[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Rules and Regulations]
[Pages 43151-43155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21187]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 932 and 941

[No. 96-56]


Federal Home Loan Bank Directors' Compensation and Expenses

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulation on the compensation of Federal Home Loan Bank (Bank) 
directors. The existing Finance Board regulation on the compensation of 
Bank directors subjects the payment of fees and expenses to limits set 
by the Finance Board. Those limits and other criteria are contained in 
the Finance Board's Directors' Fees and Allowances Policy (Policy), 
which essentially imposes a uniform directors' compensation structure 
on all Banks. The final rule, in conjunction with the repeal of the 
Policy, permits each Bank, within certain standards of reasonableness 
set forth in the regulation, to implement its own policy on director 
compensation beginning in 1997 and allows each Bank to pay its 
directors for such expenses as are payable by the Bank to its senior 
officers, effective immediately.
    The amended regulation also codifies an important provision of the 
Finance Board's Policy, which will be rescinded in its entirety as of 
the end of 1996, requiring that meetings of a Bank's board of directors 
be held within the United States.
    Finally, the final rule amends a provision of the Finance Board's 
regulation governing the compensation and expenses of the private 
citizen member of the board of directors of the Office of Finance (OF) 
to cross-reference the amended regulation on the compensation of Bank 
directors, instead of the Policy.

EFFECTIVE DATE: September 20, 1996.

FOR FURTHER INFORMATION CONTACT: Patricia L. Sweeney, Program Analyst, 
District Banks Secretariat, (202) 408-2872; or Eric M. Raudenbush, 
Attorney-Advisor, Office of General Counsel, (202) 408-2932; Federal 
Housing Finance Board, 1777 F Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Subsection 7(i) of the Federal Home Loan Bank Act (Bank Act) 
permits each Bank, with the approval of the Finance Board, to pay its 
directors reasonable compensation and necessary expenses for the time 
required of them in the performance of their Bank-related duties, in 
accordance with resolutions adopted by such directors. 12 U.S.C. 
1427(i) (1994). A general provision on Bank directors' compensation, 
which appears at Sec. 932.27 of the Finance Board's regulations, 
provides merely that directors' fees shall be established by each Bank 
within limits set by the Finance Board. See 12 CFR 932.27 (1995).
    The Finance Board has exercised its statutory responsibility to 
approve Bank director compensation and expenses largely through the 
Policy, adopted by resolution of its Board of Directors on February 23, 
1993. See Finance Board Resolution No. 93-12 (Feb. 23, 1993). The 
Policy establishes a maximum fee of $1,200 per day payable to the Chair 
of a Bank's board of directors when presiding over meetings of the 
board or its executive committee, and a maximum fee of $650 per day 
payable to all other directors for attendance at board, committee, or 
other meetings for which a fee is authorized. Under the Policy, daily 
meeting fees are the only authorized source of compensation for Bank 
directors; the Policy does not provide for payment of either a 
retainer, or non-cash benefits to directors. The Policy also sets forth 
generally the categories of expenses that are payable to Bank directors 
and identifies several specific expense items the payment of

[[Page 43152]]

which is either authorized or prohibited.
    The Banks first became subject to a formal policy on directors fees 
and expenses in 1974, when the former Federal Home Loan Bank Board 
(FHLBB) (the Finance Board's predecessor agency) adopted a policy that 
revised, clarified and incorporated the various resolutions, minute 
entries and interpretations on director compensation and expenses that 
had been issued by the FHLBB since its creation in 1932. The FHLBB 
policy was amended several times, lastly in 1986, when the current dual 
$1200/$650 per day meeting fee caps were incorporated. When the Finance 
Board succeeded the FHLBB as regulator of the Bank system in 1989, the 
FHLBB's policy on Bank directors' fees and expenses remained in effect, 
as provided by the Financial Institutions Reform Recovery and 
Enforcement Act's (FIRREA) provision on the continuation of orders, 
resolutions, determinations and regulations of the FHLBB. See Pub. L. 
No. 101-73, section 401(h), 103 Stat. 183 (1989) (codified at 12 U.S.C. 
1437 note). The Policy is essentially identical to the FHLBB's 1986 
policy.
    The Bank Act currently vests in the Finance Board the 
responsibility to supervise the Bank System, to regulate it for 
financial safety and soundness, and to pass upon most matters of 
corporate governance of the Banks. A series of studies and reports 
mandated by the Housing and Community Development Act of 1992, Pub. L. 
No. 102-550, section 1393, 106 Stat. 3672 (1992), including a report 
prepared by the Finance Board in April 1993, concluded that the Finance 
Board's authority over Bank corporate governance is in conflict with 
the agency's primary role as Bank system regulator. Since the 
completion of these studies, the Finance Board has been working closely 
with the Banks to implement regulatory and policy changes designed to 
devolve to the Banks the authority to set policy on matters of 
corporate governance, to the extent permissible under the Bank Act. In 
conjunction with these efforts, two separate task forces composed of 
senior officials of the Banks have recommended that the Finance Board 
rescind the Policy and establish broad guidelines within which the 
Banks' boards of directors can set the structure and limits for the 
compensation of their directors.
    In conformity with these recommendations and as part of its policy 
to devolve matters of corporate governance to the Banks, the Finance 
Board published in the Federal Register on April 22, 1996 a proposal to 
replace its existing regulation on Bank directors' compensation and the 
Policy adopted thereunder with a comprehensive regulation on 
Compensation and Expenses of Bank Directors, intended to allow the 
Banks greater freedom to develop and implement their own directors' 
compensation plans, while establishing clear and enforceable regulatory 
limitations. See 61 FR 17603 (1996). The Finance Board received six 
comment letters, all of which were from FHLBanks. While some commenters 
objected to particular provisions of the proposed rule, all believed 
that it was an improvement over the existing regulatory/policy scheme.

II. Analysis of the Final Rule and Public Comments on the Proposed 
Rule

    The final rule provides for the addition of a new section 932.26 to 
the Finance Board's regulations and for the revision of sections 932.27 
and 941.7(f)(2) thereof to contain entirely new text.
    Section 932.26 is adopted as proposed. This section codifies a 
provision of the Policy requiring that meetings of a Bank's board of 
directors and its committees usually should be held within the district 
served by that Bank and prohibiting Banks from holding any such 
meetings outside the borders of the United States. -
    Amended section 932.27, entitled ``Compensation and Expenses of 
Bank Directors,'' is intended to limit the total dollar pool available 
to each Bank to compensate its directors to an appropriate level, while 
providing the Banks with maximum flexibility to devise their own 
directors' compensation schemes within the dollar limit. The regulation 
is not designed to answer specific compensation issues; rather, it is 
intended to empower each Bank to exercise its reasonable discretion to 
decide how to compensate its directors, and thereby to allow many 
practices that are not explicitly authorized under the Policy, 
including, without limitation: the payment of retainer fees, the 
provision of non-cash benefits and the payment of meeting fees for 
participation in telephonic meetings.
    Paragraph (a) of new section 932.27 defines three terms--
``compensation,'' ``average compensation per director'' and ``maximum 
compensation.'' The latter definition did not appear in the proposed 
rule and was added for the reasons discussed below.
    Paragraph (b) of new section 932.27 is the operative provision with 
respect to the compensation of directors. It requires each Bank to 
adopt annually, by resolution of its board of directors, a written 
policy to provide for the payment of ``reasonable compensation'' to its 
directors for their work on Bank-related matters. In conjunction with 
the definition of ``Compensation'' contained in paragraph (a), 
paragraph (b) is intended to permit the Banks to remunerate their 
directors in a wide variety of fashions, including through the use of 
daily meeting fees, retainer fees, cash or non-cash fringe benefits, 
deferred payments, incentive payments, or combinations thereof. Because 
the timetable for transition from the Policy to the new regulatory 
scheme was unclear under the proposed rule, the final rule specifically 
provides that the Banks' policies on director compensation shall take 
effect beginning in 1997. Bank directors will continue to be 
compensated in the manner prescribed in the Policy until December 31, 
1996, at which time the Finance Board intends to rescind the Policy in 
its entirety.
    Under paragraph (b), which is otherwise identical to that set forth 
in the proposed rule, the text of each Bank's policy must detail the 
types of Bank-related meetings or other activities in which its 
directors are required or expected to participate and for which they 
may be compensated. In addition, the policy must explain fully the 
methodology for determining the amounts and the circumstances under 
which the Bank's directors may be paid, including, if applicable: 
setting forth rates of compensation for participation in Bank-related 
activities; setting forth any retainer fees payable to directors and 
the circumstances under which they may be paid; explaining the 
rationale for any graduated meeting or retainer fee scales; and 
detailing any non-cash fringe benefits to be provided to directors, 
including the approximate cash value thereof.
    Paragraph (c) of new section 932.27 sets forth the substantive 
limits on Bank directors' compensation that must be reflected in each 
Bank's policy on director compensation. The introductory text to 
paragraph (c)(1) provides for a $28,000 cap on each Bank's annual 
``average compensation per director'' (ACPD). ACPD is defined in 
paragraph (a) as the sum of the maximum compensation for all directors 
serving on a Bank's board of directors, divided by the total number of 
directors serving on that Bank's board. In turn, the term ``maximum 
compensation'' is defined in paragraph (a) as the maximum total 
compensation that would be paid to a director in a given year under the 
Bank's policy on director compensation if that director

[[Page 43153]]

attended all meetings and fulfilled all duties assigned to or otherwise 
expected of him or her for that year. The definition of ``maximum 
compensation'' has been added to the final rule and the term has been 
incorporated into the definition of ACPD, in part, to make clear that 
ACPD refers to the maximum amount of compensation that directors have 
the potential to earn if they fulfill all duties for which they may be 
compensated, including without limitation, attendance at meetings and 
service as board or committee chairs or vice-chairs.
    By capping the ACPD, new section 932.27 effectively limits the 
total pool of money available to each Bank to compensate its directors 
(to $28,000 times the total number of directors), but, because each 
Bank has a different number of directors, this has been expressed in 
terms of ``compensation per director'' instead of as a lump sum. 
Because the regulation caps only the average amount that may be paid to 
a Bank's directors, a Bank policy may be structured so that one or more 
directors could earn more than $28,000 in a year, as long as the 
average maximum compensation of all of the Bank's directors do not 
exceed that amount.
    Two of the commenters specifically opposed the inclusion in the 
regulation of any dollar cap on director compensation. One expressed a 
belief that placing an ``artificial limit'' on compensation will cause 
all Banks' compensation of directors to rise to the maximum level 
regardless of other relevant factors and both opined that each board 
should be free to set its own compensation levels based upon the 
services performed by each director and compensation practices at 
comparable institutions (taking into account the FHLBanks' status as 
government-sponsored enterprises), subject to regulatory parameters 
based on safety and soundness considerations.
    After considering the agency's statutory responsibility to 
``approve'' Bank directors' compensation, see 12 U.S.C. 1427(i), the 
Bank Act's requirement that such compensation be ``reasonable,'' see 
id., and the preference for providing a clear regulatory standard, the 
Finance Board has concluded that a dollar cap on compensation is 
necessary and appropriate. Specifically, the Finance Board has 
concluded that an ACPD cap of $28,000 is sufficient to allow the Banks 
to attract high quality individuals to serve on their boards of 
directors, yet is moderate enough, considering market rates, the Banks' 
GSE status and the general duties of Bank directors, to qualify as 
``reasonable compensation'' under the Bank Act.
    As provided in paragraph (c)(2) of new section 932.27, the cap on 
ACPD will increase automatically, beginning in 1998, to reflect the 
previous year's change in the Consumer Price Index (CPI). The proposed 
rule provided for the adjustment to occur beginning in 1997, but 
because the regulation was changed in the final rule to provide that 
the Banks' policies will take effect beginning in 1997 instead of 1996, 
the timetable for CPI adjustment was also moved back by one year.
    Paragraph (c)(1)(i) of new section 932.27 requires that, keeping 
within the stated cap on ACPD, each Bank's policy on director 
compensation should be designed such that, the actual compensation paid 
to each director in a given year reflects both the amount of time that 
the director has spent on Bank-related business and the level of 
responsibility the director has assumed with respect to his or her role 
on the Bank's board of directors during that year. This paragraph has 
been expanded in the final rule to make clear that each Bank's policy 
must in some way ensure that a director's failure to attend meetings or 
to fulfill other assigned duties has a tangible negative effect on the 
actual compensation paid to that director. Specifically, the 
requirement that a directors' annual compensation must reflect the 
amount of time spent on official Bank business is intended to ensure 
that Bank directors are being paid for meetings they actually attend 
and duties they actually perform for each Bank.
    As proposed, paragraph (c)(1)(ii) would have required each Bank to 
pay its Chair: (1) More than any other director and (2) at least 125 
percent of the Bank's ACPD. In the final rule, this provision has been 
modified slightly to require only that the ``maximum compensation'' 
that can be paid to the chair in a given year if he or she fulfills all 
of his or her duties--as opposed to the actual amount paid to the 
chair--conform to the requirements set forth in the paragraph. This 
change was made because, as noted by one commenter, under the proposed 
rule, compliance with the requirement that the chair earn at least 125 
percent of the ACPD for that Bank could have created an apparent 
conflict with paragraph (c)(1)(i) if a Bank's chair has unexpectedly 
low meeting attendance during a given year. The change is intended to 
clarify that each Bank's policy should be structured so that, assuming 
the chair fulfills all of his or her duties, he or she will be paid 
more than any other director and will earn at least 125 percent of the 
ACPD. If, in fact, the chair does not fulfill all of his or her duties 
in a given year and this causes him or her to receive less than another 
director or less than 125 percent of the ACPD, this would not result in 
a violation of the regulation.
    In the proposed rule, the Finance Board specifically requested 
comment on whether to include as part of the final regulation a 
provision under which a portion of each Bank's directors' annual 
compensation would be contingent upon that Bank's achievement of 
performance-related goals such as meeting particular earnings targets, 
achieving a satisfactory regulatory examination, or fulfilling the 
Bank's housing finance mission. Four of the commenters were opposed to 
including a requirement that a portion of a FHLBank's directors' 
compensation be incentive-based. Several commenters noted that 
incentive payments to board directors are traditionally made in the 
form of corporate stock and cited the prohibition against individual 
ownership of Bank stock, as well as the stock's non-equity nature, as 
reasons not to include an incentive component. In addition, concern 
that such a requirement would cause undue focus on short-term 
performance and the limited role in corporate governance played by the 
Bank boards were given as reasons not to include an incentive 
requirement in the regulation. One commenter supported the inclusion of 
a performance-based compensation requirement in the regulation only if 
it were designed to allow directors to receive compensation in addition 
to that provided for in the proposed regulation if performance goals 
are reached.
    After reviewing the comment letters and considering various methods 
by which an incentive component could be included in the regulation, 
the Finance Board has concluded that, given the agency's long-term 
policy to devolve management authority to the Banks, as well as the 
ambiguous connection between the actions of individual directors and 
the achievement of annual performance targets by the Bank, a mandatory 
incentive requirement would be of dubious value and would undermine the 
intended devolutionary effect of the regulation. Therefore, such a 
requirement has not been included in the final rule. The regulation 
would allow a Bank to include an incentive component of its own 
creation in its compensation policy, if it so chooses, so long as the 
policy conforms to the requirements set forth in paragraph (c) of the 
regulation.
    Paragraph (d) of new section 932.27 allows each Bank to pay its 
directors such Bank-related travel, subsistence

[[Page 43154]]

and other related expenses as are payable to senior officers of the 
Bank under the Bank's travel policy, except for gift or entertainment 
expenses. This provision, which is adopted as proposed, is intended to 
tie payment of directors' expenses to existing Bank policies which are 
subject to regulatory examination and which may be amended at the 
discretion of the Bank. Unlike the compensation provisions, which will 
not take effect until January 1, 1997, because the Banks already have 
established executive travel policies in place, the expenses provision 
may be implemented by the Banks as of the effective date of the rule, 
at which time the Finance Board intends to rescind the portion of the 
Policy governing director expenses.
    Subsection (e) of new section 932.27, which did not appear in the 
proposed rule, requires each Bank to publish as separate items in its 
annual report: the total compensation paid to all of its directors, 
collectively, in the previous year; the total expenses paid to all its 
directors, collectively, in the previous year; and a summary of its 
policy on director compensation. In the proposed rule, the Finance 
Board requested comment on whether the new regulation should include a 
requirement that the Banks' policies on director compensation be made 
available to the public through either the Finance Board or the 
FHLBanks and, if so, should the policies be disseminated as a matter of 
course, or merely made available upon request. Three commenters 
specifically objected to the publication or distribution of director 
compensation polices as a matter of course, while the remaining three 
suggested that the regulation require that disclosures be made to the 
shareholders through Bank annual reports or other similar documents. 
However, two of the commenters made the latter suggestion in connection 
with their respective suggestions that the final regulation not include 
any kind of dollar limit on directors' compensation. -
    After considering the comment letters received, the greater 
autonomy that the Banks will have to set compensation levels under the 
new regulation and the public purpose that these government-sponsored 
enterprises were created by statute to carry out, the Finance Board has 
determined that it is appropriate to require the Banks to disclose the 
above-described summary information to their member institutions and 
the public. Accordingly, paragraph (e) is included in the final rule. -
    Finally, a new provision has been added to the final rule that 
amends section 941.7(f)(2) of the Finance Board's regulations. The 
existing regulatory provision requires that the OF pay its private 
citizen board member compensation and expenses in accordance with the 
Policy. However, because the Policy will be rescinded in its entirety 
at the end of 1996, this provision is being amended to require that the 
OF pay its private citizen board member compensation and expenses under 
a policy conforming to the guidelines of new section 932.27. New 
section 941.7(f)(2) provides for some minor modifications to section 
932.27 for purposes of the cross-reference to account for the fact that 
the provision applies to only one OF director, as opposed to an entire 
board. The Finance Board considered including in the final rule an 
entirely separate compensation provision for the OF, but decided simply 
to cross-reference new section 932.27 pending a more comprehensive 
review of the structure of the OF board of directors.

III. Regulatory Flexibility Act -

    The 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 5 U.S.C. 601(6). Therefore, in accordance with 5 
U.S.C. 605(b), the Finance Board hereby certifies that this 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, Reporting and 
recordkeeping requirements.

12 CFR Part 941

    Organization and functions (Government agencies).

    -Accordingly, chapter IX, title 12, Code of Federal Regulations, is 
hereby amended as follows:

PART 932--ORGANIZATION OF THE BANKS -

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

    -Authority: 12 U.S.C. 1442a, 1422b, 1426, 1427, 1464; 18 U.S.C. 
207; 42 U.S.C. 8101 et seq.

     -2. Section 932.26 is added to read as follows:


Sec. 932.26  Site of board of directors and committee meetings.

    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. -
    3. Section 932.27 is revised to read as follows:


Sec. 932.27  Compensation and expenses of bank directors.

    (a) Definitions. As used in this section:
    (1) 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, retainer fees, daily meeting fees, incentive payments and 
fringe benefits.
    (2) Maximum compensation means the maximum total compensation that 
would be paid to a director in a given year under the Bank's policy on 
director compensation if that director attended all meetings and 
fulfilled all duties assigned to or otherwise expected of him or her 
for that year.
    (3) Average compensation per director (ACPD) means the sum of the 
maximum compensation for all directors serving on a Bank's board of 
directors, divided by the total number of directors designated by the 
Federal Housing Finance Board to serve on the Bank's board for that 
year.
    (b) Annual compensation. For 1997 and each subsequent year, each 
Bank's board of directors shall adopt annually 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, 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) The annual ACPD for each Bank shall not exceed the amount 
calculated in accordance with paragraph (c)(2) of this section. Within 
this limit:
    (i) The total actual compensation received by each director in a 
year shall reflect both the amount of time spent on official Bank 
business and the level of

[[Page 43155]]

responsibility assumed by that director, such that greater or lesser 
attendance at board and committee meetings and greater or lesser 
responsibility assumed by a director during a given year will be 
reflected in the actual compensation received by the director for that 
year; and
    (ii) The maximum compensation for the chair of each Bank's board of 
directors in a given year shall not be equaled or exceeded by the 
maximum compensation of any other director for that year and shall not 
be less than 125 percent of the Bank's ACPD for that year.
    (2) The limit on ACPD for each Bank shall be $28,000 for 1997. For 
1998 and subsequent years, the limit on ACPD shall be adjusted annually 
to reflect the preceding year's change in the Consumer Price Index 
(CPI) for all urban consumers, as published by the Bureau of Labor 
Statistics. Each year, as soon as practicable after the publication of 
the previous year's CPI, the Board shall publish notice, by Federal 
Register, distribution of a memorandum, or otherwise, of the CPI-
adjusted limit on ACPD.
    (d) Expenses. Each Bank may pay its directors for such necessary 
and reasonable travel, subsistence and other related expenses incurred 
in connection with the performance of their official duties as are 
payable to senior officers of the Bank under the Bank's travel policy, 
except that directors may not be paid for gift or entertainment 
expenses.
    (e) Disclosure. Each Bank shall, in its annual report:
    (1) State the sum of the total actual compensation paid to its 
directors in that year;
    (2) State the sum of the total actual expenses paid to its 
directors in that year; and
    (3) Summarize its policy on director compensation.

PART 941--OPERATIONS OF THE OFFICE OF FINANCE -

    1. The authority for part 941 is revised to read as follows:

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

    -2. Section 941.7(f)(2) is revised to read as follows:


Sec. 941.7  Office of Finance Board of Directors.

* * * * *
    (f) * * *
    (2) Private Citizen member. The Office of Finance shall pay 
compensation and expenses to the Private Citizen member of the OF board 
of directors in accordance with the requirements for payment of 
compensation and expenses to Bank directors set forth in section 932.27 
of this chapter, except that, for these purposes:
    (i) The Office of Finance policy on director compensation must be 
approved by the board of directors of the Finance Board;
    (ii) Section 932.27(a)(3) and (c)(1)(ii) of this chapter shall not 
apply; and
    (iii) The terms ``average compensation per director'' and ``ACPD,'' 
as used in Sec. 932.27 of this chapter, shall mean ``maximum 
compensation of the Private Citizen member''.

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

    Dated: July 25, 1996.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-21187 Filed 8-20-96; 8:45 am]
BILLING CODE 6725-01-U