[Federal Register Volume 64, Number 244 (Tuesday, December 21, 1999)]
[Rules and Regulations]
[Pages 71275-71278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33069]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 932, 934, 935

[No. 99-62]
RIN 3069-AA89


Devolution of Corporate Governance Responsibilities

AGENCY: Federal Housing Finance Board.

ACTION: Interim final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is amending 
its regulations to devolve certain corporate governance 
responsibilities from the Finance Board to the Federal Home Loan Banks 
(Banks), pursuant to the requirements of the Federal Home Loan Bank 
System Modernization Act of 1999.

DATES: This interim final rule shall be effective on December 21, 1999. 
The Finance Board will accept written comments on the interim final 
rule on or before January 20, 2000.

ADDRESSES: Mail comments to: Elaine L. Baker, Secretary to the Board, 
Federal Housing Finance Board, 1777 F Street, NW, Washington, DC 20006. 
Comments will be available for inspection at this address.

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Director, (202) 
408-2821, or Scott L Smith, Deputy Director, (202) 408-2991, Office of 
Policy, Research and Analysis; or Sharon B. Like, Senior Attorney-
Advisor, (202) 408-2930, or Eric M. Raudenbush, Senior Attorney-
Advisor, (202) 408-2932, Office of General Counsel, Federal Housing 
Finance Board, 1777 F Street, NW, Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Bank System and Finance Board Roles and Responsibilities

    Under the Federal Home Loan Bank Act (Bank Act), the Finance Board 
is responsible for the supervision and regulation of the 12 Banks. See 
12 U.S.C. 1422a(a)(3), 1422b(a)(1) (1994). Specifically, the Finance 
Board's primary duty is to ensure that the Banks operate in a 
financially safe and sound manner. Consistent with that primary duty, 
the Finance Board also is responsible for ensuring that the Banks carry 
out their housing finance and community lending mission, and that they 
remain adequately capitalized and able to raise funds in the capital 
markets. See id. 1422a(a)(3).
    Historically, the Bank Act has required the Finance Board to be 
involved in varying degrees in the corporate governance of the Banks, 
typically by requiring Finance Board approval for a host of Bank 
practices. However, the recently enacted Federal Home Loan Bank System 
Modernization Act of 1999 (Modernization Act) \1\ repealed most of 
those requirements, thereby removing most of the last vestiges of 
governance responsibilities from the Finance Board. See Pub. L. No. 
106-102, 604(a)(6); 606(d), (f), (g) (1999). Accordingly, the Finance 
Board is amending its regulations to remove the corresponding Finance 
Board approval requirements for such corporate governance functions, 
consistent with the Modernization Act.
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    \1\ The Modernization Act is Title VI of the Gramm-Leach-Bliley 
Act, Pub. L. No. 106-102, 113 Stat. 1338, enacted into law on 
November 12, 1999.
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II. Analysis of Interim Final Rule

A. Part 932-Directors, Officers and Employees of the Banks

1. Amendment of Bank Directors' Meeting and Compensation and Expenses 
Regulations--Secs. 932.16, 932.17
    Section 7(i) of the Bank Act formerly permitted each Bank, with the 
approval of the Finance Board, to pay its directors reasonable 
compensation for the time required of them, and their necessary 
expenses, in the performance of their duties, in accordance with the 
resolutions adopted by such directors. See 12 U.S.C. 1427(i) (1994). 
Section 932.17 of the Finance Board's regulations permits each Bank, 
within certain standards of reasonableness set forth in the regulation, 
to implement its own policy on director compensation and allows each 
Bank to pay its directors for such expenses as are payable by the Bank 
to its senior officers. See 12 CFR 932.17 (1999). Payments made in 
compliance with the regulation are deemed to be approved by the Finance 
Board, as required by section 7(i).
    The Modernization Act amended section 7(i) of the Bank Act by 
imposing specific limits on annual compensation for the Chairperson, 
Vice Chairperson and other members of the Bank's board of directors. 
See Modernization Act, 606(b). These statutory limits on annual 
directors' compensation are implemented by revised Sec. 932.17(c)(1) of 
this interim final rule. Payments made in compliance with the limits 
and standards are deemed to be approved by the Finance Board for 
purposes of section 7(i).
    The Finance Board understands that the new statutory limits 
generally would result in most directors receiving less compensation 
than that currently allowed pursuant to existing Sec. 932.17. 
Nevertheless, that appears to be precisely what Congress intended. 
Moreover, based on the Finance Board's consultations with Congress, it 
is clear that Congress intended that no diminution in workload would 
result as a consequence of the reduced directors' compensation. 
Accordingly, for safety and soundness reasons, Sec. 932.16 is revised 
to require that each Bank's board of directors continue to maintain its 
level of oversight of the management of the Bank. Consistent with this 
maintenance of effort standard, Sec. 932.16 requires each Bank's board 
of directors to hold no fewer in-person meetings in any year than it 
has held on average over the immediately preceding three years, but a 
Bank may apply to the Finance Board for approval, upon a showing of 
good cause, to hold in any year fewer than the required number of in-
person board meetings.
    In addition, and consistent with Congressional intent, the Finance 
Board believes that directors should be compensated only for the 
performance of official Bank business and not simply for holding 
office. Accordingly, Sec. 932.17 is revised to provide that, starting 
in 2000, a Bank may not pay fees to a director, such as retainer fees, 
that do not necessarily reflect actual performance by the director of 
official Bank business. Thus, a director who regularly fails to attend 
board or committee meetings may not be paid at all, and the Finance 
Board would consider such failure a dereliction of the director's 
fiduciary duties that would constitute cause for removal of the 
director, pursuant to section 2B(a)(2) of the Bank Act. See 12 U.S.C. 
1422b(a)(2) (1994).
2. Removal of Selection and Compensation of Bank Officers and Employees 
Regulations--Secs. 932.18 and 932.19
    Section 12(a) of the Bank Act formerly made the selection and 
compensation of Bank officers and employees subject to Finance Board 
approval. See 12 U.S.C.

[[Page 71276]]

1432(a) (1994). Sections 932.18 and 932.19 of the Finance Board's 
regulations set forth requirements for the selection of Bank Presidents 
and other Bank officers and employees, and for the payment of 
compensation to Bank officers and employees. See 12 CFR 932.18, 932.19 
(1999).
    The Modernization Act amended section 12(a) of the Bank Act by 
removing the requirement for Finance Board approval in connection with 
the selection and compensation of Bank officers and employees. See 
Modernization Act, Sec. 606(d)(1)(B). Accordingly, 932.18 and 932.19 of 
the Finance Board's regulations are removed.

B. Part 934--Operations of the Banks

1. Amendment of Bank Budgets Regulation--Sec. 934.7
    The Bank Act does not provide explicitly for Finance Board approval 
of Bank budgets. However, pursuant to the Finance Board's supervisory 
responsibilities under the Bank Act, see 12 U.S.C. 1422a(a)(3), 
1422b(a)(1) (1994), Sec. 934.7 of the Finance Board's regulations 
establishes specific requirements for the Banks' preparation and 
reporting of budget and other financial information to the Finance 
Board. In addition, section 12(a) of the Bank Act formerly required 
prior Finance Board approval for a Bank to buy or erect a bank building 
to house the Bank, or to lease a bank building under a lease with a 
term of more than ten years. See 12 U.S.C. 1432(a) (1994). Section 
934.7(a)(2) of the Finance Board's budget regulation implements this 
provision by providing that, pursuant to the requirement of section 
12(a) of the Bank Act, a Bank must obtain prior approval of the Finance 
Board before purchasing or erecting, or leasing for a term of more than 
10 years, a building to house the Bank. See 12 CFR 934.7(a)(2) (1999).
    The Modernization Act amended section 12(a) of the Bank Act by 
removing the requirement for Finance Board approval of such Bank 
building transactions. See Modernization Act, 606(d)(1)(A). 
Accordingly, the requirement in paragraph (a)(2) for Finance Board 
approval of such transactions is removed from Sec. 934.7. In addition, 
consistent with the devolution philosophy reflected in this interim 
final rule, the Finance Board has determined that the Banks should no 
longer be required to submit to the Finance Board the budget and other 
financial reports required by Secs. 934.7(b) through (e). Accordingly, 
Secs. 934.7(b) through (e) are removed.
2. Amendment of Bank Bylaws Regulation--Sec. 934.16
    Section 12(a) of the Bank Act formerly provided that the Banks had 
the power, by their boards of directors, to prescribe, amend, and 
repeal bylaws governing the manner in which their affairs may be 
administered, subject to the approval of the Finance Board. See 12 
U.S.C. 1432(a) (1994). Section 934.16 of the Finance Board's 
regulations allows the Banks to adopt, amend or repeal their bylaws 
without Finance Board approval, as long as the bylaws or amendments are 
consistent with applicable statutes, regulations and Finance Board 
policies. See 12 CFR 934.16 (1999).
    The Modernization Act amended section 12(a) of the Bank Act by 
removing the requirement for Finance Board approval of Bank bylaws, 
provided that the bylaws are consistent with applicable laws and 
regulations, as administered by the Finance Board. See Modernization 
Act, Sec. 606(d)(1)(C). The Finance Board believes that, as a matter of 
sound corporate governance practice, the Banks should have bylaws 
governing the manner in which the Banks' affairs are conducted. 
Accordingly, Sec. 934.16 is revised to provide that a Bank's board of 
directors shall have in effect at all times bylaws governing the manner 
in which the Bank administers its affairs, and that such bylaws shall 
be consistent with applicable laws and regulations as administered by 
the Finance Board.
3. Amendment of Bank Dividends Regulation--Sec. 934.17
    Section 16(a) of the Bank Act formerly provided generally that 
dividends may be paid by the Banks out of previously retained earnings 
or current net earnings only with the approval of the Finance Board. 
See 12 U.S.C. 1436(a) (1994). Section 6(g) of the Bank Act provides 
that all stock of any Bank shall share in dividend distributions 
without preference. See 12 U.S.C. 1426(g) (1994). Section 934.17 of the 
Finance Board's regulations implements these statutory provisions by 
providing generally that the board of directors of each Bank, with the 
approval of the Finance Board, may declare and pay a dividend from net 
earnings, including previously retained earnings, on the paid-in value 
of capital stock held during the dividend period. See 12 CFR 934.17 
(1999). Section 934.17 also provides that dividends on such stock shall 
be computed without preference and only for the period such stock was 
outstanding during the dividend period. See id. In addition, dividend 
payments by the Banks have been subject to a Finance Board Dividend 
Policy, see Finance Board Res. No. 90-38 (Mar. 15, 1990), as well as 
Board of Directors Resolutions approving specific Bank dividend 
payments, that established specific conditions for approval of such 
dividend payments, including that the dividend payment would not result 
in a projected impairment of the par value of the capital stock of the 
Bank.
    The Modernization Act amended section 16(a) of the Bank Act by 
removing the requirement for Finance Board approval of Bank dividend 
payments. See Modernization Act, section 606(g)(1)(B). In addition, 
under the Modernization Act, section 6(g) remains in effect during a 
transition period until the Finance Board has adopted capital 
regulations and approved the capital structure plans of the Banks, 
after which period section 6(g) is repealed. See id.  section 608.
    Because the payment of dividends no longer requires the approval of 
the Finance Board, the Finance Board believes the determination of the 
applicable dividend period for such payments also should be a 
discretionary decision of the Banks. Therefore, Sec. 934.17 of the 
Finance Board's regulations is revised to eliminate references to the 
dividend period during which capital stock is held. However, the 
Finance Board believes that, for safety and soundness reasons, the 
capital stock impairment restriction currently imposed pursuant to the 
Dividend Policy should continue to apply. Accordingly, Sec. 934.17 of 
the Finance Board's regulations is revised to provide that a Bank's 
board of directors may declare and pay a dividend only from previously 
retained earnings or current net earnings, and only if such payment 
will not result in a projected impairment of the par value of the 
capital stock of the Bank. Section 934.17 also provides that dividends 
on such capital stock shall be computed without preference.
    Consistent with these regulatory amendments, the Finance Board 
intends to rescind by separate resolution its Dividend Policy as no 
longer necessary.

C. Part 950--Bank Advances

1. Removal of Requirement for Finance Board Approval of Bank Forms for 
Advances Applications, Advances Agreements and Security Agreements--
Sec. 935.4(d)(2)
    Section 9 of the Bank Act formerly required that applications from 
members for Bank advances must be ``in such form as shall be required 
by the [Bank] with the approval of the [Finance] Board.'' See 12 U.S.C. 
1429

[[Page 71277]]

(1994). In addition, section 10(d) of the Bank Act formerly required 
that members enter into an obligation to repay the advance, ``in such 
form as shall meet the requirements of the [B]ank and the approval of 
the [Finance] Board.'' See id. section 1430(d). Section 935.4(d)(2) of 
the Finance Board's regulations provides that each Bank's forms for all 
advances applications, advances agreements and security agreements are 
deemed approved by the Finance Board if such forms are consistent with 
the requirements of part 935. See 12 CFR 935.4(d)(2) (1999). Section 
935.4(d)(2) also requires each Bank to provide copies of its current 
forms for all advances agreements and security agreements, and any 
substantive revisions thereto, to the Finance Board. See id.
    The Modernization Act amended section 9 of the Bank Act by removing 
the requirement for Finance Board approval of Bank advances application 
forms. See Modernization Act, section 606(f)(1)(A). In addition, the 
Modernization Act amended section 10(d) of the Bank Act by removing the 
requirement for Finance Board approval of Bank forms for the repayment 
of advances. See id.  section 606(f)(2)(B)(i). Accordingly, a 
regulatory provision governing Finance Board approval of Bank forms for 
advances applications, advances agreements and security agreements is 
no longer necessary, and Sec. 935.4(d)(2) is removed.
2. Removal of Requirement for Finance Board Approval of Bank Approvals 
of Conditional Advances--Sec. 935.5(a)(2)
    Section 9 of the Bank Act formerly required that a Bank may, 
subject to the approval of the Finance Board, grant an application for 
advances on such conditions as the Bank may prescribe. See 12 U.S.C. 
1429 (1994). Section 935.5(a)(2) of the Finance Board's regulations 
implements this provision by providing that a Bank, in its discretion, 
may approve a member's application for an advance subject to such 
additional terms as the Bank may prescribe, pursuant to the provisions 
of the Bank Act, part 935, and any policy guidelines of the Finance 
Board. See 12 CFR 935.5(a)(2) (1999).
    The Modernization Act amended section 9 of the Bank Act by removing 
the requirement for Finance Board approval in connection with Bank 
conditional advances. See Modernization Act, section 606(f)(1)(B). 
Accordingly, a regulatory provision governing Finance Board approval of 
Bank conditional advances is no longer necessary, and Sec. 935.5(a)(2) 
is removed.
3. Removal of Requirement for Finance Board Approval of Bank Transfers 
of Advances and Advance Participations--Sec. 935.16
    Section 10(d) of the Bank Act formerly required that: ``[s]ubject 
to the approval of the [Finance] Board, any [Bank] shall have power to 
sell to any other [Bank], with or without recourse, any advance made 
under the provisions of this chapter, or to allow to such [Bank] a 
participation therein, and any other [Bank] shall have power to 
purchase such advance or to accept a participation therein, together 
with an appropriate assignment of security therefor.'' See 12 U.S.C. 
1430(d) (1994). Section 935.16 of the Finance Board's regulations 
allows the Banks to purchase and sell advance participations without 
the approval of the Finance Board, subject to the approval of the 
boards of directors of the relevant Banks. See 12 CFR 935.16 (1999). 
The Finance Board currently approves proposed Bank transfers of whole 
advances pursuant to Chairman's Orders that set forth certain 
conditions for the approval. The Finance Board recently proposed 
amending Sec. 935.16 to allow the Banks to approve the transfer of 
whole advances, in addition to advance participations, without Finance 
Board approval, subject to the transfers meeting certain conditions 
derived in part from the Chairman's Orders. See 64 FR 44444 (Aug. 16, 
1999).
    The Modernization Act amended section 10(d) of the Bank Act by 
removing the requirement for Finance Board approval in connection with 
transfers of Bank advances and advance participations. See 
Modernization Act, section 606(f)(2)(B)(ii). Accordingly, a regulatory 
provision governing transfers of Bank advances and advance 
participations is no longer necessary, and Sec. 935.16 is removed. The 
Finance Board by separate action has withdrawn its proposed transfer of 
advances regulation, see Docket # 99-63 (Dec. 14, 1999).

III. Regulatory Flexibility Act

    Because no notice of proposed rulemaking is required for this 
interim final rule, the provisions of the Regulatory Flexibility Act, 5 
U.S.C. section 601 et seq., do not apply. Moreover, the interim final 
rule applies only to the Banks, which do not come within the meaning of 
``small entities,'' as defined in the Regulatory Flexibility Act. See 
id. section 601(6).

IV. Paperwork Reduction Act

    This interim final rule does not contain any collections of 
information pursuant to the Paperwork Reduction Act of 1995. See 44 
U.S.C. 3501 et seq. Therefore, the Finance Board has not submitted any 
information to the Office of Management and Budget for review.

V. Notice and Public Participation

    The Finance Board for good cause finds that the notice and public 
comment procedure required by the Administrative Procedure Act is 
impracticable, unnecessary or contrary to the public interest in this 
instance, because the changes made by this interim final rule implement 
recently enacted statutory amendments that rendered obsolete certain 
provisions of the Finance Board's regulations. See 5 U.S.C. 
553(b)(3)(B).

List of Subjects in 12 CFR Parts 932, 934, and 935

    Community development, Credit, Federal home loan banks, Housing, 
Reporting and recordkeeping requirements.

    Accordingly, the Finance Board hereby amends title 12, chapter IX, 
parts 932, 934, and 935, Code of Federal Regulations, as follows:

PART 932-DIRECTORS, OFFICERS, AND EMPLOYEES OF THE BANKS

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

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1427, and 
1432.

    2. Revise Sec. 932.16 to read as follows:


Sec. 932.16  Site and frequency of board of directors and committee 
meetings.

    (a) Site. Meetings of a Bank's board of directors and committees 
thereof usually should be held within the district served by the Bank. 
No meetings of a Bank's board of directors and committees thereof may 
be held in any location that is not within the United States, including 
its possessions and territories.
    (b) Maintenance of effort. (1) Notwithstanding the limits on annual 
directors' compensation established by section 7(i) of the Act, as 
amended, the board of directors of each Bank shall continue to maintain 
its level of oversight of the management of the Bank, and, except as 
provided in paragraph (b)(2), the board of directors shall hold no 
fewer in-person meetings in any year than it has held on average over 
the immediately preceding three years.
    (2) A Bank may apply to the Finance Board for approval, upon a 
showing of good cause, to hold in any year fewer than the number of in-
person board of

[[Page 71278]]

directors meetings required under paragraph (b)(1).
    3. Amend Sec. 932.17 by:
    a. Revising paragraphs (a) through (c); and
    b. Adding paragraph (f), to read as follows:


Sec. 932.17  Compensation and expenses of Bank directors.

    (a) Definition. As used in this section, compensation means any 
payment of money or provision of any other thing of value (or the 
accrual of a right to receive money or a thing of value in a subsequent 
year) in consideration of a director's performance of official duties 
for the Bank, including, without limitation, daily meeting fees, 
incentive payments and fringe benefits.
    (b) Annual compensation policy. Beginning in 2000 and annually 
thereafter, each Bank's board of directors shall adopt by resolution a 
written policy to provide for the payment to Bank directors of 
reasonable compensation for the performance of their duties as members 
of the Bank's board of directors, subject to the requirements set forth 
in paragraph (c) of this section. At a minimum, such policy shall 
address the activities or functions for which attendance is necessary 
and appropriate and may be compensated, and shall explain and justify 
the methodology for determining the amount of compensation to be paid 
to directors.
    (c) Policy requirements. Payment to directors under each Bank's 
policy on director compensation may be based upon factors that the Bank 
determines to be appropriate, but each Bank's policy shall conform to 
the following requirements:
    (1) Statutory limits on annual compensation. Pursuant to section 
7(i) of the Act, as amended, for 2000, the following limits on 
compensation shall apply: for a Chairperson--$25,000; for a Vice 
Chairperson--$20,000; for any other member of the Bank's board of 
directors--$15,000. Beginning in 2001 and for subsequent years, these 
limits on annual compensation shall be adjusted annually by the Finance 
Board to reflect any percentage increase in the preceding year's 
Consumer Price Index (CPI) for all urban consumers, as published by the 
Department of Labor. Each year, as soon as practicable after the 
publication of the previous year's CPI, the Finance Board shall publish 
notice by Federal Register, distribution of a memorandum, or otherwise, 
of the CPI-adjusted limits on annual compensation.
    (2) Compensation permitted only for performance of official Bank 
business. The total compensation received by each director in a year 
shall reflect the amount of time spent on official Bank business, such 
that greater or lesser attendance at board and committee meetings 
during a given year will be reflected in the compensation received by 
the director for that year. A Bank shall not pay fees to a director, 
such as retainer fees, that do not reflect the director's performance 
of official Bank business.
* * * * *
    (f) Approval. Payments made to directors in compliance with the 
limits on annual directors' compensation and the standards set forth in 
this section are deemed to be approved by the Finance Board for 
purposes of section 7(i) of the Act, as amended.
    4. Remove Secs. 932.18 and 932.19, and reserve subpart C.

PART 934-OPERATIONS OF THE BANKS

    5. The authority citation for part 934 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a, 1422b, 1431(g), 1432(a), and 1442.

    6. Amend Sec. 934.7 by:
    a. Removing the words ``and reporting requirements'' from the 
heading;
    b. Removing paragraphs (a)(2), (b), (c), (d) and (e); and
    c. Redesignating paragraphs (a)(1), (3), (4) and (5) as paragraphs 
(a), (b), (c) and (d), respectively.
    7. Revise Sec. 934.16 to read as follows:


Sec. 934.16  Bank bylaws.

    A Bank's board of directors shall have in effect at all times 
bylaws governing the manner in which the Bank administers its affairs, 
and such bylaws shall be consistent with applicable laws and 
regulations as administered by the Finance Board.
    8. Revise Sec. 934.17 to read as follows:


Sec. 934.17  Bank dividends.

    A Bank's board of directors may declare and pay a dividend only 
from previously retained earnings or current net earnings, and only if 
such payment will not result in a projected impairment of the par value 
of the capital stock of the Bank. Dividends on such capital stock shall 
be computed without preference.

PART 935--ADVANCES

    9. The authority citation for part 935 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1), 1426, 1429, 1430, 
1430b and 1431.


Sec. 935.4  [Amended]

    10. Amend Sec. 935.4 by:
    a. Removing paragraph designation (d)(1); and
    b. Removing paragraph (d)(2).


Sec. 935.5  [Amended]

    11. Amend Sec. 935.5 by:
    a. Removing paragraph (a)(2); and
    b. Redesignating paragraph (a)(3) as paragraph (a)(2).


Sec. 935.16  [Removed]

    12. Remove Sec. 935.16.

    Dated: December 14, 1999.
    By the Board of Directors of the Federal Housing Finance Board.
Bruce A. Morrison,
Chairman.
[FR Doc. 99-33069 Filed 12-20-99; 8:45 am]
BILLING CODE 6725-01-P