[Federal Register Volume 63, Number 108 (Friday, June 5, 1998)]
[Rules and Regulations]
[Pages 30584-30587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14970]



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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 932

[No. 98-24]
RIN 3069-AA76


Compensation and Conflicts-of-Interest Rules for Federal Home 
Loan Bank Employees

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is issuing a 
final rule amending its regulation on compensation of Federal Home Loan 
Bank (Bank) employees (Compensation regulation) and its regulation 
governing conflicts of interest of Bank employees (Conflicts 
regulation). The final rule makes two specific changes to the existing 
Compensation regulation to address issues that have arisen since the 
regulation was last revised in January of 1997. First, the final rule 
eliminates the existing limits on the base salaries and incentive 
payment opportunities of a Bank's employees other than the President, 
and establishes an overall limit on cash compensation for such 
employees equal to 125 percent of the base salary cap established by 
the Finance Board for the Bank's President. Second, the final rule 
eliminates unnecessary regulatory requirements regarding the payment of 
bonuses to Bank employees. The final rule amends the Conflicts 
regulation by adding an exception for non-exempt hourly Bank employees.

DATES: The final rule is effective on June 5, 1998.

FOR FURTHER INFORMATION CONTACT: Ellen Hancock, Associate Director, 
Compliance Assistance Division, Office of Policy, (202) 408-2906; 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. Base Salaries and Incentive Payments for Bank Employees

    Section 12(a) of the Federal Home Loan Bank Act (Bank Act) provides 
that each Bank may fix the compensation of Bank employees, subject to 
the approval of the Finance Board. See 12 U.S.C. 1432(a). From 1992 to 
1996, the Finance Board approved the compensation of Bank Presidents 
pursuant to Sec. 932.41(a) of its regulations and the Bank Presidents' 
Compensation Plan (Compensation Plan) established by the Finance Board. 
See 12 CFR 932.41(a) (January 1, 1996 revision) (amended 61 FR 2 (Jan. 
4, 1997)); Bd. Res. No. 91-565 (as amended). Under the Compensation 
Plan, the boards of directors of the individual Banks were authorized 
to set the base salaries of the Bank Presidents, subject to Finance 
Board approval, within ranges established by the Finance Board. Under 
the Compensation Plan, the Banks also were authorized to make incentive 
payments to their Presidents in amounts up to a maximum percentage of 
base salary, as determined by the Finance Board. The Finance Board's 
Compensation regulation did not contain specific standards governing 
the base salaries or incentive payments for Bank employees other than 
the Presidents. On January 2, 1997, after providing the public with 
opportunity for notice and comment, the Finance Board published a new 
Compensation regulation, which, among other things, superseded the 
Compensation Plan and provided new standards governing the base 
salaries and incentive payments for Bank Presidents and other Bank 
employees. See 61 FR 2 (Jan. 4, 1997). The 1997 revisions to the 
Compensation regulation eliminated the use of Finance Board-established 
salary ranges and now permit each Bank to set its President's base 
salary, subject to a cap to be published annually by the Finance Board. 
See 12 CFR 932.41(b)(1)(i). The 1997 revisions also established a 
dollar limit on a Bank President's total cash compensation payable in 
salary and incentive payments of 125 percent of the amount of the base 
salary cap established by the Finance Board for that Bank. Thus, a Bank 
President's maximum incentive payment allowable under the Compensation 
regulation is the difference between the President's annual base salary 
approved by the Bank and 125 percent of the annual base salary cap for 
the Bank. See id. Sec. 932.41(c)(2)(i).
    In establishing a base salary cap and the 125 percent limit on 
total cash compensation for Bank Presidents, the Finance Board 
explicitly intended to permit the Banks to choose incentive 
compensation levels for their Presidents higher than 25 percent of the 
Presidents' base salaries. Specifically, under the Compensation 
regulation, the further a Bank set its President's base salary below 
the cap, the higher the President's potential incentive payment 
opportunity. The Finance Board believes that incentive compensation is 
an important and useful management tool, and it made the regulatory 
change described above in response to comments from the Banks and 
others that the industry trend in setting compensation for chief 
executives and other employees of financial institutions was to 
allocate increasingly higher percentages of total cash compensation to 
incentive compensation rather than base salary.
    While the Compensation regulation now permits the Banks to make 
this kind of adjustment in the way they compensate their Presidents, 
most of the Banks have not taken advantage of this flexibility. Most of 
the Banks have set their Presidents' base salaries at or near the cap 
established by the Finance Board. Consequently, the Presidents receive 
the bulk of their cash compensation in base salary. Eight of the Banks 
have established incentive payment opportunities for their Presidents 
ranging from 25 to 27.8 percent of base salary. Under the Compensation 
regulation, the maximum incentive payment opportunity for a Bank 
employee other than the President is linked to the incentive payment 
opportunity of the President. Section 932.41(c)(3)(ii) of the 
Compensation regulation provides 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. See id. Sec. 932.41(c)(3)(ii). In 
addition, Sec. 932.41(b)(2) of the Compensation regulation provides 
that no employee's base salary may exceed the base salary of the Bank 
President.
    The purpose of linking the maximum incentive payment opportunities 
of the Bank Presidents and other Bank employees was to ensure a measure 
of consistency between the President and other employees regarding the 
allocation of compensation between base salary and incentive pay. 
Specifically, in providing the Banks with flexibility to allocate 
compensation between base salary and incentive pay, the Finance Board 
wished to prevent a Bank from paying a large percentage of total cash 
compensation to employees other than the President in the contingent 
form of incentive pay, while paying the President mostly in the form of 
guaranteed base salary.
    Because most of the Banks have set the base salaries of their 
Presidents at or near the caps published by the Finance Board, and 
thereby limited the Presidents' maximum incentive payment opportunities 
to the minimum percentage of base salary available under the 
regulation, these Banks are

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unable to provide increased incentive payment opportunities to their 
other employees, due to the limitation in Sec. 932.41(c)(3)(ii) of the 
Compensation regulation. As further discussed below, several of the 
Banks have voiced concerns that this is impairing their ability to hire 
and retain key personnel below the level of President. As discussed 
above, these Banks have the option to address this situation by 
reducing their Presidents' base salaries and increasing their 
Presidents' incentive payment opportunities, which would allow the 
Banks to increase incentive payment opportunities for their other 
employees. However, the Banks have not viewed reducing their 
Presidents' base salaries as a viable alternative, and the Finance 
Board does not wish to make this the Banks' sole option. Therefore, the 
Finance Board is eliminating the link between the maximum base salaries 
and incentive payment opportunities of the Bank Presidents and other 
Bank employees, and establishing instead an overall dollar limit on 
cash compensation for a Bank's employees other than the President equal 
to 125 percent of the base salary cap established by the Finance Board 
for the Bank President.

B. Payment of Bonuses

    Section 932.41(f) of the Compensation regulation provides that a 
Bank shall not pay any employee or other person a bonus. See id. 
Sec. 932.41(f). A bonus is defined in the Compensation regulation as 
``a payment to an employee, other than base salary and benefits, that 
is not based on performance.'' Id. Sec. 932.41(a). As further discussed 
below, the Finance Board is eliminating the provisions of the 
Compensation regulation governing bonuses because they have proved 
confusing and duplicative with the provisions of the regulation 
governing incentive payments for Bank employees. See id. 
Secs. 932.41(a), (c)(3)(iii).

C. Conflicts of Interest

    Section 12(a) of the Bank Act provides that each Bank may select 
and employ such officers, employees, attorneys, and agents as shall be 
necessary for the transaction of its business, subject to the approval 
of the Finance Board. See 12 U.S.C. 1432(a). The Finance Board's 
Conflicts regulation, set forth at 12 CFR 932.40(d), provides that 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. See 12 CFR 932.40(d).
    Several of the Banks maintain item processing operations in which 
they employ non-exempt hourly employees who also have full- or part-
time positions with financial institutions that are, or are eligible to 
make application to become, members of the Bank. The Finance Board has 
determined that based upon the nature of the work performed by these 
Bank employees, it is unlikely that any conflict of interest between 
the Bank and a Bank member or an institution eligible to make 
application to become a member would be created as a result of 
concurrent employment by a Bank and such institution. Consequently, the 
Conflicts regulation, as currently stated, unnecessarily impedes a 
Bank's ability to hire qualified employees for its item processing 
operations. See Bd. Res. 98-06 (Feb. 18, 1998). On this basis, the 
Finance Board has waived the Conflicts regulation, as applied to the 
non-exempt hourly employees working in the item processing operations 
of the Topeka, Pittsburgh and Indianapolis Banks. See id.
    The Finance Board believes that the rationale for waiving 
application of the Conflicts regulation to non-exempt hourly employees 
working in a Bank's item processing operations applies with equal force 
for all non-exempt hourly Bank employees. Therefore, the final rule 
adds a specific exception to the Conflicts regulation for all non-
exempt hourly employees of the Banks, so that such employees may be 
employed concurrently by a Bank and a member or an institution eligible 
to make application to become a member.

II. Analysis of the Final Rule

A. Base Salary and Incentive Payments for Employees Other than the Bank 
President

    As discussed above, several of the Banks have raised concerns that 
the limit on incentive payment opportunities for employees other than 
the President set forth in Sec. 932.41(c)(3)(ii) of the Compensation 
regulation constrains the Banks' ability to attract and retain 
experienced and highly qualified personnel in key areas of Bank 
operations, such as auditing, asset/liability management, investments, 
risk analysis, and accounting. In addition, this poses an immediate 
problem for the Banks in attracting and retaining qualified personnel 
to assist in Year 2000 information systems conversion processes.
    While there is no concern that the Banks' ability to attract key 
personnel has had any negative impact on the safety and soundness of 
their operations to date, the Finance Board believes that there is a 
credible risk that, in the future, the Banks may be placed in a non-
competitive position relative to other employers of financial and 
banking professionals. The Finance Board wishes to prevent a situation 
in which the Banks' ability to compete for the highest quality 
personnel is unduly limited.
    For these reasons, the Finance Board is making the following 
changes to the provisions of the Compensation regulation governing base 
salary and incentive payments of Bank employees other than the 
Presidents. First, the final rule eliminates the limitation in 
Sec. 932.41(c)(3)(ii) on incentive payment opportunities for Bank 
employees other than the President. Consequently, such employees may 
have incentive payment opportunities in excess of that of a Bank's 
President. However, incentive payments for employees other than the 
President will continue to be subject to the requirement in 
Sec. 932.41(c)(3)(i) of the Compensation regulation that such payments 
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. See id. 
Sec. 932.41(c)(3)(i).
    Second, in order to give the Banks maximum flexibility in 
allocating total cash compensation for employees other than the 
President between base salary and incentive pay, the final rule 
eliminates the requirement in Sec. 932.41(b)(2) of the Compensation 
regulation that no Bank employee may have a base salary higher than 
that of the President. See id. Sec. 932.41(b)(2).
    Third, the final rule establishes an overall limit on total cash 
compensation for a Bank's employees other than the President equal to 
125 percent of the base salary cap established by the Finance Board for 
the Bank's President. This limit is the same as under the existing 
Compensation regulation; however under the existing regulation, it is 
embodied in two separate limits on base salary and incentive payments 
for Bank employees other than the President, which, as discussed above, 
are eliminated by this final rule.
    The Finance Board is hopeful that the Banks will use this new 
flexibility in structuring cash compensation for employees other than 
the President to enhance their strategic plans for mission achievement, 
which are under consideration at the Banks. The Finance Board will look 
at the degree to which the Banks have tied incentive compensation for 
employees other than the President to mission-related goals, similar to 
the those that form the basis the Bank Presidents' incentive payments, 
in deciding whether further

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regulatory action in this area is warranted.
    The final rule adds a new Sec. 932.41(c)(3)(iv) to the Compensation 
regulation, requiring all Bank incentive compensation plans in effect 
on May 1, 1998, to be submitted to the Finance Board no later than June 
1, 1998. This section further provides that any subsequent amendments 
to such plans shall not become effective until submitted to the Finance 
Board. The effect of this provision is to make the effectiveness of any 
changes a Bank may adopt to its incentive programs for employees other 
than the President contingent upon the submission of such changes to 
the Finance Board, but does not contemplate any action to approve or 
disapprove the submissions. Of course, these policies and their 
implementation are subject to compliance review as part of the regular 
examination process.

B. Payment of Bonuses

    The Compensation regulation, as revised in 1997, carried forward an 
existing regulatory provision prohibiting the payment of bonuses to 
Bank employees. See id. Sec. 932.41(f). The 1997 revisions also for the 
first time adopted a regulatory definition of ``bonus'' as ``a payment 
to an employee, other than base salary and benefits, that is not based 
on performance.'' Id. Sec. 932.41(a).
    The Banks have questioned whether the new definition of ``bonus'' 
prevents an employee from receiving incentive payments based on the 
achievement of Bank-wide performance targets. For many years, several 
Banks have maintained incentive programs for employees under which 
incentive payments are based, in part, on the extent to which the Bank 
achieves certain corporate performance targets. Several Banks have 
requested confirmation that such programs remain permissible in light 
of the new definition of ``bonus.''
    The 1997 revisions were not intended to preclude the Banks from 
maintaining existing or establishing new employee incentive programs 
linked to Bank performance. Under Sec. 932.41(c)(3)(iii) of the 
Compensation regulation, the Banks may make incentive payments to 
employees other than the Bank President based on the extent to which an 
employee meets objective performance targets related to criteria 
established by the Bank's board of directors. See id. 
Sec. 932.41(c)(3)(iii). The Compensation regulation defines ``incentive 
payment'' as ``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.'' Id. Sec. 932.41(a).
    The Finance Board believes that the achievement of Bank-wide 
performance targets may be the basis for employee incentive payments as 
long as there is a reasonable nexus between the job performance of the 
employee and the achievement of the performance target. The extent to 
which a Bank achieves its corporate performance targets may be 
considered a reflection of the on-the-job performance of each of the 
Bank's employees. The regulatory changes discussed above regarding 
incentive payments for employees other than the Presidents provide the 
Banks with the opportunity to integrate Bank-wide goals related to 
mission achievement into the incentive payment plans of employees whose 
jobs may not be directly related to the mission of the Bank, but whose 
support is crucial to the Bank's overall performance, such as the Chief 
Financial Officer.
    The definition of ``bonus'' was added in 1997 to carve out non-
performance related incentive payments from the category of permissible 
incentive payments. However, the Finance Board believes, and it is the 
Finance Board's intention, that the definition of ``incentive payment'' 
in Sec. 932.41(a), coupled with Sec. 932.41(e)(1), which prohibits a 
Bank from making any payment to a Bank employee except as provided in 
the Compensation regulation, see id. Sec. 932.41(e)(1), preclude a Bank 
from making non-performance related incentive payments to Bank 
employees. Therefore, removal of the prohibition in Sec. 932.41(f) on 
the payment of bonuses and the definition of ``bonus'' would clarify 
the provisions of the Compensation regulation governing employee 
incentive payments without substantively changing the prohibition on 
non-performance related incentive payments. Based on the foregoing, and 
in light of the confusion caused by the provisions on employee bonuses, 
the Finance Board is eliminating Sec. 932.41(f) and the definition of 
``bonus'' in Sec. 932.41(a).

C. Conflicts of Interest

    For the reasons discussed in the Statutory and Regulatory 
Background section, the final rule adds a specific exception to the 
Conflicts regulation for all non-exempt hourly employees of the Banks.

III. Procedural Requirements

    The Finance Board has determined that the rule shall be effective 
upon publication in the Federal Register, for the reasons discussed 
below.
    The Administrative Procedure Act (APA) does not require adherence 
to notice-and-comment procedures when an agency ``for good cause finds 
* * * that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' 5 U.S.C. 
553(b)(3)(B). In addition, the 30-day delay in the effective date of a 
rule ordinarily required by section 553 of the APA will not apply where 
the rule relieves a restriction or upon a showing of good cause by the 
agency adopting the rule. See id. Sec. 553(d)(3).
    The Finance Board finds good cause to forgo notice-and-comment 
procedures as unnecessary in connection with lifting the limitations on 
allocating the base salary and incentive payment components of the 
total cash compensation for Bank employees other than the President 
because this regulatory action imposes no new requirements on the Banks 
or their employees. Furthermore, engaging in notice-and-comment 
procedures would be contrary to the public interest, because it would 
prolong existing conditions under which the Banks may be at a 
competitive disadvantage in attracting and retaining highly experienced 
and qualified personnel, due to the existing limits on incentive 
payments for such employees. The longer these conditions persist, the 
greater the potential risk that there will be a negative impact on the 
operations of the Banks. Furthermore, the Finance Board believes that 
the Banks should be free to take immediate action to adjust their 
compensation programs in order to attract and retain personnel involved 
in preparing their information systems for 2000. Therefore, the Finance 
Board finds good cause to forgo a delayed effective date for this 
change. In addition, the 30-day delay of effective date is not mandated 
under the APA, because this change relieves a restriction on the Banks' 
authority to set employee compensation.
    Elimination of the provisions of the Compensation regulation 
governing employee bonuses will not have a substantive effect on the 
Banks, because they are duplicative of existing provisions governing 
the Banks' employee incentive payments. Therefore, the Finance Board 
has determined that notice-and-comment procedures and a delay in the 
rule's effective date are unnecessary with regard to this change.
    As discussed above, the Finance Board has determined that, based 
upon the nature of the work performed by non-exempt hourly Bank 
employees, it is unlikely that any conflict of interest between the 
Bank and a Bank member

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or an institution eligible to make application to become a member would 
be created as a result of concurrent employment by a Bank and such 
institution. Furthermore, the Finance Board previously has permitted 
such dual employment through the granting of waivers for three Banks. 
Consequently, the Finance Board has determined that notice-and-comment 
procedures are unnecessary in connection with amendment to the 
Conflicts regulation set forth above. The 30-day delay of effective 
date is not mandated under the APA for this change, because it relieves 
a restriction on the Banks' authority to select and employ personnel.

IV. Regulatory Flexibility Act

    The Finance Board is adopting these regulatory amendments in the 
form of an final rule. Therefore, the provisions of the Regulatory 
Flexibility Act do not apply. See 5 U.S.C. 601(2), 603(a).

List of Subjects in 12 CFR Part 932

    Conflict of interests, Federal home loan banks.

    Accordingly, the Federal Housing Finance Board hereby amends title 
12, chapter IX, subchapter B, part 932 of the Code of Federal 
Regulations as follows:

SUBCHAPTER B--FEDERAL HOME LOAN BANK SYSTEM

PART 932--ORGANIZATION OF THE BANKS

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

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

    2. Amend Sec. 932.40 by revising paragraph (d) to read as follows:


Sec. 932.40  Selection.

* * * * *
    (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. The 
restriction on employment set forth in the preceding sentence shall not 
apply to non-exempt hourly employees of a Bank.
    3. Amend Sec. 932.41 by removing the definition of ``Bonus'' from 
paragraph (a), removing paragraph (f) and redesignating paragraph (g) 
as paragraph (f), revising paragraphs (b)(2) and (c)(3)(ii), and adding 
a new paragraph (c)(3)(iv) to read as follows:


Sec. 932.41  Compensation.

* * * * *
    (b) * * *
    (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.
* * * * *
    (c) * * *
    (3) * * *
    (ii) The sum of annual base salary and all incentive payments 
received in a single calendar year by an employee other than the Bank 
President shall not exceed 125 percent of the annual base salary cap 
for the Bank President, as published by the Finance Board.
* * * * *
    (iv) All Bank incentive compensation plans in effect on May 1, 
1998, shall be submitted to the Finance Board no later than June 1, 
1998. Any subsequent amendments to such plans shall not become 
effective until submitted to the Finance Board.
* * * * *
    By the Board of Directors of the Federal Housing Finance Board.

    Dated: May 13, 1998.
Bruce A. Morrison,
Chairman.
[FR Doc. 98-14970 Filed 6-4-98; 8:45 am]
BILLING CODE 6725-01-P