[Federal Register Volume 66, Number 208 (Friday, October 26, 2001)]
[Rules and Regulations]
[Pages 54097-54109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26963]



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  Federal Register / Vol. 66, No. 208 / Friday, October 26, 2001 / 
Rules and Regulations  

[[Page 54097]]



FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 925, 930, 931, 932, and 933

[No. 2001-24]
RIN 3069-AB06


Capital Requirements for Federal Home Loan Banks

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is modifying 
the capital and related regulations that were adopted on December 20, 
2000. Many of the changes were identified in response to an advance 
notice of proposed rulemaking (ANPR) relating to unforeseen issues that 
were not addressed by the final capital rule. In addition to making 
certain conforming amendments, the Finance Board is clarifying that the 
Federal Home Loan Banks (Banks) may pay dividends on Class A stock from 
retained earnings; providing Banks with discretion to prohibit members 
from transferring Bank stock; defining the phrase ``charges against the 
capital of the Bank;'' clarifying the off-balance sheet conversion 
factors for commitments to make advances and commitments to acquire 
loans; changing the provision governing the membership termination date 
for members seeking to voluntarily withdraw from the Bank System; and 
adding a requirement that a Bank make certain disclosures to its 
members before its capital plan can be implemented. The Finance Board 
is also: providing Banks with authority to suspend the redemption of 
Class A or Class B stock if continued redemption would seriously affect 
the Bank's capital position or raise other safety or soundness concerns 
and adopting a provision requiring Banks to establish a deadline in 
their capital plans by which a member must opt-out of the stock 
conversion process.

DATES: The final rule is effective November 26, 2001.

FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Managing Director, 
(202) 408-2821; Scott L. Smith, Acting Director, (202) 408-2991; Ellen 
Hancock, Senior Financial Analyst, (202) 408-2906; or Christina 
Muradian, Senior Financial Analyst, (202) 408-2584, Office of Policy, 
Research and Analysis; or Arnold Intrater, Acting General Counsel, 
(202) 408-2536; Neil R. Crowley, Deputy General Counsel, (202) 408-
2990; Thomas F. Hearn, Senior Attorney-Advisor, (202) 408-2976; or 
Thomas E. Joseph, Senior Attorney-Advisor, (202) 408-2512, Office of 
General Counsel, Federal Housing Finance Board, 1777 F Street, NW., 
Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    The Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 133 Stat. 1338 
(November 12, 1999) (GLB Act), amended the Federal Home Loan Bank Act 
(Bank Act) to change, among other things, the capital structure of the 
Banks from a ``subscription'' structure to one that includes both risk-
based and minimum leverage requirements. The GLB Act also required the 
Finance Board to prescribe uniform capital standards for the Banks and 
required each Bank to adopt and implement a capital plan consistent 
with provisions of the GLB Act and Finance Board regulations.
    On March 2, 2001, the Finance Board approved an ANPR to help 
identify issues or uncertainties that had not been contemplated by, or 
fully addressed in, the final capital rule or that had arisen only 
after the Banks had begun to develop their capital plans. See 66 FR 
14093 (Mar. 9, 2001). On August 8, 2001, the Finance Board published 
for notice and comment a notice of proposed rulemaking (proposed rule) 
addressing a small number of modifications to the capital and related 
regulations. See 66 FR 41462 (Aug. 8, 2001). Many of the changes 
proposed were identified in response to the ANPR. In addition to 
proposing certain conforming amendments, the Finance Board proposed to: 
clarify that the Banks may pay dividends on Class A stock from retained 
earnings; provide Banks with discretion to prohibit members from 
transferring Bank stock; define the phrase ``charges against the 
capital of the Bank;'' clarify the off-balance sheet conversion factor 
for commitments to make advances and commitments to acquire loans; 
change the provision governing the membership termination date for 
members seeking to withdraw voluntarily from the Bank System; and add a 
requirement that a Bank make certain disclosures to its members before 
its capital plan can be implemented. The proposed rule also addressed 
other issues arising under the capital rule that, based on the ANPR 
comments, appeared to require additional explanation, even though no 
amendment to the regulation with respect to these issues was proposed.
    After considering the comments on the proposed rule, the Finance 
Board is adopting many of the changes as proposed, and is substantially 
modifying a number of others. The Finance Board is also adopting a few 
changes after commenters prompted the Finance Board to reconsider 
issues that, when proposing the rule amendments, the Finance Board had 
indicated such issues would not require rule changes. The final rule 
being adopted herein will become effective 30 days from its date of 
publication in the Federal Register, in accordance with the 
Administrative Procedure Act. See 5 U.S.C. 553(d). Banks, however, may 
immediately rely on the changes adopted herein in developing their 
capital plans. Further, because some Banks have already submitted their 
respective capital plans to the Finance Board for approval or others 
may not have sufficient time to alter a capital plan already approved 
by the their boards of directors before October 29, 2001 (when final 
plans are to be submitted to the Finance Board), the Finance Board 
emphasizes that Banks' boards of directors may amend their capital plan 
submissions at any time up until the time the Finance Board considers 
the capital plan for approval.

II. Comments on and Changes to the Proposed Regulations

    The Finance Board received seven comment letters related to the 
proposed rule. One comment, from a Bank, was sent on behalf of all 
twelve Banks. Four Banks submitted separate comments. Comment letters 
were also submitted by

[[Page 54098]]

two trade associations. On August 20, 2001, Finance Board staff met 
with representatives of three Banks, along with a law firm representing 
the Banks, to discuss disclosure requirements in the proposed rule. A 
summary of this meeting was designated as a comment. After considering 
these comments the Finance Board has made a number of changes to the 
proposed regulations. In other cases, the Finance Board believes that 
no change to the proposed rule is warranted or that the Finance Board 
could address the comment by clarifying the meaning of regulatory text 
or a statutory provision. The Finance Board discusses below those 
comments that referenced provisions in the proposed rule amendments or 
that raised issues that the Finance Board has not previously fully or 
clearly addressed.
    Voluntary withdrawal from membership. In the proposed rule, the 
Finance Board proposed amending Sec. 925.26(b) to address a membership 
termination issue raised by a scenario described in comments to the 
ANPR. See 66 FR at 41463, 41473. Under that scenario, a member was 
required to hold Class B shares to support outstanding borrowing from a 
Bank and to hold Class A shares as a condition of membership. As 
adopted in December 2000, Sec. 925.26(b) set the effective date of a 
member's termination as of the date on which the last of the applicable 
stock redemption periods ended for the member's stock, whether the 
stock in question was held as membership stock, as activity-based 
stock, or as excess stock. Thus, this provision prevented the Bank from 
redeeming Class A stock at the end of the six-month redemption period 
because that stock would have been required to be held as a condition 
of continued membership in the Bank until the membership terminated at 
the end of the five-year redemption period applicable to the member's 
outstanding Class B stock.
    Because the rule appeared effectively to extend the redemption 
notice period for Class A stock in the situation described above by 
linking the membership termination to activity-based stock purchase 
requirements, thereby burdening members unnecessarily, the Finance 
Board proposed to change it. Under the proposed change, the membership 
of an institution that had submitted a notice of withdrawal would have 
terminated as of the date on which the last of the applicable stock 
redemption periods ended for the stock held as a condition of 
membership, as that requirement was set out in the Bank's capital plan, 
unless the institution decided not to withdraw and cancelled its notice 
of withdrawal prior to that date. This proposed change would have, in 
situations like those described above, enabled the Bank to redeem the 
Class A shares that were held as a condition of membership at the end 
of six months, unless a Bank also required a member to hold Class B 
stock as a condition of membership. In most cases, however, the Finance 
Board believed that the rule change would have helped assure that the 
redemption date for the Class A stock held as a condition of membership 
would have corresponded to the date on which the member's withdrawal 
became effective.
    No commenter objected to the proposed change. One commenter, 
however, raised a question about how the effective date of a member's 
voluntary withdrawal would be affected by the member's purchase, after 
it had submitted its notice of withdrawal, of additional stock to 
satisfy an increase in its membership stock requirement. Under 
925.26(b) as proposed, if a Bank's capital plan required a member to 
hold Class B stock as a condition of membership, voluntary termination 
of membership would ordinarily occur five years from the date the 
member submitted its notice to withdraw. However, if two years into the 
five-year redemption period, the membership requirement increased and 
the member purchased additional Class B stock to satisfy the increase, 
the language in Sec. 925.26(b), as proposed, could be read to suggest 
that the effective date of the member's voluntary withdrawal would 
become five years after the purchase of the additional stock, or in 
effect, seven years after the member first submitted its notice of 
voluntary withdrawal. Such an outcome was not intended by the Finance 
Board. Therefore, the Finance Board, in adopting this provision, has 
altered the proposed language to make clear that the effective date of 
termination for a member that voluntarily withdraws from membership is 
the date on which the last of the applicable stock redemption periods 
ends for membership stock that the member held on the date it submitted 
its withdrawal notice.
    An example illustrates how a member's voluntary termination would 
operate under the amendment to section 925.26(b). At the time it 
submits its notice of voluntary withdrawal, a member holds 100 shares 
of Class B stock to satisfy its membership stock requirement. Two years 
into its five-year redemption period, the member purchases 20 shares of 
Class B stock to satisfy an increase in its membership stock 
requirement. The effective date of the member's voluntary withdrawal 
would be unchanged by the purchase of additional stock, and on that 
date, the membership stock held as of the date the member filed the 
notice to withdraw would become subject to redemption while, as 
explained below, the additional 20 shares purchased to satisfy the 
increase in the membership stock requirement would become excess.
    Stock purchased by withdrawing member. In response to the proposed 
rule, a commenter raised two concerns regarding stock purchased by a 
withdrawing member. First, the commenter raised the scenario of a 
member that, after filing its withdrawal notice, purchased additional 
stock, either to satisfy its membership stock purchase requirement, or 
to support additional business activity. Assuming such stock were Class 
B stock, unless the redemption period for such stock were deemed to 
have begun on the date of the member's withdrawal notice, the commenter 
argued, the redemption period for such stock could extend well after 
the termination of the institution's membership.
    The Finance Board believes that, with respect to stock purchased by 
a withdrawing member to support additional business activity, such a 
scenario does not require a regulatory change. It is true that in this 
scenario, if the stock purchased to support additional activity is 
Class B stock, the redemption period would extend beyond the effective 
date of the member's voluntary withdrawal. However, once the activity 
related to the stock was liquidated, the stock would become excess and 
subject to repurchase at the Bank's discretion.
    For example, assume that two years into its five-year redemption 
period, a withdrawing member takes down a four-year advance, supporting 
it by purchasing additional Class B stock on which it immediately files 
a notice of redemption. When the membership expires in year five, there 
would still be one year left on the member's advance. When the advance 
is paid off one year later, the stock supporting that activity would 
become excess, subject to repurchase at the Bank's discretion, even 
though one year still remains to run on that stock's five-year 
redemption period.
    Similarly, with respect to Class B stock that a withdrawing member 
purchases to satisfy an increase in its membership stock requirement, 
such stock would not be subject to redemption until some time after the 
effective date of the member's voluntary termination. However, as 
explained more fully below, this stock would be

[[Page 54099]]

considered excess stock as of the effective date of the member's 
voluntary termination. As excess, such stock could be repurchased at 
the Bank's discretion under the terms of the capital plan.
    The example used previously also illustrates how a member's 
voluntary termination would operate under the amendment to 
Sec. 925.26(b). At the time it submits its notice of voluntary 
withdrawal, a member holds 100 shares of Class B stock to satisfy its 
membership stock requirement. Two years into its five year redemption 
period, the member purchases 20 shares of Class B stock to satisfy an 
increase in its membership stock requirement. The effective date of the 
member's voluntary withdrawal would be unchanged by the purchase of 
additional stock, and would remain five years from the date it 
submitted its notice to withdraw from the Bank.\1\ Further, assuming 
the member filed a redemption notice for the additional 20 shares at 
the time they were purchased, such shares could be redeemed three years 
after the member's voluntary termination was effective. Such shares 
could be repurchased by the Bank under the terms of its capital plan, 
however, at any time after the effective date of voluntary termination 
because after such date, such shares would be considered excess.
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    \1\ Of course, a Bank could provide in its capital plan a 
provision which automatically commences the redemption period upon 
purchase, for stock purchased after a member submits a notice of 
voluntary withdrawal. See 66 FR at 41463.
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    With regard to this latter point, some question may arise as to 
whether membership stock held after membership has been voluntarily 
terminated may be considered excess because of a provision in section 
6(e)(2) of the Bank Act which provides:

    Excess Stock: Shares of stock held by a member shall not be 
deemed to be ``excess stock'' for purposes [of a Bank's discretion 
to repurchase excess stock under section 6(e)(1)] by virtue of a 
member's submission of a notice of intent to withdraw from 
membership or termination of its membership in any other manner.

    The Finance Board, however, believes that section 6(e)(2) of the 
Bank Act does not preclude membership stock becoming excess upon the 
termination of membership pursuant to a member's voluntary withdrawal. 
Instead, the Finance Board interprets section 6(e)(2) as preventing a 
Bank from deeming excess the membership stock of a member that 
voluntarily withdraws from membership merely because the member has 
filed a notice of withdrawal. Nothing precludes a Bank, however, from 
considering stock as excess when membership actually terminates 
pursuant to a voluntary withdrawal because, under the statute, the 
stock is no longer required as a condition of membership. The Finance 
Board believes this interpretation is also consistent with the 
statutory provision governing voluntary termination of membership which 
sets forth that the applicable stock redemption notice period begins 
when the member files its notice to withdraw and that stock may be 
redeemed at the end of that period. See 12 U.S.C. 1426(d)(1).
    Furthermore, the Finance Board believes that use of the phrase 
``termination * * * in any other manner'' means that the second 
restriction in Section 6(e)(2) of the Bank Act applies to termination 
of membership by a process other than the filing of a voluntary notice 
of withdrawal, in other words as applying to members that are 
involuntarily terminated, or terminated through merger or consolidation 
with a nonmember or member of another Bank. Thus, section 6(e)(2) of 
the Bank Act prevents a Bank from deeming stock as excess because a 
member is involuntarily terminated or its membership terminates because 
of a merger or consolidation. This interpretation is consistent with 
the clear legislative intent, expressed in section 6(d)(2)(B)(i) of the 
Bank Act, 12 U.S.C. 1426(d)(2)(B)(i), that a Bank pay a member whose 
membership was terminated involuntarily ``* * * in cash the par value 
of [its] stock, upon the expiration of the applicable notice period * * 
* (emphasis added).'' Id. See also, 12 U.S.C. 1426(d)(2)(C) 
(automatically commencing redemption period for stock upon involuntary 
termination of membership). The wording concerning excess stock in 
section 6(e)(2) of the Bank Act in conjunction with the termination 
provisions of section 6(d) of the Bank Act, therefore, effectively 
establishes different points at which stock may be deemed excess during 
the membership termination process for institutions that withdraw from 
membership voluntarily and for institutions whose membership is 
terminated through other means.
    It should also be noted that, unlike with voluntary terminations, 
when a membership is terminated involuntarily or because of a merger or 
consolidation, termination is effective immediately. Thus a Bank would 
never face the scenario where increases in the Bank's membership stock 
requirement would result in an involuntarily terminated member 
purchasing additional stock while it awaited redemption of its stock.
    The commenter also expressed a second concern about dividends 
received as Bank stock (stock dividends) during the period after a 
member had filed a withdrawal notice. The commenter believed that 
unless the redemption period for such stock dividends were deemed to 
have begun on the date of the notice of withdrawal, a member would 
never be able to redeem all its stock because it would continue to 
receive stock dividends, and stock dividends on the stock dividends, ad 
infinitum.
    The Finance Board does not believe that the above scenario requires 
an amendment to the capital rule because a Bank could address this 
issue in its capital plan. For example, a capital plan could provide 
that withdrawing members would receive cash dividends instead of stock 
dividends or that such dividends be paid in Class A stock, which would 
allow redemption after six months. More importantly, to the extent that 
shares received as stock dividends exceed the amount a member is 
required to hold under a capital plan's minimum investment provisions, 
the stock would be excess, subject to repurchase under the terms of a 
Bank's capital plan.
    Merger and excess stock calculation. One commenter expressed 
concern about statements in the proposed rule regarding whether stock 
held by a member of one Bank may be considered to be excess stock, 
which would be eligible for repurchase by the Bank, whenever that 
institution merges into a member of another Bank or into a non-member. 
See 66 FR at 41471. The Finance Board indicated that, under the Bank 
Act such a merger could not, in and of itself, cause the disappearing 
member's stock to be deemed excess stock. The Finance Board also 
stated, however, that as a practical matter, some or all of the stock 
owned by that member could become excess stock as a result of the 
Bank's next calculation of each member's minimum stock purchase 
requirement, depending on the terms of a Bank's membership 
requirements.\2\ Id. The commenter indicated that at a Bank where Class 
B stock was used to satisfy the membership stock requirement, the 
membership stock of a disappearing member should remain at the same 
level

[[Page 54100]]

during the stock's five-year redemption period, and should not be 
subject to being deemed excess stock.
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    \2\ For example, an institution that had its charter cancelled 
because of a merger or consolidation would no longer exist as a 
separate entity, and upon normal recalculation of the membership 
requirement, a Bank would have no basis to apply the membership 
requirement. The membership requirement, therefore, would become 
zero upoon recalculation not because membership was terminated, but 
because the former member no longer existed. This reasoning would 
not be applicable to an institution that continued to exist as a 
separate entity after termination of its membership.
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    The Finance Board does not believe that the comment requires any 
regulatory change. Even if the Bank stock of a withdrawing member were 
deemed excess stock, it would remain part of the Bank's capital for the 
duration of the redemption period, unless the Bank exercised its 
discretion to repurchase it. Thus, whether such stock ceases to be part 
of the Bank's capital before the end of the redemption period is a 
decision that is at the complete discretion of the Bank.
    Rolling redemption. In the proposed rule, the Finance Board 
responded to a concern raised by a Bank that Sec. 931.7(a) could permit 
a member to file a redemption notice against all of its stock, even 
while such stock was needed to support membership or activity 
requirements, allowing what the commenter described as a ``rolling 
redemption.'' The Finance Board concluded that members would not have 
had a great deal of incentive to engage in rolling redemptions, 
especially if the Bank intended to aggressively manage its excess stock 
position. Further, the Finance Board pointed out that Sec. 931.7(a) 
permitted a Bank to impose a fee, to be specified in its capital plan, 
on a member that canceled a pending notice of redemption, and that fee 
could have also reduced the incentive to engage in rolling redemptions. 
Thus, the Finance Board did not propose any changes to its rules in 
response to the concern about rolling redemptions. See 66 FR at 41471.
    The Finance Board received one comment on this issue. The commenter 
disagreed with the Finance Board's conclusion that the redemption 
notice cancellation fee would deter a member from maintaining standing 
notices to redeem all their stock and provided examples of how the fee 
could be evaded. The commenter recommended amending the capital rule to 
permit the Banks to require a member to cancel a redemption notice 
associated with stock when the member seeks to use such stock to 
support a business activity that extends beyond, or matures after, the 
original redemption period.
    The Finance Board has reconsidered its previous reasoning and finds 
merit in the arguments put forth by the commenter. To address the 
commenter's concerns, the Finance Board is adopting an amendment to 
Sec. 931.7(a) of its rules to provide that a member's redemption 
request will be automatically cancelled if the Bank is unable to redeem 
the member's stock within five business days after the completion of 
the statutory redemption period. For example, under this change, if 
Class B stock specified for redemption were being used to support an 
activity at the completion of the five-year redemption period, the 
redemption notice would be cancelled if the activity were not 
liquidated within five business days and a new notice would have to be 
filed, starting anew the waiting period, if the member still wished to 
redeem the stock. This cancellation would still be subject to 
applicable fees specified in the Bank's capital plan. The five-day 
business period which a Bank must wait before canceling the redemption 
notice is intended to allow a member the option of liquidating the 
activity which is supported by the stock, if such early liquidation of 
the transaction is allowed under agreements with the Bank.
    The automatic cancellation of a redemption request, of course, 
would also be applied to stock if the stock were required to be held as 
a condition of membership at the time the applicable redemption period 
ended. The Finance Board notes, however, that this provision only 
applies if the stock cannot be redeemed because it must be held by the 
member to fulfill one of its minimum investment requirements. Thus, the 
provision would not apply where the Bank could not redeem stock because 
the Bank would be below its regulatory capital requirements after the 
redemption or for a reason set forth in Sec. 931.8 of the Finance Board 
rules, as that rule is being amended today, 12 CFR 931.8.
    Discretionary redemption of stock. In response to the ANPR, a few 
commenters noted that Finance Board rules appeared to require a Bank to 
redeem a member's excess stock at the end of the statutory redemption 
period, unless certain statutory or regulatory restrictions applied. 
These commenters stated their belief that this approach was contrary to 
the Bank Act. See 66 FR at 41470-71. The Finance Board disagreed with 
this assessment and noted the discretion maintained by the Banks to 
repurchase stock and reiterated its position that it was not apparent 
from the GLB Act that a Bank could deny a redemption request if certain 
statutory or regulatory limitations on redemption did not apply. Id.
    One commenter urged the Finance Board again to reconsider its 
position on this issue, citing concerns that the redemption rules, as 
written, may affect tax treatment of stock dividends and accounting 
treatment of Bank stock. In response to this comment, the Finance Board 
has carefully reconsidered its position on discretionary redemption. 
The Finance Board, however, continues to believe its earlier statements 
on this issue are correct. Id. at 41470. Further, the Finance Board's 
view is based in part on the fact that Congress in considering the GLB 
Act specifically rejected a class of non-redeemable stock. See H.R. 
Conf. Rep. No. 106-434 (discussing section 608 of the GLB Act). 
Interpreting the statute to allow the Banks sole discretion to redeem 
excess stock would effectively give the Banks the right to create a 
class of non-redeemable stock.
    The Finance Board also believes that the Bank Act provides a large 
degree of discretion to a Bank to affect the amount of stock that it 
must redeem. In this respect, a Bank may adjust minimum investment 
provisions in its capital plan to require members to hold additional 
stock, effectively rendering such stock ineligible for redemption. This 
is especially true in light the amendments to Sec. 931.7(a) being 
adopted herein, and discussed above. Further, the Finance Board has 
interpreted its rules to allow a Bank to provide minimum investment 
ranges in its capital plan so a Bank may adjust its minimum investment 
requirement within such range quickly. In cases where a Bank must amend 
its capital plan to change the minimum investment requirements, the 
Bank would need to seek Finance Board approval of the amendment, but 
the Finance Board intends to consider such requests expeditiously.
    Authority for Banks to suspend redemption of stock. In considering 
the issue of a Bank's discretion to redeem stock, the Finance Board 
carefully reviewed its current regulations and weighed whether its 
current regulations were sufficiently flexible to allow a Bank to 
address an unforeseen or quickly arising situation in which the cash 
out-flow associated with redemptions would affect the Bank's ability to 
continue operating in a safe and sound manner or would weaken its 
capital position. In this respect, Finance Board regulations clearly 
prohibit the redemption of stock in situations where a Bank would be 
below its regulatory capital requirements after such redemption or 
where a Bank has experienced losses or projects future losses that 
would impair capital. See 12 CFR 931.7(c) and 931.8. The Finance Board 
also retains the right for reasons of safety and soundness to require 
the Banks to hold capital above the minimum total capital or risk-based 
capital requirements. See 12 CFR 932.2(b) and 932.3(b). By exercising 
such right, the Finance Board would effectively reduce the amount of 
stock that the Bank could redeem.

[[Page 54101]]

    However, it is less clear whether the rules give a Bank clear 
authority to suspend redemption if it believes that its capital 
requirement may be rising in the future or if it believes that the 
capital requirements do not fully reflect the risk on the Bank's 
balance sheet. For example, the risk of certain newly-developed 
financial instruments may not become apparent until certain market 
conditions evolve, and a Bank may feel that such newly-apparent risks 
are not fully captured in the Finance Board credit or market-risk 
rules, or will result in a steady rise in a Bank's regulatory capital 
requirements over a period of time. While the Finance Board has 
authority to address such situations by raising capital requirements or 
changing its rules, it may be more prudent for the Banks to act 
immediately to stop redemptions in particularly volatile situations and 
let the Finance Board adjust its regulatory requirements in a more 
deliberate fashion.
    The Bank Act also clearly provides certain statutory prohibitions 
on the redemption or repurchase of Bank stock so that the redemption or 
repurchase of such stock does not endanger a Bank's capital position. 
See 12 U.S.C. 1426(f). The Finance Board interprets this goal as 
applying both to immediate situations in which redemption or repurchase 
would bring a Bank below regulatory capital requirements and to 
situations in which a Bank has a reasonable belief that current 
redemption or repurchase of stock would cause the Bank to fail to 
maintain adequate capital in the near-term. It is less clear, however, 
that the Finance Board regulations address this latter situation.
    In addition, the Bank Act imposes various obligations on the Banks 
and on the Finance Board. Among the duties imposed on the Finance Board 
are the requirements that it ensures that the Banks operate in a 
financially safe and sound manner, that the Banks remain adequately 
capitalized, and that the Banks carry out their housing finance 
mission. See 12 U.S.C. 1422a(a)(3). The Finance Board recognizes that 
cash out-flow associated with redemption of stock could affect the 
Banks' ability to carry out other obligations or otherwise operate in a 
safe and sound manner. The Finance Board believes that, given its 
statutory duties and obligations, it maintains full authority to 
restrict the redemption or repurchase of stock on safety and soundness 
grounds. Again, however, the Finance Board is concerned that its rules 
do not clearly give a Bank flexibility to exercise their judgment in 
situations that are fast evolving and moving in directions that cannot 
be readily ascertained.
    To assure that its regulations address these situations, the 
Finance Board is, pursuant to authority in 12 U.S.C. 1422a, 1422b and 
1426(a), adopting Sec. 931.8(b). This regulation provides a Bank's 
board of directors, or a subcommittee of the board, with authority and 
discretion to suspend the redemption of stock if the continued 
redemption of stock would cause (at some future date) the Bank to fail 
to meet its regulatory capital requirements, would prevent the Bank 
from maintaining adequate capital against a risk or potential risk not 
fully captured in the Finance Board's regulations, or would otherwise 
prevent the Bank from operating in a safe and sound manner. Moreover, 
as safety and soundness regulator, the Finance Board believes that it 
would need to be informed of any condition that caused a Bank to invoke 
the authority granted by this provision. Thus, the provision requires a 
Bank to inform the Finance Board in writing within two business days 
that it has invoked the authority granted it under Sec. 931.8(b). In 
addition, the Bank must provide the Finance Board with its reasons for 
suspending stock redemptions, including a description of the conditions 
that led to the suspension, and describe the Bank's strategies and time 
frame for addressing those conditions. The regulation also makes clear 
that in granting the Banks this discretion, the Finance Board retains 
authority to require the Banks to re-institute redemptions subject to 
whatever terms and conditions the Finance Board may set. The rule also 
prohibits a Bank from exercising its discretion to repurchase excess 
stock without the Finance Board's written permission during such time 
as a suspension of redemption under Sec. 931.8(b) is in effect.
    The Finance Board believes that the rule is needed for contingency 
purposes. In addition, the Finance Board emphasizes that the condition 
related to the failure to meet a minimum capital requirement in 
Sec. 931.8(b) differs from the limitation set forth in Sec. 931.7(c) in 
that it is forward looking and is intended to address a situation in 
which the Bank projects that continued redemptions over the near term 
will leave the Bank without sufficient capital to meet its regulatory 
requirements in the future. Thus, if current redemptions would cause a 
Bank to fall below regulatory capital requirements, the limitations in 
Sec. 931.7(c) would apply and the Bank would not need to comply with 
the conditions of Sec. 931.8(b).
    Opt-out provision. In their joint comment letter, the twelve Banks 
urged the Finance Board to address the question of members who would be 
in the process of withdrawing on the effective date of the capital 
plan. The issue arose in part because of the proposed requirement in 
the disclosure rule that a Bank provide the required disclosure at 
least 20 days before the effective date of its capital plan. The Banks 
pointed out that they had wanted to put in their capital plans a firm 
opt-out date by which a member must submit its notice to withdraw if 
the member did not want to have its existing capital stock converted 
into Class A or Class B stock. If a capital plan contained such an opt-
out date, the Banks stated, disclosure should be made before that date.
    Some Banks, in their individual comment letters, also pointed out 
that Finance Board staff's position concerning draft capital plans was 
that the Banks could not use an opt-out provision to restrict the 
members' rights to withdraw from the System upon six-months prior 
notice. Thus, Finance Board staff believed a member could withdraw from 
the System and, in effect, opt out of the conversion process up until 
the effective date of the capital plan. Further, the staff believed 
that if the withdrawal notice were submitted before the effective date 
of a capital plan, the member's right to withdraw on six-months notice 
would have been reserved and should have been applied to any Class A or 
Class B stock received by the member upon conversion. One Bank's 
comment letter expressed concern about the operational problems related 
to conversion procedures and capital stock programming requirements if 
members were allowed to opt out of conversion up to the effective date. 
The Banks in their joint comment letter also questioned whether there 
would be statutory authority to allow Banks to redeem Class B stock on 
less than five years notice, as the Finance Board staff suggested.
    The Banks reviewed various options for addressing the opt-out 
issue, but they believed some of these approaches raised legal or 
operational issues. They pointed out, however, that the Finance Board 
previously determined that it had authority to waive the six-month 
notice period for withdrawal and urged the Finance Board to use this 
authority to address the unique circumstances associated with the 
transition to the new capital structure. Specifically, the Banks wished 
to be able to adopt a flexible opt-out deadline and allow all members 
who withdrew from a Bank before this deadline to terminate membership 
and

[[Page 54102]]

have their old stock redeemed on or before the effective date of a 
Bank's capital plan. The Banks also suggested that the Finance Board 
adopt a rule requiring members that did not file a notice of withdrawal 
before the opt-out date to have their existing stock converted into 
Class A or Class B stock as required under a capital plan and to be 
subject to the new, applicable notice periods associated with those 
classes of stock. One Bank also urged the Finance Board explicitly to 
allow the Banks to convert to cash the stock of institutions whose 
membership would be terminated as of the effective date, but 
nevertheless had outstanding advances, and to hold that cash as 
collateral against the outstanding advances.\3\ The Bank also urged the 
Finance Board to deem receipt by a Bank of a notice to withdraw as 
receipt by the Finance Board of that notice.
---------------------------------------------------------------------------

    \3\ The Finance Board will consider addressing this situation on 
a case-by-case basis should it arise.
---------------------------------------------------------------------------

    The Finance Board has carefully considered the Banks' comments and 
finds many of the Banks arguments persuasive. As a starting point, the 
Finance Board recognizes that the Bank Act does not explicitly address 
how a Bank is to handle a member that, as of the effective date of a 
capital plan, has submitted a notice to withdraw from the Bank but for 
which the statutory six-month notice period has not yet been completed. 
See 12 U.S.C. 1426(e)(1994). Nor has the Finance Board previously 
addressed how this withdrawal issue should be addressed by the Banks in 
light of the statutory silence on this issue. The Finance Board does 
believe, however, that the preliminary position voiced by its staff 
that the statute allows a member to withdraw from the System on six-
months notice up until the effective date of the capital plan raises 
questions from both an operational and a legal perspective, and, 
therefore, declines to adopt that position.
    The GLB Act holds that a Bank shall apply the stock purchase and 
retention requirements that were in effect immediately prior to its 
enactment until the capital plan of that Bank is implemented. Under the 
regulatory structure adopted by the Finance Board, a Bank's capital 
plan is considered implemented on its effective date when the stock 
purchase and retention requirements (i.e., the minimum investment 
requirements) for members adopted in the capital plan and the capital 
requirements (and transition provisions) adopted by the Finance Board 
under the authority set forth in the GLB Act would be applied. See 12 
CFR 931.9. See also 66 FR 8262, 8279-80 (Jan. 30, 2001)(discussing 12 
CFR 931.9). Thus, while the six month notice period for withdrawal from 
membership are applied up until the effective date of a Bank's capital 
plan, the withdrawal provisions set forth in the GLB Act amendments to 
the Bank Act should be applied after the capital plan's effective date. 
See 12 U.S.C. 1426(d).
    The Finance Board believes that this view is also the most 
consistent with other provisions of the GLB Act. The GLB Act provides 
that the Finance Board may permit Banks to issue only those classes of 
stock authorized thereunder, and sets forth specific redemption periods 
for both Class A and Class B stock. See 12 U.S.C. 1426(a)(4). Deeming 
the six-month notice period for withdrawal to apply to Class B stock 
issued on the effective date of the capital plan would raise questions 
whether the Finance Board were allowing an unauthorized class of 
``old'' stock to be issued, or alternatively, allowing a redemption 
period that differs from the statutory requirement. Thus, the approach 
that requires the pre-GLB Act withdrawal provision to apply up to the 
effective date but that applies the withdrawal provision set forth in 
the GLB Act to membership termination and the accompanying redemption 
of stock after such date appears to be the most consistent with the 
Bank Act, as amended.
    The Finance Board also has, on at least one occasion, waived the 
statutory six-month notice period for withdrawal. See Fin. Bd. Res. No. 
97-89 (Dec. 30, 1997). In that case, the Finance Board noted that it 
acted pursuant to an opinion of the Office of General Counsel that the 
Finance Board had authority as a matter of law, to waive the statutory 
six-month notice period provided that the waiver did not: (1) endanger 
the financial stability of the Bank from which the member was 
withdrawing; (2) endanger the safety and soundness of the Bank System 
as a whole, or (3) frustrate the purposes of the statutory provision. 
Id. In this regard, the Finance Board recognizes that some Banks may 
wish to allow members to opt out of the conversion process on less than 
six-months notice, either to speed up the transition process or to 
allow members to make their decision closer to the effective date. 
Thus, as a general matter, the Finance Board recognizes that applying 
its waiver authority to allow the Banks some flexibility in managing 
the unique issues related to the transition from the old subscription-
based capital to the new risk-based capital system may strengthen the 
transition process and advance the overall statutory goals of the Bank 
Act as amended by the GLB Act.
    To codify its view of the withdrawal provisions discussed above and 
in response to the concerns raised in comments on the proposed rule, 
the Finance Board has decided to adopt Sec. 933.2(e) as part of this 
final rulemaking to require each Bank to establish in its capital plan 
an opt-out date by which a member that does not wish to convert to the 
new Class A or Class B stock must file its notice to withdraw with the 
Finance Board. This opt-out date can be no more than six months prior 
to the effective date of the capital plan, assuring that a Bank does 
not extend the withdrawal notice period beyond the six months currently 
required under the Bank Act.
    The rule, however, in reliance on the Finance Board's waiver 
authority discussed above, will allow a Bank to set its opt-out date 
less than six months prior to the effective date of the capital plan. 
The Finance Board, by approving a capital plan that has an opt-out date 
that is less than six months before the effective date of the capital 
plan, will be simultaneously waiving the six-month notice period for 
withdrawal contained in Sec. 6(e) of the Bank Act prior to its 
amendment by the GLB Act. When considering a capital plan with such an 
opt-out date, the Finance Board, therefore, will have to be satisfied 
that the opt-date will not endanger the safety and soundness of the 
Bank in question or the Bank System more generally nor be contrary to 
the withdrawal provision in the statute. Among the factors the Finance 
Board will consider in this regard are whether the opt-out date 
provides the Bank with sufficient time to adjust to unexpected 
withdrawals prior to the effective date and whether the Bank expects or 
is reasonably certain that member withdrawal will not negatively affect 
its conversion plans. The Finance Board also wishes to emphasize that 
it expects the opt-out date to be a specific date keyed to the 
effective date (e.g., four months before the effective date) and will 
not consider a range of dates.
    Section 933.2(e), as adopted, also requires each Bank's capital 
plan to provide that a member that does not file its notice to withdraw 
from the Bank on or before the opt-out date will be subject to the 
withdrawal requirements set forth in the Bank's capital plan. For a 
member of a Bank that requires an institution to hold Class B stock as 
a condition of membership, this would mean that the member would become 
subject to the five-year redemption period associated with Class B 
stock upon the conversion of its existing stock to Class B stock,

[[Page 54103]]

even though the member may have filed its notice to withdraw prior to 
the effective date of the capital plan. In this regard, the Finance 
Board will consider using its waiver authority to allow members that 
missed an opt-out date filing to terminate their membership on the 
effective date of the capital plan, upon a request of the Bank. In 
considering such a waiver, the Finance Board will review the effects of 
letting the member leave the System on its Bank's capital position, as 
well as review other safety and soundness implications of the request.
    Section 933.2(e), as adopted, also makes clear that a Bank shall 
consider the period of time after the member files its notice to 
withdraw but before the effective date of the capital plan in 
calculating the applicable stock redemption periods for the Class A or 
Class B stock that are converted from existing stock on the effective 
date of the capital plan. The voluntary withdrawal provisions in the 
Bank Act both before and after its amendment by the GLB Act required 
the withdrawal notice period to commence upon the member's filing of 
its notice to withdraw. Cf. 12 U.S.C. 1426(e)(1994) and 12 U.S.C. 
1426(d)(1). The Finance Board, therefore, believes that it is 
consistent with the GLB Act provisions to allow the date that the 
member's notice of withdrawal was first filed with the Finance Board to 
carry over when existing stock is converted into Class A or Class B 
stock. This approach also results in the applicable stock redemption 
periods remaining five years from the date the notice was filed for 
Class B stock and six months from the date the notice was filed for 
Class A stock, as required by the GLB Act. Section 933.2(e), as 
adopted, does not alter current procedures which require that a notice 
to withdraw be filed with the Finance Board to become effective. This 
long standing practice is required by the Bank Act and has not 
generally resulted in delays in member filings. Of course, on the 
effective date of a Bank's capital plan, voluntary withdrawal from that 
Bank would be governed by Sec. 925.26 of the Finance Board's rules, 12 
CFR 925.26, which requires that members provide their notices of 
withdrawal to the Bank.
    This final provision being adopted by the Finance Board also does 
not alter the current practices for calculating the effective date of 
termination of membership. Under these procedures, a member whose 
notice of withdrawal is received by the Finance Board on February 1 
would be given a membership termination date of August 1 (i.e., the 
count is six months not 180 days). Thus, by the same token, a Bank that 
wished to have an effective date of August 1, 2003, could set its opt-
out date no earlier than February 1, 2003.
    In adopting Sec. 933.2(e), the Finance Board is requiring all Banks 
to set an opt-out date in their capital plans. The Finance Board fully 
expects this change may require some Banks to amend the plans that they 
initially submitted and has no objection to a Bank's altering its 
capital plan after the submission date.
    The Finance Board also agrees with the Banks' comments that the 
disclosure requirement should be tied to the opt-out date to assure 
that members have information that would aid in their decisions whether 
to convert existing stock to the new Class A and/or Class B stock. 
Therefore, the Finance Board is adopting in the final disclosure rule 
(more fully discussed below) a requirement that all information 
required to be provided to members by Sec. 933.5 be transmitted, sent, 
or given to members between forty-five and sixty days before the opt-
out date established in a Bank's capital plan. The Finance Board 
believes that this deadline will provide members sufficient time to 
review the information provided by the Bank and to make follow-up 
inquiries if necessary while still being sufficiently close to the opt-
out date.
    Furthermore, to assure that members fully understand the 
ramifications of the opt-out provision, Sec. 933.5(c)(4)(iv) of the 
final disclosure rule requires a Bank to provide the opt-out date in 
the disclosure materials. Because a Bank will know the intended 
effective date of its capital plan by the time the disclosure document 
is provided, the Finance Board expects that Bank to provide the 
calendar date for the opt-out deadline. Along with disclosing this opt-
out date, the Bank also must explain the consequences to members of not 
filing the withdrawal notice on or before the opt-out date.
    Disclosure to members. In proposing Sec. 933.5, the Finance Board 
intended to provide a baseline for a Bank's disclosure about its 
financial condition, its capital plan, and the capital conversion 
process. The Finance Board decided to propose this rule after the Banks 
requested further clarification of Finance Board staff guidance that 
had outlined the types of communications with members that staff 
believed would help the Banks demonstrate the feasibility of 
implementation of their capital plans, as is required by Sec. 933.2(g) 
of the Finance Board's rules, 12 CFR 933.2(g). The Finance Board noted 
that because use of disclosure documents could play an important role 
in member outreach and that the quality of a Bank's disclosure on a 
number of issues would play an important role in the Finance Board's 
review of the Banks' capital plans, there was merit in responding to 
the requests for additional guidance by adopting a rule in this area. 
See 66 FR at 41467-68.
    Proposed Sec. 933.5 would have required a Bank to provide a member 
with certain specified information at least 20 days before the 
effective date of the capital plan. In developing this proposed 
requirement, the Finance Board looked to disclosure standards 
established by the Securities and Exchange Commission (SEC), and 
specifically, the rule would have required the Banks to provide 
disclosure meeting the requirements of Item 11(a) through (d) and Item 
12(a) and (e) of Schedule 14A of the SEC's proxy rules (17 CFR 240.14a-
101, Items 11 and 12). The Finance Board noted that Items 11 and 12 are 
``usually thought of as mutually exclusive provisions,'' but given the 
unique nature of the Banks and the conversion process, the Finance 
Board believed that appropriate disclosures from both Items should be 
provided to members. Id. The proposed rule would also have required the 
Banks to provide certain specific financial information to the members 
that was in scope, form, and content consistent with SEC's regulations 
S-X and S-K (17 CFR parts 210 and 229), as well as to provide pro forma 
balance sheet and income statements. The proposal would have allowed 
the Banks to incorporate by reference any of the financial information 
that had been incorporated in any Bank or Bank System report or that 
had been filed along with the capital plan with the Finance Board. 
Under proposed Sec. 933.5, the Banks would also have had to provide 
members with a brief statement as to the anticipated accounting 
treatment and the federal income tax consequences of the transaction 
and with other information.
    The Finance Board received four comment letters on various aspects 
of the disclosure requirements. One of the letters was on behalf of all 
twelve Banks. Three Banks also commented separately on specific aspects 
of the proposed disclosure rule. To the extent that the commenters 
addressed the same issues, the comment letters were generally 
consistent in their requests for changing the proposed rule.
    In their joint comment letter, the twelve Banks stated that it was 
important for the Finance Board to clarify the premise under, which it 
was adopting the disclosure regulation. They noted that the Finance 
Board had explained that the proposed disclosure

[[Page 54104]]

regulations were intended to help the Banks satisfy the disclosure 
criteria suggested by Finance Board staff in the Capital Plan 
Feasibility Guidance that had been provided by letter to the Bank 
presidents in May 2001. The Banks, however, viewed the staff guidance 
as applicable only to the outreach process which should be completed 
before the Banks filed their capital plans on October 29, 2001, while 
the disclosure required under the proposed rule would not occur until 
after approval of the capital plan.
    The Finance Board agrees that clarification on this point is 
necessary. The criteria contained in the staff's guidance concerning 
the Banks' communications with their members indicated that a Bank was 
expected to disclose information about specific requirements in its 
capital plan. Because the Finance Board expects that the review process 
of a capital plan is likely to result in changes to the capital plan as 
originally submitted, information about specific provisions cannot be 
disclosed with certainty until after the Finance Board actually 
approves the plan.\4\ This fact creates a timing problem under the 
staff guidance in that a Bank cannot submit complete information about 
its outreach effort until after a capital plan is approved, but at the 
same time, the guidance suggested that a capital plan could not be 
approved until after such information was submitted. Section 933.5(a), 
as adopted, addresses this timing problem by stating that a capital 
plan cannot become effective until the disclosure required under the 
rule is provided to the members. In this respect, the disclosure rule 
is intended to replace the staff guidance concerning a Bank's 
communication with its membership.
---------------------------------------------------------------------------

    \4\ These changes may result from comments made by the Finance 
Board staff or from a Bank's reconsideration of its capital plan.
---------------------------------------------------------------------------

    The Finance Board notes, however, that a Bank may wish to provide a 
narrative as supplemental information supporting the approval of the 
capital plan which describes member reaction to the version of the 
capital plan that it submits for approval and describes any issues that 
members saw as key to their acceptance of the capital plan. The Finance 
Board also emphasizes that Sec. 933.5 as adopted only sets forth the 
minimum disclosure requirements, and does not prevent the Banks from 
undertaking additional outreach or disclosing additional information at 
any time.
    The Banks in their joint comment letter also raised concerns about 
the approach to disclosure proposed in Sec. 933.5 and about some of the 
specific information that the Finance Board was proposing be disclosed 
under the rule. Most importantly, the Banks emphasized that the 
wholesale incorporation of the SEC's rules was problematic for several 
reasons. First, the Banks stated that the specific proxy disclosure 
items from the SEC rules cited by the Finance Board were in some cases 
mutually exclusive and in other cases overlapping. This fact, the Banks 
believed, made it difficult to determine what information had to be 
disclosed and could lead to different Banks applying different 
standards. Moreover, the Banks believed that the SEC regulations were 
not designed to address either the unique capital structure of the 
Banks or the unique circumstances surrounding the re-capitalization 
which created additional difficulties in discerning what disclosure 
would be required. The Banks also questioned whether SEC precedent 
would be applied to its disclosure and cited the expense and 
difficulties for the Banks, which have not been subject to the SEC 
requirements, to develop the expertise in this area necessary to 
prepare their disclosure documents.
    The Banks also objected to the provisions in proposed 
Sec. 933.5(b)(1)(ii) which would have required the Banks to provide 
members with quarterly pro forma balance sheet and income statements. 
The Banks believed that this information would be so highly speculative 
and be based on such a detailed set of assumptions so as to be of 
little use to members. The Banks also voiced concern about the 
liability associated with requiring disclosure of such highly 
speculative financial information. As an alternative to the disclosure 
of the pro forma financial information, the Banks suggested that they 
be required to provide members with a pro forma capitalization table 
that would reflect the new capital structure of a Bank and with a 
narrative discussion of known material trends that could affect the 
liquidity, capital resources or continuing operations of the Bank. Two 
Banks also submitted separate comment letters emphasizing these points 
with one of the Banks suggesting that the narrative discussion may also 
include a statement of management's plans and objectives for future 
operations.
    In developing the proposed disclosure rule, the Finance Board had 
turned to the SEC proxy rules (and related precedent) because it 
believed these rules provide a valuable model and a degree of certainty 
for the Banks as to the disclosure requirements. The Finance Board 
continues to believe that the SEC rules provide the best model for 
disclosure requirements but also understands the Banks' concerns that 
their unique capital structure makes the wholesale adoption of these 
rules confusing. The Finance Board has also reconsidered the proposed 
requirement that the Banks provide specific pro forma financial 
information to their members in light of the Banks' comments. As a 
result, the Finance Board has restructured the final disclosure rule to 
address the Banks' concerns and to more closely relate the SEC 
disclosure requirements to the capital plans of the Banks and is 
adopting Sec. 933.5 as discussed below.
    First, the Finance Board has deleted the specific references in its 
rules to the SEC proxy requirements. Instead, the Finance Board now 
describes in Sec. 933.5(b) of the final rule the specific information 
that a Bank must disclose about the Class A and/or Class B stock that 
the Bank intends to issue on the effective date of its plan. (Thus, to 
the extent that a Bank's capital plan does not call for the issuance of 
Class A stock, the Bank's disclosure document would not be required to 
address Class A stock.) Specifically, Sec. 933.5(b), as adopted, 
requires a Bank to briefly outline with regard to the Class A and/or 
Class B stock that it intends to issue: dividend rights, the terms of 
the conversion, the terms and conditions of a member's rights to have 
the Class A and/or Class B stock redeemed or repurchased, voting rights 
and preferences associated with the stock, liquidation rights, and a 
member's liability to further calls or to assessments by the Banks. The 
final disclosure provision also requires the Banks to describe any 
differences with regard to these rights between existing Bank stock and 
the new Class A and Class B stock. The Banks will also be required to 
discuss briefly the reasons for the conversion, the general effect of 
the conversion on a member's rights, and outline any other material 
features concerning the conversion.
    Further, to assure that each Bank adequately discloses how 
provisions in its capital plan may affect a member's rights, the 
Finance Board has adopted Sec. 933.5(c)(4) to require a Bank to 
disclose certain additional information related to its capital plan to 
the extent that the information was not provided to fulfill the 
requirements of Sec. 933.5(b). Specifically, Sec. 933.5(c)(4) requires 
each Bank to describe the minimum stock investment requirements set 
forth in the capital plan, to review the procedures for the Bank to 
amend the capital plan, to describe any restrictions (not

[[Page 54105]]

disclosed elsewhere) on a member's right to redeem or to have its stock 
repurchased or to make use of its stock to fulfill its minimum stock 
investment requirement, and to describe a member's rights to have its 
stock redeemed or repurchased upon the member's voluntary or 
involuntary termination of membership.
    As already discussed above, Sec. 933.5(c)(4), as adopted, also 
requires a Bank to disclose the last date by which a member's written 
notice to withdraw from membership must be received by the Finance 
Board for the member not to have its existing stock converted to Class 
A and/or Class B stock and to explain the ramifications of not filing a 
notice to withdraw on or before that date. As also discussed more fully 
above, the date by which a Bank must make the disclosure required by 
Sec. 933.5 is tied to the opt-out date set in a Bank's capital plan, 
and under Sec. 933.5(a), as adopted, a Bank must transmit the required 
disclosure to members between forty-five and sixty days before the opt-
out date.
    The Finance Board has also modified Sec. 933.5 with regard to the 
proposed disclosure of pro forma financial information, and, as 
requested by the Banks, Sec. 933.5, as adopted, no longer requires the 
Banks to provide members with quarterly pro forma balance sheets and 
income statements. Instead, Sec. 933.5(c)(1)(ii) requires each Bank to 
provide a pro forma capitalization table that reflects the expected new 
capital structure of the Bank, an estimate of the Bank's risk-based 
capital requirement under Sec. 932.3 of the Finance Board rules, and an 
estimate of the Bank's total capital-to-asset ratio (where total 
capital would be regulatory total capital as defined in part 930 of the 
Finance Board's rules, 12 CFR part 930). This information should be 
based on actual financial data as of the date of the latest balance 
sheet required to be provided by Sec. 933.5(c)(1)(i) of the disclosure 
regulation. Thus, the rule requires a Bank to show an estimate of what 
its capitalization, risk-based capital requirement, and total capital-
to-asset ratio would have been, if the conversion process had occurred 
as of the applicable year-end date. The Banks are also required to 
disclose any material assumptions, and the basis for these assumptions, 
underlying the pro forma capitalization table, the estimated risk-based 
capital requirement, and the total capital-to-asset ratio.
    Furthermore, Sec. 933.5(c)(2) has been added to the final rule to 
require the Banks to provide members with a narrative discussing 
anticipated developments that could materially affect the liquidity, 
capital, earnings or continuing operations of a Bank, including those 
developments that could affect dividends, product volumes, investment 
volumes, new business lines, and risk profile. Because this narrative 
is viewed as a replacement for the proposed disclosure of the pro forma 
financial information, the Finance Board expects that the narrative 
will be forward looking. At the same time, however, the Finance Board 
used the term ``anticipated developments'' to indicate that it expects 
the Banks to discuss in its narrative those developments that, in the 
Bank's opinion, may be likely to unfold, given important trends, the 
Bank's business strategies, and the general economic conditions 
existing at the time the disclosure is made. The Finance Board also 
expects that the narrative will provide members with sufficient 
information to understand the underlying reasons for a Bank's views.
    The Banks also requested that the Finance Board make some 
additional changes to the proposed rule to clarify some of the 
disclosure requirements. With regard to the requirement in proposed 
Sec. 933.5(b)(1)(i) that the audited balance sheets and statements of 
income and cash flows be consistent in scope, form, and content with 
Regulation S-X and S-K, the Banks commented in their joint letter that 
this standard may be viewed as different from the current standard 
required of the Banks. In this respect, they pointed out that 
Sec. 989.4 of the Finance Board rules, 12 CFR 989.4, stated that 
quarterly or annual statements issued by an individual Bank should be 
consistent in both form and content with the financial statements 
presented in the combined Bank System annual or quarterly financial 
reports. Two Banks reiterated this point in their individual letters. 
The Finance Board did not intend that the financial disclosure required 
under Sec. 933.5 be different in form or content from what is currently 
required for an individual Bank's or the Bank System's financial 
reports. Thus, Sec. 933.5(c)(1)(i), as adopted, requires that the 
audited balance sheets and statements of income and cash flow meet the 
requirements of Sec. 989.4 of the Finance Board rules in form and 
content. As did the proposed rule, the final disclosure regulation 
still requires the Banks to provide members with audited balance sheets 
as of the end of the two most recent fiscal years, audited statements 
of income and cash flows for each of the three fiscal years preceding 
the date of the most recent audited balance sheet being presented, and 
unaudited interim financial statements as of and for appropriate 
interim dates.
    The disclosure rule, as adopted, also allows the Banks to 
incorporate by reference any of the financial information required to 
be disclosed under Sec. 933.5(c)(1), if that information was contained 
in an annual or quarterly Bank report, so long as that report conformed 
with the requirements of Sec. 989.4 of the Finance Board rules, or an 
annual or quarterly Bank System report. See Sec. 933.5(c)(1)(iii). To 
incorporate this information by reference, the final rule, as proposed, 
requires a Bank only to identify the incorporated information in the 
disclosure to members, and no other steps need be taken by a Bank. The 
final rule, as adopted, however, did not carry over from the proposed 
rule the right to incorporate by reference information that would have 
been filed with the Finance Board along with the Bank's capital plan. 
This provision had been proposed mainly to facilitate the incorporation 
by reference of the pro forma financial information that the proposed 
rule would have required Banks to provide to members. Because the pro 
forma financial information no longer must be disclosed to members and 
because filing information with the Finance Board would not necessarily 
mean the information is readily available to Bank members, the Finance 
Board has deleted this provision from the final rule.
    The Banks in their joint comment letter also expressed concern with 
the wording of proposed Sec. 933.5(b)(4), which would have required the 
Banks to provide members with a brief statement as to the anticipated 
accounting treatment and the federal income tax consequences of the 
conversion transaction. The Banks felt that the use of the phrase 
``federal income tax consequences'' raised the issue of whether the 
Finance Board intended the Banks to provide tax advice to their 
members. The Banks suggested that the rule be rewritten to require the 
Banks to provide a statement of the federal income tax considerations 
that may be relevant to members as a result of the transaction. The 
Finance Board notes that it is common practice in disclosure documents 
to provide information on the potential tax implications of a 
transaction and such disclosure does not generally raise concerns that 
the disclosing party is acting as a tax advisor. The Finance Board, 
however, also did not intend to imply that the Banks were to act, or 
would in any way be acting, as tax advisors to the members with regard 
to the conversion transaction. Thus, in adopting the final disclosure 
rule, the wording of this

[[Page 54106]]

requirement, now set forth at Sec. 933.5(c)(6), has been changed to 
state that a Bank shall provide its members with a statement as to the 
anticipated accounting treatment for the conversion transaction and the 
federal income tax implications of the transaction that members should 
consider in consultation with their own accounting and tax advisors.
    A number of disclosure requirements have also been adopted as 
proposed, although the requirements appear in a different section of 
the final rule. Thus, a Bank is required to provide members, if 
applicable, with a description of any amendments that it anticipates 
making to its by-laws or other governance documents as a result of the 
implementation of its capital plan. See Sec. 933.5(c)(3).The Bank must 
also state in its disclosure document a name, address and telephone 
number for members to direct a written or oral request to obtain, free 
of charge, a copy of the capital plan and any other instrument or 
document that defines the member's rights. See Sec. 933.5(c)(5). The 
final disclosure rule also makes clear (in Sec. 933.5(d)) that nothing 
in Sec. 933.5 shall create or shall be deemed to create any rights in 
any third party. As the Finance Board explained when proposing this 
provision, the disclosure rule is meant to add consistency, clarity, 
and precision to the disclosure process, and it is not the Finance 
Board's intention to impose liability under the federal securities laws 
on the Banks, or to create any private right of action in any third 
party. See 66 FR at 41468.
    The Finance Board also notes that it is not prescribing a form to 
be used by Banks in providing the disclosure, which provides a great 
deal of flexibility to the Banks in this respect. However, the Finance 
Board expects that no matter what form is chosen, the disclosure 
documents will provide the required information to members in clear 
narratives and will not merely incorporate language taken directly from 
a capital plan or the Finance Board rules. The disclosure should also 
be referenced to the specific rights or obligations set forth in the 
Bank's capital plan. For example, a Bank that requires that only Class 
A stock be held as a condition of membership would be expected to 
discuss its withdrawal provisions in terms of the six month applicable 
notice period related to that class of stock while Banks that require 
Class B stock be held as a condition of membership would discuss 
withdrawal as requiring a five-year notice period.

III. Other Provisions Adopted in the Final Rule

    The Finance Board did not receive any comments or received only 
favorable comments on a number of the rule changes that it proposed in 
August 2001. As discussed below, these provisions are being adopted in 
substance, as proposed.
    Charges against capital. In comments to the ANPR, seven Banks 
stated that the phrase ``charges against the capital of the Bank'' as 
used in Sec. 931.8 of the Finance Board rules was ambiguous. The main 
concern was that the phrase could be read to require the Banks to seek 
written permission of the Finance Board to redeem or repurchase stock 
anytime a Bank expected to incur, or actually had incurred, even a 
small loss. See 66 FR at 41465-66. As the Finance Board pointed out, 
the phrase itself was used in the Bank Act. See 12 U.S.C. 1426(f). 
After applying rules of statutory construction and considering the 
goals of and other relevant provisions in the Bank Act, the Finance 
Board concluded that the phrase was not meant to trigger the 
requirements of Sec. 931.8 whenever a Bank projected or experienced 
loss. See 66 FR at 41465-66. The Finance Board therefore proposed to 
define in Sec. 930.1 the phrase ``charges against the capital of the 
Bank'' as meaning an other than temporary decline in the Bank's total 
equity that causes the value of total equity to fall below the Bank's 
aggregate capital stock amount. This definition would effectively 
trigger the requirements of Sec. 931.8 (which given other changes 
adopted as part of this final rulemaking are now found at 
Sec. 931.8(a)) only when a Bank experiences a charge against its 
capital stock.
    The Finance Board received one comment on this matter in response 
to the proposed rule, and that comment supported adoption of the 
definition as proposed. Therefore, for the reasons set forth in the 
SUPPLEMENTARY INFORMATION section of the preamble of the proposing 
release for this rule, the Finance Board is adopting in Sec. 930.1 the 
definition of ``charges against the capital of the Bank,'' as proposed.
    Dividends on Class A stock. In the proposed rule, the Finance Board 
proposed to amend Sec. 931.4 to state expressly that a Bank may pay 
dividends on both Class A and Class B stock from either of the sources 
specified in 12 U.S.C. 1436(a), i.e., retained earnings and current net 
earnings. See 66 FR at 41464, 41473. This change was proposed to 
address concern that because section 6(h) of the Bank Act, 12 U.S.C. 
1426(h), granted Class B stockholders an ownership interest in their 
Bank's retained earnings, the Bank's authority to pay dividends on 
Class A stock from retained earnings could be called into question.
    In the proposed rule, the Finance Board concluded that, given the 
intent of Congress to allow an individual Bank, subject to Finance 
Board regulation, to determine the dividend rights for any class of 
stock that it issues, it appeared unlikely that the Congress also 
intended to preclude a Bank from paying any dividends on the Class A 
stock. The Finance Board further indicated that if the Congress had 
intended that result, it was more likely that the Congress would have 
done so expressly, rather than indirectly by enacting a new provision 
that was somewhat at odds with a long-standing provision of the Bank 
Act regarding the available sources of dividends for Bank stock. 
Moreover, the Finance Board continued, construing these provisions of 
the Bank Act in a manner that would effectively have precluded the 
payment of dividends on the Class A stock could have made it difficult, 
if not impossible, for a Bank to sell Class A stock to its members. 
That would have been an absurd result, in light of the clear intent of 
the Congress to create a new capital structure for the Banks and 
ultimately, the Finance Board determined that it should construe these 
provisions to allow the payment of dividends on Class A stock from 
retained earnings, as those amounts may be calculated under GAAP. See 
66 FR at 41464.
    The Finance Board received no comments objecting to the proposed 
change to Sec. 931.4, and adopts it as proposed for the reasons set 
forth in the preamble of the proposing release.
    Transfer of capital stock. In the proposed rule, the Finance Board 
proposed amending Sec. 931.6 to allow a Bank the option of generally 
prohibiting its members from transferring Bank stock. If a Bank chose 
to allow transfers, the transfers clearly would have been subject to 
the Bank's approval. See 66 FR at 41465, 41473. A conforming change 
regarding transfer of stock was also proposed to Secs. 933.2(e)(3) and 
(4). Id. at 41465, 41474.
    This proposal arose out of a comment received in response to the 
ANPR. Upon consideration of this comment, the Finance Board stated that 
it would have been consistent with the discretion afforded a Bank in 
the GLB Act ``to establish standards, criteria, and requirements for 
the * * * transfer * * * of stock issued by that bank,'' id. at 12 
U.S.C. 1426(c)(5)(B), to allow a Bank, as part of its capital plan, 
either

[[Page 54107]]

to prohibit any transfers of its stock among its members or to permit 
these transfers subject to the conditions currently set forth in 
Sec. 931.6.
    Under the proposed change, each Bank would have been required to 
state in its capital plan whether a member may transfer capital stock 
of the Bank, and, if such transfers were allowed, to specify the 
procedures that a member must follow to effect the transfer, and to 
specify that any transfer may only have been undertaken in the limited 
circumstances set forth in Sec. 931.6. The proposed amendment also 
expressly provided that a Bank, in its capital plan, may have required 
a member to obtain the Bank's approval to effect the transfer of stock.
    The Finance Board received no comment opposing the amendment to 
Sec. 931.6, and is adopting it as proposed. The Finance Board also 
adopted in substance the conforming changes proposed to 
Secs. 933.2(e)(3) and (4), although, because of other amendments 
adopted in this final rule, these amended paragraphs have been 
redesignated and adopted as Secs. 933.2(f)(3) and (f)(4).
    Off-balance sheet credit conversion factors. In the proposed rule, 
the Finance Board proposed amending Table 2 of Sec. 932.4(f) so that 
the 100 percent credit conversion factor for off-balance sheet items 
would have applied only to commitments to make advances with certain 
drawdowns and commitments to acquire loans subject to certain drawdown. 
Further, the Finance Board proposed to define certain drawdown in 
Sec. 930.1 to mean a legally binding agreement that committed the Bank 
to make an advance or to acquire a loan, at or by a specified date in 
the future. See 66 FR at 41466-67.
    These changes were proposed in response to concerns that the 100 
percent credit conversion factor for commitments to make advances and 
to acquire loans as adopted in Table 2 in December 2000 were broader 
than the requirements of other federal bank regulators. For instance, 
Table 2 as adopted appeared to require a 100 percent conversion factor 
for ``master commitments'' to acquire loans under Acquired Member Asset 
(AMA) programs even though such commitments were not an accurate 
indicator of future acquisition. It was pointed out that other federal 
bank regulators would have applied a 100 percent conversion factor only 
to commitments subject to certain drawdown, (i.e., commitments that an 
institution is legally obligated to honor at a specified future date no 
matter what change may have occurred in the counterparty's financial 
situation.) Because it was generally the intent of the Finance Board to 
conform to the extent possible its credit risk charges to the Basle 
Accord as currently incorporated by the federal bank regulatory 
agencies, the Finance Board proposed to revise the credit conversion 
factors of Table 2 so that the 100 percent credit conversion factor 
applies only to commitments subject to certain drawdown and to provide 
a definition of certain drawdown to assure this result.
    The Finance Board received one comment from a Bank supporting the 
proposed changes to Secs. 930.1 and 932.4(f) and, therefore, adopts 
them as proposed.
    Conforming changes. No comments were received on the conforming 
changes as described in the SUPPLEMENTARY INFORMATION section of the 
proposed rule. See 66 FR at 41468. These conforming changes are being 
adopted by the Finance Board as proposed.

IV. Regulatory Flexibility Act

    The final rule applies only to the Banks, which do not come within 
the meaning of small entities as defined in the Regulatory Flexibility 
Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance with section 
605(b) of the RFA, 5 U.S.C. 605(b), the Finance Board hereby certifies 
that this final rule will not have a significant economic effect on a 
substantial number of small entities.

V. Paperwork Reduction Act

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

Lists of Subjects

12 CFR Part 925

    Credit, Federal home loan banks, Reporting and recordkeeping 
requirements.

12 CFR Parts 930, 931, 932, and 933

    Capital, Credit, Federal home loan banks, Investments, Reporting 
and recordkeeping requirements.

    Accordingly, the Federal Housing Finance Board amends title 12, 
chapter IX of the Code of Federal Regulations as follows:

PART 925--MEMBERS OF THE BANKS

    1. The authority citation for part 925 continues to read as 
follows:

    Authority: 12 U.S.C. 1422, 1422a, 1422b, 1423, 1424, 1426, 1430, 
1442.

    2. Amend Sec. 925.26 by revising paragraph (b) to read as follows:


Sec. 925.26  Voluntary withdrawal from membership.

* * * * *
    (b) Effective date of withdrawal. The membership of an institution 
that has submitted a notice of withdrawal shall terminate as of the 
date on which the last of the applicable stock redemption periods ends 
for the stock that the member is required to hold, as of the date that 
the notice of withdrawal is submitted, under the terms of a Bank's 
capital plan as a condition of membership, unless the institution has 
cancelled its notice of withdrawal prior to the effective date of the 
termination of its membership.
* * * * *
    3. Amend Sec. 925.27 by revising paragraph (c) to read as follows:


Sec. 925.27  Involuntary termination of membership.

* * * * *
    (c) Membership rights. An institution whose membership is 
terminated involuntarily under this section shall cease being a member 
as of the date on which the board of directors of the Bank acts to 
terminate the membership, and the institution shall have no right to 
obtain any of the benefits of membership after that date, but shall be 
entitled to receive any dividends declared on its stock until the stock 
is redeemed or repurchased by the Bank.

PART 930--DEFINITIONS APPLYING TO RISK MANAGEMENT AND CAPITAL 
REGULATIONS

    4. The authority citation for part 930 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.

    5. In Sec. 930.1 add, in correct alphabetical order the definitions 
for Certain drawdown and Charges against the capital of the Bank, to 
read as follows:


Sec. 930.1  Definitions.

* * * * *
    Certain drawdown means a legally binding agreement that commits the 
Bank to make an advance or acquire a loan, at or by a specified future 
date.
    Charges against the capital of the Bank means an other than 
temporary decline in the Bank's total equity that causes the value of 
total equity to fall below the Bank's aggregate capital stock amount.
* * * * *

[[Page 54108]]

PART 931--FEDERAL HOME LOAN BANK CAPITAL STOCK

    6. The authority citation for part 931 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.

    7. Amend Sec. 931.4 by revising the first sentence of paragraph (a) 
to read as follows:


Sec. 931.4  Dividends.

    (a) * * * A Bank may pay dividends on Class A or Class B stock, 
including any subclasses of such stock, only out of previously retained 
earnings or current net earnings, and shall declare and pay dividends 
only as provided by its capital plan. * * *
* * * * *

    8. Amend Sec. 931.6 by revising the first sentence of the section 
and adding a new sentence at the end of the section to read as follows:


Sec. 931.6  Transfer of capital stock.

    A Bank in its capital plan may allow a member to transfer any 
excess capital stock of the Bank to another member of that Bank or to 
an institution that has been approved for membership in that Bank and 
that has satisfied all conditions for becoming a member, other than the 
purchase of the minimum amount of Bank stock that it is required to 
hold as a condition of membership. * * * The Bank may, in its capital 
plan, require a member to receive the approval of the Bank before a 
transfer of the Bank's stock, as allowed under this section, is 
completed.

    9. Amend Sec. 931.7 by adding, before the last sentence of 
paragraph (a), two new sentences to read as follows:


Sec. 931.7  Redemption and repurchase of capital stock.

    (a) * * * A request by a member (whose membership has not been 
terminated) to redeem specific shares of stock shall automatically be 
cancelled if the Bank is prevented from redeeming the member's stock by 
paragraph (c) of this section within five business days from the end of 
the expiration of the applicable redemption notice period because the 
member would fail to maintain its minimum investment in the stock of 
the Bank after such redemption. The automatic cancellation of a 
member's redemption request shall have the same effect as if the member 
had cancelled its notice to redeem stock prior to the end of the 
redemption notice period, and a Bank may impose a fee (to be specified 
in its capital plan) for automatic cancellation of a redemption 
request. * * *
* * * * *

    10. Amend Sec. 931.8 by revising the heading of the section, 
redesignating the current text as paragraph (a), adding a new heading 
to paragraph (a), and adding new paragraph (b) to read as follows:


Sec. 931.8  Other restrictions on the repurchase or redemption of Bank 
stock.

    (a) Capital impairment. * * *
    (b) Bank discretion to suspend redemption. A Bank, upon the 
approval of its board of directors, or of a subcommittee thereof, may 
suspend redemption of stock if the Bank reasonably believes that 
continued redemption of stock would cause the Bank to fail to meet its 
minimum capital requirements as set forth in Secs. 932.2 or 932.3 of 
this chapter, would prevent the Bank from maintaining adequate capital 
against a potential risk that may not be adequately reflected in its 
minimum capital requirements, or would otherwise prevent the Bank from 
operating in a safe and sound manner. A Bank shall notify the Finance 
Board in writing within two business days of the date of the decision 
to suspend the redemption of stock, informing the Finance Board of the 
reasons for the suspension and of the Bank's strategies and time frames 
for addressing the conditions that led to the suspension. The Finance 
Board may require the Bank to re-institute the redemption of member 
stock. A Bank shall not repurchase any stock without the written 
permission of the Finance Board during any period in which the Bank has 
suspended redemption of stock under this paragraph.

PART 932--FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS

    11. The authority citation for part 932 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.

    12. Amend Sec. 932.4 by revising paragraph (d) heading, revising 
the first sentence in paragraph (e)(2)(ii)(E) and revising Table 2, 
which follows paragraph (f)(1), to read as follows:


Sec. 932.4  Credit risk capital requirement.

* * * * *
    (d) Credit risk capital charge for derivative contracts. * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (E) The credit risk percentage requirement for mortgage assets that 
are acquired member assets described in Sec. 955.2 of this chapter 
shall be assigned from Table 1.2 of this part based on the rating of 
those assets after taking into account any credit enhancement required 
by Sec. 955.3 of this chapter. * * *
* * * * *
    (f) * * *
    (1) * * *

     TABLE 2.--CREDIT CONVERSION FACTORS FOR OFF-BALANCE SHEET ITEMS
------------------------------------------------------------------------
                                                              Credit
                                                            conversion
                       Instrument                           factor  (In
                                                             percent)
------------------------------------------------------------------------
Asset sales with recourse where the credit risk remains              100
 with the Bank..........................................
Commitments to make advances subject to certain drawdown
Commitments to acquire loans subject to certain drawdown
Standby letters of credit...............................              50
Other commitments with original maturity of over one
 year...................................................
Other commitments with original maturity of one year or               20
 less...................................................
------------------------------------------------------------------------

* * * * *

PART 933--BANK CAPITAL STRUCTURE PLANS

    13. The authority citation for part 933 continues to read:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443, 
1446.

    14. Amend Sec. 933.2 by redesignating paragraphs (e), (f) and (g) 
as paragraphs (f), (g), and (h), respectively, adding new paragraph 
(e), redesignating newly designated paragraphs (f)(4), (f)(5) and 
(f)(6) as paragraphs (f)(5), (f)(6) and (f)(7), respectively, revising 
newly designated paragraph (f)(3), and adding new paragraph (f)(4) to 
read as follows:


Sec. 933.2  Contents of plan.

* * * * *
    (e) Members wishing not to convert existing stock. The capital plan 
shall establish an opt-out date on or before which a member that does 
not wish to convert its existing stock into Class A and/or Class B 
stock must file a written notice to withdraw from membership with the 
Finance Board. This opt-out date shall not be more than six months 
before the effective date of the capital plan. (For purposes of 
applying this provision, the membership of an institution that files 
its notice to withdraw with the Finance Board on or before the opt-out 
date established in a capital plan shall terminate six months from the 
date that the notice of withdrawal was filed with the Finance

[[Page 54109]]

Board or on the effective date of the Bank's capital plan, whichever 
date is earlier.) The capital plan shall further provide that any 
member that is in the process of withdrawing on the effective date of 
the capital plan but did not file its written notice to withdraw from 
membership with the Finance Board on or before this opt-out date, shall 
have its existing stock converted into Class A and/or Class B stock as 
required by the capital plan, and that the effective date of withdrawal 
for such member shall be established in accordance with Secs. 925.26(b) 
and (c) of this chapter, provided, however, that the applicable stock 
redemption periods calculated under Sec. 925.26(c) of this chapter 
shall commence on date the member first submitted its written notice to 
withdraw to the Finance Board.
    (f) * * *
    (3) Shall specify whether the stock of the Bank may be transferred 
among members, and, if such transfer is allowed, shall specify the 
procedures that a member should follow to effect such transfer, and 
that the transfer shall be undertaken only in accordance with 
Sec. 931.6 of this chapter;
    (4) Shall specify that the stock of the Bank may be traded only 
between the Bank and its members;
* * * * *
    15. Add new Sec. 933.5 to read as follows:


Sec. 933.5  Disclosure to members concerning capital plan and capital 
stock conversion.

    (a) No capital plan shall become effective until disclosure 
required by paragraphs (b) and (c) of this section has been provided to 
members. All disclosure required under this section shall be 
transmitted, sent or given to members not less than 45 days and not 
more than 60 days prior to the opt-out date established in the Bank's 
capital plan in accordance with Sec. 933.2(e).
    (b) The following information shall be provided to members about 
the Class A and/or Class B stock that a Bank intends to issue on the 
effective date of its capital plan:
    (1) With regard to each class or subclass of authorized stock, a 
description of:
    (i) Dividend rights;
    (ii) The terms of conversion;
    (iii) Redemption and repurchase rights;
    (iv) Voting rights and preferences,
    (v) Liquidation rights; and
    (vi) Any liability to further calls or to assessments by the Banks;
    (2) A description of any material differences between the 
securities to be converted into Class A and/or Class B stock and the 
Class A and/or Class B stock with regard to the rights addressed in 
paragraph (b)(1) of this section.
    (3) A statement of the reasons for the conversion to Class A and/or 
Class B stock and of the general effect thereof upon the rights of 
existing members; and
    (4) A description of any other material features concerning the 
Bank's initial issuance of Class A and/or Class B stock.
    (c) In addition to the disclosure about Class A and/or Class B 
stock, the following information shall be provided to members:
    (1) The Bank shall disclose financial information as follows:
    (i) Audited balance sheets as of the end of the two most recent 
fiscal years, audited statements of income and cash flows for each of 
the three fiscal years preceding the date of the most recent audited 
balance sheet being presented, and unaudited interim balance sheets and 
statements of income and cash flows as of and for appropriate interim 
dates that in form and content meet the requirements of Sec. 989.4 of 
this chapter;
    (ii) A pro forma capitalization table that reflects the Bank's 
projected new capital structure relative to its actual capitalization 
as of the date of the latest balance sheet required to be provided to 
members by paragraph (c)(1)(i) of this section. The Bank shall also 
provide a description of any material assumptions underlying the pro 
forma capitalization table and the basis for these assumptions, and 
shall provide estimates of its risk-based capital requirement, 
calculated in accordance with Sec. 932.3 of this chapter, and of its 
total capital-to-asset ratio (both of which shall be based on the same 
financial data used for the capitalization table), along with a 
discussion of material assumptions underlying these estimates and the 
basis for these assumptions; and
    (iii) Any of the financial information required to be disclosed by 
paragraph (c)(1) of this section may be incorporated by reference, 
provided the information being incorporated is contained in an annual 
or quarterly Bank report prepared in accordance with Sec. 989.4 of this 
chapter or an annual or quarterly Bank System report, and the 
disclosure identifies the information being incorporated by reference;
    (2) A narrative discussion of anticipated developments that could 
materially affect the liquidity, capital, earnings or continuing 
operations of the Bank, including those affecting dividends, product 
volumes, investment volumes, new business lines and risk profile.
    (3) A description of any amendments anticipated to be made to the 
Bank's by-laws, policies or other governance documents as a result of 
the implementation of the capital plan;
    (4) To the extent that such information has not been provided under 
paragraph (b) of this section, the Bank shall disclose information 
related to the capital plan as follows:
    (i) A description of the minimum stock investment requirements set 
forth in the capital plan;
    (ii) A statement outlining the requirements for amending the 
capital plan;
    (iii) A description of any restrictions or limitations under a 
Bank's capital plan on a member's rights to buy, or redeem its class A 
or class B stock, to have such stock repurchased, or otherwise to make 
use of such stock to fulfill the member's minimum stock investment 
requirement;
    (iv) A statement setting forth the opt-out date, on or before which 
a member's written notice to withdraw must be filed with the Finance 
Board (as established in accordance with Sec. 933.2(e) of this part) 
for the member not to have its existing Bank stock converted to Class A 
or Class B stock on the effective date of the Bank's capital plan and 
describing the effect on a member's effective date of withdrawal of 
failing to file its notice to withdraw on or before the opt-out date; 
and
    (v) A description of a member's rights under the capital plan to 
have its stock redeemed or repurchased upon voluntary or involuntary 
termination of its membership;
    (5) The Bank should state the name, address and telephone number 
where members may direct written or oral requests for a copy of the 
capital plan and any other instrument or document that defines the 
rights of the member/stockholders. This information shall be provided 
to the members without charge; and
    (6) The Bank shall provide a statement as to the anticipated 
accounting treatment for the transaction and the federal income tax 
implications of the transaction that members should consider in 
consultation with their own accounting and tax advisors.
    (d) Nothing in this section shall create or be deemed to create any 
rights in any third party.

    Dated: October 19, 2001.
    By the Board of Directors of the Federal Housing Finance Board.
J. Timothy O'Neill,
Chairman.
[FR Doc. 01-26963 Filed 10-25-01; 8:45 am]
BILLING CODE 6725-01-P