides that a Bank may make payments in the 
nature of benefits to its President and other Bank employees only 
pursuant to a ``benefit plan'' or a ``bona fide deferred compensation 
plan or arrangement,'' which are specifically defined in proposed 
Secs. 932.41(a)(1) and (2). Proposed Sec. 932.41(e) codifies the 
Board's current practice of permitting the Banks to adopt benefit plans 
without prior Board approval if such plans are open for participation 
by all Bank employees. However, this section changes the Board's 
current practice of requiring the Banks to obtain prior Board approval 
of plans that limit participation to a Bank's President and other 
selected officers. Similar provisions regarding OF employees are 
contained in proposed Sec. 941.9(c).
    4. Severance. Proposed Sec. 932.41(f) is intended to permit the 
Banks to establish severance plans for their employees without prior 
Board approval. Similar provisions regarding OF employees are contained 
in proposed Sec. 941.9(c).
    5. General Limits on Payments. Proposed Sec. 932.41(g)(1) is 
intended to clarify that the provisions of Sec. 932.41 govern all 
payments, as that term is defined in Sec. 932.41(a)(5), to Bank 
employees, and any payments made to a Bank employee that are not in 
accordance with Sec. 932.41 are prohibited. Proposed Sec. 932.41(g)(2) 
requires the total amount of base salaries, incentive payments, and 
benefits paid to Bank employees to be within the limit set forth in the 
Bank's approved budget. The board of directors of each Bank must review 
annually the compensation plan for its employees, including appropriate 
documentation, prior to approving the Bank's annual budget. Proposed 
Sec. 932.40(h) carries forward the existing prohibition on the payment 
of bonuses to Bank employees and other persons. A bonus is defined as a 
payment to an employee, other than base salary, benefits and severance, 
that is not based on performance. Similar provisions regarding OF 
employees are contained in proposed Sec. 941.9(c).

III. Regulatory Flexibility Act

    The proposed rule applies only to the twelve Banks, which do not 
come within the meaning of ``small entities,'' as defined by the 
Regulatory Flexibility Act (RFA). 5 U.S.C. 601. Therefore, in 
accordance with the RFA, the Board hereby certifies that the proposed 
rule, if promulgated as a final rule, will not have a significant 
economic impact on a substantial number of small entities.

List of Subjects

12 CFR Part 932

    Conflict of interests, Federal home loan banks.

12 CFR Part 941

    Organization and functions (Government agencies).

    Accordingly, chapter IX, title 12, subchapter B, Code of Federal 
Regulations, is hereby proposed to be amended as follows:
SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM

PART 932--ORGANIZATION OF THE BANKS

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

    Authority: 12 U.S.C. 1422a, 1422b, 1426, 1427, 1432; 42 U.S.C. 
8101 et seq.

    2. Section 932.40 is revised to read as follows:


Sec. 932.40  Selection.

    (a) Bank Presidents. (1) Each Bank may appoint or reappoint a 
President, subject to prior Board approval.
    (2) A President of a Bank shall be appointed initially for a term 
not to exceed one calendar year, expiring on December 31 of the year in 
which the President takes office.
    (3) A President may be reappointed to succeeding one-year terms, 
each expiring on December 31 of the year for which the President is 
reappointed.
    (4) By November 1 of each year, the board of directors of each Bank 
shall adopt and submit to the Board a resolution appointing or 
reappointing its President for the following year.
    (5) No appointment or reappointment of a Bank President shall be 
effective until approved by the Board.
    (b) Bank employees other than the President. Each Bank may appoint 
or elect officers other than the President and may hire other employees 
of the Bank without prior Board approval.
    (c) Conflicts of interest. A Bank employee shall not also be 
employed by, or otherwise act in any capacity for, a member or an 
institution eligible to make application to become a member.
    3. Section 932.41 is revised to read as follows:


Sec. 932.41  Compensation.

    (a) Definitions. The following definitions apply for purposes of 
this section:
    (1) Benefit plan. Benefit plan means any plan, contract, agreement, 
or other arrangement which is an ``employee welfare benefit plan,'' as 
that term is defined in section 3(1) of the Employee Retirement Income 
Security Act of 1974 (as amended) (29 U.S.C. 1002(1)), or other usual 
and customary plans such as dependent care, tuition reimbursement, 
group legal services or cafeteria plans.
    (2) Bona fide deferred compensation plan or arrangement. (i) Bona 
fide deferred compensation plan or arrangement means:
    (A) Any plan, contract, agreement, or other arrangement whereby a 
Bank employee voluntarily elects to defer all or a portion of the base 
salary or incentive payment paid for services rendered which otherwise 
would have been paid to such employee at the time the services were 
rendered (including a plan that provides for the crediting of a 
reasonable investment return on such elective deferrals) and the Bank 
either:
    (1) Recognizes compensation expense and accrues a liability for the 
benefit payments according to generally accepted accounting principles 
(GAAP); or
    (2) Segregates or otherwise sets aside assets in a trust which may 
only be used to pay plan and other benefits, except that the assets of 
such trust may be available to satisfy claims of the Bank's creditors 
in the case of insolvency; or
    (B) A nonqualified deferred compensation or supplemental retirement 
plan established by a Bank, other than an elective deferral plan 
described in paragraph (a)(2)(i)(A) of this section:
    (1) Primarily for the purpose of providing benefits for certain 
employees in excess of the limitations on contributions and benefits 
imposed by sections 415, 401(a)(17), 402(g) or any other applicable 
provision of the Internal Revenue Code of 1986 (26 U.S.C. 415, 
401(a)(17), 402(g)); or
    (2) Primarily for the purpose of providing supplemental retirement 
benefits or other deferred compensation for a select group of 
management or

[[Page 42575]]

highly compensated employees (excluding payments under a severance plan 
described in paragraph (a)(6) of this section).
    (ii) The following requirements shall apply to any nonqualified 
deferred compensation or supplemental retirement plans as described in 
paragraph (a)(2)(i)(B) of this section:
    (A) The plan must have been in effect at least one year prior to a 
payment of benefits under the plan;
    (B) Any payment made pursuant to such plan must be made in 
accordance with the terms of the plan and any amendments to such plan 
made during such one year period that do not increase the benefits 
payable thereunder;
    (C) The employee must have a vested right, as defined under the 
applicable plan document, at the time of termination of employment, to 
payments under such plan;
    (D) Benefits under such plan must be accrued each period only for 
current or prior service rendered to the employee;
    (E) The Bank must have previously recognized compensation expenses 
and accrued a liability for the benefit payments according to GAAP or 
segregated or otherwise set aside assets in a trust which may only be 
used to pay plan benefits, except that the assets of such trust may be 
available to satisfy claims of the Bank's creditors in the case of 
insolvency; and
    (F) Payments pursuant to such plans shall not be in excess of the 
accrued liability computed in accordance with GAAP.
    (3) Incentive payment. Incentive payment means a direct or indirect 
transfer of funds by a Bank to a Bank employee, in addition to base 
salary, based on the employee's on-the-job performance.
    (4) Nondiscriminatory. Nondiscriminatory means that the plan, 
contract or arrangement in question applies to all employees of a Bank 
who meet reasonable and customary eligibility requirements applicable 
to all employees, such as minimum length of service requirements. A 
nondiscriminatory plan, contract, or arrangement may provide different 
benefits based only on objective criteria such as base salary, total 
compensation, length of service, job grade or classification, which are 
applied on a proportionate basis.
    (5) Payment. Payment means:
    (i) Any direct or indirect transfer of any funds or any asset;
    (ii) Any forgiveness of any debt or other obligation;
    (iii) The conferring of any benefit; and
    (iv) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of, or arrangement for, any letter 
of credit or other instrument for the purpose of making, or pursuant to 
any agreement to make, any payment on or after the date on which such 
funds or assets are segregated, or at the time of or after such trust 
is established or letter of credit or other instrument is made 
available, without regard to whether the obligation to make such 
payment is contingent on:
    (A) The determination, after such date, of the liability for the 
payment of such amount; or
    (B) The liquidation, after such date, of the amount of such 
payment.
    (6) Severance plan. A nondiscriminatory pay plan or arrangement 
which provides for payment of severance benefits to all eligible 
employees upon involuntary termination other than for cause, voluntary 
resignation, or early retirement; provided, however, that no employee 
shall receive any such payment which exceeds the base compensation paid 
to such employee during the 12 months immediately preceding termination 
of employment, resignation or early retirement.
    (b) Base salary--(1) Bank President. (i) Each Bank shall establish 
the base salary of its President within the following salary ranges, 
which ranges may be adjusted annually by the Board:
    (A) A Bank with total assets as of December 31 of the prior year 
equal to or greater than $40 billion shall have a base salary range for 
its President beginning January 1, 1996, consisting of a minimum, mid-
point, and maximum dollar amount of $240,000, $305,000 and $385,000, 
respectively; and
    (B) A Bank with total assets as of December 31 of the prior year 
less than $40 billion shall have a base salary range for its President 
beginning January 1, 1996, consisting of a minimum, mid-point, and 
maximum dollar amount of $195,000, $245,000, and $310,000, 
respectively.
    (ii) A newly appointed Bank President may not receive a base salary 
higher than the mid-point of the applicable base salary range.
    (iii) Beginning January 1, 1997, and annually thereafter, a Bank 
may adjust the base salary of its President based on a merit increase 
rate. The maximum merit increase rate shall be determined by the Board 
on an annual basis. Any annual increase in a Bank President's base 
salary shall not exceed the merit increase rate established by the 
Board, nor shall such annual increase result in a Bank President's base 
salary exceeding the maximum dollar amount of the applicable base 
salary range under paragraph (b)(1)(i)(A) or (B) of this section. No 
other adjustment may be made to a President's base salary during the 
year without prior Board approval.
    (iv) By January 2 of each year, a Bank must report to the Board the 
approved base salary of its President.
    (2) Other Bank employees. (i) Each Bank may establish base salaries 
for employees other than the President without prior Board approval, 
provided that such base salaries are reasonable and comparable with the 
base salaries of employees of the other Banks and other similar 
businesses (including financial institutions) with similar duties and 
responsibilities. Banks shall maintain documentation supporting the 
reasonableness and comparability of their employees' base salaries.
    (ii) By January 2 of each year, a Bank must report to the Board the 
approved salary of the highest paid employee other than the Bank 
President.
    (c) Incentive payments for Bank President. (1) Any incentive 
payment made to a Bank President shall be based solely on the 
performance of the Bank during the year in which the incentive payment 
is earned, and shall be determined in accordance with the requirements 
of this paragraph (c). A Bank shall not make any incentive payment to 
its President if the most recent examination of the Bank by the Board 
identified an unsafe or unsound practice or condition with regard to 
the Bank.
    (2) At least 20 percent of a Bank President's incentive payment 
shall be based on the following criteria:
    (i) Average annual advances outstanding; and
    (ii) Average annual letters of credit outstanding and average 
annual notional principal outstanding in swap and option contracts with 
members.
    (3) At least 30 percent of a Bank President's incentive payment 
shall be based on the following criteria:
    (i) Average annual Community Investment Program (CIP) advances 
outstanding, which are provided in support of new CIP lending activity, 
not as refinancings of existing CIP-eligible loans originated more than 
30 days prior to the CIP financing request, nor for the purpose of 
borrower balance sheet restructuring;
    (ii) Average annual consolidated obligation principal customized 
for and issued to state or local government agencies, non-profits, 
foundations, and other entities, the proceeds of which serve unmet 
needs; and
    (iii) Average annual balances outstanding of investments identified 
as fulfilling unmet needs by the Board,

[[Page 42576]]

where such investments are in accordance with items 11 and 12 of 
section IIB of the Financial Management Policy for the Federal Home 
Loan Bank System, and other investments approved by the Board.
    (4) Up to 50 percent of a Bank President's incentive payment may be 
based upon criteria identified by the Bank's board of directors, 
provided such criteria reflect the Bank's performance in achieving its 
mission during the year for which the incentive payment is being made.
    (5) A Bank board of directors shall assign a weight greater than 
zero for each of the criteria in paragraphs (c)(2) and (4) of this 
section, as it deems appropriate based upon its view of the importance 
of each of these activities in enabling the FHLBank to fulfill its 
mission.
    (6) The Bank's board of directors shall establish reasonable 
numerical measures of performance under the performance criteria listed 
in paragraphs (c) (2) and (3) of this section, as well as for any 
criteria identified by the Bank's board of directors pursuant to 
paragraph (c)(4) of this section, and shall establish reasonable 
numerical targets for the achievement of such criteria. Performance 
targets shall be set at such a level as to show an improvement in the 
Bank's performance over the prior year or an extraordinary achievement 
in attaining the designated target.
    (7) By January 1 of each year, the board of directors of each Bank 
that intends to make any incentive payment to its President for such 
year shall adopt and submit to the Board a resolution establishing the 
performance measures and targets on which such incentive payment will 
be based.
    (8) The amount of an incentive payment shall be based upon the 
extent to which a Bank achieves the performance targets. A Bank must 
achieve at least 100 percent of the target for a performance criterion 
in order for any payment to be made based upon that criterion. A Bank 
may increase the incentive payment to the extent that the Bank exceeds 
the performance targets, as set forth in the following table [The 
percentages in the right hand column of the table will be determined by 
the Board, after review of public comments on this proposed rule.]:

                         Incentive Payment Level                        
------------------------------------------------------------------------
  Bank performance as a percent of       Total incentive payment as a   
               target                       percent of base salary      
------------------------------------------------------------------------
150.0% -...........................                                     
149.0% -...........................                                     
148.0% -...........................                                     
147.0% -...........................                                     
146.0% -...........................                                     
145.0% -...........................                                     
144.0% -...........................                                     
143.0% -...........................                                     
142.0% -...........................                                     
141.0% -...........................                                     
140.0% -...........................                                     
139.0% -...........................                                     
138.0% -...........................                                     
137.0% -...........................                                     
136.0% -...........................                                     
135.0% -...........................                                     
134.0% -...........................                                     
133.0% -...........................                                     
132.0% -...........................                                     
131.0% -...........................                                     
130.0% -...........................                                     
129.0% -...........................                                     
128.0% -...........................                                     
127.0% -...........................                                     
126.0% -...........................                                     
125.0% -...........................                                     
124.0% -...........................                                     
123.0% -...........................                                     
122.0% -...........................                                     
121.0% -...........................                                     
120.0% -...........................                                     
119.0% -...........................                                     
118.0% -...........................                                     
117.0% -...........................                                     
116.0% -...........................                                     
115.0% -...........................                                     
114.0% -...........................                                     
113.0% -...........................                                     
112.0% -...........................                                     
111.0% -...........................                                     
110.0% -...........................                                     
109.0% -...........................                                     
108.0% -...........................                                     
107.0% -...........................                                     
106.0% -...........................                                     
105.0% -...........................                                     
104.0% -...........................                                     
103.0% -...........................                                     
102.0% -...........................                                     
101.0% -...........................                                     
100.0% -...........................                                     
------------------------------------------------------------------------

    (9) The total incentive payment earned by a Bank President for a 
given year may not exceed [A percentage of base salary, to be 
determined by the Board after review of public comments, from 0 to 37.5 
percent.] of the President's base salary for that year.
    (10) By March 1 of each year, the board of directors of each Bank 
making any incentive payment to its President for the prior year shall 
adopt and submit to the Board a resolution showing the results for the 
individual performance measures and the amount of the incentive payment 
to the Bank President. Such incentive payment shall be deemed approved 
by the Board and payable to a Bank President only if determined in 
accordance with the requirements of this paragraph (c).
    (d) Incentive payment for other bank employees. Each Bank may make 
incentive payments to employees other than the President without prior 
Board approval, provided that such incentive payments are reasonable 
and comparable with incentive payments made to employees of the other 
Banks and other similar businesses (including financial institutions) 
with similar duties and responsibilities. Banks shall maintain 
documentation supporting the reasonableness and comparability of their 
employees' incentive payments.
    (e) Benefits. A Bank may make payments in the nature of benefits to 
its President and to other Bank employees only pursuant to a benefit 
plan and a bona fide deferred compensation plan or arrangement, as 
defined in paragraphs (a)(1) and (2) of this section.
    (f) Severance plans. A Bank may make payments in the nature of 
severance to its President and to other Bank employees only pursuant to 
a severance plan, as defined in paragraph (a)(6) of this section.
    (g) General limits on payments. (1) No Bank shall make any payment 
to a Bank employee, except as provided in this section.
    (2) The total amount of base salaries, incentive payments, and 
benefits paid to Bank employees shall be within the limit set forth in 
the Bank's approved budget. The board of directors of each Bank shall 
review annually the compensation plan for its employees, including 
appropriate documentation, prior to approving the Bank's annual budget.
    (h) Prohibition on bonuses. A Bank shall not pay any employee or 
other person a bonus. For purposes of this paragraph (h), a bonus is a 
payment to an employee, other than base salary, benefits, and severance 
payments, that is not based on performance.

PART 941--OPERATIONS OF THE OFFICE OF FINANCE

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

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

    5. Section 941.9 is amended by revising paragraph (b)(6) and by 
adding paragraph (c) to read as follows:


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

* * * * *
    (b) * * *
    (6) Select and employ the Director, subject to the following 
requirements:

[[Page 42577]]

    (i) The Director shall be appointed initially for a term not to 
exceed one calendar year, expiring on December 31 of the year in which 
the Director takes office;
    (ii) A Director may be reappointed to succeeding one-year terms, 
each expiring on December 31 of the year for which the Director is 
reappointed;
    (iii) By November 1 of each year, the OF Board of Directors shall 
adopt and submit to the Finance Board a resolution appointing or 
reappointing its Director for the following year; and
    (iv) No appointment or reappointment of a Director shall be 
effective until approved by the Finance Board;
* * * * *
    (c) Compensation--(1) Definitions. The definitions which appear in 
Sec. 932.41 of this chapter apply to this paragraph (c).
    (2) The Director. (i) Subject to prior Finance Board approval, the 
OF Board of Directors shall establish and pay the base salary of the 
Director, including any merit increase, in accordance with the 
provisions of Sec. 932.41(b) of this chapter. For purposes of 
Sec. 932.41(b) of this chapter, the OF shall be deemed to have total 
assets of less than $40 billion. By January 2 of each year, OF must 
report to the Finance Board the approved base salary of its Director.
    (ii) Any incentive payment made to the Director shall be based 
solely on the performance of the OF during the year in which the 
incentive payment is earned, and shall be determined in accordance with 
the requirements of this paragraph (c)(2)(ii), subject to prior Finance 
Board approval. The OF shall not make any incentive payment to the 
Director if the most recent examination of OF by the Finance Board 
identified an unsafe or unsound practice or condition with regard to 
OF. The Director's incentive payment shall be based upon criteria 
identified by OF Board of Directors, which must establish reasonable 
numerical measures and targets for the achievement of such criteria. 
Performance targets shall be set at such a level as to show an 
improvement in the performance of OF over the prior year or an 
extraordinary achievement in attaining the designated target.
    (iii) By January 1 of each year, the OF Board of Directors shall 
adopt and submit to the Finance Board for approval a resolution 
establishing the performance measures and targets on which any 
incentive payment will be based.
    (iv) The amount of an incentive payment shall be calculated in 
accordance with the provisions of Sec. 932.41(c)(8) and (9) of this 
chapter.
    (v) By March 1 of each year, the OF Board of Directors shall adopt 
and submit to the Finance Board a resolution showing the results for 
the individual performance measures and the amount of the proposed 
incentive payment to the Director.
    (3) Other OF Employees. (i) The OF Board of Directors may establish 
base salaries for employees other than the Director without prior 
Finance Board approval, provided that such base salaries are reasonable 
and comparable with the base salaries of employees of the Banks and 
other similar businesses (including financial institutions) with 
similar duties and responsibilities. The OF Board of Directors shall 
maintain documentation supporting the reasonableness and comparability 
of OF employees' base salaries.
    (ii) By January 2 of each year, the OF must report to the Finance 
Board the approved salary of the highest paid employee other than the 
Director.
    (iii) The OF board of directors may make incentive payments to 
employees other than the Director without prior Finance Board approval, 
provided that such incentive payments are reasonable and comparable 
with incentive payments made to employees of the Banks and other 
similar businesses (including financial institutions) with similar 
duties and responsibilities. The OF Board of Directors shall maintain 
documentation supporting the reasonableness and comparability of their 
employees' incentive payments.
    (4) Benefits. The OF may make payments in the nature of benefits to 
its Director and to other OF employees only pursuant to a benefit plan 
and a bona fide deferred compensation plan or arrangement, as defined 
in Sec. 932.41(a) of this chapter.
    (5) Severance plans. The OF may make payments in the nature of 
severance to its Director and to other OF employees only pursuant to a 
severance plan, as defined in Sec. 932.41(a) of this chapter.
    (6) General limits on payments. (i) The OF shall not make any 
payment to any OF employee, except as provided in this section.
    (ii) The total amount of base salaries, incentive payments, and 
benefits paid to OF employees shall be within the limit set forth in 
the OF's approved budget. The OF Board of Directors shall review 
annually the compensation plan for its employees, including appropriate 
documentation, prior to approving the OF annual budget.
    (7) Prohibition on bonuses. The OF shall not pay any employee or 
other person a bonus. For purposes of this paragraph (c)(7), a bonus is 
a payment to an employee, other than base salary, benefits, and 
severance payments, that is not based on performance.

    Dated: August 6, 1996.

    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-20486 Filed 8-15-96; 8:45 am]
BILLING CODE 6725-01-U