[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Modernization Act of 1999 (Modernization Act) \1\ repealed most of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