[Federal Register Volume 62, Number 1 (Thursday, January 2, 1997)]
[Rules and Regulations]
[Pages 4-10]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-33329]


=======================================================================
-----------------------------------------------------------------------

FEDERAL HOUSING FINANCE BOARD

12 CFR Part 932

[No. 96-97]


Selection and Compensation of Federal Home Loan Bank Employees

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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

SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
the provisions of its regulations governing the selection and 
compensation of employees of the Federal Home Loan Banks (Banks) in 
order to streamline regulatory requirements and transfer specific 
functions currently performed by the Finance Board to the board of 
directors of each Bank. The final rule requires a Bank to obtain prior 
Finance Board approval of the appointment of a new President, but 
permits a Bank to reappoint an incumbent President without prior 
Finance Board approval. The final rule also gives the Banks broad 
authority to set Bank Presidents' salaries within established caps and 
authorizes the Banks to make incentive payments to their Presidents 
based on each Bank's performance and on fulfillment of its mission. The 
devolution of authority to the Banks is consistent with the goals of 
the Regulatory Reinvention Initiative of the National Performance 
Review.

EFFECTIVE DATE: January 2, 1997.

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

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

A. Selection of Employees

    Section 12(a) of the Federal Home Loan Bank Act (Bank Act) provides 
that each Bank may select, employ, and fix the compensation of Bank 
employees, subject to the approval of the Finance Board. See 12 U.S.C. 
1432(a). Section 932.40 of the Finance Board's regulations, which 
governs the selection of Bank employees, provides that officers, legal 
counsel, and employees of a Bank shall be elected or appointed in 
accordance with the Bank's bylaws. See 12 CFR 932.40. Each Bank's 
bylaws are subject to the approval of the Finance Board. See 12 U.S.C. 
1432(a). Under each Bank's bylaws, a Bank elects or appoints its 
President subject to Finance Board approval.
    Section 932.40 also sets forth conflicts of interest prohibitions 
applicable to full-time officers or employees of a Bank, and to counsel 
retained by a Bank. See 12 CFR 932.40. These provisions generally 
prohibit a Bank employee from acting on behalf of a member or other 
institution insured by the former Federal Savings and Loan Insurance 
Corporation (FSLIC), except under specified circumstances and with the 
consent of the FSLIC. Existing Sec. 932.40 extends this prohibition to 
counsel and attorneys of any Bank, whether employed on a salary, fee, 
retainer, or other basis, unless the Finance Board consents to such 
representation. See id.

B. Compensation

1. Bank Presidents
    Under section 12(a) of the Bank Act, the compensation of all Bank 
employees is subject to Finance Board approval. See 12 U.S.C. 1432(a). 
However, under its existing regulation on Bank employee compensation, 
prior Finance Board approval is required only for compensation of a 
Bank's President. See 12 CFR 932.41(a). Section 932.41 of the Finance 
Board's existing compensation regulation requires the board of 
directors of each Bank annually to adopt and submit to the Finance 
Board for its

[[Page 5]]

approval an appropriate resolution showing the contemplated 
compensation of its President. See id.
    In setting the compensation of their Presidents, the Banks are 
governed by the Bank Presidents' Compensation Plan (Compensation Plan), 
adopted by the Finance Board on November 19, 1991, as amended from time 
to time. See Bd. Res. No. 91-565 (as amended). The Compensation Plan 
establishes base salary guidelines, merit increase (to base salary) 
guidelines, and criteria for incentive payments for Bank Presidents. 
The Compensation Plan requires each Bank annually to submit for Finance 
Board approval recommendations for merit increases to its President's 
base salary and proposed incentive payments.
2. Other Bank Employees
    Section 932.41(b) of the Finance Board's existing compensation 
regulation permits a Bank to fix the compensation of officers other 
than the President without prior Finance Board approval, provided that 
such compensation is within ranges established by the Finance Board and 
the total limits for such compensation in the Bank's approved budget. 
See 12 CFR 932.41(b). Each Bank may establish the amount and form of 
compensation for all other employees (including legal counsel) within 
the limits set forth in the Bank's approved budget. See id. Section 
932.41(b) also prohibits a Bank from paying a bonus to any director, 
officer, employee, or other person. See id.
    In Resolution No. 84-390, dated July 25, 1984, the Finance Board's 
predecessor agency, the Federal Home Loan Bank Board (FHLBB), 
established a cap on compensation of Bank employees other than the 
President, providing that the salary of the second-highest-paid Bank 
officer may not exceed 80 percent of the Bank President's salary. This 
resolution currently remains in effect. See 12 U.S.C. 1437 note.

II. Proposed Rulemaking

    On August 16, 1996, the Finance Board published for public comment 
a notice of proposed rulemaking, which proposed to amend Secs. 932.40 
and 932.41 of its regulations to clarify the scope of the Banks' 
discretion in selecting and fixing the compensation of Bank Presidents 
and other Bank employees. See 61 FR 42570 (Aug. 16, 1996) (proposed 
rule). The proposed rule also included amendments to Sec. 941.9 of the 
Finance Board's regulations to codify the Finance Board's existing 
practice regarding the annual appointment and compensation of the 
Director of the Office of Finance (OF) and other OF employees. See id. 
The proposed rule provided for a 60-day comment period.
    The Finance Board received letters from a total of 49 commenters, 
including all 12 Banks, a joint Bank committee on Bank Presidents' 
compensation, 32 Bank members, 2 not-for-profit housing organizations, 
one advocacy group, and one individual. The commenters generally 
supported the concept of transferring to the individual Banks more 
authority to determine the compensation of Bank employees and, in 
particular, the Bank Presidents. However, various commenters stated 
that the Banks should have more authority in this area than would be 
allowed under the proposed rule. Commenters also generally supported 
giving the Banks more control over the appointment of Bank Presidents 
than would be permitted under the proposed rule.
    A discussion of the relevant comments is included below in the 
Analysis of the Final Rule. Where no comments were received on a 
particular regulatory provision, or a provision was not considered 
controversial, and the Finance Board has determined to adopt the 
provision as proposed, the provision generally is not discussed in this 
preamble. The Finance Board is deferring action on the portions of the 
proposed rule pertaining to the selection and compensation of OF 
employees and benefits until a later date.

III. Analysis of the Final Rule

A. Selection of Employees

1. Bank Presidents
    Section 932.40(a) of the proposed rule codified the Finance Board's 
existing practice of approving the appointments of Bank Presidents for 
one-year terms. The preamble to the proposed rule interpreted the one-
year appointment requirement to prohibit a President from holding over 
upon expiration of his or her term of office, and to supersede the 
existing provisions in the Banks' by-laws allowing for the holdover of 
Bank Presidents.
    Twenty-two commenters opposed requiring Finance Board approval of 
the initial appointment and the reappointment of Bank Presidents. Many 
commenters believed that the Finance Board should rely on the boards of 
the Banks to appoint the Bank Presidents, given that the boards are 
duly elected by the members and appointed by the Finance Board, and the 
Banks are for-profit, privately capitalized institutions owned by their 
stockholders. According to some commenters, requiring Finance Board 
approval of reappointment also may discourage qualified candidates from 
seeking the Presidencies. Several commenters recommended that the 
Bank's boards be permitted to enter into multi-year employment 
contracts with their Presidents.
    Ten commenters opposed requiring Finance Board approval of the 
reappointment of Bank Presidents, but these commenters either supported 
or would not necessarily object to the Finance Board having a role in 
approving the initial appointment of Bank Presidents.
    While the Banks may be characterized as for-profit, privately 
capitalized institutions owned by their stockholders, the Banks exist 
primarily to carry out a public purpose: the promotion and expansion of 
housing finance. See 12 U.S.C. Sec. 1422a(a)(3)(B)(ii). Therefore, a 
Bank's President is charged with representing and furthering not only 
the interests of the Bank's stockholders but also the interests of the 
public. The Bank Act provides that the primary duty of the Finance 
Board is to ensure that the Banks operate in a financially safe and 
sound manner. See id. Sec. 1422a(a)(3)(A). The other statutory duties 
of the Finance Board are to: supervise the Banks; ensure that they 
carry out their housing finance mission; and ensure that they remain 
adequately capitalized and able to raise funds in the capital markets. 
See id. Sec. 1422a(a)(3)(B).
    The Finance Board believes that retaining approval authority over a 
Bank's selection of its highest officer is necessary to carry out the 
Finance Board's statutory duties. Therefore, Sec. 932.40(a) of the 
final rule requires a Bank to obtain prior Finance Board approval of 
the appointment of a new President. However, a Bank may reappoint an 
incumbent President without prior Finance Board approval. For purposes 
of clarity and completeness, Sec. 932.40(a) also restates the statutory 
requirements in sections 2B(a)(2) and 12(a) of the Bank Act providing, 
respectively, that: (1) a Bank President may be suspended or removed by 
the Finance Board for cause, which shall be communicated in writing to 
the President and the Bank, and (2) a Bank President serves at the 
pleasure of the Bank. See id. Secs. 1422b(a)(2), 1432(a).
    Twenty-four commenters opposed elimination of a Bank President's 
ability to holdover on the ground that, among other things, this may 
lead to a situation where a Bank is without leadership if the Finance 
Board fails to approve a new President. By requiring prior

[[Page 6]]

Finance Board approval only of new Bank Presidents, the final rule 
allows for the holdover of an incumbent Bank President.
2. Other Bank Employees
    Section 932.40(b) of the final rule adopts the language of the 
proposed rule providing that a Bank may appoint or elect officers other 
than the President and may hire other employees of the Bank without 
prior Finance Board approval.
3. Conflicts of Interests
    Proposed Sec. 932.40(c) updated the conflicts of interest 
provisions in existing Sec. 932.40 by eliminating references to the 
FSLIC, which was abolished by Congress in 1989. See id. Sec. 1437 note. 
The proposed rule retained, in substance, the existing requirement that 
a Bank employee shall not act in any capacity for certain specified 
institutions whose interests are likely to be in conflict with the 
interests of the Bank. Specifically, proposed Sec. 932.40(c) prohibited 
a Bank employee from being employed by, or acting in any other capacity 
for, a Bank member or an institution eligible to make application to 
become a Bank member. The final rule adopts proposed Sec. 932.40(c), 
without change.

B. Compensation of Bank Employees

1. Base Salaries
    a. Bank Presidents. The proposed rule permitted each Bank to 
establish the base salary of its President within specific ranges, 
based on the Bank's asset size, and to pay yearly merit increases, up 
to a maximum rate set by the Finance Board. The general consensus of 
the commenters was that the boards of directors of the Banks should be 
permitted to set compensation for all Bank employees, including the 
Presidents, provided such compensation is reasonable and comparable to 
what is being paid in the marketplace. Commenters generally opposed 
Finance Board control over the compensation of the Bank Presidents, 
except to the extent that it relates to safety and soundness of the 
Banks. Commenters made a variety of arguments in support of these 
positions, including: (1) The establishment of detailed requirements 
governing compensation for Bank Presidents is not necessary to ensure 
that the Banks operate safely and soundly; (2) a Bank's strategic 
advantage of being a regionally based entity able to experiment with 
new ways to meet local housing needs is hindered by nationally mandated 
compensation goals; (3) placing the compensation issue in the hands of 
a regulator is contrary to the intent and mission of the Banks, which 
are for-profit, shareholder-owned enterprises, and creates a conflict 
of interest for the Finance Board in its capacity as a regulator; and 
(4) codifying the Bank Presidents' salaries in regulation politicizes 
the compensation process and treats the Presidents like public, rather 
than private sector employees. Several commenters recommended that the 
Finance Board adopt the approach of other federal bank regulatory 
agencies that limit compensation only for executives of institutions 
with safety and soundness problems.
    The Finance Board finds merit in the ideas that detailed regulatory 
requirements for the compensation of Bank Presidents do not necessarily 
further the goal of ensuring the safe and sound operation of the Banks, 
and that a Bank should have flexibility to establish compensation goals 
that encourage the Bank to address local housing needs. The Finance 
Board also agrees that management functions, such as the establishment 
of employee compensation, should be in the hands of the Banks to the 
maximum extent feasible.
    However, the Finance Board disagrees with the idea that it should 
approach the regulation of Bank employee compensation in the same 
manner as regulators of private entities, such as commercial banks and 
savings associations, which are not government chartered corporations. 
Although the primary duty of the Finance Board is to ensure the 
financial safety and soundness of the Banks, the Finance Board also has 
a statutory mandate to ensure that the Banks carry out their 
programmatic purposes in the area of housing finance. See id. 
Sec. 1422a(a)(3)(A), (B)(ii). Unlike the institutions regulated by 
other federal bank regulators, the Banks exist primarily to serve the 
public interest. See id. Sec. 1422a(a)(3)(B)(ii). Consequently, the 
Finance Board has an interest in exercising some control over the 
compensation of Bank Presidents, not only to ensure the safety and 
soundness of the Banks, but also to ensure that the programmatic goals 
of the Banks are met.
    The Finance Board currently determines the salary ranges for Bank 
Presidents using a comparability model based on the salaries of the 
chief operating officers (COO) of private financial subsidiaries of 
similar asset size and geographic location, offset by staff size. The 
preamble to the proposed rule specifically requested comment on the 
appropriate universe of entities that should be used in establishing 
the comparability of the Bank Presidents' salaries. For instance, it 
has been suggested that the salaries of the Bank Presidents should be 
comparable to the salaries of the Presidents (or their equivalent) of 
the Federal Reserve Banks, other segments of the financial services 
industry, or other federally or state-created entities with similar 
size, functions, and mission. The Bank Presidents' Compensation 
Committee (Compensation Committee), which is comprised of persons 
appointed from each of the 12 Banks, retained Hewitt Associates, LLC, 
to review the proposed rule. The Hewitt Associates study (Hewitt study) 
concluded, among other things, that the banking industry is the 
appropriate comparator group for the Bank Presidents in setting 
compensation, and that the chief executive officer (CEO) of a bank 
subsidiary is a more appropriate match than a COO of a subsidiary.
    Most of the Banks' comments on this issue are in accord with the 
conclusions of the Hewitt study. Several Banks and the Hewitt study 
concluded that an offset based on asset base and staff size should be 
used in the development of compensation levels. The two Bank members 
that addressed this issue believed that Bank Presidents' compensation 
should be comparable with the salaries of CEOs of organizations of 
similar size, scope, and risk.
    In light of the public purpose of the Banks, the issue for the 
Finance Board in determining comparability of compensation is not how 
the Bank Presidents are different from comparable positions in the 
private sector, but how the Bank Presidents are different from 
comparable positions with governmental or quasi-governmental entities.
    The Hewitt study concluded that the Federal Reserve Banks (FRBs) 
are not an appropriate comparator group for the Banks because the Banks 
are profit-driven in that they are owned by their members, who are 
entitled to dividends. Further, the Banks operate in a competitive 
environment and must market their services to members and prospective 
customers. In addition, the Banks make statutorily mandated annual 
payments of $300 million to the Resolution Funding Corporation, see 12 
U.S.C. 1441b, and at least $100 million to the Affordable Housing 
Program, see id. Sec. 1430(j).
    In contrast to the Banks, the FRBs' primary mission is 
governmental, and the FRBs do not manage an investment portfolio. One 
Bank commenter stated that the FRBs are not appropriate

[[Page 7]]

comparators for the Banks on this issue because: (1) they carry out 
governmental monetary and regulatory functions; (2) their boards are 
advisory in nature; (3) their stock pays a fixed return; and (4) their 
profits are returned to the Department of the Treasury.
    In recognition of the expressed arguments against detailed 
regulatory requirements for Bank Presidents' compensation, the final 
rule does not adopt those provisions in the proposed rule prescribing 
salary ranges and merit increase rates. The final rule provides for the 
Finance Board, on an annual basis, to determine and publish by November 
30 individual caps on the base salaries payable to each of the Banks' 
Presidents for the subsequent calendar year. The base salary cap for 
each Bank President shall be based on the average base salary of a CEO 
of a subsidiary financial institution in the Bank's primary 
metropolitan statistical area with an asset size comparable to that of 
the Bank, as of June of the prior year, reduced by five percent and 
rounded to the nearest $5,000. The five percent reduction is intended 
to reflect the public purpose of the Banks. Each Bank shall establish, 
on an annual basis, a reasonable base salary for its President, not to 
exceed 100 percent of the applicable base salary cap published by the 
Finance Board. However, those Bank Presidents whose currently approved 
and recommended base salaries for 1997 exceed the 1997 cap will not 
experience any reduction in base salary. These Presidents' base 
salaries will be capped at their current levels until the annual cap 
set by the Finance Board for the Bank exceeds the 1997 base salary 
currently approved and recommended for the President by the Bank's 
board of directors. By January 2 of each year, a Bank must report to 
the Finance Board the approved base salary of its President for that 
year.
    b. Other Bank Employees. The proposed rule permitted each Bank to 
establish base salaries for employees other than the President without 
prior Finance Board approval, provided such salaries are reasonable and 
comparable with the base salaries of employees of the other Banks and 
other similar businesses, such as similar financial institutions, with 
similar duties and responsibilities. Section 932.41(b)(2) adopts the 
provisions of the proposed rule, with the additional requirement that 
no employee's base salary shall exceed the base salary of the Bank 
President. This is intended to ensure the effectiveness of the cap on 
the Bank President's salary.
2. Incentive Payments
    a. Bank Presidents. The proposed rule required incentive payments 
to Bank Presidents to be based solely on the performance of the Bank, 
rather than on the President's individual performance. The proposed 
rule established specific criteria on which a Bank President's 
incentive payment is to be based, and required the boards of directors 
of the Banks to establish numerical performance targets and measures to 
be used in determining a Bank President's incentive payment. 
Specifically, the proposed rule provided that at least 20 percent of 
any incentive payment for a Bank President must be based on certain 
specified criteria illustrating the Bank's emphasis on the portion of 
its mission involved with support for member credit activities; at 
least 30 percent of any incentive payment must be based on certain 
specified criteria illustrating the Bank's emphasis on additional 
support for housing and community development finance; and the 
remaining portion of the incentive payment must be based on the Bank's 
performance in achieving other objectives established by the Bank's 
board of directors.
    The proposed rule provided that performance targets must be set at 
such a level as to show an improvement in the Bank's performance over 
the prior year or an extraordinary achievement in attaining the 
designated target. In order to obtain the maximum incentive payment, 
the proposed rule required a Bank President to achieve 150 percent of 
the performance target for a given incentive criterion.
    Nine Banks specifically opposed the setting of standard criteria 
for incentive payments throughout the Bank System. Commenters 
recommended that each Bank's board of directors be permitted to 
establish incentive payment criteria in order to ensure a complete 
reflection of the issues the boards believe are critical. Several Banks 
commented that there is no logical relationship between meeting 150 
percent of a performance target and an outstanding level of 
performance.
    The final rule gives the Banks more flexibility to determine the 
basis for incentive payments to Bank Presidents, but retains the 
requirements that such payments be based solely on the performance of 
the Bank and that they be based in part on the Bank's measured progress 
in the achievement of its mission.
    Section 932.41(c)(2) of the final rule provides that at least fifty 
percent of the Bank President's incentive payment must be based on the 
extent to which the Bank meets reasonable numerical performance targets 
established by the Bank's board of directors related to the Bank's 
achievement of its housing finance mission, which shall include 
substantial consideration of growth in innovative products directed at 
unmet credit needs, growth in pre-committed Community Investment 
Program (CIP) advances, growth in non-advance credit support and risk 
management products for members, as well as growth in advances, 
including long-term advances. Pre-committed CIP advances means CIP 
advances provided in support of new CIP lending activity, not 
refinancings of existing CIP-eligible loans.
    The remaining portion of the incentive payment must be based on the 
extent to which the Bank meets reasonable numerical performance targets 
related to the achievement of goals established by the Bank's board of 
directors, in its discretion. By January 31 of each year, the board of 
directors of each Bank that intends to make any incentive payment to 
its President for such year shall adopt a resolution establishing the 
performance measures and targets on which such incentive payment will 
be based. Any incentive payment made to a Bank President shall be based 
solely upon the extent to which a Bank achieves the performance targets 
established by the board of directors.
    The preamble to the proposed rule requested comments on the 
appropriateness and the reasons for limiting a Bank President's total 
incentive payment to a maximum percentage of base salary, at some point 
in the range between zero and 37.5 percent. Under the existing Bank 
President's Compensation Plan, prior to the most recent amendment, the 
maximum incentive payment payable to a Bank President was 37.5 percent 
of base salary. The Compensation Plan was amended on July 25, 1996, to 
limit an incentive payment to 31.25 percent of base salary. See Bd. 
Res. 96-54 (July 25, 1996).
    Eight Banks opposed the 31.25 percent and 37.5 percent limits on 
incentive payments as arbitrary and not reflective of marketplace 
conditions. Several Banks commented that their boards should be 
permitted to set limits on incentive compensation based on the 
industry-wide average. Commenters also stated that the Banks should be 
permitted to determine the appropriate mix between base salary and 
incentive compensation for their employees. The final rule attempts to 
provide the added flexibility recommended by commenters.

[[Page 8]]

    The final rule provides that a Bank may establish an incentive 
payment program or programs for its employees. The maximum incentive 
payment to a Bank President may not exceed the difference between that 
President's base annual salary approved by the Bank and 125 percent of 
the annual base salary cap, as published by the Finance Board. The 
effect of this provision is to limit a Bank President's total cash 
compensation payable in salary and incentive compensation to 125 
percent of the amount of the base salary cap established by the Finance 
Board for that Bank.
    The proposed rule prohibited a Bank from making any incentive 
payment to its President if the most recent examination of the Bank by 
the Finance Board identified an unsafe or unsound practice or condition 
with regard to the Bank. The Finance Board specifically requested 
comment on whether there are other events or conditions that should 
result in a prohibition on incentive payments to Bank Presidents.
    Several Banks opposed the prohibition on incentive payments based 
on examination findings because such a practice would make the 
examination process more adversarial and potentially could deny a 
President an incentive payment based on an examination finding that may 
be reversed upon appeal. One Bank and the Compensation Committee 
recommended clarifying that if an examination finding of an unsafe or 
unsound practice or condition is subsequently resolved in favor of the 
Bank, the Bank's board will be allowed to pay a Bank President an 
incentive payment retroactively. The final rule makes this 
clarification.
    The Finance Board wishes to make clear that the proposed rule does 
not require a Bank to make incentive payments, but if a Bank chooses to 
make such payments, it must meet the requirements of Sec. 932.41(c).
    b. Other Bank Employees. The final rule adopts the provisions of 
the proposed rule authorizing the Banks to make incentive payments to 
employees other than the Bank Presidents that are reasonable and 
comparable with incentive payments made to employees of the other Banks 
and other similar businesses (including financial institutions) with 
similar duties and responsibilities. The final rule also provides that 
incentive payments for employees other than the Bank President shall be 
based on the extent to which an employee meets objective performance 
targets related to performance criteria established by the Bank's board 
of directors under the Bank's incentive compensation program or 
programs. The final rule limits the incentive payment opportunities for 
employees other than the President such that the total incentive 
payment opportunity, expressed as a percentage of base salary, for an 
employee other than the Bank President shall not exceed the total 
incentive payment opportunity, expressed as a percentage of base 
salary, allowable for the Bank President.
3. Benefits
    The proposed rule authorized the Banks to establish certain kinds 
of benefits plans for their employees and to provide benefits pursuant 
to such plans without prior Finance Board approval. The Finance Board 
is deferring action on the portions of the proposed rule governing 
benefits until a later date.
4. Severance Payment Plans
    The proposed rule authorized the Banks to establish 
nondiscriminatory severance plans that provide benefits upon 
involuntary termination other than for cause, voluntary resignation, or 
early retirement, provided that total benefits paid do not exceed one 
year of employee base compensation.
    Nine Banks believed that the Banks should be permitted to set their 
own severance policies, without the limitation that severance payments 
not exceed 12 months of base compensation. Commenters suggested that 
severance payments to employees who are discharged for cause may be 
warranted in some circumstances, and that the ``for cause'' exception 
could result in litigation over whether a Bank had cause to terminate 
an employee. One Bank objected to the denying severance to an employee 
in the case of early retirement.
    The final rule retains the 12-month rule as a reasonable limitation 
on severance payments. In addition, the restriction on severance 
payments to employees terminated for cause is removed. The final rule 
provides for severance payments to be made in cases of involuntary 
termination. Thus, the final rule continues the restriction on 
severance payments for early retirees on the ground that severance 
payment plans are intended to provide for income replacement in the 
event of involuntary termination.
5. Change-of-Control Agreements
    The Finance Board requested comments on whether the Banks should be 
permitted to enter into change-of-control arrangements with certain 
senior officers. Change-of-control agreements, so-called ``golden 
parachutes,'' typically are entered into with senior management and 
provide for guaranteed, and often enhanced, severance in the event of 
termination of employment following some period after a change of 
control.
    All 12 Banks believed change-of-control agreements are important to 
maintaining the safety and soundness of a Bank in cases where merger or 
consolidation is imminent, and that the Banks' boards should be 
permitted to enter into and determine the terms of change-of-control 
agreements with Bank officers.
    While the Finance Board is not opposed to the use of change-of-
control agreements in the appropriate situation, the Finance Board is 
not authorizing the Banks to have such agreements with their employees 
at this time. The Finance Board will take into consideration the need 
for such agreements should events arise that would make change-of-
control agreements relevant.

IV. Effective Date

    The Finance Board has approved this final rule to become effective 
immediately upon publication, on the ground that, as described above, 
the final rule relieves restrictions placed on the Banks by the 
existing provisions of Secs. 932.40 and 932.41 of its regulations. 
Therefore, the thirty-day delay in the effective date that otherwise 
would be required by section 552 of the Administrative Procedures Act 
is not applicable to this final rule. See 5 U.S.C. 553(d)(1).

V. Regulatory Flexibility Act

    The final rule applies only to the 12 Banks, which do not come 
within the meaning of ``small entities,'' as defined by the Regulatory 
Flexibility Act (RFA). 5 U.S.C. 601. Therefore, in accordance with the 
RFA, the Finance Board hereby certifies that final rule will not have a 
significant economic impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 932

    Conflict of interests, Federal home loan banks.
    Accordingly, chapter IX, title 12, subchapter B, Code of Federal 
Regulations, is hereby amended as follows:

SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM

PART 932--ORGANIZATION OF THE BANKS

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


[[Page 9]]


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

    2. Section 932.40 is revised to read as follows:


Sec. 932.40  Selection.

    (a) Bank Presidents. Each Bank may appoint a President, subject to 
the following limitations:
    (1) No appointment of a new Bank President shall be effective until 
approved by the Finance Board;
    (2) A President shall serve at the pleasure of the Bank; and
    (3) A President may be suspended or removed by the Finance Board 
for cause, which shall be communicated in writing to the President and 
the Bank.
    (b) Bank employees other than the President. Each Bank may appoint 
or elect officers other than the President and may hire other employees 
of the Bank without prior Finance Board approval.
    (c) Prohibition on employment contracts. A Bank shall not enter 
into an employment contract with an employee.
    (d) Conflicts of interest. A Bank employee shall not also be 
employed by, or otherwise act in any capacity for, a member or an 
institution eligible to make application to become a member.
    3. Section 932.41 is revised to read as follows:


Sec. 932.41  Compensation.

    (a) Definitions. The following definitions apply for purposes of 
this section:
    Bonus means a payment to an employee, other than base salary and 
benefits, that is not based on performance.
    Incentive payment means a direct or indirect transfer of funds by a 
Bank to a Bank employee, in addition to base salary, based on the 
employee's on-the-job performance.
    Nondiscriminatory means that the plan, contract or arrangement in 
question applies to all employees of a Bank who meet reasonable and 
customary eligibility requirements applicable to all employees, such as 
minimum length of service requirements. A nondiscriminatory plan, 
contract, or arrangement may provide different benefits based only on 
objective criteria such as base salary, total compensation, length of 
service, job grade or classification, which are applied on a 
proportionate basis.
    Payment. (1) the term payment means:
    (i) Any direct or indirect transfer of any funds or any asset;
    (ii) Any forgiveness of any debt or other obligation; and
    (iii) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of, or arrangement for, any letter 
of credit or other instrument for the purpose of making, or pursuant to 
any agreement to make, any payment on or after the date on which such 
funds or assets are segregated, or at the time of or after such trust 
is established or letter of credit or other instrument is made 
available, without regard to whether the obligation to make such 
payment is contingent on:
    (A) The determination, after such date, of the liability for the 
payment of such amount; or
    (B) The liquidation, after such date, of the amount of such 
payment.
    (2) The term payment does not mean:
    (i) Reimbursement of an employee by the Bank for necessary and 
customary expenses incurred by the employee in the scope of his or her 
employment while carrying out the business of the Bank; or
    (ii) Benefits.
    Severance pay plan means a severance pay plan or arrangement as 
that term is defined in the Employee Retirement Income Security Act of 
1974 (as amended) (29 U.S.C. 1002(1)) (ERISA) and regulations 
thereunder which is nondiscriminatory and which provides for payment of 
severance benefits to all eligible employees upon involuntary 
termination, provided that no employee shall receive any such payment 
which exceeds the base compensation paid to such employee during the 
twelve (12) months immediately preceding termination of employment.
    (b) Base salaries of Bank employees.--(1) Bank President. (i) The 
Finance Board annually will determine and publish by November 30 caps 
on the base salary paid to the Bank President for the subsequent 
calendar year for each of the 12 Banks.
    (ii) The base salary cap for each Bank shall be based on the 
average base salary of a chief executive officer of a subsidiary 
financial institution in the Bank's primary metropolitan statistical 
area with an asset size comparable to that of the Bank, as of June of 
the prior year, reduced by five percent and rounded to the nearest 
$5,000.
    (iii) Each Bank shall establish, on an annual basis, a reasonable 
base salary for its President, not to exceed 100 percent of the 
applicable base salary cap published by the Finance Board, except that 
for a Bank President whose approved base salary for the calendar year 
1997 exceeds the cap published by the Finance Board for 1997, the Bank 
shall establish, on an annual basis, a reasonable base salary not 
exceeding the greater of the Bank President's approved base salary for 
the calendar year 1997 or the base salary cap published by the Finance 
Board for the year.
    (iv) By January 31 of each year, a Bank must report to the Finance 
Board the approved base salary of its President for that year.
    (2) Other Bank employees. Each Bank shall establish base salaries 
for employees other than the President that are reasonable and 
comparable with the base salaries of employees of the other Banks and 
other similar businesses (including financial institutions) with 
similar duties and responsibilities, provided that no employee's base 
salary shall exceed the base salary of the Bank President.
    (3) Documentation. Each Bank shall maintain documentation 
supporting the reasonableness and comparability of their employees' 
base salaries.
    (c) Incentive payments for Bank employees.--(1) In general. A Bank 
may establish an incentive payment program or programs for its 
employees.
    (2) Bank President. (i) The maximum incentive payment to a Bank 
President may not exceed the difference between that President's base 
annual salary approved by the Bank and 125 percent of the annual base 
salary cap, as published by the Finance Board.
    (ii) At least fifty percent of the Bank President's incentive 
payment shall be based on the extent to which the Bank meets reasonable 
numerical performance targets established by the Bank's board of 
directors related to the Bank's achievement of its housing finance 
mission, which shall include substantial consideration of growth in 
innovative products directed at unmet credit needs, growth in pre-
committed Community Investment Program advances, growth in non-advance 
credit support and risk management products for members, as well as 
growth in advances, including long-term advances. The remaining portion 
of the Bank President's incentive payment shall be based on the extent 
to which the Bank meets reasonable numerical performance targets 
established by the Bank's board of directors related to achievement of 
goals established by the board of directors, in its discretion.
    (iii) Any incentive payment made to a Bank President shall be based 
solely upon the extent to which a Bank achieves the performance targets 
established by the board of directors.
    (iv) By January 31 of each year, the board of directors of each 
Bank that intends to make any incentive payment to its President for 
such year shall adopt a resolution establishing the performance 
measures and targets on which such incentive payment will be based.

[[Page 10]]

    (v) By March 1 of each year, the board of directors of each Bank 
making any incentive payment to its President for the prior year shall 
adopt and submit to the Finance Board a resolution showing the results 
for the individual performance measures and the amount of the incentive 
payment to the Bank President for the prior year.
    (vi) A Bank shall not make any incentive payment to its President 
if the most recent examination of the Bank by the Finance Board 
identified an unsafe or unsound practice or condition with regard to 
the Bank, provided that if the finding of an unsafe or unsound practice 
or condition subsequently is resolved in favor of the Bank by the 
Finance Board, the Bank may pay its President the incentive payment 
that he or she otherwise would have received.
    (3) Incentive payments for other Bank employees. (i) Each Bank may 
make incentive payments to employees other than the President, provided 
that such incentive payments are reasonable and comparable with 
incentive payments made to employees of the other Banks and other 
similar businesses (including financial institutions) with similar 
duties and responsibilities. Each Bank shall maintain documentation 
supporting the reasonableness and comparability of their employees' 
incentive payments.
    (ii) The total incentive payment opportunity, expressed as a 
percentage of base salary, for an employee other than the Bank 
President shall not exceed the total incentive payment opportunity, 
expressed as a percentage of base salary, allowable for the Bank 
President.
    (iii) An incentive payment for an employee other than the Bank 
President shall be based on the extent to which the employee meets 
objective performance targets related to performance criteria 
established by the Bank's board of directors under the Bank's incentive 
compensation program or programs.
    (d) Severance plans. A Bank may make payments in the nature of 
severance to its President and to other Bank employees only pursuant to 
a severance pay plan.
    (e) General limits on payments. (1) No Bank shall make any payment 
to a Bank employee, except as provided in this section.
    (2) The total amount of base salaries, incentive payments, and 
benefits paid to Bank employees shall be within the limit set forth in 
the Bank's approved budget. The board of directors of each Bank shall 
review annually the compensation for its employees, including 
appropriate documentation, prior to approving the Bank's annual budget.
    (f) Prohibition on bonuses. A Bank shall not pay any employee or 
other person a bonus.
    (g) Determination of employee status. A Bank shall not treat an 
employee as an independent contractor in order to avoid complying with 
the requirements of this section.

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

    Dated: December 20, 1996.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-33329 Filed 12-31-96; 8:45 am]
BILLING CODE 6725-01-U