[Federal Register Volume 68, Number 180 (Wednesday, September 17, 2003)]
[Proposed Rules]
[Pages 54396-54400]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23761]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900 and 998

[No. 2003-19]
RIN 3069-AB22


Registration by Each Federal Home Loan Bank of a Class of Its 
Securities Under the Securities Exchange Act of 1934

AGENCY: Federal Housing Finance Board.

ACTION: Proposed regulation.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to adopt a regulation requiring each Federal Home Loan Bank (Bank) to 
prepare and make public certain disclosures relating to its business 
and financial condition. Each Bank will satisfy these disclosure 
requirements by voluntarily registering a class of its securities with 
the Securities and Exchange Commission (SEC) under the provisions of 
section 12(g) of the Securities Exchange Act of 1934. By voluntarily 
registering a class of its securities, each Bank will subject itself to 
the 1934 Act's periodic disclosure regime, as interpreted and 
administered by the SEC.

DATES: Written comments on the proposed regulation must be received by 
January 15, 2004.

ADDRESSES: Send comments by electronic mail to [email protected], by 
facsimile to 202/408-2530, or by regular mail to the Federal Housing 
Finance Board, 1777 F Street, NW., Washington, DC 20006, Attn: Public 
Comments.

FOR FURTHER INFORMATION CONTACT: Arnold Intrater, General Counsel, 202/
408-2536, [email protected], or John P. Foley, Senior Attorney-
Advisor, Office of General Counsel, 202/408-2932, [email protected], or 
Joseph A. McKenzie, Deputy Chief Economist, Office of Supervision, 202/
408-2845, [email protected], Federal Housing Finance Board, 1777 F 
Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION: 

I. Comments

    The Finance Board invites comments on all aspects of the proposed 
regulation, including legal and policy considerations, and assessments 
of the

[[Page 54397]]

proposed regulation's impact on access to capital markets, cost of 
funds, and other costs to the Bank System. The Finance Board will take 
all comments into consideration before issuing a final regulation. For 
copies of public comments, contact Karen Rogers, Executive Secretary, 
by e-mail at [email protected], by facsimile at 202/408-2530, or by 
telephone at 202/408-2910.

II. Statutory and Regulatory Background

A. The Banks

    The 12 Banks are privately owned ``government-sponsored 
enterprises'' (GSEs) organized under the authority of the Federal Home 
Loan Bank Act (Bank Act) \1\ to support the financing of housing and 
community lending by their members.\2\ The Bank Act requires the Banks 
to adopt a cooperative structure. Eligible financial institutions 
(principally, depository institutions) may become members of a Bank if 
they satisfy certain statutory and regulatory criteria and purchase a 
specified amount of a Bank's capital stock.\3\ Only Bank members may 
own Bank capital stock and share in Bank profits. Only Bank members, 
and certain eligible housing associates (such as State housing finance 
agencies), may borrow from or use other Bank products and services.\4\
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    \1\ 12 U.S.C. 1421 et seq.
    \2\ 12 U.S.C. 1422a(a)(3)(B)(ii), 1430(i), (j).
    \3\ 12 U.S.C. 1424, 1426.
    \4\ 12 U.S.C. 1426, 1430, 1430b.
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B. The Finance Board

    The Banks' regulator is the Finance Board, an independent agency in 
the executive branch of the U.S. government. The Finance Board's 
primary duty is to ensure that the Banks operate in a financially safe 
and sound manner. To the extent consistent with that duty, the Finance 
Board also must supervise the Banks, ensure that the Banks carry out 
their housing finance mission, and ensure that the Banks remain 
adequately capitalized and able to raise funds in the capital 
markets.\5\
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    \5\ 12 U.S.C. 1422a(a)(3)(A), (B).
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C. Gramm-Leach-Bliley Act

    The Gramm-Leach-Bliley Act \6\ (GLB Act) required the Banks to 
adopt new risk-based capital structures. On January 30, 2001, the 
Finance Board published a final regulation implementing new capital 
structure requirements for the Banks.\7\ As of July 18, 2002, the 
Finance Board had approved a new capital plan for each of the Banks. To 
date, six Banks have implemented their capital plans and are operating 
under new capital structures. Until a Bank implements its capital plan, 
its capital structure is governed by the Finance Board's pre-GLB Act 
regulations.
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    \6\ Pub. L. 106-102 (1999).
    \7\ 66 FR 8262 (January 30, 2001).
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D. Bank System Securities

    Consolidated Obligations. The Bank Act authorizes the individual 
Banks to issue debt securities, subject to Finance Board regulation.\8\ 
While the Finance Board has not adopted regulations permitting the 
issuance of debt securities by individual Banks and no Bank has ever 
individually issued debt securities, the Finance Board has adopted 
regulations authorizing the Office of Finance (OF), a joint office of 
the Banks, as agent for the Banks, to offer, issue and service 
consolidated obligations on which the Banks are jointly and severally 
liable.\9\ The Banks, together with the OF, comprise the Bank System. 
The Banks' GSE status enables the OF to issue consolidated obligations 
at favorable rates. The Banks pass along their funding advantage to 
their members--and ultimately to consumers--by providing advances 
(secured loans) and other financial services to their members at lower 
rates than the members generally could obtain elsewhere. At June 30, 
2003, the Bank System had $507 billion of consolidated obligation bonds 
(maturity of one year or more) and $134 billion of consolidated 
obligation discount notes (maturity of less than one year) outstanding.
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    \8\ 12 U.S.C. 1431(a).
    \9\ 12 CFR 985.3(a). Prior to 2001, the OF performed the same 
functions for the Finance Board, which had issued consolidated 
obligations on behalf of the Banks pursuant to Section 11(c) of the 
Bank Act. The Finance Board no longer issues consolidated 
obligations on behalf of the Banks under Section 11(c).
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    Equity Securities. Banks that have implemented new capital plans 
may issue Class A stock or Class B stock (and each class may have 
subclasses). Shares of both Class A stock and Class B stock are issued 
at a par value of $100 per share. Shares of Class A stock are 
redeemable in cash on six-months written notice to a Bank. Shares of 
Class B stock are redeemable in cash on five-years written notice to a 
Bank. The redemption price for shares of both Class A stock and Class B 
stock is $100 per share.\10\ Banks that have not implemented new 
capital plans issue only one class of capital stock redeemable by the 
Bank on six-months notice. This capital stock is also purchased by the 
member and redeemed by the Bank at a par value of $100 per share. Each 
Bank may also repurchase outstanding shares of any type of Bank capital 
stock at a price of $100 per share in certain circumstances.
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    \10\ 12 CFR 931.1.
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E. 1933 Act and 1934 Act Exemptions Applicable to Bank Securities

    1933 Act Exemption for Bank Equity and Debt Securities. Equity 
securities issued by individual Banks to their members and debt 
securities issued by the OF as agent for the Banks to public investors 
are exempt from the registration requirements of the Securities Act of 
1933 (1933 Act) \11\ because the Banks are persons ``controlled or 
supervised by and acting as an instrumentality of the Government of the 
United States pursuant to authority granted by the Congress of the 
United States.'' \12\
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    \11\ 15 U.S.C. 77a et seq.
    \12\ 15 U.S.C. 77c(a)(2).
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    1934 Act Exemption for Bank Debt Securities. Debt securities issued 
by the OF as agent for the Banks are exempt from the registration 
requirements of the Securities Exchange Act of 1934 (1934 Act).\13\ 
Sections 3(a)(12)(A) and 3(a)(42)(B) of the 1934 Act designate as 
exempt securities, ``government securities,'' including ``securities 
which are issued or guaranteed by corporations in which the United 
States has a direct or indirect interest and which are designated by 
the Secretary of the Treasury for exemption as necessary or appropriate 
in the public interest or for the protection of investors.'' \14\ In 
Release 34-1168 dated April 28, 1937, the SEC announced the Secretary 
of the Treasury's designation for exemption of those securities issued 
by the Federal Home Loan Bank Board (the predecessor agency to the 
Finance Board) or by the Banks under the authority of Section 11 of the 
Bank Act. The consolidated obligations issued by the OF as agent for 
the Banks are issued under the authority of Section 11(a) of the Bank 
Act.
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    \13\ 15 U.S.C. 78a et seq.
    \14\ 15 U.S.C. 78c(a)(42)(B).
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    Bank Equity Securities under the 1934 Act. The Secretary of the 
Treasury has not designated Bank equity securities for exemption under 
the 1934 Act.
    Basis for 1933 Act and 1934 Act Exemptions. The Banks' 1933 Act and 
1934 Act exemptions rest on a presumption, and the Finance Board's 
supervisory and examination authority over the Banks includes a 
responsibility to ensure, that the securities activities of government 
instrumentalities are conducted in the public interest and for the 
protection of investors. This obligation was reinforced when

[[Page 54398]]

Congress assigned to the Finance Board the statutory duty ``to ensure 
that the Federal Home Loan Banks remain adequately capitalized and able 
to raise funds in the capital markets.'' \15\
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    \15\ 12 U.S.C. 1422a(a)(3)(B)(iii).
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F. Current Bank System Securities Disclosure

    Bank System Combined Reports. Subject to certain specifically 
enumerated exceptions, Finance Board regulations currently require the 
OF to prepare combined annual and quarterly financial reports for the 
Bank System (Bank System Combined Reports) in scope, form and content 
generally consistent with the requirements of SEC Regulation S-K and 
Regulation S-X.\16\ Under these Finance Board regulations, the OF 
prepares an annual and three quarterly Bank System Combined Reports. 
The annual report portion of the Bank System Combined Reports contains: 
(i) Audited balance sheets for the prior two years and income 
statements for the prior three years; (ii) a discussion and analysis of 
the Bank System's financial condition and results of operations; and 
(iii) supplemental information describing the Bank System's business 
and senior Bank System management. The quarterly report portions of the 
Bank System Combined Reports contain unaudited interim financial 
statements with accompanying discussion and analysis of the Bank 
System's financial condition and results of operations.
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    \16\ 12 CFR 985.6(b)(1).
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    Bank Annual and Quarterly Reports. Finance Board regulations also 
require that any financial statements contained in an annual or 
quarterly financial report issued by an individual Bank be consistent 
in both form and content with the financial statements presented in the 
Bank System Combined Reports.\17\ Except for this obligation, there is 
no Finance Board regulatory requirement that individual Bank annual or 
quarterly reports be in scope, form and content generally consistent 
with the requirements of SEC Regulation S-K and Regulation S-X. Each 
Bank currently prepares and distributes to its members an annual report 
containing audited financial statements and a management discussion and 
analysis section. Each Bank also distributes brief quarterly or semi-
annual summary financial reports to its members.
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    \17\ 12 CFR 989.4.
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    Additional OF 1933 Act Disclosure Documents. The OF distributes 
various offering documents to investors in connection with issuances of 
Bank System consolidated obligations. These OF disclosure documents are 
modeled on the disclosure documents that are prepared by issuers of 
investment grade debt who issue debt securities under cover of a Form 
S-3 shelf registration statement.

G. Reassessment of the Securities Disclosure of the Individual Banks

Bank System's Need to Remain Adequately Capitalized
    Comprehensive, fully transparent securities disclosure is necessary 
if the Banks are to maintain the long-term confidence of the investment 
community and the national rating agencies. The rules and regulations 
that form the 1934 Act's periodic disclosure system establish the best 
practices standard for disclosure by U.S. corporations. The SEC has the 
resources and the expertise to ensure that individual Bank disclosure 
documents meet this standard. Congress established the SEC in 1934 to 
enforce the newly enacted federal securities laws, to promote stability 
in the financial markets and to protect investors. For the last 69 
years, the SEC has been in the forefront of investor protection and has 
significantly contributed to the integrity of the United States 
securities markets.
    Because of the SEC's expertise and resources and the credibility 
that SEC review brings to a registrant's financial statements, the 
Finance Board has concluded that the Bank System's ability to access 
the capital markets may be better secured if each of the 12 Banks 
voluntarily registers a class of its securities with the SEC under 
Section 12(g) of the 1934 Act, thereby subjecting the Banks to the 
SEC's periodic disclosure system, as interpreted and administered by 
the SEC.
    The Finance Board's proposal that each Bank should be required to 
voluntarily register a class of its securities under Section 12(g) of 
the 1934 Act also rests on the fact that Bank accounting and financial 
statement reporting issues have become significantly more complex in 
recent years because of new Financial Accounting Standards Board (FASB) 
statements. In particular, Statement of Financial Accounting Standards 
No. 133, Accounting for Derivative Instruments and Hedging Activities, 
has given rise to interpretative complexities. These more complex FASB 
financial statement reporting requirements necessitate more 
comprehensive and detailed disclosure by individual Banks. The SEC 
staff has the extensive accounting expertise required to review this 
Bank disclosure.
    Finally, the Finance Board recognizes that Fannie Mae has 
voluntarily registered its common stock with the SEC under Section 
12(g) of the 1934 Act and that Freddie Mac has agreed to do so upon the 
completion of its restatement of its financial statements. There may be 
merit in having the core securities disclosures of all of the housing 
GSEs overseen by the same disclosure regulator.
    Finance Board Will Continue to Oversee the Bank System Combined 
Reports in Consultation with the SEC. The OF is a joint office of the 
12 Banks and is not a separate legal entity. Thus, the OF would not fit 
into a 1934 Act registration regime that is premised on registrants 
being separate legal entities with distinct managements. Moreover, the 
Bank System Combined Reports combine rather than consolidate financial 
information from each of the 12 Banks. If each of the 12 Banks subjects 
itself to the SEC's integrated disclosure regime, this will make 
available to the OF and the Finance Board 1934 Act periodic disclosure 
documents prepared by each Bank that have been reviewed by SEC staff. 
With this foundation, the Finance Board believes that its extensive 
knowledge of the Bank System and the Bank System Combined Reports make 
the Finance Board the appropriate regulator to continue to supervise 
the Bank System Combined Report's disclosure. In carrying out this 
responsibility, the Finance Board will consult with the SEC.

III. Analysis of Proposed Regulation

A. Section 900.3 Definitions

    The proposed regulation would amend Sec.  900.3\18\ to include the 
following three additional definitions of terms related to securities 
disclosure that are used in the proposed regulation: ``GLB Act,'' 
``SEC,'' and ``1934 Act.''
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    \18\ 12 CFR 900.3.
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B. Section 998.1 General

1. Section 998.1(a) Purpose
    This section describes the purpose of part 998, which is to require 
each Bank to prepare and submit the financial and other disclosures 
required by the Finance Board by voluntarily registering a class of its 
securities with the SEC under Section 12(g) of the 1934 Act. The 
voluntary registration of a class of the securities of each Bank will 
bring each Bank under the 1934 Act periodic disclosure regime, as 
interpreted and administered by the SEC.

[[Page 54399]]

2. Section 998.1(b) No Limitation on Safety and Soundness Authority and 
Access to Capital Market Responsibilities
    This section would state that the proposed regulation would not 
limit or restrict the Finance Board's ability carry out its 
responsibilities under the Bank Act including its responsibility to act 
under its safety and soundness authority to regulate the Banks, 
including conducting examinations, requiring reports and disclosures, 
and enforcing compliance with applicable laws, rules and regulations. 
This section would not alter the Finance Board's responsibility to 
ensure the Bank System's continued access to the capital markets.

C. Section 998.2 Bank Periodic Disclosures

1. Section 998.2(a) Periodic Disclosures
    This section would require each Bank to prepare and make public 
disclosures relating to its financial condition, results of operations, 
trends or uncertainties affecting its business, and its management's 
assessment of its business and financial condition that includes 
supporting financial information and certifications.
2. Section 998.2(b) Satisfaction of Bank Periodic Disclosure 
Requirement
    This section would require each Bank to satisfy the disclosure 
requirements of proposed Sec.  998.2(a) by subjecting itself to the 
1934 Act's periodic disclosure regime and preparing an annual report, 
quarterly reports, current reports and such other materials as may be 
required under the SEC's rules and regulations, including SEC and SEC 
staff interpretations and rules governing audited financial statements.
3. Section 998.2(c) Voluntary Registration of a Class of the Securities 
of Each of the Banks with the SEC
    This section would establish a mechanism for each Bank to subject 
itself to the SEC's 1934 Act period disclosure regime. That mechanism 
would be the voluntary registration of a class of the securities of 
each Bank with the SEC under Section 12(g) of the 1934 Act. Each Bank 
would have to agree to voluntarily register a class of its securities 
with the SEC under Section 12(g) of the 1934 Act within 120 days of the 
adoption of this proposed regulation as a final regulation.
4. Section 998.2(e) Submission of Disclosures to Finance Board
    This section would require each Bank to provide to the Finance 
Board on a concurrent basis copies of all disclosure documents filed 
with the SEC.

IV. Regulatory Flexibility Act

    The proposed regulation, if adopted as a final regulation, will 
apply only to the Banks, which do not come within the meaning of 
``small entities,'' as defined in the Regulatory Flexibility Act 
(RFA).\19\ Therefore, in accordance with section 605(b) of the RFA,\20\ 
the Finance Board hereby certifies that the proposed regulation, if 
promulgated as a final regulation, will not have a significant economic 
impact on a substantial number of small entities.
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    \19\ 5 U.S.C. 601(6).
    \20\ 5 U.S.C. 605(b).
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V. Paperwork Reduction Act

    The proposed regulation does not contain any collections of 
information pursuant to the Paperwork Reduction Act of 1995.\21\ 
Consequently, the Finance Board has not submitted any information to 
the Office of Management and Budget for review.
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    \21\ 44 U.S.C. 3501 et seq.
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List of Subjects in 12 CFR Parts 900 and 998

    Federal home loan banks, Reporting and recordkeeping requirements, 
and Securities disclosure.

    Accordingly, the Finance Board hereby proposes to amend title 12, 
chapter IX, of the Code of Federal Regulations, as follows:

PART 900--GENERAL DEFINITIONS APPLYING TO ALL FINANCE BOARD 
REGULATIONS

    1. The authority citation for part 900 continues to read as 
follows:

    Authority: 12 U.S.C. 1422b(a).

    2. Amend Sec.  900.3 by adding the following three definitions in 
alphabetical order:


Sec.  900.3  Terms relating to other entities and concepts used 
throughout 12 CFR chapter IX.

* * * * *
    GLB Act means the Gramm-Leach-Bliley Act (Pub. L. 106-102 (1999)).
* * * * *
    SEC means the U.S. Securities and Exchange Commission.
* * * * *
    1934 Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a 
et seq.).
* * * * *
    3. Add Subchapter M (part 998) to title 12, chapter IX, to read as 
follows:

Subchapter M--Bank System Securities Disclosure

PART 998--VOLUNTARY REGISTRATION OF A CLASS OF SECURITIES OF EACH 
BANK UNDER SECTION 12(g) OF THE 1934 ACT

Sec.
998.1 General.
998.2 Bank periodic disclosures.

    Authority: 12 U.S.C. 1422b(a), 1422a(a)(3)(A), 
1422a(a)(3)(B)(iii).


Sec.  998.1  General.

    (a) Purpose. The purpose of this part is to require each Bank to 
prepare and publicly distribute certain financial and other 
disclosures. The required disclosures are those that would be provided 
by 1934 Act registrants subject to the 1934 Act's periodic disclosure 
regime, as interpreted and administered by the SEC.
    (b) No limitation on safety and soundness authority or access to 
capital markets responsibility. This part does not limit or restrict 
the Finance Board's ability carry out its responsibilities under the 
Act including its responsibility to act under its safety and soundness 
authority to regulate the Banks, including conducting examinations, 
requiring reports and disclosures, and enforcing compliance with 
applicable laws, rules and regulations. This part shall not alter the 
Finance Board's responsibility to ensure the Bank System's continued 
access to the capital markets.


Sec.  998.2  Bank periodic disclosures.

    (a) Periodic disclosures. Each Bank shall prepare and make public 
disclosures relating to its financial condition, results of operations, 
trends or uncertainties affecting its business, and its management's 
assessment of its business and financial condition that includes 
supporting financial information and certifications.
    (b) Satisfaction of Bank periodic disclosure requirement. Each Bank 
shall satisfy the disclosure requirements of paragraph (a) of this 
section by subjecting itself to the 1934 Act's periodic disclosure 
regime and preparing an annual report, quarterly reports, current 
reports and such other materials as may be required under the SEC's 
rules and regulations, including SEC and SEC staff interpretations and 
rules governing audited financial statements.
    (c) Requirement to voluntarily register a class of securities. Each 
Bank shall subject itself to the 1934 Act's periodic disclosure regime 
by agreeing to voluntarily register a class of its securities with the 
SEC under Section

[[Page 54400]]

12(g) of the 1934 Act (15 U.S.C. 78l(g)) within 120 days of the 
adoption of this regulation.
    (d) Submission of disclosures to Finance Board. Unless otherwise 
required by the Finance Board, each Bank shall provide to the Finance 
Board on a concurrent basis copies of all disclosure documents filed 
with the SEC.

    Dated: September 11, 2003.

    By the Board of Directors of the Federal Housing Finance Board.
John T. Korsmo,
Chairman.
[FR Doc. 03-23761 Filed 9-16-03; 8:45 am]
BILLING CODE 6725-01-P