[Federal Register Volume 66, Number 177 (Wednesday, September 12, 2001)]
[Proposed Rules]
[Pages 47557-47563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-22925]



  Federal Register / Vol. 66, No. 177 / Wednesday, September 12, 2001 / 
Proposed Rules  

[[Page 47557]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1710

RIN 2550-AA20


Corporate Governance

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Proposed regulation.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
responsible for ensuring the safety and soundness of the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation (Enterprises). In furtherance of that responsibility, OFHEO 
is proposing a regulation to set forth minimum requirements with 
respect to corporate governance practices and procedures of the 
Enterprises.

DATES: Written comments on the proposed regulation must be received by 
November 13, 2001.

ADDRESSES: Send written comments concerning the proposed regulation to 
Alfred M. Pollard, General Counsel, Office of Federal Housing 
Enterprise Oversight, Fourth Floor, 1700 G Street, NW., Washington, DC 
20552. Written comments may also be sent to Mr. Pollard by electronic 
mail at [email protected]. OFHEO requests that written comments 
submitted in hard copy also be accompanied by the electronic version in 
MS Word or in portable document format (PDF) on 3.5" disk.

FOR FURTHER INFORMATION CONTACT: David W. Roderer, Deputy General 
Counsel, telephone (202) 414-3804 (not a toll-free number); or Isabella 
W. Sammons, Associate General Counsel, telephone (202) 414-3790 (not a 
toll-free number); Office of Federal Housing Enterprise Oversight, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The telephone 
number for the Telecommunications Device for the Deaf is (800) 877-
8339.

SUPPLEMENTARY INFORMATION:

Comments

    OFHEO invites comments on all aspects of the proposed regulation, 
including legal and policy considerations, and will take all comments 
into consideration before issuing the final regulation. Copies of all 
comments will be posted on the OFHEO Internet web site at http://www.ofheo.gov. In addition, copies of all comments received will be 
available for examination by the public at the Office of Federal 
Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552.

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Pub. L. 102-550, titled the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.), established 
OFHEO as an independent office within the Department of Housing and 
Urban Development to ensure that the Federal National Mortgage 
Association and the Federal Home Loan Mortgage Corporation 
(collectively, the Enterprises) are adequately capitalized and operate 
safely and in compliance with applicable laws, rules, and regulations.
    Corporate governance involves the relationships between an 
Enterprise, its management, board of directors, shareholders, 
regulators, and other stakeholders. It provides the structure through 
which the business objectives and strategies of the Enterprises are set 
as well as the means of attaining those objectives and monitoring 
performance. In recent years, regulators, investor organizations, stock 
exchanges, and corporations themselves have increased their focus on 
the importance of good corporate governance practices and procedures to 
ensure the long-term success of corporations.
    OFHEO recognizes that good corporate governance practices and 
procedures are essential to the safe and sound operations of the 
Enterprises and accomplishment of their public policy purposes. Thus, 
corporate governance is one category of risk and risk management that 
is examined by OFHEO under its annual risk-based examination program. 
The proposed regulation builds upon the annual risk-based examination 
program in that it sets forth basic safety and soundness standards for 
corporate governance with which the Enterprises are required to comply. 
The proposed corporate governance practices and procedures are 
substantively similar to those required by Federal banking agencies 
with respect to the regulated financial institutions. To a large 
extent, the corporate governance requirements set forth in the proposed 
regulation reflect the current practices of the Enterprises and the 
supervisory standards of OFHEO. The Enterprises must be able to 
continue to attract and retain the highest caliber of board members and 
executive officers.

Section-by-Section Analysis

Subpart A--General

Section 1710.1  Purpose

    OFHEO is responsible under the Act for ensuring the safety and 
soundness of the Enterprises. In furtherance of that responsibility, 
proposed Sec. 1710.1 provides that the purpose of the proposed 
regulation is to set forth minimum requirements with respect to the 
corporate governance practices and procedures of the Enterprises.

Section 1710.2  Definitions

    Proposed Sec. 1710.2 sets forth the definitions of terms used in 
the proposed regulation. The term:
    Act is proposed to mean the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992, Title XIII of the Housing and 
Community Development Act of 1992, Pub.L. 102-550, section 1301, Oct. 
28, 1992, 106 Stat. 3672, 3941 through 4012 (1993) (12 U.S.C. 4501 et 
seq.).
    Agent is proposed to mean any person, other than a board member, 
executive officer, or employee of an Enterprise, who acts on behalf or 
for the benefit of an Enterprise, such as representing an Enterprise in 
contacts with third parties or providing professional services to an 
Enterprise.
    Board member is proposed to mean a member of the board of 
directors; and, for purposes of subpart D, ``board member'' is proposed 
to include a current or former board member.
    Board of directors is proposed to mean the board of directors of an 
Enterprise.
    Chartering acts is proposed to mean the Federal National Mortgage 
Association Charter Act and the Federal Home Loan Mortgage Corporation 
Act, which are codified at 12 U.S.C. 1716 through 1723i and 12 U.S.C. 
1451 through 1459, respectively.
    Compensation is proposed to mean any payment of money or the 
provision of any other thing of current or potential value in 
connection with employment. The term ``compensation'' is also proposed 
to include all direct and indirect payments of benefits, both cash and 
non-cash, including, but not limited to, payments and benefits derived 
from compensation or benefit agreements, fee arrangements, perquisites, 
stock option plans, post employment benefits, or other compensatory 
arrangements.
    Conflict of interest is proposed to mean an interest in a 
transaction, relationship, or activity that might affect adversely, or 
appear to affect adversely, the ability to perform duties and 
responsibilities on behalf of the

[[Page 47558]]

Enterprise in an objective and impartial manner.
    Director means the Director of OFHEO or his or her designee.
    Employee is proposed to mean a salaried individual, other than an 
executive officer, who works part-time, full-time, or temporarily for 
an Enterprise.
    Enterprise is proposed to mean the Federal National Mortgage 
Association or the Federal Home Loan Mortgage Corporation; and the term 
``Enterprises'' is proposed to mean, collectively, the Federal National 
Mortgage Association and the Federal Home Loan Mortgage Corporation.
    Entity is proposed to mean a corporation, company, association, 
firm, joint venture, general or limited partnership, society, joint 
stock company, fund, or other organization or institution.
    Executive officer is proposed to mean any senior executive officer 
and any senior vice president or individual with similar 
responsibilities, without regard to title, who is in charge of a 
principal business unit, division, or function, or who reports directly 
to the chairperson, vice chairperson, chief operating officer, or 
president; and, for purposes of subpart D, ``executive officer'' is 
proposed to include a current or former executive officer.
    Independent board member is proposed to mean a board member who 
meets the criteria for independence under the NYSE rules for audit 
committee members, regardless of the committee(s) on which the board 
member serves.
    Legal expenses is proposed to mean, with respect to a claim, 
proceeding, or action, the amount of legal or other professional fees 
and expenses, and the amount of, and any cost incurred in connection 
with a penalty, fine, assessment, judgment, or settlement.
    NYSE means the New York Stock Exchange.
    OFHEO means the Office of Federal Housing Enterprise Oversight.
    Payment, for purposes of subpart D of this part, is proposed to 
mean:
    (1) Direct or indirect transfer of funds or assets;
    (2) Forgiveness of a debt or other obligation;
    (3) Conferment of a benefit, including but not limited to stock 
options and stock appreciation rights; and
    (4) Segregation of funds or assets, establishment or funding of a 
trust, or purchase of or arrangement for a letter of credit or other 
instrument, for the purpose of making, or pursuant to an agreement to 
make, a payment on or after the date on which such funds or assets are 
segregated, such trust is established, or such letter of credit or 
other instrument is made available, without regard to whether the 
obligation to make such payment is contingent on the determination, 
after such date, of the liability for the payment of such amount or the 
liquidation of the amount of such payment.
    Person is proposed to mean an individual or entity.
    Senior executive officer is proposed to mean the chairperson of the 
board of directors, chief executive officer, chief financial officer, 
chief operating officer, president, vice chairperson, any executive 
vice president of an Enterprise, and any individual, without regard to 
title, who has similar responsibilities.

Sections 1710.3-1710.9

    Sections 1710.3 through 1710.9 are proposed to be reserved.

Subpart B--Corporate Practices and Procedures

Section 1710.10  Applicable Law

    Congress established the Enterprises as privately owned 
corporations, imbued with private and public purposes, to be managed by 
their respective boards of directors. To dispel any legal uncertainty 
as to whether and to what extent State or Federal law applies to 
corporate governance practices and procedures of the Enterprises, 
proposed Sec. 1710.10 would require that each Enterprise elect to 
follow and be bound by a specified body of corporate governance law to 
the extent such law is not inconsistent with applicable Federal law, 
rules, or regulations, including the standards proposed here. 
Specifically, the proposal requires the Enterprise to elect either the 
law of the jurisdiction in which its principal office is located, 
Delaware General Corporation Law, or the Model Business Corporation 
Act. The Enterprise is required to specify its election in its bylaws.
    The proposed approach provides the Enterprises with flexibility in 
structuring their corporate governance practices and procedures while 
at the same time providing shareholders and other interested parties 
with certainty as to the body of corporate law applicable to each 
Enterprise.
    OFHEO requests comments as to whether the choice of law to be 
elected should be narrower or broader than proposed. More particularly, 
should the law of the jurisdiction where the principal office of the 
Enterprise is located be the applicable law? Should the Delaware 
General Corporation Law and the Model Business Corporation Act be 
permissible alternatives? Should Federal law or agency-promulgated 
standards be the sole legal basis for corporate governance practices 
and procedures of the Enterprises?

Section 1710.11  Committees of Board of Directors

    Proposed Sec. 1710.11 provides that an Enterprise may establish 
committees of the board of directors, in addition to the minimally 
required audit and compensation committees. No committee is to have the 
authority of the board of directors to amend the bylaws and no 
committee is to operate to relieve the board of directors or any board 
member of any responsibility imposed by applicable laws, rules, and 
regulations. In addition, proposed Sec. 1710.11 requires that each 
Enterprise provide in its bylaws for the establishment of audit and 
compensation committees, however styled.\1\
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    \1\ The importance of an independent audit committee has 
received increased attention by recent publications, including the 
Recommendation of the Blue Ribbon Committee on Improving the 
Effectiveness of Corporate Audit Committees, sponsored by the NYSE 
and the National Association of Securities Dealers, which can be 
accessed at http://www.nyse.com or http://www.nasd.com.
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    The proposed section requires that the audit committee comply with 
all NYSE rules with respect to the audit committee, including charter, 
independence, composition, and expertise requirements.\2\ The NYSE 
rules are adequate to ensure an effective and independent audit 
committee without further supplementation by OFHEO. Furthermore, since 
both Enterprises are listed with the NYSE, the Enterprises should not 
need to make changes to their respective audit committees to comply 
with the requirements of proposed Sec. 1710.11.
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    \2\ The NYSE rules applicable to audit committees are in 
sections 303.01 and 303.02 of the NYSE Listed Company Manual, which 
can be accessed at http://www.nyse.com.
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    The compensation committee is proposed to be comprised of at least 
three independent board members. The proposed duties of the 
compensation committee include ensuring that compensation plans for 
executive officers and employees comply with applicable laws, rules, 
and regulations and approving the compensation of senior executive 
officers.
    OFHEO specifically requests comments as to whether the definition 
of the term ``independent board member'' in proposed Sec. 1710.2 is 
appropriate to use with respect to the

[[Page 47559]]

independence of board members of the compensation committee.

Section 1710.12  Compensation of Board Members, Executive Officers, and 
Employees

    Proposed Sec. 1710.12 requires that the compensation of board 
members, executive officers, and employees be reasonable and 
commensurate with their duties and responsibilities and comply with 
applicable laws, rules, and regulations.\3\
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    \3\ OFHEO has issued a proposed regulation with respect to the 
compensation of executive officers at 65 FR 81771 (Dec. 27, 2000).
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Section 1710.13  Quorum of Board of Directors; Proxies Not Permissible

    Proposed Sec. 1710.13 requires that each Enterprise provide in its 
bylaws that, for the transaction of business, a quorum of the board of 
directors is a majority of the entire board of directors and that a 
board member may not vote by proxy.

Section 1710.14  Conflict-of-Interest Standards

    Proposed Sec. 1710.14 requires that each Enterprise establish and 
administer written conflict-of-interest standards that will provide 
reasonable assurance that the board members, executive officers, 
employees, and agents of the Enterprise discharge their 
responsibilities in an objective and impartial manner.

Sections 1710.15-1710.19

    Sections 1710.15 through 1710.19 are proposed to be reserved.

Subpart C--Responsibilities of Board of Directors

Section 1710.20  Conduct of Board Members

    Proposed Sec. 1710.20 sets forth the standards that board members 
must follow in conducting the business of the Enterprise. In addition 
to devoting sufficient time to his or her duties and responsibilities, 
each board member is to act:
    (1) On a fully informed, impartial, objective, and independent 
basis;
    (2) In good faith and with due diligence, care, and loyalty;
    (3) In the best interests of the shareholders and the Enterprise; 
and
    (4) In compliance with the chartering acts of the Enterprises and 
other applicable laws, rules, and regulations.
    This proposed section is based on current legal standards embodied 
in State law and the Model Business Corporation Act.

Section 1710.21  Responsibilities of Board of Directors

    Proposed Sec. 1710.21 sets forth the responsibilities of the board 
of directors. The board of directors is responsible for managing the 
conduct and affairs of the Enterprise to ensure that the Enterprise is 
operated in a safe and sound manner, including, at a minimum:
    (1) Reviewing and overseeing corporate strategy, major plans of 
action, and risk policy as well as monitoring corporate performance;
    (2) Hiring and retaining qualified senior executive officers and 
overseeing succession planning for such senior executive officers;
    (3) Ensuring that compensation plans for executive officers and 
employees comply with applicable law, rules, and regulations and 
approving the compensation of board members and senior executive 
officers.
    (4) Ensuring the integrity of the accounting and financial 
reporting systems of the Enterprise, including independent audits, and 
that appropriate systems of control are in place to identify and 
monitor risk and compliance with the chartering acts of the Enterprises 
and other applicable laws, rules, and regulations;
    (5) Remaining informed of the condition, activities, and operations 
of the Enterprise;
    (6) Overseeing the process and adequacy of reporting, disclosures, 
and communications to shareholders, investors, and potential investors; 
and
    (7) Ensuring the responsiveness of executive officers in providing 
accurate and timely reports to Federal regulators and in addressing the 
supervisory concerns of Federal regulators in a timely and appropriate 
manner.
    The proposed section also notes that the board of directors should 
refer to publications of and formal pronouncements by OFHEO for 
guidance on the responsibilities of the board of directors.\4\ The 
proposed section is based on current OFHEO supervisory standards as 
well as State laws and the Model Business Corporation Act.
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    \4\ For example, the OFHEO Examination Handbook, published at 
http://www.ofheo.gov, provides information and sets forth the 
examination criteria with respect to responsibilities of the board 
of directors.
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Sections 1710.22-1710.29

    Sections 1710.22 through 1710.29 are proposed to be reserved.

Subpart D--Indemnification Payments

Sec. 1710.30  Permitted Indemnification Payments

    Proposed Sec. 1710.30 delineates the circumstances under which an 
Enterprise may make or agree to make indemnification payments. In 
proposing this section, OFHEO has considered the likely effect of such 
delineation on the ability of the Enterprises to attract and retain 
competent board members, executive officers, employees, and agents, and 
defers to applicable law in connection with actions not initiated or 
undertaken by OFHEO.
    OFHEO considers an administrative proceeding to be initiated or 
undertaken by the issuance of a notice of charges. With respect to 
administrative proceedings initiated or undertaken by OFHEO, the 
proposed section permits an Enterprise to make or to agree to make 
indemnification payments, which are not prohibited under proposed 
Sec. 1710.31, to a board member or executive officer, if the following 
two criteria are met:
    (1) The board of directors of the Enterprise, in good faith, 
determines in writing after due investigation and consideration that 
the board member or executive officer acted in good faith and in a 
manner he or she believed to be in the best interests of the Enterprise 
and that the indemnification payment will not materially adversely 
affect the safety and soundness of the Enterprise; and
    (2) The board member or executive officer agrees in writing to 
reimburse the Enterprise, to the extent the Enterprise is not covered 
by a commercial insurance policy or similar coverage, for that portion 
of any indemnification payment that subsequently becomes a prohibited 
indemnification payment under proposed Sec. 1710.31.
    In connection with an administrative proceeding initiated or 
undertaken by OFHEO, proposed Sec. 1710.30 provides that the board 
member or executive officer requesting an indemnification payment is 
not to participate in any way in the discussion of the board of 
directors and approval of such payment. It does, however, provide that 
the board member or executive officer may present the request for 
indemnification to the board of directors and respond to any inquiries 
from the board of directors concerning his or her involvement in the 
circumstances giving rise to the administrative proceeding.
    If a majority of board members are named as respondents in an 
administrative proceeding initiated or undertaken by OFHEO and request 
indemnification, proposed Sec. 1710.30 provides that the remaining 
board

[[Page 47560]]

members may authorize independent legal counsel to review the 
indemnification request and provide the remaining board members with a 
written opinion of counsel as to whether the two criteria for payment, 
noted above, are met. If the opinion of counsel concludes that the 
criteria have been met, the remaining board members may rely on the 
opinion in authorizing the requested indemnification.
    Likewise, if all of the board members are named as respondents in 
an administrative proceeding and request indemnification, proposed 
Sec. 1710.30 provides that the board of directors is to authorize 
independent legal counsel to review the indemnification request and 
provide the board of directors with a written opinion of counsel as to 
whether the two criteria have been met. If the opinion of counsel 
concludes that the criteria have been met, the board of directors may 
rely on such opinion in authorizing the requested indemnification.
    These proposed procedures address the conflicts inherent in 
situations where the majority or all of the board members are subjects 
of an administrative proceeding. The use of independent legal counsel 
provides for an unbiased review of the two criteria necessary to 
approve indemnification and does not impose an undue hardship on the 
Enterprise. The board members may, of course, decline to approve the 
indemnification request despite a favorable opinion of legal counsel. 
OFHEO would consider legal counsel to be independent for purposes of 
the proposed section if the legal counsel is not a member of the legal 
staff of the Enterprise, does not have a recent or ongoing relationship 
with the Enterprise or any of its board members or senior executive 
officers, and has no other conflict of interest.
    In a civil action or an administrative proceeding not initiated or 
undertaken by OFHEO, the proposed section authorizes an Enterprise to 
provide for payment to any board member, executive officer, employee, 
or agent of the Enterprise of legal expenses, in accordance with 
applicable law, provided that such payment is consistent with the safe 
and sound operations of the Enterprise.

Section 1710.31  Prohibited Indemnification Payments

    Proposed Sec. 1710.31 addresses when indemnification is prohibited 
in connection with an administrative proceeding that OFHEO initiates or 
undertakes. Thus, the proposed section does not permit an Enterprise or 
any affiliate of an Enterprise to make or agree to make, with certain 
exceptions, any payment to indemnify a board member or executive 
officer for any legal expense incurred in connection with an 
administrative proceeding initiated or undertaken by OFHEO that results 
in a final order or settlement pursuant to which such board member or 
executive officer is assessed a civil money penalty or is required to 
cease and desist from or take any affirmative action with respect to 
the Enterprise.
    The proposed exceptions to this prohibition are that an Enterprise 
may make a reasonable payment that:
    (1) Is used to purchase a commercial insurance policy or similar 
coverage; provided, that such insurance policy or similar coverage is 
not used to indemnify a board member or executive officer for the cost 
of any civil money penalty assessed against him or her in an 
administrative proceeding initiated or undertaken by OFHEO, but may be 
used to pay other legal expenses incurred in connection with such 
administrative proceeding or the amount of any restitution to the 
Enterprise; or
    (2) Represents partial indemnification for legal expenses 
specifically attributable to particular charges for which there has 
been a formal and final adjudication or finding in connection with a 
settlement that the board member or executive officer has not violated 
certain laws or regulations or has not engaged in certain unsafe or 
unsound practices or breaches of fiduciary duty.
    With respect to the second exception noted above, OFHEO recognizes 
that the appropriate amount of any partial indemnification may be 
difficult to ascertain with certainty. OFHEO, nevertheless, is of the 
opinion that the permissibility of partial indemnification is more 
equitable than an all or nothing approach.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    The proposed regulation is not classified as a significant rule 
under Executive Order 12866 because it would not result in an annual 
effect on the economy of $100 million or more or a major increase in 
costs or prices for consumers, individual industries, Federal, State, 
or local government agencies, or geographic regions; or have 
significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic or 
foreign markets. Accordingly, no regulatory impact assessment is 
required and this proposed regulation has not been submitted to the 
Office of Management and Budget for review.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the 
proposed regulation under the Regulatory Flexibility Act. The General 
Counsel of OFHEO certifies that the proposed regulation, if adopted, is 
not likely to have a significant economic impact on a substantial 
number of small business entities because the regulation is applicable 
only to the Enterprises, which are not small entities for purposes of 
the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1710

    Administrative practice and procedure, Government Sponsored 
Enterprises.
    Accordingly, for the reasons stated in the preamble, OFHEO proposes 
to add subchapter B to 12 CFR chapter XVII as follows:

Subchapter B--Corporate Governance

PART 1710--CORPORATE GOVERNANCE

Subpart A--General
Sec.
1710.1   Purpose.
1710.2   Definitions.
1710.3-1710.9   [Reserved]
Subpart B--Corporate Practices and Procedures
1710.10   Applicable law.
1710.11   Committees of board of directors.
1710.12   Compensation of board members, executive officers, and 
employees.
1710.13   Quorum of board of directors; proxies not permissible.
1710.14   Conflict-of-interest standards.
1710.15-1710.19   [Reserved]
Subpart C--Responsibilities of Board of Directors
1710.20   Conduct of board members.
1710.21   Responsibilities of board of directors.
1710.22-1710.29   [Reserved]

[[Page 47561]]

Subpart D--Indemnification Payments
1710.30   Permitted indemnification payments.
1710.31   Prohibited indemnification payments.

    Authority: 12 U.S.C. 4513(a) and 4513(b)(1).

Subpart A--General


Sec. 1710.1  Purpose.

    OFHEO is responsible under the Act for ensuring the safety and 
soundness of the Enterprises. In furtherance of that responsibility, 
this part sets forth minimum requirements with respect to the corporate 
governance practices and procedures of the Enterprises.


Sec. 1710.2  Definitions.

    For purposes of this part, the term:
    (a) Act means the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992, Title XIII of the Housing and Community 
Development Act of 1992, Pub. L. 102-550, section 1301, Oct. 28, 1992, 
106 Stat. 3672, 3941 through 4012 (1993) (12 U.S.C. 4501 et seq.).
    (b) Agent means any person, other than a board member, executive 
officer, or employee of an Enterprise, who acts on behalf or for the 
benefit of an Enterprise, such as representing an Enterprise in 
contacts with third parties or providing professional services to an 
Enterprise.
    (c) Board member means a member of the board of directors; and, for 
purposes of subpart D of this part, the term ``board member'' includes 
a current or former board member.
    (d) Board of directors means the board of directors of an 
Enterprise.
    (e) Chartering acts mean the Federal National Mortgage Association 
Charter Act and the Federal Home Loan Mortgage Corporation Act, which 
are codified at 12 U.S.C. 1716 through 1723i and 12 U.S.C. 1451 through 
1459, respectively.
    (f) Compensation means any payment of money or the provision of any 
other thing of current or potential value in connection with 
employment. The term ``compensation'' includes all direct and indirect 
payments of benefits, both cash and non-cash, including, but not 
limited to, payments and benefits derived from compensation or benefit 
agreements, fee arrangements, perquisites, stock option plans, post 
employment benefits, or other compensatory arrangements.
    (g) Conflict of interest means an interest in a transaction, 
relationship, or activity that might affect adversely, or appear to 
affect adversely, the ability to perform duties and responsibilities on 
behalf of the Enterprise in an objective and impartial manner.
    (h) Director means the Director of OFHEO or his or her designee.
    (i) Employee means a salaried individual, other than an executive 
officer, who works part-time, full-time, or temporarily for an 
Enterprise.
    (j) Enterprise means the Federal National Mortgage Association or 
the Federal Home Loan Mortgage Corporation; and the term 
``Enterprises'' means, collectively, the Federal National Mortgage 
Association and the Federal Home Loan Mortgage Corporation.
    (k) Entity means a corporation, company, association, firm, joint 
venture, general or limited partnership, society, joint stock company, 
fund, or other organization or institution.
    (l) Executive officer means any senior executive officer and any 
senior vice president of an Enterprise and any individual with similar 
responsibilities, without regard to title, who is in charge of a 
principal business unit, division, or function of an Enterprise, or who 
reports directly to the chairperson, vice chairperson, chief operating 
officer, or president of an Enterprise; and, for purposes of subpart D 
of this part, the term ``executive officer'' includes a current or 
former executive officer.
    (m) Independent board member means a board member who meets the 
criteria for independence under the NYSE rules for audit committee 
members, regardless of the committee(s) on which the board member 
serves.
    (n) Legal expenses means, with respect to a claim, proceeding, or 
action, the amount of legal or other professional fees and expenses, 
and the amount of, and any cost incurred in connection with a penalty, 
fine, assessment, judgment, or settlement.
    (o) NYSE means the New York Stock Exchange.
    (p) OFHEO means the Office of Federal Housing Enterprise Oversight.
    (q) Payment, for purposes of subpart D of this part, means:
    (1) Direct or indirect transfer of funds or assets;
    (2) Forgiveness of a debt or other obligation;
    (3) Conferment of a benefit, including but not limited to stock 
options and stock appreciation rights; and
    (4) Segregation of funds or assets, establishment or funding of a 
trust, or purchase of or arrangement for a letter of credit or other 
instrument, for the purpose of making, or pursuant to an agreement to 
make, a payment on or after the date such funds or assets are 
segregated, such trust is established, or such letter of credit or such 
other instrument is made available, without regard to whether the 
obligation to make such payment is contingent on the determination, 
after such date, of the liability for such payment or the liquidation 
of the amount of such payment.
    (r) Person means an individual or entity.
    (s) Senior executive officer means the chairperson of the board of 
directors, chief executive officer, chief financial officer, chief 
operating officer, president, vice chairperson, any executive vice 
president of an Enterprise, and any individual, without regard to 
title, who has similar responsibilities.


Secs. 1710.3-1710.9  [Reserved]

Subpart B--Corporate Practices and Procedures


Sec. 1710.10  Applicable law.

    (a) Election. Each Enterprise shall elect to follow and be bound by 
the corporate governance practices and procedures of one of the 
following bodies of law, to the extent such procedures are not 
inconsistent with safety and soundness and applicable Federal law, 
rules, and regulations:
    (1) Law of the jurisdiction in which the principal office of the 
Enterprise is located;
    (2) Delaware General Corporation Law, Del. Code Ann. tit. 8, as 
amended; or
    (3) Model Business Corporation Act, as amended.
    (b) Designation. Each Enterprise shall designate in its bylaws the 
body of law elected pursuant to paragraph (a) of this section within 90 
calendar days from the effective date of this part.


Sec. 1710.11  Committees of board of directors.

    (a) Committees. An Enterprise may provide in its bylaws for the 
establishment of committees of the board of directors, in addition to 
the audit and compensation committees required under paragraph (b) of 
this section. No committee of the board of directors shall have the 
authority of the board of directors to amend the bylaws and no 
committee shall operate to relieve the board of directors or any board 
member of any responsibility imposed by applicable laws, rules, and 
regulations.
    (b) Audit and compensation committees. Each Enterprise shall 
provide in its bylaws, within 90 calendar days after the effective date 
of this part, for the establishment of the following committees, 
however styled:

[[Page 47562]]

    (1) An audit committee that is in compliance with the charter, 
independence, composition, expertise, and all other requirements of the 
audit committee rules of the NYSE.
    (2) A compensation committee, comprised of at least three 
independent board members, whose duties include, at a minimum, ensuring 
that compensation plans for executive officers and employees comply 
with applicable laws, rules, and regulations and approving the 
compensation of senior executive officers.


Sec. 1710.12  Compensation of board members, executive officers, and 
employees.

    Compensation of board members, executive officers, and employees 
shall not be in excess of that which is reasonable and commensurate 
with their duties and responsibilities and comply with applicable laws, 
rules, and regulations.


Sec. 1710.13  Quorum of board of directors; proxies not permissible.

    Each Enterprise shall provide in its bylaws, within 90 calendar 
days from the effective date of this part, that, for the transaction of 
business, a quorum of the board of directors is a majority of the 
entire board of directors and that a board member may not vote by 
proxy.


Sec. 1710.14  Conflict-of-interest standards.

    Each Enterprise shall establish and administer written conflict-of-
interest standards that will provide reasonable assurance that the 
board members, executive officers, employees, and agents of the 
Enterprise discharge their responsibilities in an objective and 
impartial manner.


Secs. 1710.15-1710.19  [Reserved]

Subpart C--Responsibilities of Board of Directors


Sec. 1710.20  Conduct of board members.

    (a) Actions. Each member of the board of directors of an 
Enterprise, in conducting the business of the Enterprise, shall act:
    (1) On a fully informed, impartial, objective, and independent 
basis;
    (2) In good faith and with due diligence, care, and loyalty;
    (3) In the best interests of the shareholders and the Enterprise; 
and
    (4) In compliance with the chartering act of the Enterprise and 
other applicable laws, rules, and regulations.
    (b) Time. Each board member of an Enterprise shall devote 
sufficient time and attention to his or her responsibilities in 
conducting the business of the Enterprise.


Sec. 1710.21  Responsibilities of board of directors.

    (a) Responsibilities. The board of directors is responsible for 
managing the conduct and affairs of the Enterprise to ensure that the 
Enterprise is operated in a safe and sound manner, including, at a 
minimum:
    (1) Reviewing and overseeing corporate strategy, major plans of 
action, risk policy, as well as monitoring corporate performance;
    (2) Hiring and retaining qualified senior executive officers and 
overseeing succession planning for such senior executive officers;
    (3) Ensuring that compensation plans for executive officers and 
employees comply with applicable law, rules, and regulations and 
approving the compensation of board members and senior executive 
officers;
    (4) Ensuring the integrity of the accounting and financial 
reporting systems of the Enterprise, including independent audits, and 
that appropriate systems of control are in place to identify and 
monitor risk and compliance with the chartering act of the Enterprise 
and other applicable laws, rules, and regulations;
    (5) Remaining informed of the condition, activities, and operations 
of the Enterprise;
    (6) Overseeing the process and adequacy of reporting, disclosures, 
and communications to shareholders, investors, and potential investors; 
and
    (7) Ensuring the responsiveness of executive officers in providing 
accurate and timely reports to Federal regulators and in addressing the 
supervisory concerns of Federal regulators in a timely and appropriate 
manner.
    (b) Additional guidance. The board of directors should refer to 
publications of and formal pronouncements of OFHEO for guidance on the 
responsibilities of the board of directors.


Secs. 1710.22-1710.29  [Reserved]

Subpart D--Indemnification Payments


Sec. 1710.30  Permitted indemnification payments.

    (a) OFHEO administrative proceedings. (1) Except as provided in 
Sec. 1710.31, an Enterprise may make or agree to make indemnification 
payments to a board member or executive officer of the Enterprise with 
respect to legal expenses incurred in connection with an administrative 
proceeding initiated or undertaken by OFHEO, if:
    (i) The board of directors of the Enterprise, in good faith, 
determines in writing after due investigation and consideration that 
the board member or executive officer acted in good faith and in a 
manner he or she believed to be in the best interests of the Enterprise 
and that the indemnification payment will not materially adversely 
affect the safety and soundness of the Enterprise; and
    (ii) The board member or executive officer agrees in writing to 
reimburse the Enterprise, to the extent the Enterprise is not covered 
by any commercial insurance policy or similar coverage, for that 
portion of an indemnification payment that subsequently becomes a 
prohibited indemnification payment under Sec. 1710.31.
    (2) In connection with an administrative proceeding initiated or 
undertaken by OFHEO:
    (i) The board member or executive officer requesting an 
indemnification payment shall not participate in any way in the 
discussion of the board of directors and approval of such payment; 
provided, however, that such board member or executive officer may 
present the request for indemnification to the board of directors and 
respond to any inquiries from the board of directors concerning his or 
her involvement in the circumstances giving rise to the administrative 
proceeding.
    (ii) In the event that a majority of the board members are named as 
respondents, the remaining board members may authorize independent 
legal counsel to review the indemnification request and provide the 
remaining board members with a written opinion of counsel as to whether 
the conditions delineated in paragraph (a)(1) of this section have been 
met. If the opinion of counsel concludes that such conditions have been 
met, the remaining members of the board of directors may rely on the 
opinion in authorizing the requested indemnification.
    (iii) In the event that all of the board members are named as 
respondents, the board of directors shall authorize independent legal 
counsel to review the indemnification request and provide the board 
with a written opinion of counsel as to whether the conditions 
delineated in paragraph (a)(1) of this section have been met. If the 
opinion of counsel concludes that such conditions have been met, the 
board of directors may rely on the opinion in authorizing the requested 
indemnification.
    (b) Other civil actions or administrative proceedings. In cases 
involving a civil action or an administrative proceeding not initiated 
or undertaken by OFHEO, an Enterprise may provide for payment to any 
board member, executive officer, employee, or agent of the Enterprise 
of legal expenses in accordance with applicable law, provided that such 
payment will not

[[Page 47563]]

materially adversely affect the safety and soundness of the Enterprise.


Sec. 1710.31  Prohibited indemnification payments.

    (a) Prohibited indemnification payments. An Enterprise or any 
affiliate of an Enterprise may not make, except as provided in 
paragraph (b) of this section, any payment to indemnify any board 
member or executive officer for any legal expense incurred in 
connection with an administrative proceeding initiated or undertaken by 
OFHEO that results in a final order or settlement pursuant to which the 
board member or executive officer is assessed a civil money penalty or 
is required to cease and desist from or take any affirmative action 
with respect to the Enterprise.
    (b) Exceptions. An Enterprise may make a reasonable payment that:
    (1) Is used to purchase any commercial insurance policy or similar 
coverage; provided, however, that such insurance policy or similar 
coverage shall not be used to indemnify a board member or executive 
officer for the cost of any civil money penalty assessed against him or 
her in an administrative proceeding initiated or undertaken by OFHEO, 
but may be used to pay other legal expenses incurred in connection with 
such administrative proceeding or to pay the amount of any restitution 
to the Enterprise; or
    (2) Represents partial indemnification for legal expenses 
specifically attributable to particular charges for which there has 
been a formal and final adjudication or a finding in connection with a 
settlement that the board member or executive officer has not violated 
certain laws or regulations or has not engaged in certain unsafe or 
unsound practices or breaches of fiduciary duty.

    Dated: September 4, 2001.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 01-22925 Filed 9-11-01; 8:45 am]
BILLING CODE 4220-01-U