[Federal Register Volume 63, Number 142 (Friday, July 24, 1998)]
[Notices]
[Pages 39872-39875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19809]


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FEDERAL HOUSING FINANCE BOARD

[No. 98-27]


Statement of Policy: Disclosures in the Combined Annual and 
Quarterly Financial Reports of the Federal Home Loan Bank System

AGENCY: Federal Housing Finance Board.

ACTION: Final Policy Statement.

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SUMMARY: The Board of Directors of the Federal Housing Finance Board 
(Finance Board) is adopting a statement of policy entitled 
``Disclosures in the Combined Annual and Quarterly Financial Reports of 
the Federal Home Loan Bank System.'' The policy statement will 
generally require that the combined annual and quarterly financial 
reports of the Federal Home Loan Bank (FHLBank) System be prepared in a 
manner that is consistent, in the judgment of the Finance Board, with 
the financial and other disclosure requirements promulgated by the 
Securities and Exchange Commission (SEC).

EFFECTIVE DATE: August 24, 1998.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Director, 
Financial Analysis and Reporting Division, Office of Policy, 202-408-
2845, or Deborah F. Silberman, General Counsel, Office of General 
Counsel, 202-408-2570, Federal Housing Finance Board, 1777 F Street, 
NW, Washington, DC 20006.

SUPPLEMENTARY INFORMATION: The FHLBank Act (12 U.S.C. 1431(c)) 
authorizes the Finance Board to issue consolidated obligations (COs) 
that are the joint-and-several obligations of the FHLBanks. As issuer 
of the COs the Finance Board has assumed the responsibility of 
preparing combined FHLBank System annual and quarterly financial 
reports that are used in conjunction with the issuance of the COs.
    Until now, the Finance Board has established no formal policies as 
to the scope and content of the information presented in the FHLBank 
System combined annual and quarterly financial reports. Since the 
establishment of the Finance Board in 1989, the combined annual report 
has grown in length as the disclosures have become more detailed and 
more comprehensive. Current disclosure practices represent an evolution 
of generally accepted accounting principles (GAAP) and industry 
disclosure standards, and reflect a consensus among Finance Board 
staff, FHLBank staff, the independent outside accountant for the 
combined financial report, and outside bond counsel.
    The scope, form, and content of the combined FHLBank System annual 
and quarterly financial reports closely resemble reports issued by both 
corporate securities issuers that are required to register their 
securities with the SEC under the Securities Exchange Act of 1934, 15 
U.S.C. 78a et seq., (1934 Act), and by other Government Sponsored 
Enterprises (GSEs) that are, like the FHLBank System, exempt from such 
requirements.
    The Finance Board is adopting this final policy statement about 
financial and other disclosures in the combined annual and quarterly 
financial reports for two reasons. First, the Finance Board will 
address a significant policy matter on how the FHLBanks provide 
disclosures and raise debt in the capital markets. The Finance Board 
believes that, as one of the largest issuers of debt securities in the 
U.S. capital markets, it has an obligation to provide purchasers of 
FHLBank System debt with adequate and accurate financial disclosure 
that is consistent with industry standards. One of the statutory 
responsibilities of the Finance Board is to ensure that the FHLBanks 
remain able to raise funds in the capital markets (see 12 U.S.C. 1422a 
(a)(3)(b)(iii)).\1\ The Finance Board believes that the rules 
promulgated by the SEC pursuant to the Federal securities laws 
represent ``best practice,'' and that financial and other disclosure 
concerning the FHLBank System should conform to this standard to the 
greatest extent practicable.
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    \1\ At December 31, 1997, consolidated obligations outstanding 
exceeded $304 billion, and the amount of consolidated obligations 
issued in 1997 exceeded $2.1 trillion.
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    Second, the Finance Board believes that adoption of the final 
policy statement and final rule should address Congressional concerns 
about FHLBank System disclosure, as described in the notice of the 
proposed policy statement, 63 FR 5381 at 5382 (Feb. 2, 1998).
    The Finance Board published the proposed policy statement for 
notice and comment on February 2, 1998 (63 FR 5381, Feb. 2, 1998). In 
response to this proposal and a related proposed regulation on 
financial disclosures by the FHLBanks, the Finance Board received a 
total of six comments. Four of the comments were from or on behalf of 
FHLBanks, one comment was from a trade association, and one comment was 
from a public accounting firm. With respect to the proposed policy 
statement, the comments addressed the following major issues: the 
method of applying SEC reporting and disclosure requirements; 
disclosures about derivatives; Federal preemption of State securities 
laws; and implementation date.

Analysis of Comments Received

Method of Applying SEC Reporting and Disclosure Requirements

    The proposed policy statement provided that the combined annual and 
quarterly reports of the FHLBank System would follow SEC requirements 
with certain exceptions. Several commenters urged that, instead of 
enumerating exceptions, the Finance Board specify the areas in which 
the FHLBank System would follow the SEC requirements in place at the 
time that the policy statement was adopted. The commenters expressed 
concern that the Bank System would automatically be subject to yet-
unwritten SEC rules if the policy statement were adopted in the 
proposed form. The commenters preferred the approach of formal adoption 
by the Finance Board each time the SEC changes its reporting and 
disclosure rules.
    The Finance Board is adopting the procedure outlined in the 
proposed policy statement without change. The final policy statement 
enumerates areas for which no disclosure or modified disclosure will be 
made of information that, in the judgment of the Finance Board, would 
otherwise be required by the SEC's rules to be disclosed in a 
particular way. This will make clear that the Finance Board fully 
intends to provide disclosure on an ongoing basis that is consistent to 
the extent practicable and in the judgment of the Finance Board with 
the SEC's reporting and disclosure requirements, even if the SEC 
changes its rules. In addition, the Finance Board will not have to take 
formal action each time the SEC modifies its reporting and disclosure 
requirements to render the Finance

[[Page 39873]]

Board's policies consistent with those of the SEC.
    The policy statement makes it clear that consistency with the SEC's 
reporting and disclosure rules as they affect the combined annual and 
quarterly financial reports of the FHLBank System will be determined 
solely by the Finance Board.

Derivatives

    In February 1997, the SEC amended its rules by adding new 
disclosure and reporting requirements about derivatives. These 
requirements are codified as Item 305(b) of Regulation S-K (17 CFR 
229.305) (Derivatives Rule). In general, the Derivatives Rule requires 
registrants to provide qualitative information about their use of 
derivatives, their strategies using derivatives, and any limits the 
entity places on derivatives. In addition, Item 305(a) of Regulation S-
K requires registrants to present certain quantitative information 
about derivatives. The Derivatives Rule gives registrants a number of 
options on how best to present this information. The qualitative and 
quantitative information about derivatives is not part of the entity's 
financial statements, and, accordingly, the entity's independent 
outside accountant does not have to attest to the statements made.
    The proposed policy statement on financial disclosure indicated 
that the Finance Board would provide the qualitative disclosures 
required by the Derivatives Rule in the 1997 combined FHLBank System 
annual financial report, but would defer making the quantitative 
disclosures until the 1998 combined FHLBank System annual financial 
report.
    Two commenters recommended deferring the qualitative disclosures 
until 1998 because of a concern that any disclosures made in 1997 may 
not be consistent with disclosures made when the Finance Board fully 
implements the rule in 1998. However, one of the commenters recommended 
that the Finance Board ``consider enhancing the section 305-affected 
disclosures [that appeared in the 1996 annual financial report] only 
where they are not dependent on the yet to be determined quantitative 
disclosures.''
    The Finance Board has expanded the discussion of risk management 
that appeared in the 1996 combined annual financial report, and this 
expanded discussion appears in the 1997 combined annual financial 
report. The Finance Board believes that this expanded discussion meets 
all the qualitative derivative disclosure requirements by the 
Derivatives Rule, but the disclosure is in no way dependent on the 
prospective quantitative disclosures.

Federal Preemption

    A number of commenters recommended that the Finance Board state 
explicitly in both the policy statement and the regulation that the 
FHLBank Act and any regulations promulgated by the Finance Board 
thereunder occupy the field and preempt State law in matters related to 
the issuance of CO's. These commenters expressed concern that the 
Finance Board should explicitly express its intention to exercise its 
preemptive authority over State law so that the Finance Board and the 
FHLBanks may limit their liability and avoid attempts by States to 
impose their laws or regulations on the Finance Board's issuance of 
COs.
    The Finance Board believes that such statements are unnecessary and 
inappropriate for the purposes of the policy statement and the 
regulation, and therefore has not included such a statement in either 
the policy statement or the regulation.
    Implementation Date. Two commenters recommended deferring all 
derivatives disclosures until the 1998 combined FHLBank System annual 
financial report. Two other commenters recommended deferring the 
effective date of the policy statement to the end of 1999.

Disclosure Standards

    In light of the comments received and based on further analysis, 
the Finance Board is adopting the policy statement with several changes 
that are addressed below. These changes do two things. First, the 
changes clarify that consistency with the SEC's reporting and 
disclosure rules as they affect the combined annual and quarterly 
financial reports of the FHLBank System will be determined solely by 
the Finance Board. Second, the final policy statement enumerates a 
number of additional areas that the Finance Board will carve out from 
disclosure in the combined FHLBank System reports because, in its 
judgment, the Finance Board believes such disclosure is either 
inapplicable or inappropriate for the FHLBank System.
    The Finance Board believes that the combined FHLBank System annual 
and quarterly financial reports are generally consistent with SEC 
disclosure requirements, with several exceptions. The final policy 
statement requires, as a general matter, that the combined FHLBank 
System annual and quarterly financial reports be prepared in a manner 
that is consistent, in the judgment of the Finance Board, with the 
SEC's regulations to the greatest extent practicable, with certain 
noted exceptions.
    The Finance Board intends to comply with Statement of Financial 
Accounting Standards No. 131, ``Disclosures about Segments of an 
Enterprise and Related Information'' (FASB 131). For purposes of FASB 
131, the Finance Board considers each FHLBank to be a segment. In 
complying with FASB 131, the Finance Board will provide combining 
schedules for the statement of condition and the statement of income in 
the quarterly combined financial report of the FHLBank System. The 
Finance Board already provides these combining schedules in the annual 
combined financial report.

Exceptions to Following SEC Rules

Derivatives

    On February 10, 1997, the SEC published the Derivatives Rule. It 
applies to all filings made with the SEC after June 15, 1997, and 
encompasses all types of derivatives--commodity, currency, equity, and 
financial. The Finance Board believes that the only facet of the 
FHLBanks' operations that meets the threshold test for disclosure in 
the Derivatives Rule is the interest-rate risk associated with 
financial derivatives.
    The Derivatives Rule presents only one issue unique to the FHLBank 
System. The System combined financial report rolls up the financial 
information of 12 independent portfolios and eliminates all material 
transactions among the FHLBanks. Many complex financial organizations 
fall within the scope of the rule, but these complex organizations 
ultimately report to a single board of directors. The FHLBanks report 
to 12 separate boards of directors, and each has differing investment 
strategies, yet each FHLBank is jointly and severally liable for the 
consolidated obligations of the FHLBank System issued by the Finance 
Board.
    Information for the System's quantitative disclosures would come 
from simulation of interest-rate shocks in the asset-liability 
management models of the FHLBanks. The FHLBanks use different modeling 
software and assumptions. Any analysis should first ensure some 
uniformity of assumptions and methodology to make sure the results will 
be meaningful and comparable. Furthermore, there are conceptual 
difficulties in how the Finance Board could combine the results of 
these 12 sets of simulations to present a System derivatives 
disclosure.

[[Page 39874]]

It may not be possible to present a combined quantitative derivatives 
disclosure, and the Finance Board instead may present separate 
quantitative derivatives disclosures in 1998 for each of the FHLBanks.
    In light of these complexities, the Finance Board is making the 
qualitative disclosures about derivatives in the 1997 combined 
financial report, but will make the quantitative disclosures in the 
1998 combined annual financial report. Finance Board staff will work 
with FHLBanks' staff in developing a methodology for arriving at a 
common set of assumptions for the quantitative analysis that would 
appear in the 1998 combined financial report.

Related-Party Transactions

    SEC regulations require the disclosure of any transaction greater 
than $60,000 between a director and a related party. Due to the 
cooperative nature of the FHLBank System, it is expected that the 
FHLBanks will have business dealings with members whose officers also 
serve as directors of the FHLBank. It would be unwieldy to present full 
disclosures of all credit relationships between the FHLBanks and the 
members their directors represent in the combined annual report. 
However, the Finance Board is including in the combined annual report 
an aggregate disclosure about the percentage of advances to members 
whose officers serve as directors of an FHLBank. In addition, the 
Finance Board is including a disclosure in the annual financial report 
that shows the 10 largest advance borrowers in the FHLBank System and 
the 5 largest advance borrowers by FHLBank along with indicating which 
of these members had an officer that also served as an FHLBank 
director.

Information about Directors and Officers

    The SEC's regulations require disclosure of a wide variety of 
information about all directors and executive officers of the 
registrant. The required information includes name, age, current and 
previous positions with the registrant, terms of office, family 
relationships with the registrant, business experience, and other 
directorships. The Finance Board believes that presenting biographical 
information on all FHLBank directors and all FHLBank executive officers 
in the combined annual report would be unwieldy and not particularly 
enlightening. The FHLBanks may wish to consider making this disclosure 
in their individual annual reports. The Finance Board has expanded the 
biographical information about members of the Board of Directors of the 
Finance Board and FHLBank presidents by including the age of those 
persons. In addition, the Finance Board is providing similar 
biographical information about the managing director of the Office of 
Finance and the chairs and vice chairs of the FHLBanks.

Submission of Matters to a Vote of Stockholders

    The SEC's regulations require registrants to provide certain 
information about matters submitted to stockholders for a vote. The 
only item that FHLBank stockholders vote upon is the annual election of 
directors. For two reasons, the Finance Board has determined to exclude 
election-of-director information from the combined annual financial 
statements. First, matters concerning election of directors can be 
handled more expeditiously and efficiently by separate mailings to an 
FHLBank's stockholders as a part of the election process. The combined 
financial report is primarily a disclosure document for bond holders. 
Second, election of directors occurs in the fall, but the annual 
combined financial report is published in late spring, making it 
impossible to provide timely information about the election of 
directors in the combined annual report.

Compensation

    Item 402 of the SEC's Regulation S-K (17 CFR 229.402) sets forth 
the requirements for disclosure of compensation for the chief executive 
officer and the four next most highly compensated executive officers 
other than the chief executive officer. The policy statement will 
require disclosure of compensation information only for the presidents 
of the 12 FHLBanks and the managing director of the Office of Finance.

Exhibits

    The policy statement will not require the FHLBanks to file the 
exhibits specified to be filed with the SEC by the SEC's regulations.

Per Share Information

    The SEC has a number of requirements that certain financial 
information be presented on a per-share basis. Per share disclosure is 
not meaningful or appropriate for the FHLBank System, because stock in 
the FHLBanks is not publicly traded and is based on statutory 
requirements. The amount of shares expands and contracts as member 
assets or advances change. Furthermore, members purchase FHLBank stock 
at par and can redeem it at par.

Ownership of Capital Stock

    Item 403 of the SEC's Regulation S-K (17 CFR 229.403) requires 
certain disclosures about the beneficial ownership of capital stock. 
The policy statement requires, and the annual FHLBank System 1997 
combined financial report will provide instead, a listing of the top 10 
holders of capital stock in the FHLBank System and a listing of the top 
5 holders of capital stock by FHLBank. These listings will identify all 
those members and officer of which serves and an FHLBank director.

Dates

    SEC registrants are required to file their annual reports within 90 
days from the end of their fiscal year, and quarterly reports are to be 
filed within 45 days from the end of a fiscal quarter. Since the 
Finance Board cannot begin preparing the combined financial reports 
until the FHLBanks finish their annual and quarterly reports, the time 
frames for the publication of the combined annual and quarterly reports 
need to be adjusted accordingly. It is Finance Board's intention 
generally to make the annual report available by June 30, and to make 
the quarterly reports available within 90 days of the end of a quarter.

Distribution

    While the SEC rules apply to entities with publicly traded stock, 
the stock in the FHLBanks is not publicly traded, and minimum capital 
stock holdings are set in statute. Furthermore, only members of an 
FHLBank may own stock in that FHLBank. Members purchase stock at its 
par value, and voluntary members may redeem stock at its par value. 
Nevertheless, the Finance Board believes that disclosure to the 
stockholders of an FHLBank is as important as disclosure to the 
purchasers of FHLBank debt. Therefore, the Finance Board will 
distribute a copy of the annual and quarterly combined financial 
reports to each FHLBank member.
    The text of the proposed policy follows:

Federal Housing Finance Board--Statement of Policy

Disclosures in the Combined Annual and Quarterly Financial Reports 
of the Federal Home Loan Bank System

1. Policy Objective

    The Federal Housing Finance Board (Finance Board) policy on 
Disclosures in the Combined Annual and Quarterly Financial Reports of 
the Federal Home Loan Bank System provides that purchasers of Federal 
Home Loan Bank

[[Page 39875]]

(FHLBank) System consolidated obligations receive information 
consistent, in the judgment of the Finance Board and to the extent 
practicable, with disclosures required to be made by Securities and 
Exchange Commission (SEC) registrants. The Finance Board has the 
explicit statutory responsibility to ensure that the FHLBanks are able 
to raise funds in the capital markets, and assuring that it is 
providing industry-standard disclosures facilitates the issuance of 
this debt.

2. General Policy

    It is the policy of the Finance Board that in preparing the 
combined FHLBank System annual and quarterly financial reports the 
Finance Board will maintain consistency to the extent practicable with 
the requirements of the SEC's Regulations S-K and S-X (see 17 CFR Parts 
229 and 210). With respect to the combined FHLBank System annual and 
quarterly reports, consistency with the SEC's regulations will be 
determined solely by the Finance Board.
    The Finance Board will comply with Statement of Financial 
Accounting Standards No. 131, ``Disclosures about Segments of an 
Enterprise and Related Information'' (FASB 131). It will include in the 
quarterly combined financial report the combining schedules required by 
FASB 131.

3. Exceptions to the General Policy

    a. Derivatives. Item 305, Regulation S-K, 17 CFR 229.305, requires 
certain registrants to present information about their derivatives 
holdings and activities. The requirement includes a discussion of 
accounting policy for derivatives, a qualitative discussion about 
derivatives by management, and an analysis that presents quantitative 
information about derivatives. The presentation of the quantitative 
information will be deferred until the 1998 combined annual report of 
the FHLBank System.
    b. Related-Party Transactions. Item 404 of Regulation S-K, 17 CFR 
229.404, requires the disclosure of certain relationships and related 
party transactions. In light of the cooperative nature of the FHLBank 
System, related-party transactions are to be expected, and a disclosure 
of all related-party transactions that meet the threshold would not be 
meaningful. Instead, the combined annual report will provide 
disclosures on (1) the percent of advances to members an officer of 
which serves and an FHLBank director, and (2) a listing of the top 10 
holders of advances in the FHLBank System and the top 5 holders of 
advances by FHLBank, with a further disclosure that indicates which of 
these members had an officer that served as an FHLBank.
    c. Biographical Information. The biographical information required 
by Items 401 and 405 of Regulation S-K, 17 CFR 229.401, 229.405, will 
be provided only for the members of the Board of Directors of the 
Finance Board, FHLBank presidents, the managing director of the Office 
of Finance, and FHLBank chairs and vice chairs.
    d. Compensation. The information on compensation required by Item 
402 of Regulation S-K, 17 CFR 229.402, will be provided only for 
members of the FHLBank presidents and the managing director of the 
Office of Finance. Since stock in each FHLBank trades at par, the 
Finance Board will not include the performance graph specified in Item 
402(l) of Regulation S-K, 17 CFR 229.402(l).
    e. Submission of Matters to a Vote of Stockholders. No information 
will be presented on matters submitted to shareholders for a vote, as 
otherwise required by Item 4 of the SEC's form 10-K, 17 CFR 249.310. 
The only item shareholders vote upon is the annual election directors.
    f. Exhibits. The exhibits required by Item 601 of Regulation S-K, 
17 CFR 229.601, are not applicable and will not be provided.
    g. Per Share Information. The statement of financial information as 
required by Items 301 and 302 of Rule S-K , 17 CFR 229.301 and 302, is 
inapplicable because the shares of the FHLBanks are subscription 
capital that trades at par, and the shares expand or contract with 
changes in member assets or advance levels.
    h. Beneficial Ownership. Item 403 of Rule S-K, 17 CFR 229.403, 
requires the disclosure of security ownership of certain beneficial 
owners and management. The combined financial report will provide a 
listing of the 10 largest holders of capital stock and a listing of the 
5 largest holders of capital stock by FHLBank. This listing will also 
indicate which members had an officer that served as a director of an 
FHLBank.
    i. Dates. The Finance Board generally intends to make the annual 
combined financial report available within 180 days from the end of the 
previous year. It plans to make quarterly reports available 90 days 
from the end of the previous quarter.

4. Distribution

    The Finance Board will distribute a copy of the annual and 
quarterly combined financial reports to each FHLBank member.

    Dated: June 24, 1998.
    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairperson.
[FR Doc. 98-19809 Filed 7-23-98; 8:45 am]
BILLING CODE 6725-01-P