[Federal Register Volume 65, Number 50 (Tuesday, March 14, 2000)]
[Rules and Regulations]
[Pages 13663-13666]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6201]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Chapter IX

[No. 2000-09]
RIN 3069-AA-96


Devolution of Corporate Governance Responsibilities

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is adopting 
as final, with several changes, the Interim Final Rule 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.

EFFECTIVE DATE: This final rule shall be effective on March 14, 2000.

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, 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; 
Regulatory Background

    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. Sec. 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Modernization Act of 1999 (Modernization Act) \1\ repealed most of 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, Secs. 604(a)(6); 606(d), (f), (g) (1999). Accordingly, the 
Finance Board adopted the Interim Final Rule, which amended its 
regulations to remove the corresponding Finance Board approval 
requirements for such corporate governance functions, consistent with 
the Modernization Act. See 64 FR 71275 (Dec. 21, 1999). The Interim 
Final Rule maintained or imposed standards or requirements on the Banks 
where deemed necessary for reasons of safety and soundness and sound 
corporate governance practice. See id.
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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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    The Interim Final Rule provided for a 30-day comment period, which 
closed on January 20, 2000. The Finance Board received a total of 8 
comment letters on the Interim Final Rule. Commenters included six 
Banks, a trade association representing 10 of the 12 Banks, and a 
banking institutions trade association. The provisions of the Interim 
Final Rule on which significant comments were received are discussed 
below.

[[Page 13664]]

II. Analysis of the Final Rule

A. Amendment of Bank Directors' Meeting and Compensation and Expenses 
Provisions--Secs. 918.3, 918.7

1. Annual Directors' Compensation Limits--Sec. 918.3(a)(2)
    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 a Bank's board of directors. See 
Modernization Act, Sec. 606(b). The statutory limits on directors' 
annual compensation were implemented in revised Sec. 932.17(c)(1) of 
the Interim Final Rule,\2\ to be effective in 2000. Commenters 
requested clarification on the applicability of the annual compensation 
limits to the payment by the Banks of deferred compensation to Bank 
directors.\3\ As Sec. 918.3(a)(2) of the final rule now states, 
starting in 2000, the annual compensation limits would apply to the 
year in which the deferred compensation was accrued or earned, and not 
to the year in which it is paid. Thus, amounts accrued in 2000 but paid 
to the director in 2001 would be subject to the annual compensation 
limit applicable for 2000.
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    \2\ The Finance Board recently reorganized and redesignated all 
of its regulations. See 65 FR 8253 (Feb. 18, 2000). Section 
932.17(c)(1) of the Interim Final Rule was redesignated as 
Sec. 918.3(a). See 65 FR 8253, 8260 (to be codified at 12 CFR 
918.3(a)).
    \3\ The Finance Board has no regulation or policy prohibiting 
the Banks from adopting deferred compensation plans for Bank 
directors, and neither the Interim Final Rule nor this final rule 
prohibits the Banks from adopting such plans.
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2. Maintenance of Effort Standard; Minimum Number of In-Person Bank 
Board Meetings Requirement--Sec. 918.7
    Section 932.16(b)(1) of the Interim Final Rule (redesignated 
Sec. 918.7(a)) required each Bank's board of directors to continue to 
maintain its level of oversight of the management of the Bank and, 
except as provided in paragraph (b)(2) (redesignated paragraph (b)), to 
hold no fewer in-person board meetings in any year than it has held on 
average over the immediately preceding three years. Redesignated 
paragraph (b) provided that 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 meetings required under paragraph (a).
    Commenters generally opposed the minimum meetings requirement on 
the ground that such decisions are within the fiduciary corporate 
governance responsibilities of the Banks' boards and, therefore, should 
not be regulated by the Finance Board. One commenter stated that the 
requirement was unnecessary in light of the Finance Board's recently 
proposed regulation setting forth the responsibilities of Bank boards 
as a means of ensuring that they fulfill their duties to operate the 
Banks in a safe and sound manner. See 65 FR 81 (January 3, 2000). 
Another commenter stated that the three-year averaging requirement 
unnecessarily reduces the flexibility of the Banks to make decisions on 
the number of board meetings, which normally are based on a number of 
subjective factors, and may not be appropriate to meet current needs of 
the Bank. One commenter also stated that the Finance Board can address 
any concerns in this area through the examination and supervision 
process.
    As discussed in the preamble to the Interim Final Rule, the minimum 
meetings requirement was adopted for safety and soundness reasons. See 
64 FR 71275. The reduction in compensation to be paid to directors as a 
result of the new annual compensation limits has raised concerns that 
the Banks' boards will hold fewer meetings, thus reducing their level 
of oversight of the management of the Banks.
    The Finance Board acknowledges that decisions on the number of Bank 
board meetings generally should be within the purview of the corporate 
governance responsibilities of the Banks' boards, and general corporate 
governance standards are set forth in the Finance Board's proposed 
corporate governance rule as a means of ensuring that the Banks' boards 
fulfill their duties to operate the Banks in a safe and sound manner. 
However, the Finance Board believes that, notwithstanding the Bank 
boards' fiduciary duties regarding safety and soundness, the Finance 
Board's safety and soundness concerns with respect to the Bank boards' 
level of oversight of Bank management warrant a regulatory response in 
this area. Accordingly, the Finance Board is retaining a minimum 
meetings requirement in the final rule.
    However, based on the comments received, the Finance Board believes 
that the required minimum number of meetings per year should be 
reduced. Historically, the Banks held monthly board meetings. In recent 
years, the trend has been to operate with fewer board meetings at many 
of the Banks. For 2000, statistics indicate that the three-year 
averaging requirement in the Interim Final Rule would result in at 
least: (i) 12 in-person meetings for one Bank; (ii) 11 in-person 
meetings for one Bank, which has applied for Finance Board approval to 
hold 9 in-person meetings; (iii) 9 in-person meetings for 4 Banks; (iv) 
8 in-person meetings for 1 Bank, which has applied for Finance Board 
approval to hold 6 in-person meetings; (v) 7 in-person meetings for 4 
Banks; and (vi) 6 in-person meetings for 1 Bank. The Finance Board 
recognizes that a pure averaging requirement incorporates the vagaries 
of timing into the calculation of the minimum meetings requirement for 
a particular Bank. For example, in 2000, 2 Banks would be required to 
hold more than 9 in-person board meetings per year, while the other 10 
Banks would be allowed to hold 9 or fewer such meetings. While the 
Finance Board still believes it is important to maintain a minimum 
meeting standard for all of the reasons discussed in the preamble to 
the Interim Final Rule, it is persuaded that it would be fair and 
reasonable to reduce the minimum meetings requirement to reflect the 
operational reality at the Banks. Accordingly, the final rule amends 
the Interim Final Rule to provide that a Bank's board of directors 
shall hold a minimum number of meetings per year equal to the lesser 
of: (i) The three-year averaging requirement for the Bank; or (ii) 9. 
See Sec. 918.7(a).
    In response to a request from one commenter, the final rule also 
revises the Interim Final Rule to clarify that if the three-year 
averaging number is a fraction, the Bank may, in its discretion, round 
down the number to the nearest whole number. See Sec. 918.7(a)(2).
    Several commenters urged that teleconference and videoconference 
meetings be allowed to count towards the minimum meetings requirement. 
The Finance Board believes that calling in-person board meetings is 
necessary to enable the directors to fulfill their responsibilities to 
operate the Banks in a safe and sound manner, and this requirement is 
maintained in the final rule. The final rule does not prohibit an 
individual director from participating in a meeting called as an in-
person meeting by teleconferencing or videoconferencing.
    The final rule also revises the Interim Final Rule to clarify that 
a Bank may apply to the Finance Board for a waiver of the minimum 
meetings requirement in paragraph (a) pursuant to the waiver procedures 
set forth in part 907 of the Finance Board's regulations. See 12 CFR 
part 907.
3. Prohibition on Payment of Retainer Fees--Sec. 918.3(b)
    The Interim Final Rule revised Sec. 932.17(c)(2) (redesignated 
Sec. 918.3(b)) to provide that, starting in 2000, the total 
compensation received by each director in a year shall reflect the

[[Page 13665]]

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. This section also provided that 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.
    As discussed in the preamble to the Interim Final Rule, these 
provisions were intended to ensure that, consistent with Congressional 
intent, directors be compensated only for the performance of official 
Bank business and not simply for holding office. See 64 FR 71275. The 
preamble stated that 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 id.; 12 U.S.C. 1422b(a)(2) 
(1994).
    Commenters objected to these provisions in the Interim Final Rule, 
apparently interpreting them as prohibiting the Banks from paying 
directors for official Bank business conducted by the directors outside 
of board or committee meetings, such as the time and effort expended in 
preparing for board and committee meetings, monitoring ongoing 
activities of the Bank, and staying informed on financial and other 
business developments relevant to the Bank. The revisions in the 
Interim Final Rule were not intended by the Finance Board to prohibit 
the Banks from paying directors for the performance of such official 
Bank business in between board or committee meetings, as long as the 
director also continues to regularly attend board or committee meetings 
and the fees are paid to the director after he or she has conducted the 
official Bank business. Accordingly, the final rule revises the 
language in the Interim Final Rule to clarify the Finance Board's 
intent in this regard. See Sec. 918.3(b).

B. Clarification of Date of Applicability of Removal of Requirements 
Regarding Compensation of Bank Officers and Employees--Sec. 918.9

    The Modernization Act amended section 12(a) of the Bank Act by 
removing the requirement for Finance Board approval in connection with 
the compensation of Bank officers and employees. See Modernization Act, 
Sec. 606(d)(1)(B). In order to implement this provision, the Interim 
Final Rule removed Sec. 932.19 of the Finance Board's regulations. 
Section 932.19 of the Finance Board's regulations had set forth 
requirements for the payment of compensation to Bank officers and 
employees. See 12 CFR 932.19 (1999). A number of Banks have raised 
questions regarding the effect of the Interim Final Rule on their 
ability to pay compensation to officers or employees for 1999 in excess 
of that which would have been allowed under Sec. 932.19 of the Finance 
Board's regulations and the Banks' policies adopted thereunder. These 
questions actually translate into a question regarding the date of 
applicability of the removal of the compensation regulation. For the 
reasons discussed below, notwithstanding the December 21, 1999 overall 
effective date of the Interim Final Rule, the Finance Board believes 
that the removal of the requirements relating to compensation of Bank 
officers and employees in 12 CFR 932.19 (1999) should be applicable 
only to compensation years starting after December 21, 1999. 
Accordingly, a new Sec. 918.9 is being added in the final rule to 
clarify this result.
    The compensation regulation in effect in 1999 provided that the 
maximum incentive payment to a Bank president could not exceed the 
difference between that president's annual base salary approved by the 
Bank's board and 125 percent of a base salary cap established by the 
Finance Board. Id. Sec. 932.19(c)(2)(i) (1999). The regulation further 
provided that, by January 31 of each year, the board of each Bank that 
intended to make any incentive payment to its president for such year 
was required to adopt a resolution establishing the performance 
measures and targets on which such incentive payment would be based. 
The Banks have operated, and the Bank presidents have performed, 
pursuant to the provisions of their incentive compensation plans and 
the Finance Board's compensation regulation for the entire 1999 year.
    The Modernization Act, while deleting the requirement in section 
12(a) of the Bank Act for Finance Board approval of Bank officer and 
employee compensation, did not affect in any way the ability of the 
Finance Board to continue to regulate Bank officer and employee 
compensation, nor did the enactment of the Modernization Act have the 
effect of suspending the Finance Board's existing compensation 
regulation.
    Therefore, the controlling statutory, regulatory and corporate 
governance framework for Bank officer and employee compensation in 1999 
should be that which was in place when, on January 31, each Bank 
established the base salary for its president, when each Bank adopted 
its incentive compensation plan for that year, and when, by January 31, 
each Bank's board established the performance measures and targets on 
which incentive payments to that Bank's president would be based. This 
view is consistent with that taken in Sec. 932.17 of the Interim Final 
Rule (redesignated part 918), and finalized in this final rule, that 
the annual director compensation limits established in the 
Modernization Act apply only to compensation to be paid for services 
performed in 2000 and in subsequent years.
    Thus, all compensation, both base salary and incentive 
compensation, to be paid to a president or other officer of a Bank for 
services performed during 1999 (or prior compensation years) must 
comply with the provisions of the 1999 compensation (or the 
compensation regulation in effect for that compensation year). See 12 
CFR 932.19 (1999).
    The Finance Board is aware that a number of Banks had a practice of 
adopting incentive compensation plans that permitted the Banks' 
presidents to earn incentive compensation in excess of the limits 
established in the compensation regulation, although to the Finance 
Board's knowledge, no Bank's plan provided for the payment of those 
excess amounts. Because the removal of the compensation requirements in 
12 CFR 932.19 (1999) is applicable only to compensation years starting 
after December 21, 1999, Banks that had adopted such plans in 1999 and 
before may not pay incentive compensation earned under such plans in 
excess of the limits established by the Finance Board in the 1999 
compensation regulation (or prior compensation regulations). See id. 
Sec. 932.19(c)(2) (1999).

III. Regulatory Flexibility Act

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

IV. Paperwork Reduction Act

    This 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.

[[Page 13666]]

List of Subjects 12 CFR Parts 917, 918 and 950

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


    Accordingly, the Interim Final Rule amending 12 CFR chapter IX, 
which was published at 64 FR 71275 (Dec. 21, 1999), and amended at 65 
FR 8253 (Feb. 18, 2000), is adopted as final with the following 
changes:

PART 918--BANK COMPENSATION, EXPENSES AND MEETINGS

    1. The authority citation for part 918 continues to read as 
follows:

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

    2. Revise the heading of Sec. 918.2 to read as follows:

Sec. 918.2  Annual directors' compensation policy.

* * * * *

    3. Amend Sec. 918.3 by:
    a. Revising the heading;
    b. Redesignating paragraph (a) as paragraph (a)(1);
    c. Adding paragraph (a)(2); and
    d. Revising paragraph (b), to read as follows:


Sec. 918.3  Directors' compensation policy requirements.

* * * * *
    (a) * * *
    (1) * * *
    (2) Starting in 2000, the annual compensation limits set forth in 
paragraph (a)(1) of this section shall apply to the year in which any 
deferred compensation was accrued or earned by a director, and not to 
the year in which it is paid to the director.
    (b) 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, and 
greater or lesser attendance at board and committee meetings during a 
given year shall be reflected in the compensation received by the 
director for that year. A Bank shall not pay a director who regularly 
fails to attend board or committee meetings. 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 conducted prior to the 
payment of such fees.

    4. Revise the heading of Sec. 918.4 to read as follows:


Sec. 918.4  Directors' expenses.

* * * * *

    5. Revise Sec. 918.7 to read as follows:


Sec. 918.7  Maintenance of effort.

    (a) General. 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) of this section, the board of directors shall hold a 
minimum number of in-person meetings in any year equal to the lesser 
of:
    (1) 9; or
    (2) The number of in-person board of directors meetings held by the 
Bank on average over the immediately preceding three years (which 
number, if a fraction, may be rounded down to the nearest whole number, 
in the Bank's discretion).
    (b) Waiver of minimum meetings requirement. A Bank may apply to the 
Finance Board for a waiver of paragraph (a) of this section pursuant to 
the procedures set forth in part 907 of this chapter.

    6. Add Sec. 918.9 to read as follows:


Sec. 918.9  Date of applicability of removal of requirements regarding 
compensation of bank officers and employees.

    The removal of the requirements relating to compensation of Bank 
officers and employees in 12 CFR 932.19 (in the Code of Federal 
Regulations revised as of January 1, 1999), is applicable for all Bank 
officer and employee compensation years starting after December 21, 
1999.

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

    Dated: February 23, 2000.
Bruce A. Morrison,
Chairman.
[FR Doc. 00-6201 Filed 3-13-00; 8:45 am]
BILLING CODE 6725-01-P