[Federal Register Volume 67, Number 107 (Tuesday, June 4, 2002)]
[Rules and Regulations]
[Pages 38361-38371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13917]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1710

RIN 2550-AA20


Corporate Governance

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Final regulation.

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

EFFECTIVE DATE: August 5, 2002.

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

SUPPLEMENTARY INFORMATION:   

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Pub. L. 102-550, titled the Federal Housing Enterprises Financial 
Safety and Soundness Act of 1992 (Act) (12 U.S.C. 4501 et seq.) 
established OFHEO as an independent office within the Department of 
Housing and Urban Development to ensure that the Federal National 
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage 
Corporation (Freddie Mac) (collectively, the Enterprises) are 
adequately capitalized and operate safely and in compliance with 
applicable laws, rules, and regulations.
    The Enterprises were established and operate under the authority of 
their respective Federal chartering acts as government-sponsored, 
privately owned corporations, to be directed by their respective boards 
of directors to fulfill the public purpose of providing a stable

[[Page 38362]]

secondary market for residential mortgages.\1\
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    \1\ Consistent with the purposes of the chartering acts, the 
Enterprises are authorized, among other things, to provide stability 
in the secondary market for residential mortgages; respond 
appropriately to the private capital market; provide ongoing 
assistance to the secondary market for residential mortgages 
(including activities relating to mortgages on housing for low- and 
moderate-income families involving a reasonable economic return that 
may be less than the return earned on other activities) by 
increasing the liquidity of mortgage investments and improving the 
distribution of investment capital available for residential 
mortgage financing; and promote access to mortgage credit throughout 
the United States (including central cities, rural areas, and 
underserved areas) by increasing the liquidity of mortgage 
investments and improving the distribution of investment capital 
available for residential mortgage financing. See 12 U.S.C. 1716, 
with respect to Fannie Mae, and 12 U.S.C. note to 1451, with respect 
to Freddie Mac.
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Corporate Governance

    Corporate governance involves the relationships between an 
Enterprise, its management, board of directors, shareholders, 
regulators, and other stakeholders. It provides the structure through 
which the business objectives and strategies of the Enterprises are set 
as well as delineating the means of attaining those objectives and 
monitoring business performance. The chartering acts contain several 
provisions related to matters of corporate governance. For example, 
Congress therein provided for establishing principal offices, board 
member composition and qualifications, board of director powers, 
compensation of executive officers and employees, and common and 
preferred stock. The chartering acts, however, are silent with respect 
to other corporate governance provisions that are commonly addressed 
for state-chartered corporations under State law.
    In recent years, regulators, investor organizations, stock 
exchanges, and corporations themselves have increased their focus on 
the importance of sound corporate governance practices and procedures 
to ensure the long-term success of corporations. Sound corporate 
governance practices and procedures are essential to the safe and sound 
operations of the Enterprises and accomplishment of their public policy 
purposes. As one Enterprise noted in its comments to the proposed 
regulation, ``[a] well-qualified and effective board of directors is 
one of the most important elements in maintaining the safety and 
soundness of a financial institution.'' Thus, corporate governance is 
one category of risk and risk management that is examined by OFHEO 
under its annual risk-based examination program and the subject of 
additional policy guidance.

Examination and Guidance With Respect to Corporate Governance

    In furtherance of its safety and soundness supervisory 
responsibilities, OFHEO routinely conducts risk-based examinations of 
each Enterprise in four categories: credit, market risk, operations, 
and corporate governance. As described in the Examination Handbook 
(Dec. 1998),\2\ the corporate governance category is comprised of four 
programs: (1) The Board Governance Program, which assesses the manner 
in which the Board of Directors discharges its duties and 
responsibilities in governing the Enterprise; (2) the Management 
Processes Program, which assesses the processes used to drive behaviors 
to support the defined corporate goals, standards, and risk tolerances 
of the Enterprise; (3) the Audit Program, which assesses the 
appropriateness of reliance of the Board of Directors management on 
internal or external audits; and lastly, (4) the Management Information 
Program, which assesses the effectiveness, accuracy, and completeness 
of information and reports. The factors and criteria used to assess and 
evaluate the four program areas are set forth in Risk-based 
Examinations--Evaluation Criteria (Evaluation Criteria).\3\
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    \2\ Examination Handbook (Dec. 1998), available at http://www.ofheo.gov.
    \3\ Risk-based Examinations--Evaluation Criteria, EG-98-01 (Dec. 
31, 1998), available at http://www.ofheo.gov.
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    In addition to safety and soundness standards contained in the 
Examination Handbook and the Evaluation Criteria, OFHEO has issued 
safety and soundness policy guidelines. To date, the guidelines address 
minimum safety and soundness requirements and safety and soundness 
standards for information. The policy guideline, titled Minimum Safety 
and Soundness Requirements, sets forth in broad terms various minimum 
board and management responsibilities and functions.\4\
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    \4\ Minimum Safety and Soundness Requirements, PG-00-001 (Dec. 
19, 2000), available at http://www.ofheo.gov.
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Corporate Governance Regulation

    To further support the supervisory scheme with respect to corporate 
governance, OFHEO issued a proposed corporate governance regulation, 
published in the Federal Register on September 12, 2001.\5\ The 
proposed regulation builds upon and reinforces the annual risk-based 
examination and supervisory program in that it restates and amplifies 
upon the minimum safety and soundness standards affecting the corporate 
governance policies and practices of the Enterprises.
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    \5\ 66 FR 47557 (Sept. 12, 2001).
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    To a large extent, the minimum corporate governance standards set 
forth in the proposed regulation reflect the current practices of the 
Enterprises and the current supervisory standards of OFHEO. OFHEO 
conducts a comprehensive program of review of corporate governance at 
each Enterprise. Supervisory and examination policies provide for 
oversight of all facets of board and senior management attention to 
their responsibilities. OFHEO has had a significant portion of its 
examination function focused on corporate governance and conducts a 
vigorous review of all areas determined to be of importance. OFHEO has 
reported in annual examination reports to Congress that each Enterprise 
has met and exceeded its safety and soundness standards.

Response to Comments

    OFHEO received eleven comment letters on the proposed regulation. 
Comment letters were received from (1) Fannie Mae; (2) Freddie Mac; (3) 
the Board Members of Fannie Mae; (4) the Presidential appointees to the 
board of Fannie Mae; (5) a former Board Member of Fannie Mae; (6) a 
lawyer with Gibson, Dunn & Crutcher LLP, who is the Chairman of the 
American Bar Association's Committee on Corporate Governance, on behalf 
of Fannie Mae; (7) a Widener University professor, on behalf of Freddie 
Mac; (8) a Georgetown University Law Center professor, on behalf of 
Freddie Mac; (9) the National Association of Corporate Directors, an 
educational, publishing, and consulting organization on board 
leadership; (10) FM Watch, a coalition of eight trade associations; and 
(11) Consumer Mortgage Coalition, an association of national 
residential mortgage lenders and servicers.

General Comments

    Many of the comments addressed general issues with the overall 
regulation as proposed. Several of the comments described the proposed 
regulation as confusing. Some comments insisted that the proposed 
regulation should be withdrawn, alleging lack of legal authority for 
OFHEO to issue a regulation relating to the corporate governance of the 
Enterprises, inconsistency with prevailing corporate governance 
principles, lack of necessity in light of supervisory examinations 
conducted by OFHEO, and likely detrimental effect on the ability of the 
Enterprises to attract and retain quality board members and senior 
management. Conversely, other

[[Page 38363]]

commenters offered that the proposed regulation is a good starting 
point, but that OFHEO should strengthen the proposal in various 
recommended ways so as not to limit the supervisory authority of the 
agency. Other comments objected to certain provisions as having no 
counterpart in the regulatory schemes of the bank regulatory agencies, 
or not being appropriate to the Enterprises. Yet others recommended the 
adoption of additional and more stringent provisions that would be 
similar to the regulations or guidelines of bank regulatory agencies.
    As explained above, OFHEO is responsible under the Act for ensuring 
the safety and soundness of the Enterprises. Congress charged OFHEO 
with express statutory authority to do so and to issue regulations to 
implement and support its statutory responsibilities. The proposed 
corporate governance regulation was published in furtherance of that 
authority and to support the risk-based examination process of the 
agency. The OFHEO regulation neither supplants nor displaces 
traditional standards of corporate governance as commonly defined by 
State laws regarding the relationships of corporate board members and 
management to shareholders and other stakeholders. Indeed, Sec. 1710.10 
of the final regulation explicitly clarifies the applicability of such 
standards to the Enterprises. In contrast, the regulation in largest 
part sets minimum standards pertaining to the safe and sound operations 
of the Enterprises under the Act and the respective chartering acts of 
the Enterprises.
    Notably, the comments of both Enterprises and others reflect 
recognition of the examination program and supervisory process of 
OFHEO, including the appropriate supervisory role of the agency in 
relation to the corporate governance practices and procedures of the 
Enterprises. Indeed, both Enterprises highlighted that the results of 
recent examinations indicate that OFHEO has determined that they met or 
exceeded the examination standards in regard to such matters. That is, 
no commenter asserted that OFHEO lacks statutory authority to oversee 
and examine the corporate governance program of the Enterprises.
    In order to carry out its statutory role and responsibilities, 
OFHEO is broadly empowered to determine the manner in which it oversees 
the safe and sound operation of the Enterprises and how it conducts 
examinations and the scope of such examinations. As set forth in the 
Examination Handbook, OFHEO reviews corporate governance matters as an 
area of risk appropriately subject to examination and oversight to 
ensure the safety and soundness of the Enterprises.
    The proposed corporate governance regulation, however, differs from 
the regulatory scheme adopted by the bank regulatory agencies. As 
several comments noted, the Enterprises are not banks or thrift 
institutions, inasmuch as the Enterprises do not engage in deposit 
taking or origination of commercial or consumer loans. Most 
significantly, the Enterprises have no federal deposit insurance. The 
Enterprises, however, do enjoy a special status under their federally 
granted charters. OFHEO, therefore, has fashioned standards to reflect 
the nature of the Enterprises that generally employ as models the 
regulatory regimes of bank regulatory agencies without imposing the 
numerous transaction-related limits and constraints that affect insured 
banks and thrift institutions. The bank regulatory scheme also imposes 
stringent conflict-of-interest requirements with respect to insider 
relationships and transactions beyond the management and corporate 
governance standards applicable to other companies that are not subject 
to specific requirements under this regulation.
    Assertions that the regulation will engender confusion and be 
detrimental to the ability of the Enterprises to attract and retain 
qualified board members and senior management, and those contrary 
assertions that the regulation should go further are addressed below. 
In responding to the specific comments, OFHEO is guided primarily by 
pragmatic objectives for which the comments themselves call, that is, 
to clarify the relationship of the board of directors with management; 
to support the examination function by providing both greater 
transparency and enforceability to supervisory standards; and to ensure 
clarity of the regulation without narrowing the supervisory 
prerogatives of OFHEO. These objectives guide the changes to the 
proposed regulation that OFHEO is adopting in the final regulation.

Specific Comments

Section 1710.1  Purpose

    Proposed Sec. 1710.1 reiterates that OFHEO is responsible under the 
Act for ensuring the safety and soundness of the Enterprises and that, 
in furtherance thereof, the regulation sets forth certain minimum 
standards with respect to the corporate governance practices and 
procedures of the Enterprises. As explained above, the corporate 
governance regulation establishes a regulatory framework for the 
performance of the safety and soundness and supervisory 
responsibilities of OFHEO under the Act. OFHEO received no comments 
specific to this proposed section and adopts it as proposed with no 
substantive change.

Section 1710.2  Definitions

    As described below, OFHEO received comments with respect to the 
definitions of several of the defined terms and adopts them as proposed 
and deletes a few and adopts others as modified to conform to changes 
elsewhere in the regulation.
    Agent, entity, and person. The definitions of these terms are 
deleted as they are not needed in connection with proposed 
Sec. 1710.14, discussed below.
    Board member. The term was proposed to mean a member of the board 
of directors; and, for purposes of subpart D of this part, the term 
``board member'' included a current or former board member. The 
definition has been modified by deleting the reference to subpart D and 
to current or former board members to conform with changes to proposed 
Secs. 1710.30 and 1710.31, discussed below.
    Conflict of interest. The definition of this term is deleted as it 
is not needed in connection with proposed Sec. 1710.14, discussed 
below.
    Executive officer and senior executive officer. The term 
``executive officer,'' was proposed to mean any senior executive 
officer and any senior vice president of an Enterprise and any 
individual with similar responsibilities, without regard to title, who 
is in charge of a principal business unit, division, or function of an 
Enterprise, or who reports directly to the chairperson, vice 
chairperson, chief operating officer, or president of an Enterprise; 
and, for purposes of subpart D (the indemnification provisions), the 
term ``executive officer'' included a current or former executive 
officer. The term ``senior executive officer,'' was proposed to mean 
the chairperson of the board of directors, chief executive officer, 
chief financial officer, chief operating officer, president, vice 
chairperson, any executive vice president of an Enterprise, and any 
individual, without regard to title, who has similar responsibilities.
    Two commenters noted that the definition of these terms differ from 
the combined definition of ``executive officer'' adopted by OFHEO in 
the executive compensation regulation.\6\

[[Page 38364]]

The comments recommended that the proposed definition be conformed to 
the definition set forth in the executive compensation regulation, 
including the provision that OFHEO will identify the officers who are 
covered by the definition.
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    \6\ 12 CFR part 1770, 66 FR 47550 (Sept. 12, 2001).
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    OFHEO has determined not to make the recommended changes. The 
proposed definitions are essentially similar to the definitions in the 
executive compensation regulation and do not warrant modification. In 
addition, the provision that OFHEO will identify the officers covered 
by the specific requirements of 12 CFR part 1770 is not relevant to the 
corporate governance regulation and will thus not be incorporated into 
the final regulation. Also see the discussion below under proposed 
Sec. 1710.12. The definition has been modified by deleting the 
reference to subpart D and to current or former board members to 
conform with changes to proposed Secs. 1710.30 and 1710.31, discussed 
below.
    Independent board member. The definition of this term is deleted as 
unnecessary. See the discussion below under proposed Sec. 1710.11.
    Legal expenses and payment. In conformance with changes to proposed 
Secs. 1710.30 and 1710.31, discussed below, the separate definitions of 
these terms are unnecessary and are deleted.

Section 1710.10  Applicable Law

    The proposed section required each Enterprise to elect to follow 
the corporate governance practices and procedures of one of the 
following bodies of law, to the extent such provisions are not 
inconsistent with applicable Federal law, rules, and regulations: the 
law of the jurisdiction in which the principal office of the Enterprise 
is located; Delaware General Corporation Law, Del. Code Ann. tit. 8, as 
amended; or Revised Model Business Corporation Act (RMBCA), as amended. 
The proposed section also would have required each Enterprise to 
designate in its bylaws the body of law elected within 90 calendar days 
from the effective date of the regulation.
    Section 1710.10 was proposed to dispel any legal uncertainty as to 
whether and to what extent standards and procedures of State law apply 
to corporate governance of the Enterprises. The intent of the proposed 
approach is to provide the Enterprises with flexibility in structuring 
their corporate governance practices and procedures while at the same 
time providing certainty to shareholders and other stakeholders as to 
the body of corporate law applicable to each Enterprise. The body of 
law elected by the Enterprises, and legal precedents thereunder, to the 
extent not inconsistent with applicable Federal standards, set forth 
the standards of conduct of board members with respect to shareholders.
    Two commenters objected to permitting the Enterprises to elect a 
body of State law or the RMBCA as an inappropriate delegation of the 
fundamental responsibility of the Federal government for establishing 
the legal underpinnings of the Enterprises. The comments alleged that 
the laws applicable to traditional private companies are not fully 
appropriate for guiding the governance of federally chartered 
institutions, such as the Enterprises, which were created by Congress 
to meet specific public purposes. The comments recommended that OFHEO 
clearly state that the chartering acts and other applicable Federal law 
are the sole source of the powers of the Enterprises.
    OFHEO agrees that the Enterprises are not simply private companies 
chartered under State law. They were established by Congress and 
operate under the authority of their respective Federal chartering 
acts, as government-sponsored, privately-owned corporations, to be 
directed by their respective board of directors, in compliance with law 
and regulation and to fulfill particular public purposes.\7\ The 
chartering acts contain various specific corporate governance 
provisions that are clearly within the realm of the congressionally 
mandated oversight by OFHEO of the safe and sound operations of the 
Enterprises. In addition, OFHEO has broad supervisory authority over 
the corporate behavior of the Enterprises from a safety and soundness 
perspective. The regulation does not delegate authority to the States, 
does not in any manner abrogate Federal authority, and does not expand 
the lawful powers and activities of the Enterprises under their 
respective chartering acts.
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    \7\ OFHEO recognizes that the chartering acts provide a mixture 
of private control and management along with Federal oversight, as 
has been done, to a greater or lesser degree, with other companies.
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    Moreover, the section requiring the election of a specific body of 
law establishes, in effect, a ``safe harbor'' for an Enterprise that 
undertakes a corporate governance program conforming to corporate 
practices and procedures of State law or the RMBCA. An Enterprise and 
its officers and board members may reasonably assume that corporate 
practices, procedures, and behaviors that conform to those standards 
shall be deemed to be safe and sound unless inconsistent with the 
chartering act or other applicable Federal law, rule, or regulation, or 
other guidance or directive from OFHEO.\8\ In order to underscore that 
neither State corporate law nor the RMBCA is incorporated wholesale by 
the election of such a body of law by an Enterprise, OFHEO has revised 
proposed Sec. 1710.10.
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    \8\ For example, although the RMBCA and Virginia and Delaware 
corporate law would permit a quorum to be one-third of the board of 
directors under certain circumstances, such a practice would be 
inconsistent with the requirement under this regulation that a 
quorum constitutes at least a majority of the board. Bank regulatory 
agencies, likewise, provide for a higher quorum requirement. See, 
for example, the requirements of the Comptroller of the Currency at 
12 CFR 7.2009, and those of the Office of Thrift Supervision at 12 
CFR 552.6-1. It should be noted that the ``safe harbor'' here is 
limited; judgment must be exercised in combination with regulatory 
consultation.
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    Fannie Mae specifically recommended that the election of law 
provision be expanded to allow the choice of either the District of 
Columbia or Virginia, the two jurisdictions in which the Enterprise has 
significant operations. OFHEO believes the location of the corporate 
headquarters provides a reasonable nexus for choice of law. The 
additional options of either Delaware State law or the RMBCA allow for 
a choice of laws that are well developed by the courts. No further 
expansion of choice of law is appropriate at this time.
    Finally, one commenter requested that the time period to implement 
the designation in the bylaws of the body of law elected be lengthened 
to provide sufficient time for the drafting, review and adoption of the 
requisite amendment to the bylaws. OFHEO has determined not to increase 
the time period for implementation in light of the 60-day delayed 
effective date, which, when added to the 90-day implementation period, 
provides the Enterprises sufficient time.

Section 1710.11  Committees of Board of Directors

    Paragraph (a) of the proposed section required that an Enterprise 
provide in its bylaws for the establishment of committees of the board 
of directors. It also provided that no committee of the board of 
directors shall have the authority of the board of directors to amend 
the bylaws and no committee shall operate to relieve the board of 
directors or any board member of a responsibility imposed by applicable 
law, rule, or regulation.
    Paragraph (b) of the proposed section required that each Enterprise 
provide in its bylaws, within 90 calendar days after the effective date 
of this regulation, for the establishment of two committees, however 
styled: an audit committee that

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is in compliance with the charter, independence, composition, 
expertise, and all other requirements of the audit committee rules of 
the NYSE; and a compensation committee, to include at least three 
independent board members, the duties of which include, at a minimum, 
ascertaining that compensation plans for executive officers and 
employees comply with applicable laws, rules, and regulations and 
approving the compensation of senior executive officers.
    The Enterprises asserted that paragraph (a) is unnecessary in that 
State law and the RMBCA already provide that board of directors may 
establish committees and that the board of directors may rely on 
reports from such board committees in directing the corporation. OFHEO 
agrees and has modified the final section accordingly. Although board 
members may rely on reports of various committees, it must be 
emphasized, however, that the ultimate responsibility for the direction 
of the Enterprises rests with the entire board of directors.
    The Enterprises also objected to the requirement for the 
establishment of audit and compensation committees as unnecessary 
because (1) neither the Code of Virginia, District of Columbia Code, 
the General Delaware Corporation Law, nor the RMBCA require audit or 
compensation committees; and (2) the Enterprises have established such 
committees and are required to establish an audit committee by the NYSE 
listing agreement. Another commenter recommended that OFHEO not adopt 
the definition of ``independent board member'' as defined by the NYSE, 
but rather establish rules specifically adapted to the special 
circumstances of the Enterprises to ensure that the board members are 
truly independent.
    Audit and compensation committees play important roles in the safe 
and sound operations of the Enterprises and OFHEO has determined, 
therefore, to retain the requirement for both committees. With respect 
to the audit committee, OFHEO has determined to retain the reference to 
the rules of the NYSE, but with the addition of the proviso ``or as 
otherwise provided by OFHEO,'' clarifying that OFHEO may issue 
subsequent guidance with respect to the audit committee's composition 
in the event that an Enterprise is no longer listed with the NYSE or 
that the NYSE audit committee rules are no longer found to be adequate.
    OFHEO has determined to delete the definition of ``independent 
board member'' that was proposed in Sec. 1710.2. What constitutes 
independence of board members is adequately defined under the NYSE 
rules, unless OFHEO determines additional guidance is needed.

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

    Proposed Sec. 1710.12 provided that the compensation of board 
members, executive officers, and employees is not to be in excess of 
that which is reasonable and commensurate with their duties and 
responsibilities and comply with applicable laws, rules, and 
regulations. The Enterprises asserted that the proposed section exceeds 
the statutory authority of OFHEO under Section 1318 of the Act,\9\ 
which purportedly limits OFHEO to prohibiting an Enterprise from 
providing compensation to an executive officer that is not reasonable 
and comparable with compensation for employment in other similar 
businesses involving similar duties and responsibilities.
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    \9\ 12 U.S.C. 4518.
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    Section 1318 specifically charges OFHEO to prohibit excessive 
compensation with respect to certain executive officers. A regulation 
to implement that provision of the Act was adopted on September 12, 
2001.\10\ Section 1318, however, does not address the separate and 
primary authority of OFHEO to ensure the safe and sound operations of 
the Enterprises, under which authority Sec. 1710.12 is issued. That 
authority is founded in Sections 1302(6) and 1313 of the Act.\11\
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    \10\ 12 CFR part 1770, 66 FR 47550 (Sept. 12, 2001).
    \11\ 12 U.S.C. 4501(6) and 4513, respectively.
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    Congress has made clear that safety and soundness encompasses 
regulatory action regarding excessive compensation.\12\ The bank 
regulatory agencies explicitly prohibit compensation that is 
unreasonable or disproportionate to the services performed by an 
executive officer, employee, or board member, or that could lead to a 
material financial loss to an institution. See the Interagency 
Guidelines Establishing Standards for Safety and Soundness, for the 
Office of the Comptroller of the Currency, 12 CFR part 30; for the 
Board of Governors of the Federal Reserve System, 12 CFR part 263; for 
the Federal Deposit Insurance Corporation, 12 CFR part 308, subpart R; 
and for the Office of Thrift Supervision, 12 CFR part 570.
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    \12\ Section 39 of the Federal Deposit Insurance Act, 12 U.S.C. 
1831p-1(c).
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    Section 1710.12 provides for OFHEO to review the adequacy of 
compensation polices and procedures used by each Enterprise under the 
obligatory oversight of the board of directors.\13\ Section 1710.12 
reflects OFHEO examination guidelines used to ensure that policies and 
practices established by the Enterprises avoid compensation that 
creates perverse incentives for board members, executive officers, and 
employees.
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    \13\ The boards of directors of both Enterprises, as charged by 
their respective chartering acts, are required to cause the 
Enterprise to pay such compensation to ``officers, attorneys, 
employees, and agents'' as the board of directors ``determines 
reasonable and comparable with compensation for employment in other 
similar businesses (including other publicly held financial 
institutions or major financial services companies) involving 
similar duties and responsibilities.* * *'' See 12 U.S.C. 
1723a(d)(2) (Fannie Mae) and 12 U.S.C. 1452(c)(9) (Freddie Mac).
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    The Enterprises also suggested that proposed Sec. 1710.12 is 
essentially an attempt by OFHEO to set salaries at the Enterprises. 
OFHEO disagrees. Routine practice under similar Federal standards has 
not demonstrated any ``setting'' of compensation by Federal regulators.
    Two other commenters recommended that OFHEO impose an explicit 
requirement that the compensation structure of an Enterprise consider 
the extent to which the individual officer or employee contributes to 
the fulfillment of the public purpose of the Enterprise. OFHEO has 
determined that there is no need to reiterate such an expectation in 
the regulation.

Section 1710.13  Quorum of Board of Directors; Proxies Not Permissible

    Proposed Sec. 1710.13 required that each Enterprise provide in its 
bylaws that, for the transaction of business, a quorum of the board of 
directors is a majority of the entire board of directors and that a 
board member may not vote by proxy.
    Freddie Mac suggested that the proposed section would unnecessarily 
and inappropriately supplant otherwise applicable State law and 
override a Virginia State law provision, which Freddie Mac follows, 
that permits a company's articles of incorporation or bylaws to adjust 
the quorum requirement either upward or downward. Freddie Mac asserted 
that although its bylaws are in compliance with the proposed section, 
there is no reason for OFHEO to restrict its flexibility.
    The Code of Virginia (VA Section 13.1-689), the Delaware General 
Corporation Law (Section 141), the RMBCA (Section 8.24) include quorum 
requirements that permit a quorum of no less than one-third of the 
total number of the members of the board; the District of Columbia Code 
is silent. None of those bodies of law address proxy requirements. The 
proposed

[[Page 38366]]

quorum and proxy requirements are appropriate minimum standards for 
Federal safety and soundness purposes necessary to ensure the 
participation of board members in the deliberative processes of the 
Enterprises. OFHEO has determined, therefore, to retain the 
requirements. The proposed language is revised, however, to clarify 
that the Enterprise may increase the quorum requirement upward when 
deemed by the Enterprise to be appropriate.

Section 1710.14  Conflict-of-Interest Standards

    Section 1710.14, as proposed, required that each Enterprise 
establish and administer written conflict-of-interest standards that 
would provide reasonable assurance that board members, executive 
officers, employees, and agents of the Enterprise discharge their 
responsibilities in an objective and impartial manner. As proposed, the 
term ``conflict of interest'' would be defined in Sec. 1710.2(g) as an 
interest in a transaction, relationship, or activity that might affect 
adversely, or appear to affect adversely, the ability to perform duties 
and responsibilities on behalf of the Enterprise in an objective and 
impartial manner.
    In conducting the risk-based examination of the Enterprises with 
respect to corporate governance, OFHEO assesses whether the board of 
directors ensures that executive management appropriately defines the 
operating parameters and risk tolerances of the Enterprise consistent 
with, among other things, ethical standards. The evaluation criteria 
for this assessment factor include: (1) Is there an appropriate Code of 
Conduct? (2) Does the board receive periodic reports on compliance with 
the Code of Conduct? \14\ OFHEO also assesses whether management 
effectively conveys an appropriate message of integrity and ethical 
values.\15\ In addition, one of the criteria used to determine if the 
Enterprise has effective programs for recruiting competent staff, is 
whether employee retention and promotion criteria are aligned with 
codes of conducts and other behavioral guidelines of the 
Enterprise.\16\
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    \14\ EG-98-01, supra note 3, at 28.
    \15\ The evaluation criteria for this assessment factor include 
the following: (1) Ascertain if codes of conduct are comprehensive, 
addressing conflicts of interest, illegal or other improper payments 
and are periodically acknowledged; (2) Verify the establishment of 
the tone at the top including explicit moral guidance about what is 
right and wrong; (3) Determine if everyday dealings with employees, 
investors, customers, creditors, insurers, competitors, and auditors 
are based on honesty and fairness; determine if management responds 
to violations of behavioral standards; (4) Determine if management 
has stringent policies towards overriding established internal 
controls; (5) Ascertain that deviations from policies are 
investigated and documented; ascertain that there are no conditions, 
such as extreme incentives or temptations, that exist that can 
unnecessarily and unfairly test people's adherence to ethical 
values; (6) Determine if controls are in place to reduce temptations 
that might otherwise exist. Id. at 27.
    \16\ Id., at 26.
---------------------------------------------------------------------------

    One commenter suggested that the definition of the term ``conflict 
of interest'' be revised so that it does not refer to a person's 
ability to perform duties and responsibilities ``in an objective and 
impartial'' manner. The commenter suggested that any conflict of 
interest provision should do no more than require the Enterprises to 
establish and administer written standards that are designed to 
preclude situations in which board members, executive officers, and 
employees face a conflict of interest when discharging their 
responsibilities on behalf of the Enterprise. Another commenter 
recommended defining a conflict of interest as a situation in which an 
actual or apparent question of loyalty arises between a board member's 
personal interest (financial or otherwise) and his or her 
responsibilities to the Enterprise.
    OFHEO has determined not to adopt these recommendations, but has 
revised Sec. 1710.14 to clarify that the discharge of duties and 
responsibilities is on behalf of the Enterprise. In addition, the 
definition of conflict of interest has been deleted because the 
examination guidance provided in the Evaluation Criteria is adequate 
and the concept of conflict of interest is a fundamental concept widely 
understood under traditional precepts of corporate law. OFHEO will 
continue to review conflict-of-interest standards of the Enterprises 
and will take action as necessary to ensure that such standards are 
adequate.
    Objections were raised to the use of the term ``assurance'' with 
respect to the phrase ``standards that will provide reasonable 
assurance.'' It is not possible for the Enterprises, the commenters 
explain, to guarantee the state of mind of the affected individuals. 
Section 1710.14, as proposed, does not require that the conflict-of-
interest standards ``guarantee'' that board members, executive 
officers, employees, and agents will always act in an objective and 
impartial manner. Rather, Sec. 1710.14 is intended to require that the 
conflict-of-interest standards be so crafted and implemented so as to 
ensure that compliance with them will provide reasonable assurance that 
the affected individuals are to act in an objective and impartial 
manner on behalf of the Enterprise. To clarify this intent, the 
language of Sec. 1710.14 has been revised to provide that the written 
conflict-of-interest standards be ``reasonably designed to assure'' the 
appropriate conduct.
    Objections were also raised to the proposal that the conflict-of-
interest standards be required of agents of the Enterprises. Inasmuch 
as the principal purpose of the regulation is to provide greater 
transparency as to the respective roles and responsibilities of the 
board of directors and management, the practices and policies of agents 
of the Enterprises are beyond the immediate focus of the regulation. 
Such matters appropriately remain as a matter of course within the 
proper scope of review by management of each Enterprise in effecting 
the routine management of its business operations. Therefore, that 
portion of proposed Sec. 1710.14 related to the inclusion of agents 
within the conflict-of-interest standards has been deleted. If, at a 
later time, OFHEO finds it necessary to revisit such matters, it will 
do so in an appropriate manner. OFHEO expects each Enterprise to 
ascertain and address any potential or perceived conflict-of-interest 
an agent may present as a matter of routine business practice.
    Two commenters also recommended that OFHEO expand Sec. 1710.14, as 
proposed, (1) to specifically prohibit an Enterprises from retaliating 
against an individual or entity that advocates a public policy position 
adverse to that of the Enterprise, and (2) to require each Enterprise 
to disclose, at least annually, a list of all employees whose total 
annual compensation exceeds $100,000 and employees who have been 
employed, or whose spouse or immediate family member has been employed, 
by the Federal government, including the Congress, in the last five 
years. Both recommendations, however, are rejected as being beyond the 
scope of the proposed regulation.

Section 1710.20  Conduct of Board Members, and Section 1710.21  
Responsibilities of Board of Directors

    Proposed Sec. 1710.20 would have explicitly required that each 
board member, in conducting the business of the Enterprise, is to act: 
(1) On a fully informed, impartial, objective, and independent basis; 
(2) in good faith and with due diligence, care, and loyalty; (3) in the 
best interests of the shareholders and the Enterprise; and (4) in 
compliance with the chartering act of the Enterprise and other 
applicable laws, rules, and regulations. Furthermore, the proposed 
section would have required that each board member of an Enterprise is 
to devote sufficient time and attention to his or

[[Page 38367]]

her responsibilities in conducting the business of the Enterprise.
    Proposed Sec. 1720.21 provided that the board of directors is 
responsible for managing the conduct and affairs of the Enterprise to 
ensure that the Enterprise is operated in a safe and sound manner. It 
included responsibilities such as hiring qualified senior executive 
officers; ensuring the integrity of the accounting and financial 
reporting systems of the Enterprise, including independent audits; and 
remaining informed of the condition, activities, and operations of the 
Enterprise.
    Several commenters objected to proposed Secs. 1710.20 and 1710.21 
inasmuch as they allegedly depart from prevailing State law by making 
so-called ``aspirational standards'' enforceable standards, with the 
potential threat of civil penalties for nonobservance. That is, the 
proposed regulation would effectively expose board members to a 
standard of liability arguably stricter than that of the traditional 
business judgment rule under State law. The commenters argued that the 
proposed section could cause a well-advised person not to choose a 
board position at one of the Enterprises when he or she has attractive 
opportunities to serve elsewhere in a lower risk environment. In 
addition, the commenters asserted that the proposed provision would 
cause confusion when compared to the duty of care standards provided 
under State law and the RMBCA. The commenters asserted that the 
potential liability of board members should be limited under the 
business judgment rule, so that, absent self-dealing or bad faith, a 
board member would not be held liable for what in hindsight might be 
determined by the agency to have been unreasonable conduct.
    OFHEO agrees that it would be inappropriate for OFHEO to alter the 
liability standard of the business judgment rule with respect to a 
board member's potential exposure to shareholder actions against an 
Enterprise. Neither proposed Sec. 1710.20 nor proposed Sec. 1710.21 
does so; neither section addresses nor impinges on the business 
judgment rule, shareholder rights, or board member accountability to 
shareholders. Rather, proposed section Sec. 1710.20 would set forth 
minimum standards of board member conduct and proposed Sec. 1710.21 
would enumerate certain of the minimum responsibilities of the board of 
directors deemed to be integral to the safe and sound operation of the 
Enterprise for Federal supervisory purposes.\17\ OFHEO enforces 
compliance with minimum standards in furtherance of the 
congressionally-mandated supervisory responsibilities of OFHEO. OFHEO 
has revised Sec. 1710.21 and expressly states that the section is not 
intended to affect the potential exposure of board members to 
shareholder actions under applicable standards of State law.
---------------------------------------------------------------------------

    \17\ As noted above, OFHEO conducts risk-based examinations of 
each Enterprise with respect to, among other areas, corporate 
governance. The responsibilities listed in proposed Sec. 1710.21 
reflect the current corporate governance examination of the 
Enterprises and further provide the Enterprises with notice of those 
minimum responsibilities of the board of directors that OFHEO deems 
essential to the safe and sound operation of the Enterprises.
---------------------------------------------------------------------------

    The arguments that OFHEO, in proposed Secs. 1710.20 and 1710.21, 
would undo State corporate governance law are not only incorrect, but 
are contrary to the purpose and intentions of Sec. 1710.10, which would 
require each Enterprise to elect a body of State law or the RMBCA. The 
regulation would require that a body of law be selected. OFHEO also 
addresses its supervisory obligations under Federal law to oversee the 
safe and sound operations of the Enterprises. The obligations of OFHEO 
are separate and apart from traditional matters of State law. While the 
comments made on this topic were instructive on the history, 
progression, and direction of State corporate governance law, they bear 
little or no relevance here. OFHEO has been consistent in the proposed 
rule--election of a State law or the RMBCA is directed, in line with 
the need to protect shareholders and promote corporate purposes; 
adherence to Federal standards for safe and sound operations pursuant 
to a separate and distinct regulatory regime are set forth as well. 
This is not inconsistent, but rather is the nature of Federal and State 
relations across a broad range of federal regulatory regimes where 
private companies operating under State laws (whether or not federally 
charted) are subject to Federal standards based on the exercise by 
Congress of its constitutional authorities. In all of these regimes, 
companies and their boards operate with an eye toward both Federal and 
State law and regulation.
    Several commenters objected to the use of the term ``ensure'' with 
respect to board of director responsibilities and the relationship of 
the responsibilities of management with that of the board of directors. 
OFHEO has revised the final section to clarify its intent that OFHEO is 
not requiring the board of directors to ``guarantee'' outcomes.
    Another commenter recommended that proposed Sec. 1710.20 include a 
specific reference to the obligation of the board of directors to 
ensure that the activities of the Enterprise are consistent with the 
authorities under its chartering act and a specific reference to the 
oversight of internal controls. OFHEO makes no changes in response to 
these recommendations; references, however, to the chartering acts and 
internal controls are retained in the revised section.
    Two commenters recommended that the list of responsibilities in 
proposed Sec. 1710.21 specifically require that presidential appointees 
to the board are to ensure that the Enterprise fulfills its public 
mission. They also recommended that the regulation require each 
Enterprise to establish a separate committee composed of presidential 
appointees with specific responsibility to publish periodic reports on 
the Enterprise's fulfillment of its public purposes. OFHEO rejects 
these recommendations inasmuch as each board member, whether elected by 
shareholders or appointed by the President, is responsible for 
overseeing the operation and direction of the Enterprise in accordance 
with its chartering act and the public purposes set forth therein. The 
chartering acts do not differentiate between elected and appointed 
board members with respect to their duties and responsibilities.
    Two commenters recommended that OFHEO establish rules, modeled 
after the Interagency Guidelines Establishing Standards for Safety and 
Soundness (Interagency Guidelines) of the bank regulatory agencies, 
that require review by the board of directors and senior management of 
areas such as internal controls and information systems, internal 
audits, external audits, credit underwriting policies and procedures, 
asset quality and asset growth, and privacy and security safeguards. 
OFHEO has, however, already published examination and other guidance 
that addresses those areas and does not deem it necessary to include 
such explicit requirements in this regulation.
    Upon review, OFHEO has determined to revise Secs. 1710.20 and 
1710.21 to ensure that those provisions best complement the supervisory 
and examination policies of OFHEO. The new Sec. 1710.15, titled Conduct 
and responsibilities of board of directors, contains general principles 
while more specific guidance may be found in OFHEO's examination 
materials. The revised section clarifies that board members are not 
required to guarantee the successful outcomes of their decisions and 
deliberations. As discussed above, OFHEO routinely conducts risk-based 
examinations of the corporate governance operations of the Enterprises, 
which include regular

[[Page 38368]]

assessments of the effectiveness with which the board of directors 
discharges its duties and responsibilities in governing the Enterprise. 
In doing so, OFHEO may assess individual board member performance, as 
well as the conduct of the board as a whole.\18\ The body of law and 
legal precedents thereunder elected by the Enterprises pursuant to 
Sec. 1710.10, to the extent not inconsistent with applicable Federal 
rules, set forth standards of conduct of board members with respect to 
shareholders.
---------------------------------------------------------------------------

    \18\ For example, OFHEO examiners assess whether board members 
are able to devote sufficient, well-organized time to carry out 
their responsibilities, which is evaluated by, among other criteria, 
how many other boards the individual Enterprise board members sit on 
simultaneously. EG-98-01 at 29. Furthermore, formal and informal 
administrative enforcement actions against individual board members 
are supervisory tools available to OFHEO as authorized by Congress.
---------------------------------------------------------------------------

    Certain revisions and technical modifications, as discussed above, 
are appropriate to the proposed regulation. These changes are merited 
because they continue to support the examination program and standards 
of OFHEO; they do not diminish the flexibility of OFHEO to review 
corporate behavior and to determine if safe and sound operations are 
threatened or a violation of law, rule, or regulation has occurred; and 
they clarify the intent of OFHEO not to alter the relationship of the 
board to senior management in day-to-day operations. The board of 
directors remains responsible for seeing that management adopts 
policies and procedures that adequately address areas of corporate 
practice and concern. On this last point, the revised regulation 
maintains the current strong framework for safe and sound operations 
and supports the continued ability of the Enterprises to retain and 
attract the strongest board of directors.

Section 1710.30  Permitted Indemnification Payments, and Section 
1710.31  Prohibited Indemnification Payments

    Proposed Sec. 1710.30 generally permitted indemnification payments 
to a board member or executive officer of an Enterprise, in civil 
actions or administrative proceedings not initiated or undertaken by 
OFHEO, provided that such payment would not materially adversely affect 
the safe and sound operations of the Enterprise. Proposed Sec. 1710.31 
would have prohibited indemnification payments in connection with 
administrative proceedings initiated or undertaken by OFHEO that result 
in a final order or settlement pursuant to which the board member or 
executive officer is assessed a civil money penalty or is required to 
cease and desist from or take any affirmative action with respect to 
the Enterprise.\19\
---------------------------------------------------------------------------

    \19\ The proposed indemnification sections were drawn from 
elements founded in the indemnification regulations of the bank 
regulatory agencies.
---------------------------------------------------------------------------

    Several commenters strongly objected to the proposed prohibitions 
against indemnification in certain enforcement actions initiated by the 
agency. These commenters asserted that the statutory prohibition in 
section 1376(g) \20\ of the Act (subsection (g)), which expressly 
prohibits an Enterprise from reimbursing or indemnifying certain 
individuals for so-called ``third tier'' civil money penalties under 
section 1376(b)(3),\21\ impliedly constrains the authority of OFHEO to 
impose such sanctions against corporate insiders in any other 
circumstances such as in ``second tier'' situations. The commenters 
also asserted that the expression of broad authority in proposed 
Sec. 1710.31 of OFHEO to prohibit indemnification other than in 
connection with third-tier civil money penalties would make it 
difficult for the Enterprises to attract and retain qualified board 
members and executive officers.
---------------------------------------------------------------------------

    \20\ 12 U.S.C. 4636(g).
    \21\ 12 U.S.C. 4636(b)(3).
---------------------------------------------------------------------------

    OFHEO disagrees with the assertion that it has no authority beyond 
that contained in subsection (g) to address indemnification.\22\ 
Neither that subsection nor other provisions of the Act explicitly nor 
implicitly purports to constrain the discretion of the agency to 
fashion remedies as appropriate in varying circumstances consistent 
with OFHEO's safety and soundness authorities under the Act.
---------------------------------------------------------------------------

    \22\ The authority of OFHEO to preclude indemnification of a 
wrongdoer in connection with an administrative enforcement 
proceeding by the agency flows from its statutory enforcement and 
supervisory authorities to ensure the safe and sound operations of 
the Enterprises and to issue regulations in furtherance of the 
responsibilities of the agency. OFHEO previously has issued rules of 
practice and procedure that recount the enforcement powers and their 
legal foundations that set forth the procedures for the exercise 
thereof. 12 CFR part 1780.
    Under the statutory and regulatory enforcement scheme, OFHEO is 
afforded broad enforcement powers by Congress to fashion remedies 
deemed appropriate to the circumstances against board members and 
executive officers, as well as an Enterprise, including permanent 
and temporary cease-and-desist orders, sections 1371 and 1372 of the 
Act (12 U.S.C. 4631 and 4632, respectively) and civil money 
penalties, section 1376 of the Act (12 U.S.C. 4636). With respect to 
civil money penalties, which are the narrow focus of the comments 
from Fannie Mae, the Director may impose such penalties against an 
Enterprise, board member, or executive officer who (1) violates a 
provision of the Act, the chartering acts, or any order, rule, or 
regulation under the Act (with certain exceptions); (2) violates a 
final or temporary cease-and-desist order; (3) violates a written 
agreement between the Enterprise and OFHEO or (4) engages in conduct 
that causes or is likely to cause a loss to the Enterprise. (Section 
1376(a) of the Act; 12 U.S.C. 4636(a)) The amounts of the civil 
money penalties are denominated ``tiers.'' The first tier civil 
money penalty amount is applicable under the terms of the Act to the 
Enterprises only.
    With respect to executive officers and board members, second 
tier civil money penalties may be imposed in an amount not to exceed 
$10,000 for each day that a violation or conduct continues, if the 
Director finds that the violation or conduct is a part of a pattern 
of misconduct; or involved recklessness and caused or would be 
likely to cause a material loss to the Enterprise. Third tier civil 
money penalties may be imposed on such persons in an amount not to 
exceed $100,000 for each day that a violation or conduct described 
above continues, if the Director finds that the violation or conduct 
was knowing and caused or would be likely to cause a substantial 
loss to the Enterprise. (Section 1376(b) of the Act; 12 U.S.C. 
4636(b)). In subsection (g), Congress fashioned an absolute bar that 
``[a]n enterprise may not reimburse or indemnify any individual for 
any penalty imposed under subsection (b)(3) [third tier civil money 
penalty].''
---------------------------------------------------------------------------

    The commenters also assert that subsection (g) is a penal statute 
because it defines when individuals must bear the full practical 
consequence of financial sanctions. According to one commenter, the Act 
must be construed strictly to prohibit OFHEO from denying 
indemnification for other than third tier civil money penalties. The 
explicit language of subsection (g), however, relates only to the 
inability of an Enterprise to indemnify corporate insiders in certain 
circumstances; it does not purport to in any way address the 
discretionary remedial authority of OFHEO.\23\ Furthermore, the canon 
cited by the commenter that penal statutes are to be construed strictly 
is not to be applied so as to defeat the purpose of all other rules of 
statutory construction.\24\
---------------------------------------------------------------------------

    \23\ See Mourning v. Family Publications Service, Inc., 411 U.S. 
356, 375 (1973) (Every section of an act establishing a broad 
regulatory scheme need not be construed as a penal provision merely 
because a few sections of the act provide for civil and criminal 
penalties.)
    \24\ See Norman J. Singer, Statutes and Statutory Construction 
Sec. 59:8 (6th ed. 2001).
---------------------------------------------------------------------------

    One commenter would apply the canon of statutory construction known 
as, expressio unius est exclusio alterius, i.e, the expression of one 
thing excludes others not expressed, to read subsection (g) to preclude 
impliedly the denial of indemnification in other circumstances. That 
is, asserting to apply the canon here, the commenter would interpret 
the law to mean that because subsection (g) explicitly prohibits the 
Enterprises from indemnifying for third tier civil money penalties, it 
impliedly also prohibits OFHEO from denying indemnification in other 
proceedings. Such an interpretation goes beyond the logical application 
of the canon, is inconsistent with the limited use of the canon by the

[[Page 38369]]

courts, and is inappropriate in the context at hand.\25\ Indeed, the 
courts have recognized ``an equally pertinent canon of interpretation'' 
that:
---------------------------------------------------------------------------

    \25\ See, e.g., Herman & MacLean v. Huddleston, 459 U.S. 375, 
387 (1983); U.S. Dept. of Labor v. Bethlehem Mines, et al., 669 F.2d 
187, 197 (4th Cir. 1982); Mobile Communications Corp. of America v. 
FCC, 77 F.3d 1399, 1404 (D.D.C. 1996); Texas Rural Legal Aid, Inc. 
v. Legal Services Corporation, 940 F.2d 685, 694 (D.D.C. 1991); 
Cheney Railroad Co., Inc. v. ICC, 902 F.2d 66, 69 (D.D.C. 1990); 
National Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 676 (D.D.C. 
1973). Its application also is inappropriate when, as here, a 
nonexclusive reading better serves the purposes for which the 
statute was enacted or allows the exercise of incidental authority 
necessary to an expressed power or right. Bailey v. Federal 
Intermediate Credit Bank of St. Louis, 788 F.2d 498, 500 (8th Cir. 
1986) cert. denied, 479 U.S. 915 (1986).

    [A] congressional decision to prohibit certain activities does 
not imply an intent to disable the relevant administrative body from 
taking similar action with respect to activities that pose a similar 
danger. * * * Indeed, a congressional prohibition of particular 
conduct may actually support the view that the administrative entity 
---------------------------------------------------------------------------
can exercise its authority to eliminate a similar danger.\26\

    \26\ Texas Rural Legal Aid, Inc., at 694 (emphasis in original, 
citations omitted). Thus, the congressional decision to prohibit the 
Enterprises from indemnifying board members and executive officers 
in connection with third tier civil money penalties does not imply 
congressional intent to disable OFHEO from prohibiting 
indemnification in connection with other agency actions.
---------------------------------------------------------------------------

    Further, OFHEO remains cognizant of the canon of statutory 
construction known as the ``whole statute'' interpretation.\27\ Because 
a statute is passed as a whole and not in parts or sections, this canon 
requires that each section should be construed in connection with every 
other part or section so as to produce a harmonious whole.\28\ Statutes 
must be construed to further the statutory scheme; ``a statutory 
subsection may not be considered in a vacuum.'' \29\ Here, the Director 
is broadly empowered under various sections of the Act to fashion 
appropriate sanctions and remedies to address varying circumstances of 
misconduct, such as that resulting from recklessness or fraud, by 
corporate officials, including officers and directors of an Enterprise. 
This occurs without regard to other provisions of the Act that curtail 
the authority of an Enterprise to indemnify such persons in certain 
extraordinary circumstances.
---------------------------------------------------------------------------

    \27\ See Singer, supra note 24, at Sec. 46:05.
    \28\ Id.
    \29\ Id. and FDA v. Brown & Williamson Tobacco Corp., et al., 
529 U.S. 120, 132-133 (2000) (``It is a `fundamental canon of 
statutory construction that the words of a statute must be read in 
their context and with a view to their place in the overall 
statutory scheme.' A court must therefore interpret the statute `as 
a symmetrical and coherent regulatory scheme.' '' [citations 
omitted]). The authority of OFHEO in connection with administrative 
enforcement proceedings is derived from its statutory enforcement 
and supervisory responsibilities. It would be wholly inconsistent 
with the congressional scheme to read subsection (g) so as to 
constrain the essential flexibility of OFHEO to fashion differing 
remedies to address particular circumstances.
---------------------------------------------------------------------------

    The commenters also asserted that its restrictive interpretation of 
subsection (g) is supported by the argument that if Congress had wanted 
to prohibit indemnification for second tier civil money penalties, it 
knew how to do so in light of congressional amendment of section 18(k) 
of the Federal Deposit Insurance Act (FDI Act).\30\ More particularly, 
that law explicitly authorizes the Federal Deposit Insurance 
Corporation to prohibit indemnification payments to institution-
affiliated parties, including board members and executive officers of 
federally insured banks and thrifts, for penalties and related legal 
expenses in view of such factors as the agency spells out by 
regulation. But Congress did not address indemnification in the Act 
affecting the Enterprises in the same manner as it did for insured 
banks and thrift institutions under the FDI Act. Logic supports the 
position that the different statutory formulations of the Act and the 
FDI Act evidence that Congress knew how to prohibit expressly OFHEO 
from denying indemnification, but did not do so.
---------------------------------------------------------------------------

    \30\ 30 12 U.S.C. 1828(k).
---------------------------------------------------------------------------

    OFHEO rejects the assertion that it has no authority beyond 
subsection (g) to address indemnification. In order to minimize 
misunderstanding and to clarify the authority of the agency to fashion 
appropriate remedies on a case-by-case basis, proposed Secs. 1710.30 
and 1710.31 have been revised and renumbered as Sec. 1710.20 to require 
each Enterprise to adopt written policies and procedures concerning 
indemnification and to recount the authority of OFHEO to fashion 
appropriate remedies, including indemnification pursuant to its 
inchoate enforcement authority under various sections of the Act as set 
forth at 12 CFR part 1780.
    Under Sec. 1710.20, the body of law elected by an Enterprise 
pursuant to Sec. 1710.10 will provide the basis for indemnification by 
the Enterprise. The Enterprises are authorized to operate under the 
indemnification requirements set forth by the elected body of State law 
or the RMBCA. The revisions to the indemnification provision are 
designed to preclude any misunderstanding as to the applicability of 
State law or RMBCA provisions that may mandate or provide for 
indemnification in certain circumstances. Thus, the revised 
indemnification provisions should not detract from the efforts of the 
Enterprises to continue to attract and retain qualified board members 
and executive officers.

Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

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

Executive Order 13132, Federalism

    Executive Order 13132 requires that Executive departments and 
agencies identify regulatory actions that have significant federalism 
implications. A regulation has federalism implications if it has 
substantial direct effects on the States, on the relationship or 
distribution of power between the Federal Government and the States, or 
on the distribution of power and responsibilities among various levels 
of Government. The Enterprises are federally chartered corporations 
supervised by OFHEO. The final regulation sets forth minimum corporate 
governance standards with which the Enterprises must comply for Federal 
supervisory purposes. The final regulation requires that each 
Enterprise elect a body of State corporate law or the Revised Model 
Corporation Act to follow in terms of its corporate practices and 
procedures. The final regulation does not affect in any manner the 
powers and authorities of any State with respect to the Enterprises or 
alter the distribution of power and responsibilities between State and 
Federal levels of government. Therefore, OFHEO has determined that the 
final regulation has no federalism implications that warrant the 
preparation of a Federalism Assessment in accordance with Executive 
Order 13132.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a

[[Page 38370]]

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

List of Subjects in 12 CFR Part 1710

    Administrative practice and procedure, Government Sponsored 
Enterprises.


    Accordingly, for the reasons stated in the preamble, OFHEO adds 
part 1710 to subchapter C of 12 CFR chapter XXVII to read as follows:

PART 1710--CORPORATE GOVERNANCE

Subpart A--General
Sec.
1710.1   Purpose.
1710.2   Definitions.
1710.3--1710.9   [Reserved]
Subpart B--Corporate Practices and Procedures
1710.10   Law applicable to corporate governance.
1710.11   Committees of board of directors.
1710.12   Compensation of board members, executive officers, and 
employees.
1710.13   Quorum of board of directors; proxies not permissible.
1710.14   Conflict-of-interest standards.
1710.15   Conduct and responsibilities of board of directors.
1710.16-1710.19   [Reserved]
Subpart C--Indemnification
1710.20   Indemnification.

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

Subpart A--General


Sec. 1710.1  Purpose.

    OFHEO is responsible under the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992, 12 U.S.C. 4501 et seq., for 
ensuring the safety and soundness of the Enterprises. In furtherance of 
that responsibility, this part sets forth minimum standards with 
respect to the corporate governance practices and procedures of the 
Enterprises.


Sec. 1710.2  Definitions.

    For purposes of this part, the term:
    (a) Act means the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992, Title XIII of the Housing and Community 
Development Act of 1992, Pub. L. 102-550, section 1301, Oct. 28, 1992, 
106 Stat. 3672, 3941 through 4012 (1993) (12 U.S.C. 4501 et seq.).
    (b) Board member means a member of the board of directors.
    (c) Board of directors means the board of directors of an 
Enterprise.
    (d) Chartering acts mean the Federal National Mortgage Association 
Charter Act and the Federal Home Loan Mortgage Corporation Act, which 
are codified at 12 U.S.C. 1716 through 1723i and 12 U.S.C. 1451 through 
1459, respectively.
    (e) Compensation means any payment of money or the provision of any 
other thing of current or potential value in connection with 
employment. The term ``compensation'' includes all direct and indirect 
payments of benefits, both cash and non-cash, including, but not 
limited to, payments and benefits derived from compensation or benefit 
agreements, fee arrangements, perquisites, stock option plans, post 
employment benefits, or other compensatory arrangements.
    (f) Director means the Director of OFHEO or his or her designee.
    (g) Employee means a salaried individual, other than an executive 
officer, who works part-time, full-time, or temporarily for an 
Enterprise.
    (h) Enterprise means the Federal National Mortgage Association or 
the Federal Home Loan Mortgage Corporation; and the term 
``Enterprises'' means, collectively, the Federal National Mortgage 
Association and the Federal Home Loan Mortgage Corporation.
    (i) Executive officer means any senior executive officer and any 
senior vice president of an Enterprise and any individual with similar 
responsibilities, without regard to title, who is in charge of a 
principal business unit, division, or function of an Enterprise, or who 
reports directly to the chairperson, vice chairperson, chief operating 
officer, or president of an Enterprise.
    (j) NYSE means the New York Stock Exchange.
    (k) OFHEO means the Office of Federal Housing Enterprise Oversight.
    (l) Senior executive officer means the chairperson of the board of 
directors, chief executive officer, chief financial officer, chief 
operating officer, president, vice chairperson, any executive vice 
president of an Enterprise, and any individual, without regard to 
title, who has similar responsibilities.


Secs. 1710.3--1710.9  [Reserved]

Subpart B--Corporate Practices and Procedures


Sec. 1710.10  Law applicable to corporate governance.

    (a) General. The corporate governance practices and procedures of 
each Enterprise shall comply with applicable chartering acts and other 
Federal law, rules, and regulations, and shall be consistent with the 
safe and sound operations of the Enterprise.
    (b) Election and designation of body of law. (1) To the extent not 
inconsistent with paragraph (a) of this section, each Enterprise shall 
follow the corporate governance practices and procedures of the law of 
the jurisdiction in which the principal office of the Enterprise is 
located, as amended; Delaware General Corporation Law, Del. Code Ann. 
tit. 8, as amended; or the Revised Model Business Corporation Act, as 
amended.
    (2) Each Enterprise shall designate in its bylaws the body of law 
elected for its corporate governance practices and procedures pursuant 
to this paragraph within 90 calendar days from August 5, 2002.


Sec. 1710.11  Committees of board of directors.

    (a) General. The board of directors may rely, in directing the 
Enterprise, on reports from committees of the board of directors, 
provided, however, that no committee of the board of directors shall 
have the authority of the board of directors to amend the bylaws and no 
committee shall operate to relieve the board of directors or any board 
member of a responsibility imposed by applicable law, rule, or 
regulation.
    (b) Audit and compensation committees. Each Enterprise shall 
provide in its bylaws, within 90 calendar days from August 5, 2002, for 
the establishment of, however styled:
    (1) An audit committee that is in compliance with the charter, 
independence, composition, expertise, and other requirements of the 
audit committee rules of the NYSE, as from time to time amended, unless 
otherwise provided by OFHEO; and
    (2) A compensation committee, the membership of which is to include 
at least three independent board members and the duties of which 
include, at a minimum, oversight of compensation policies and plans for 
executive officers and employees and approving the

[[Page 38371]]

compensation of senior executive officers.


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

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


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

    Each Enterprise shall provide in its bylaws, within 90 calendar 
days from August 5, 2002, that, for the transaction of business, a 
quorum of the board of directors is at least a majority of the entire 
board of directors and that a board member may not vote by proxy.


Sec. 1710.14  Conflict-of-interest standards.

    Each Enterprise shall establish and administer written conflict-of-
interest standards that are reasonably designed to assure the ability 
of board members, executive officers, and employees of the Enterprise 
to discharge their duties and responsibilities, on behalf of the 
Enterprise, in an objective and impartial manner.


Sec. 1710.15  Conduct and responsibilities of board of directors.

    (a) Purpose. The purpose of this section, and of this subpart, is 
to set forth minimum standards of the conduct and responsibilities of 
the board of directors in furtherance of the safe and sound operations 
of each Enterprise. The provisions of this section neither provide 
shareholders of an Enterprise with additional rights nor impose 
liability on any board member under State law.
    (b) Conduct and responsibilities. The board of directors is 
responsible for directing the conduct and affairs of the Enterprise in 
furtherance of the safe and sound operation of the Enterprise and must 
remain reasonably informed of the condition, activities, and operations 
of the Enterprise. The responsibilities of the board of directors 
include having in place adequate policies and procedures to assure its 
oversight of, among other matters, the following:
    (1) Corporate strategy, major plans of action, risk policy, and 
corporate performance;
    (2) Hiring and retention of qualified senior executive officers and 
succession planning for such senior executive officers;
    (3) Compensation programs of the Enterprise;
    (4) Integrity of accounting and financial reporting systems of the 
Enterprise, including independent audits and systems of internal 
control;
    (5) Process and adequacy of reporting, disclosures, and 
communications to shareholders, investors, and potential investors; and
    (6) Responsiveness of executive officers in providing accurate and 
timely reports to Federal regulators and in addressing the supervisory 
concerns of Federal regulators in a timely and appropriate manner.
    (c) Guidance. The board of directors should refer to the body of 
law elected under Sec. 1710.10 and to publications and other 
pronouncements of OFHEO for additional guidance on conduct and 
responsibilities of the board of directors.


Secs. 1710.16-1710.19  [Reserved]

Subpart C--Indemnification


Sec. 1710.20  Indemnification.

    (a) Safety and soundness authority. OFHEO has the authority, under 
the Act, to prohibit or restrict reimbursement or indemnification of 
any current or former board member or any current or former executive 
officer by an Enterprise or by any affiliate of an Enterprise in 
furtherance of the safe and sound operations of the Enterprise.
    (b) Policies and procedures. Each Enterprise shall have in place 
policies and procedures consistent with this part for indemnification, 
including the approval or denial by the board of directors of 
indemnification of current and former board members and current or 
former executive officers. Such policies and procedures should address, 
among other matters, standards relating to indemnification, 
investigation by the board of directors, and review by independent 
counsel.

    Dated: May 30, 2002.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 02-13917 Filed 6-3-02; 8:45 am]
BILLING CODE 4220-01-P