[Federal Register Volume 66, Number 177 (Wednesday, September 12, 2001)]
[Rules and Regulations]
[Pages 47550-47556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-22926]



[[Page 47549]]

-----------------------------------------------------------------------

Part III





Department of Housing and Urban Development





-----------------------------------------------------------------------



Office of Federal Housing and Enterprise Oversight



-----------------------------------------------------------------------



12 CFR Parts 1710 et al.



Executive Compensation, Corporate Governance and Flood Insurance; Final 
Rule and Proposed Rules

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

[[Page 47550]]


-----------------------------------------------------------------------

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1770

RIN 2550-AA13


Executive Compensation

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Final regulation.

-----------------------------------------------------------------------

SUMMARY: The Office of Federal Housing Enterprise Oversight (``OFHEO'') 
is issuing a final regulation that clarifies the procedures OFHEO 
employs in overseeing compensation provided by the Federal National 
Mortgage Association and the Federal Home Loan Mortgage Corporation 
(collectively, ``the Enterprises'') to their executive officers. The 
final regulation formalizes processes by which OFHEO performs its 
separate reviews of executive compensation and termination benefits. 
The processes require the submission of relevant information by the 
Enterprises on a timely basis to enable OFHEO to efficiently carry out 
its executive compensation functions.

EFFECTIVE DATE: The effective date of this regulation is October 29, 
2001.

FOR FURTHER INFORMATION CONTACT: David W. Roderer, Deputy General 
Counsel, telephone (202) 414-3804; Christine C. Dion, Associate General 
Counsel, telephone (202) 414-3838 (not a toll-free number); or Brian M. 
Doherty, Senior Policy Analyst, telephone (202) 414-8922, 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:

I. Background

    Title XIII of the Housing and Community Development Act of 1992, 
Pub. L. No. 102-550, entitled the ``Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992'' (the ``Act''),\1\ 
established the Office of Federal Housing Enterprise Oversight 
(``OFHEO'') as an independent office within the Department of Housing 
and Urban Development. OFHEO is the safety and soundness regulator of 
two of the nation's largest housing-related government sponsored 
enterprises: the Federal National Mortgage Association (``Fannie Mae'') 
and the Federal Home Loan Mortgage Corporation (``Freddie Mac'') 
(collectively, the ``Enterprises''). In addition to establishing OFHEO, 
the Act made amendments to the Enterprises' enabling statutes 
(collectively, the ``charter acts''),\2\ in part to accommodate OFHEO's 
statutory supervisory powers.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 4501 et seq.
    \2\ Federal National Mortgage Association Charter Act (12 U.S.C. 
1716-1723i) and Federal Home Loan Mortgage Corporation Act (12 
U.S.C. 1451-1459).
---------------------------------------------------------------------------

    Included in the supervisory responsibilities of the Director of 
OFHEO (the ``Director'') is oversight of compensation provided by the 
Enterprises to their respective executive officers. Briefly, the 
Director's statutory oversight of executive compensation involves two 
statutory mandates: (1) The prohibition of excessive compensation, as 
required by the Act; and (2) the prior review of termination benefits, 
as required by the charter acts. Notably, the differing statutes use 
similar but not identical terms in delineating the standards and 
identifying the different comparator groups to be used in these 
matters.
    Specifically, the Act requires the Director to prohibit the 
Enterprises from providing compensation to any executive officer that 
is not reasonable and comparable with that paid by similar businesses 
to executives doing similar work. Businesses used for comparison 
purposes include publicly held financial institutions or major 
financial services companies.\3\
---------------------------------------------------------------------------

    \3\ Section 1318(a) (12 U.S.C. 4518(a)).
---------------------------------------------------------------------------

    The charter acts were amended by the Act to similarly provide that 
an Enterprise may only pay compensation that it determines is 
reasonable and comparable with compensation for employment in other 
similar businesses, and that the Enterprise must report annually to 
Congress on the comparability of the compensation policies for their 
employees with the compensation policies of other similar 
businesses.\4\ The Enterprises have the general power to select the 
individuals who will work for them and to set their specific 
compensation. The Act explicitly provides that OFHEO may not prescribe 
or set a specific level or range of compensation for executive officers 
of the Enterprises.\5\
---------------------------------------------------------------------------

    \4\ Section 309(d)(2) and (3) of Federal National Mortgage 
Association Charter Act (12 U.S.C. 1723a(d)(2) and (3)) and section 
303(c) and (h) of Federal Home Loan Mortgage Corporation Act (12 
U.S.C. 1452(c) and (h)).
    \5\ Section 1318(b) (12 U.S.C. 4518(b)).
---------------------------------------------------------------------------

    To effectuate OFHEO's charge to prohibit excessive compensation, 
the Act requires OFHEO to take such actions and perform such functions 
as the Director determines to be necessary.\6\ OFHEO may also require 
an Enterprise to submit reports and special reports as deemed 
appropriate and in such form as the Director may require.\7\ Moreover, 
OFHEO has express statutory authority to retain any consultant that the 
Director determines is necessary to assist in such matters.\8\ The Act 
also grants OFHEO a wide array of enforcement powers. Thus, without 
regard to the capital condition of an Enterprise, the Director can 
undertake enforcement actions, both formal and informal, including the 
issuance of a notice of charges, for conduct in violation of the 
compensation provisions of the Act, the charter acts or this 
regulation.\9\ The Director can require an Enterprise, or any executive 
officer or member of the board of directors (``Board'') to correct or 
remedy any violation in such manner as the Director determines to be 
appropriate.\10\
---------------------------------------------------------------------------

    \6\ Section 1313(8) (12 U.S.C. 4513(8)).
    \7\ Section 1314(a) (12 U.S.C. 4514(a)).
    \8\ Section 1315(e) (12 U.S.C. 4515(e)).
    \9\ Section 1371(a)(3) (12 U.S.C. 4631) and section 1372 (12 
U.S.C. 4632).
    \10\ Section 1371(d)(7) (12 U.S.C. 4631(d)(7)).
---------------------------------------------------------------------------

    In addition to prohibiting the payment of excessive executive 
compensation, OFHEO is required to review termination benefits provided 
by the Enterprises to their executive officers. The respective charter 
acts of the Enterprises were identically amended by the Act to provide 
that an Enterprise may not enter into an agreement or contract to 
provide for payment of money or other thing of current or potential 
value in connection with the termination of employment of an executive 
officer unless the agreement or contract is approved in advance by 
OFHEO.\11\ The Act further amended the charter acts to prohibit the 
Director from approving termination benefits that are not comparable to 
such benefits provided by other public or private entities involved in 
financial services and housing interests to executives with comparable 
duties and responsibilities.
---------------------------------------------------------------------------

    \11\ Section 310(d)(3)(B) of Federal National Mortgage 
Association Charter Act (12 U.S.C. 1723a(d)(3)(B)), and section 
303(h)(2) of Federal Home Loan Mortgage Corporation Act (12 U.S.C. 
1452(h)(2)).
---------------------------------------------------------------------------

    These amendments to the charter acts were effective after October 
28, 1992. Therefore, agreements to provide termination payments to 
executives that were entered into before that date are not subjected to 
retroactive review for approval or disapproval by OFHEO. However, the 
amended charter acts provide that any subsequent renegotiation, 
amendment or change to any such agreement entered into on or

[[Page 47551]]

before October 28, 1992, is to be considered as entering into an 
agreement subject to approval by OFHEO. An extension of such an 
agreement is deemed to constitute a change subject to OFHEO's prior 
approval. OFHEO's approval is required regardless of how such an 
extension is structured, e.g., by a written agreement or by a 
resolution adopted by the Board of the Enterprise.
    OFHEO published a notice of proposed rulemaking for public comment 
relating to its executive compensation oversight responsibilities.\12\ 
Comments on the proposed regulation were received only from the two 
Enterprises. Those comments were carefully considered in developing 
this final regulation. A discussion of those comments and OFHEO's 
response to those comments follows.
---------------------------------------------------------------------------

    \12\ 65 FR 81771 (December 27, 2000).
---------------------------------------------------------------------------

II. Comments on the Proposed Executive Compensation Regulation

General Comments

OFHEO's Role and Authority
    Both Enterprises commented that OFHEO has a narrow and precisely 
defined role with regard to executive compensation oversight. They 
described OFHEO's role as reviewing Board-established executive 
compensation decisions to determine whether they meet the comparability 
standards contained in the Enterprises' charter acts. One Enterprise 
stated that OFHEO cannot regulate what an Enterprise's Board chooses to 
pay senior executives or the Board's choice of a compensation 
structure. The Enterprise suggested that such regulation by OFHEO would 
interfere with management prerogatives; would amount to an undue 
regulatory interference; and would be contrary to a balance intended by 
Congress between regulatory action and the Enterprises' independence.
    Both Enterprises noted other constraints on their executive 
compensation in addition to OFHEO's review. They stated that their 
executive compensation practices are subject to public disclosure under 
ERISA and other benefit laws and regulations. One Enterprise commented 
that extensive public disclosure also results from conformance with 
federal securities laws and stock exchange rules, responsiveness to 
market discipline, and compliance with reporting requirements to 
Congress.
    OFHEO agrees that it has a defined role with regard to oversight of 
Enterprise executive compensation practices. Under the Act, OFHEO is 
required to prohibit executive compensation that exceeds certain 
standards. Under the charter acts, OFHEO cannot approve termination 
benefits provided by an Enterprise to an executive officer that are not 
comparable to the requisite standards. In the event that OFHEO 
determines that compensation is excessive or that termination benefits 
are not similar, the Enterprise would have to revise the executive 
officer's compensation in order to render it reasonable and comparable. 
In fulfilling its congressionally defined role, OFHEO does not set 
executive salaries or dictate an Enterprise's choice of a compensation 
structure. OFHEO seeks to carry out its responsibilities in this area 
in the most efficient and least burdensome manner. The regulation sets 
forth clear processes designed to meet OFHEO's oversight needs, 
including the submission by the Enterprises of relevant information on 
a timely basis.
Safety and Soundness Issues
    Both Enterprises asserted that OFHEO's executive compensation 
authority is separate and distinct from its safety and soundness 
authority. One Enterprise referred to the legislative history of 
OFHEO's enabling statute, suggesting that Congress was not concerned 
that excessive compensation practices pose a financial threat to the 
Enterprises, i.e., asserting that such practices do not present a 
safety and soundness concern. The other Enterprise stated that, unlike 
the federal bank regulators, OFHEO's executive compensation oversight 
is not tied to the regulated entities' financial condition.
    One Enterprise argued that OFHEO does not have broad authority 
under its executive compensation oversight authorities and that OFHEO's 
rulemaking should not take the same approach to remedial and corrective 
actions employed to address safety and soundness concerns, i.e., 
remedies that address a threat to the financial integrity or stability 
of a regulated institution.
    OFHEO disagrees. The executive compensation practices of 
corporations are widely acknowledged to reflect the integrity of 
management and soundness of corporate governance practices, as 
indicators of safe and sound operation. OFHEO recognizes that in 
addition to its broad authority to oversee the safety and soundness of 
the Enterprises policies and practices, including executive 
compensation matters, the agency has specific responsibilities unlike 
those of the banking agencies to review compensation and termination 
benefits of the Enterprises' executive officers. OFHEO may use its full 
range of preventative and remedial tools to address problems in this 
area, including rescission agreements and recovery. OFHEO has modified 
the language of the final rule to clarify the special nature of 
executive compensation under the statute and the range of supervisory 
tools it may employ, both formal and informal.
Confidentiality Concerns
    One Enterprise stated that inadvertent release of nonpublic 
executive compensation information may cause competitive and economic 
harm. The Enterprise suggested that such information only be subject to 
on-site review.
    OFHEO recognizes the sensitive, nonpublic nature of certain 
information submitted by the Enterprises regarding their executive 
compensation practices and OFHEO has established appropriate safeguards 
under its internal procedures and regulations and in line with 
applicable federal law. Restricted review of executive compensation 
information at an Enterprise would be contrary to past and current 
practice. The suggested restriction would result in a less effective 
and inefficient implementation of OFHEO's oversight responsibilities 
and could delay timely reviews sought by the Enterprises. The final 
regulation continues to require the timely submission of all relevant 
information by the Enterprises to OFHEO in the manner and format 
specified by OFHEO.

Section Comments

Definitions (Sec. 1770.3(g))
    Both Enterprises made several suggestions to narrow the definition 
of the term ``executive officer'' in the proposed regulation. The 
proposed definition of the term ``executive officer'' included the 
chairman of the Board, chief executive officer, chief financial 
officer, president, vice chairman and any executive vice president, and 
added the position of chief operating officer, and any individual who 
performs functions similar to such positions whether or not the 
individual has an official title. Additionally, the proposed definition 
of term ``executive officer'' covered any senior vice president 
(``SVP'') or other 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 Enterprise's 
chairman of the Board, vice

[[Page 47552]]

chairman, president or chief operating officer.
    One Enterprise argued that the proposed definition of executive 
officer is inconsistent with the plain language and intent of the Act 
and suggested a narrower definition. The Enterprise objected to 
defining the term ``executive officer'' by reference to job function 
and including consideration of individuals performing ``similar 
responsibilities, without regard to title.'' The Enterprise suggested 
that the definition of ``executive officer'' be confined to those 
titled SVPs in charge of a principal business unit, division or 
function; and that all other provisions in the proposed definition 
should be deleted. It further stated that the statutory language ``in 
charge of'' should be read narrowly to mean managerial and policymaking 
authority and responsibilities; and that ``principal'' business means 
of ``highest importance,'' similar to the term's definition as used in 
accounting.
    Both Enterprises noted the past use by OFHEO of a reporting 
function to define the term ``executive officer.'' They suggested that, 
if OFHEO determines to use a broad standard, OFHEO should look to the 
Enterprises' principal lines of business to identify officers who play 
a key role in management and policymaking decisions. They asserted that 
an approach limiting review to officers managing key business units 
would avoid unnecessary reviews of officers engaged in support or 
subsidiary functions.
    After consideration of the comments, OFHEO has determined to retain 
the definition of the term ``executive officer'' set forth in the 
proposed regulation, with one modification. The final regulation adds a 
provision that the Director shall inform the Enterprises of those 
officers covered by the definition. This is intended to allow continued 
discussion between OFHEO and the Enterprises as to the appropriate 
coverage of particular officers under the regulation.
    OFHEO has retained from the proposed regulation the determination 
that, under the Enterprises' current organizational structure, any 
officer who reports directly to the chairman of the Board, vice 
chairman, president or chief operating officer is deemed to be in 
charge of a principal business unit, division, or function and has an 
important policymaking role, regardless of his or her title. The 
Director of OFHEO has discretion to define coverage of SVPs under the 
term ``executive officer'' whenever warranted by changes in either 
Enterprise's organizational structure, position responsibilities or 
other relevant factors.
    In response to one Enterprise's request for clarification, it is 
noted here that administrative and support staff, such as secretaries 
and special assistants who report directly to the chairman, vice 
chairman, etc., are not considered to be executive officers for 
purposes of this regulation.
Submissions Requirements (Sec. 1770.4) Categories of Information 
Relating to Prohibition of Excessive Compensation (Sec. 1770.4(b))
    Both Enterprises commented that Sec. 1770.4(b)(1) and (2) of the 
proposed regulation appear to require the submission of committee and 
board minutes within a week after the meeting of either. The 
Enterprises recommended that OFHEO amend both paragraphs to require the 
submission of minutes only after they are finalized, that is, after the 
adoption of minutes at the next board or committee meeting.
    For purposes of clarification, paragraph (b) has been amended in 
this final regulation to provide that information on actions relating 
to compensation by the board of directors or the committee of the board 
responsible for compensation that are effective immediately upon board 
or committee action should be submitted to OFHEO within a week (along 
with supporting materials). Otherwise, OFHEO expects information 
regarding compensation to be submitted within a week of adoption of 
minutes by the board or the committee responsible for compensation, as 
this is the normal effective date for board or committee actions, 
usually taken at the next meeting of these bodies.
    In response to one Enterprise's request for clarification, the term 
``supporting materials'' as used in Sec. 1770.4(b)(1) and (2) of the 
proposed regulation is defined here to mean copies of compensation 
documents that are referenced in or are incorporated by reference in 
the board or in committee resolutions, e.g., human resources documents 
and benefit plans of the Enterprise. Continuing existing OFHEO 
practice, the regulation excepts individual performance ratings from 
its submission requirements.
    Both Enterprises objected to proposed paragraph (b)(8) of 
Sec. 1770.4, which requires submission to OFHEO of information 
regarding the hiring and payment of compensation to an executive for 
whom a contract remains under negotiation. One Enterprise suggested 
that proposed paragraph (b)(8) is not consistent with Sec. 1770.5(a), 
which authorizes employment contracts to be entered into prior to OFHEO 
approval, provided they contain notice of the approval requirement. The 
Enterprise recommended that paragraph (b)(8) be deleted.
    OFHEO agrees that paragraph (b)(8) is unnecessary and has deleted 
the paragraph from the final regulation. The requirements contained in 
Sec. 1770.5(a) will govern any contract negotiated and entered into 
prior to OFHEO's approval.
    Revisions to paragraph (b) in this final regulation include the 
following: materials required for submission under paragraphs (b)(1) 
and (2) of the proposed regulation are now contained in paragraphs 
(b)(1) through (3) of the final regulation, and paragraphs (b)(3) 
through (7) of the proposed regulation are redesignated as paragraphs 
(b)(4) through (8) in the final regulation.
Timing of Submissions Related to Prior Approval of Termination Benefits 
(Sec. 1770.4(c))
    Both Enterprises made extensive comment regarding paragraph (c) of 
Sec. 1770.4. The paragraph sets out when information relevant to the 
Director's prior approval of termination benefits should be submitted 
by an Enterprise to OFHEO. As proposed, the paragraph requires that the 
relevant information be provided to OFHEO when the Enterprise: (1) 
Enters into any agreement or contract with a new or existing executive 
officer that includes termination benefits; (2) makes any extension or 
other amendment to such an agreement or contract; (3) takes any other 
action to provide termination benefits to a specific executive officer, 
regardless of how effected; (4) makes any changes in post-employment 
benefit programs affecting multiple executive officers; or (5) changes 
the termination provisions of other compensation programs affecting 
multiple executive officers.
    One Enterprise recommended the deletion of the requirement in 
Sec. 1770.4(c)(1) that requires submission of information on an 
agreement between an Enterprise and a new or existing officer because, 
assertedly, most executive officers ``are not terminated,'' but rather 
leave voluntarily. The commenter suggested that this would save OFHEO 
from reviewing hypothetical terminations. The Enterprise noted that it 
could choose to submit a termination agreement for a current executive 
officer for review by OFHEO at any time.
    OFHEO disagrees with this argument. Prior approval by OFHEO is 
mandatory whenever an Enterprise enters into or changes an agreement or 
contract with a new or existing executive that contains provisions 
providing termination benefits. The legislative

[[Page 47553]]

history of the Act contains no indication that the term ``termination'' 
is limited to involuntary situations. OFHEO considers the specific 
benefits to which an officer would be entitled under those provisions 
at the end of his or her employment term and compares those termination 
benefits to the applicable standard. This determination includes 
consideration of the effect on termination benefits if the executive 
departs prior to the expiration of the employment term, either on a 
voluntary or an involuntary basis. The proposed submission requirements 
of Sec. 1770.4(c)(1) are therefore retained in the final regulation.
    Both Enterprises objected to the language of paragraphs (c)(4) and 
(5) of Sec. 1770.4 relating to changes in post-employment programs and 
in the termination provisions of other compensation programs affecting 
multiple executive officers. They noted that, as drafted, the 
provisions suggest that OFHEO has prior approval authority over changes 
in any compensation or benefit plan or program provided to all officers 
or corporate-wide. The Enterprises requested clarification that the 
provisions cover only individual termination packages that provide 
special benefits to an executive officer under so-called ``top hat'' 
plans, as opposed to benefits provided to multiple officers under 
general welfare and benefit plans. One Enterprise further stated that 
prior approval by OFHEO is not required for executive compensation 
generally available to similarly situated executives which is received 
as part of annual compensation, even if it is to be paid post-
employment, e.g., pensions, deferred compensation, stock option plans, 
and retirees' health benefits. It recommended deleting reporting 
requirements for general welfare and benefit plans and relocating 
provisions (4) and (5) from paragraph (c) to paragraph (b), which 
addresses review of ``excessive'' compensation. The Enterprise also 
recommended that only ``material'' changes to covered plans and 
programs be submitted to OFHEO.
    OFHEO has made several clarifications and modifications to the 
submissions section of the final regulation. Section 1770.4(c), 
addressing timing of submissions of information for review of 
termination benefits, has been revised. The revisions indicate that, 
except as provided under Sec. 1770.5(a), an Enterprise must submit 
certain delineated information before entering into agreements, making 
amendments or taking other actions on termination benefits and when 
changes to termination benefits are made that affect multiple executive 
officers. Paragraph (d) of Sec. 1770.4 has been revised to make clear 
that such submissions need not include information on benefit plans of 
general applicability, as the statute only contemplates review of 
``golden parachute'' and similar contracts or grants.
    Further, for purposes of clarification, OFHEO notes that 
information submissions under paragraph (c), at the times stated under 
provisions (1) through (4)--paragraphs (4) and (5) being consolidated 
in the final regulation--enable OFHEO to determine an individual 
executive officer's termination benefits. The total payment or value 
derived from all such termination benefits are included in OFHEO's 
consideration of compensation. The final regulation makes clear that, 
while OFHEO has access to benefit plans of general applicability under 
its oversight authorities, they are not required to be submitted for 
purposes of prior approval under the consideration of termination 
benefits. As noted earlier, the intent of the statute and the 
regulation is to focus on so-called ``top hat plans,'' golden 
parachutes and similar arrangements. Any change in such benefits may 
alter the value of the total termination benefits package. Notably, if 
a change in termination benefits affects an executive officer, the 
Enterprise may request OFHEO's consideration of the change in officer 
termination benefits, in the context of previously-granted termination 
benefits, either at that time or when the officer leaves the 
Enterprise.
    Additionally, both Enterprises expressed concern that the language 
of paragraphs (c)(4) and (5) appears to suggest that OFHEO can review 
an officer's compensation twice (under the ``excessive'' standard in 
the Act and under the standard for prior approval of termination 
benefits in the charter acts). One Enterprise stated that such review 
could result in retroactive disapproval of previously awarded 
compensation, creating recruitment, retention, and constitutional 
issues. The other Enterprise asserted that reviewing twice would be 
contrary to congressional intent.
    OFHEO's review authority extends both to the ``compensation'' and 
to the individualized termination benefits package provided to an 
executive officer by an Enterprise. The term ``compensation'' is 
broadly defined to include benefits to an executive officer that are 
derived from post-employment benefit plans or programs and other 
compensatory benefit arrangements containing termination benefits, 
which affect the executive officer individually or as part of a group. 
As a result, OFHEO reviews the value of benefits provided under such 
plans, programs and arrangements on an ongoing basis in exercising its 
dual review authorities. OFHEO aggregates the benefits provided under 
such plans, programs and arrangements with all other payments of money 
or any other thing of current or potential value to determine whether 
an officer's overall ``compensation'' is excessive.
    OFHEO also reviews termination benefits provided by such plans, 
programs and arrangements in exercising its prior approval authority. 
Such a review is performed when any agreement that includes termination 
benefits is entered into, as well as at the time the executive officer 
leaves his or her employment with an Enterprise, if there have been 
benefit enhancements or modifications since the time the package was 
agreed upon. Upon determining that an officer's termination benefits 
package, as previously approved by OFHEO, has not changed in structure 
or terms, such package will not be subject to subsequent review or 
disapproval.
Specific Information to Calculate Termination Benefits (Sec. 1770.4(d))
    Paragraph (d) of Sec. 1770.4 of the proposed regulation specifies 
what information the Enterprise is to submit and when in order for 
OFHEO to calculate an executive officer's termination benefits package. 
Both Enterprises commented that paragraph (d) seems to prevent them 
from entering into an agreement with a new or departing officer prior 
to OFHEO approval if that agreement contains individualized termination 
provisions. They suggested that this would be a departure from current 
practice and would impede their ability to hire expeditiously. They 
also asserted that such a requirement would be inconsistent with 
proposed Sec. 1770.5(a), which authorizes employment contracts to be 
entered into prior to OFHEO approval, provided they contain notice of 
the approval requirement.
    As noted above in response to the Enterprises' comments on proposed 
Sec. 1770.4(b)(8), an employment agreement subject to OFHEO's prior 
approval may be entered into prior to that approval, provided that such 
agreement satisfies the notice requirements set forth in 
Sec. 1770.5(a).
    One Enterprise requested clarification on paragraph (d)(1), which 
requires submission of details of a program change before entering into 
an

[[Page 47554]]

agreement containing termination provisions. The Enterprise suggested 
that the requirement not apply to programmatic benefits available to 
executives as part of their total compensation, but to ``individualized 
departures'' from programmatic termination benefits.
    As noted above, in response to the Enterprises' comments on 
proposed Sec. 1770.4(c)(4) and (5), paragraph (d) has been clarified in 
the final regulation to provide that submissions need not include 
information on benefit plans of general applicability, such as so-
called 401(k) plans or general health plans.
Compliance (Sec. 1770.5)
    One Enterprise requested deletion of proposed Sec. 1770.5(b), which 
would require the Enterprises to adopt written procedures implementing 
the regulation's submission requirements, as unwarranted ``micro-
management'' of the Enterprises' internal procedures. It further 
asserted that the regulation's force of law and the enforcement 
remedies of paragraph (d) are sufficient to ensure compliance without 
the need for written procedures.
    OFHEO agrees that the regulation need not require written 
procedures implementing the submission requirements contained in 
Sec. 1770.4. Therefore, paragraph (b) has been deleted from this final 
regulation. Paragraphs (c) and (d) have been consolidated and 
redesignated as paragraph (b) in the final regulation. Failure by an 
Enterprise to comply with the requirements of this regulation may 
warrant remedial action. OFHEO has broad formal and informal 
authorities to remedy problems and to enforce its determinations, 
including rescission agreements and recovery.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review
    This regulation is not classified as a significant rule under 
Executive Order 12866 because it will 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 final 
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 this 
final regulation under the Regulatory Flexibility Act. The General 
Counsel of OFHEO certifies that the rule, as herein adopted, is not 
likely to have a significant economic impact on a substantial number of 
small business entities because the regulation only affects the 
Enterprises.
Paperwork Reduction Act
    This final regulation does not contain any information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
Unfunded Mandates Reform Act of 1995
    This final regulation does not require the preparation of an 
assessment statement in accordance with the Unfunded Mandates Reform 
Act of 1995, 2 U.S.C. 1531. Assessment statements are not required for 
regulations that incorporate requirements specifically set forth in 
law. As explained in the preamble, this regulation implements specific 
statutory requirements. In addition, this regulation does not include a 
Federal mandate that may result in the expenditure by State, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more (adjusted annually for inflation) in any one year.

List of Subjects in 12 CFR Part 1770

    Administrative practice and procedure, Confidential business 
information, Reporting and recordkeeping requirements.

    Accordingly, for the reasons stated in the preamble, OFHEO adds 12 
CFR part 1770 to subchapter C to read as follows:

PART 1770--EXECUTIVE COMPENSATION

Sec.
1770.1  Authority and scope.
1770.2  Purpose.
1770.3  Definitions.
1770.4  Submission requirements.
1770.5  Compliance.

    Authority: 12 U.S.C. 1452(h)(2), 1723a(d)(3)(B), 4501(6), 
4502(3), 4502(7), 4513, 4514, 4517, 4518(a), 4631, 4632, 4636, 4641.


Sec. 1770.1  Authority and scope.

    (a) Authority. Title XIII of the Housing and Community Development 
Act of 1992, Pub. L. No. 102-550, entitled the Federal Housing 
Enterprises Financial Safety and Soundness Act of 1992 (``the Act'') 
(12 U.S.C. 4501 et seq.), established the Office of Federal Housing 
Enterprise Oversight (``OFHEO'') as an independent office within the 
Department of Housing and Urban Development. In general, OFHEO is the 
safety and soundness regulator of two housing-related government 
sponsored enterprises: the Federal National Mortgage Association 
(``Fannie Mae'') and the Federal Home Loan Mortgage Corporation 
(``Freddie Mac'') (collectively, ``the Enterprises''). The supervisory 
responsibilities of the Director of OFHEO (the ``Director'') include 
oversight of compensation provided by the Enterprises to their 
executive officers.
    (b) Scope. The procedures set forth in this part apply to OFHEO's 
oversight of executive compensation under the following two statutory 
mandates:
    (1) Prohibition of excessive compensation. The Act requires the 
Director to prohibit an Enterprise from providing compensation to any 
executive officer that is not reasonable and comparable with that paid 
by other similar businesses to executives doing similar work, i.e., 
having similar duties and responsibilities. Businesses used for 
comparison purposes include publicly held financial institutions or 
major financial services companies. (12 U.S.C. 4518(a)). To effectuate 
this compensation oversight responsibility, the Act provides that the 
Director has full authority to take such actions as the Director 
determines are necessary. (12 U.S.C. 4513(8)). However, the Director 
may not prescribe or set a specific level or range of compensation for 
executive officers of the Enterprises. (12 U.S.C. 4518(b)).
    (2) Prior approval of termination benefits. The Enterprises' 
enabling statutes (``charter acts'') similarly provide that an 
Enterprise may not enter into any agreement or contract to provide any 
payment of money or other

[[Page 47555]]

thing of current or potential value in connection with the termination 
of employment of an executive officer unless the agreement or contract 
is approved in advance by the Director. The Director may only approve 
termination benefits that are comparable to benefits provided by other 
public or private entities involved in financial services and housing 
interests to executives with comparable duties and responsibilities. 
Agreements or contracts that provide for termination payments to 
executives that were entered into before October 28, 1992 are not 
retroactively subject to approval or disapproval by the Director. 
However, a renegotiation, amendment or change to such an agreement or 
contract entered into on or before October 28, 1992 shall be considered 
as entering into an agreement or contract that is subject to approval 
by the Director. (Section 309(d)(3)(B); 12 U.S.C. 1723a(d)(3)(B) of 
Fannie Mae's Charter Act; Section 303(h)(2); 12 U.S.C. 1452(h)(2) of 
Freddie Mac's Corporation Act)


Sec. 1770.2  Purpose.

    In exercising responsibilities related to executive compensation, 
the Director has established a structured process for the submission of 
relevant information by each Enterprise. This part codifies those 
procedures and clarifies the terms used therein in order to facilitate 
and enhance the efficiency of OFHEO's oversight.


Sec. 1770.3  Definitions.

    The following definitions apply to the terms used in this part:
    (a) The Act is Title XIII of the Housing and Community Development 
Act of 1992, Pub. L. No. 102-550, Oct. 28, 1992, 106 Stat. 3672, 3941 
through 4012 (1993), 12 U.S.C. 4501 et seq., separately entitled the 
``Federal Housing Enterprises Financial Safety and Soundness Act of 
1992.''
    (b) Affiliate means, except as provided by the Director, any entity 
that controls, is controlled by, or is under common control with, an 
Enterprise.
    (c) Charter 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.
    (d) Compensation means any payment of money or the provision of any 
other thing of current or potential value in connection with 
employment. Compensation includes all direct and indirect payments of 
benefits, both cash and non-cash, granted to or for the benefit of any 
executive officer, including, but not limited to, payments and benefits 
derived from an employment contract compensation or benefit agreement, 
fee arrangement, perquisite, stock option plan, post employment benefit 
or other compensatory arrangement.
    (e) Director means the Director of OFHEO or his or her designee.
    (f) Enterprise means the Federal National Mortgage Association and 
the Federal Home Loan Mortgage Corporation and, except as provided by 
the Director, any affiliate thereof.
    (g)(1) Executive officer means, with respect to an Enterprise:
    (i) The chairman of the board of directors, chief executive 
officer, chief financial officer, chief operating officer, president, 
vice chairman, any executive vice president, and any individual who 
performs functions similar to such positions whether or not the 
individual has an official title; and
    (ii) Any senior vice president (SVP) or other individual with 
similar responsibilities, without regard to title:
    (A) Who is in charge of a principal business unit, division or 
function, or
    (B) Who reports directly to the Enterprise's chairman of the board 
of directors, vice chairman, president or chief operating officer.
    (2) The Director shall inform the Enterprises of those officers 
covered by this definition.
    (h) OFHEO means the Office of Federal Housing Enterprise Oversight.


Sec. 1770.4  Submission requirements.

    (a) Submission of information to OFHEO. All information required to 
be filed for purposes of this part is to be provided in a timely 
fashion by each Enterprise to OFHEO's Associate Director of the Office 
of Policy Analysis and Research, as specified in this section, or as 
designated by the Director.
    (b) Categories of information relating to prohibition of excessive 
compensation. The following materials, unless otherwise specified, 
shall be provided by each Enterprise to OFHEO for review within one 
week after the specified action or event:
    (1) Resolutions, including supporting materials and related 
reports, from meetings of the Enterprise's committee responsible for 
compensation when the committee takes any action regarding a 
compensation matter that under the committee's authority is effective 
without further action by the committee or the board of directors;
    (2) Resolutions, including supporting materials and related reports 
(not otherwise provided to OFHEO under paragraph (b)(1) of this 
section), from meetings of the board of directors relating to executive 
compensation when the board of directors takes any action regarding a 
compensation matter that is effective without any further action by the 
board of directors;
    (3) Minutes, including supporting materials and related reports, 
when adopted by the committee responsible for compensation and those 
portions of minutes of the board of directors, including supporting 
materials and related reports, related to compensation matters (except 
for materials previously provided under paragraphs (b)(1) or (2) of 
this section);
    (4) General benefit plans applicable to executive officers when 
adopted or amended;
    (5) Any study conducted by or on behalf of an Enterprise with 
respect to compensation of executive officers;
    (6) The Enterprise's annual compensation report to Congress when 
submitted;
    (7) A current organizational chart when changes occur affecting the 
status of executive officers under this part;
    (8) Proxy statements when issued; and,
    (9) Such other information as deemed appropriate by the Director, 
except that submissions required under this paragraph shall not include 
materials related to the performance of specific individuals.
    (c) Timing of submissions related to prior approval of termination 
benefits. All relevant information, except as provided under 
Sec. 1770.5(a), should be provided to OFHEO, unless already provided 
under paragraph (b) of this section:
    (1) Before an Enterprise enters into any agreement or contract with 
a new or existing executive officer that includes termination benefits;
    (2) Before an Enterprise makes any extension or other amendment to 
such an agreement or contract;
    (3) Before an Enterprise takes any other action to provide 
termination benefits to a specific executive officer, regardless of how 
effected; or
    (4) When an Enterprise makes any changes to the termination 
provisions of any compensation or benefit program affecting multiple 
executive officers.
    (d) Specific information required for calculation of termination 
benefits. For submissions under paragraph (c) of this section, an 
Enterprise shall submit to OFHEO the following materials:
    (1) The details of the agreement or program change, e.g., 
employment agreements, termination agreements, severance agreements, 
and portions of minutes of the board of directors relating to executive 
compensation and minutes and supporting materials of the

[[Page 47556]]

compensation Committee of the board of directors;
    (2) All information, data, assumptions and calculations for the 
potential total dollar value or range of values of the benefits 
provided, such as but not limited to salary, bonus opportunity, short-
term incentives, long-term incentives, special incentives and pension 
provisions or related contract or benefit terms; and
    (3) Such other information deemed appropriate by the Director, 
except that information required to be submitted under paragraph (c) of 
this section or under this paragraph shall not include information on 
benefit plans of general applicability.


Sec. 1770.5  Compliance.

    (a) An employment agreement or contract subject to the Director's 
prior approval, as set forth in Sec. 1770.1(b)(2), may be entered into 
prior to that approval, provided that such agreement or contract 
specifically provides that termination benefits under the agreement or 
contract shall not be effective and no payments shall be made 
thereunder unless and until approved by OFHEO. Such notice should make 
clear that alteration of benefit plans subsequent to OFHEO approval 
under this section, that affect final termination benefits of an 
executive officer, requires review at the time of the individual's 
termination from the Enterprise and prior to the payment of any 
benefits.
    (b) Failure by an Enterprise to comply with the requirements this 
regulation may warrant remedial action by OFHEO. Such action may be 
taken in the form determined appropriate by the Director and may be 
taken separately from, in conjunction with, or in addition to any other 
corrective or remedial action, including an enforcement action to 
require an individual to make restitution to or reimbursement to the 
Enterprise of excessive compensation or inappropriately paid 
termination benefits.

    Dated: September 4, 2001.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 01-22926 Filed 9-11-01; 8:45 am]
BILLING CODE 4220-01-U