[Federal Register Volume 69, Number 70 (Monday, April 12, 2004)]
[Proposed Rules]
[Pages 19126-19132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8236]



[[Page 19126]]

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1710

RIN 2550-AA24


Corporate Governance

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Proposed amendments.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
proposing for comment amendments to its corporate governance regulation 
to enhance the minimum corporate governance standards applicable to the 
Federal National Mortgage Association and the Federal Home Loan 
Mortgage Corporation.

DATES: Written comments on the proposed amendments must be received by 
June 11, 2004.

ADDRESSES: You may submit your comments, identified by regulatory 
information number (RIN) 2550-AA24, by any of the following methods:
     U.S. Mail, United Parcel Post, Federal Express, 
or Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2550-AA24, Office of 
Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552.
     Hand Delivered/Courier: The hand delivery 
address is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 
2550-AA24, Office of Federal Housing Enterprise Oversight, Fourth 
Floor, 1700 G Street, NW., Washington, DC 20552. The package should be 
logged at the Guard Desk, First Floor, on business days between 9 a.m. 
and 5 p.m.
     E-mail: [email protected]. Comments to 
Alfred M. Pollard, General Counsel, may be sent by e-mail at 
[email protected]. Please include RIN 2550-AA24 in the subject line 
of the message.
    Instructions: OFHEO requests that comments to the proposed 
amendments include the reference RIN 2550-AA24. OFHEO further requests 
that comments submitted in hard copy also be accompanied by the 
electronic version in Microsoft([reg]) Word or in portable document 
format (PDF) on 3.5'' disk. Please see the section, SUPPLEMENTARY 
INFORMATION, below, for additional information on the posting and 
viewing of comments.

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

SUPPLEMENTARY INFORMATION:

Comments

    OFHEO invites comments on all aspects of the proposed amendments, 
including legal and policy considerations, and will take all comments 
into consideration before issuing the final amendments.
    All comments received will be posted without change to http://www.ofheo.gov, including any personal information provided. Copies of 
all comments received will be available for examination by the public 
on business days between the hours of 10 a.m. and 3 p.m., at the Office 
of Federal Housing Enterprise Oversight, Fourth Floor, 1700 G Street 
NW., Washington, DC 20552. To make an appointment to inspect comments, 
please call the Office of General Counsel at (202) 414-6924.

Background

    Title XIII of the Housing and Community Development Act of 1992, 
Public Law 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 or government 
sponsored enterprises) are adequately capitalized and operate safely 
and in compliance with applicable laws, rules, and regulations.
    In furtherance of its supervisory responsibilities, in 2002, OFHEO 
published the final corporate governance regulation, taking into 
consideration comments filed in response to an earlier proposed 
regulation.\1\ The corporate governance regulation sets forth minimum 
standards with respect to corporate governance practices and procedures 
of the Enterprises. It establishes a framework for corporate governance 
addressing applicable law, requirements and responsibilities of the 
board of directors and board committees, conflict-of-interest 
standards, and indemnification.
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    \1\ 12 CFR part 1710, 67 FR 38361 (June 4, 2002).
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    As a result of findings and recommendations contained in the Report 
of the Special Examination of Freddie Mac \2\ (Report of Special 
Examination), as well as developments in law, supervision, and industry 
standards, OFHEO is undertaking to amend the corporate governance 
regulation within this framework. On June 7, 2003, the Director of 
OFHEO ordered a special examination of the events leading to the public 
announcement by Freddie Mac of an audit of prior year financial 
statements and the termination, resignation, and retirement of three 
principal executive officers of Freddie Mac.
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    \2\ OFHEO, Report of the Special Examination of Freddie Mac 
(Dec. 2003) (Report of Special Examination), which may be found at 
http://www.ofheo.gov/media/pdf/specialreport122003.pdf.
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    The Report of Special Examination found that ``[t]he accounting and 
management problems of Freddie Mac were largely the product of a 
corporate culture that demanded steady but rapid growth in profits and 
focused on management of credit and interest rate risks but neglected 
key elements of the infrastructure of the enterprise needed to support 
growth.'' \3\ The Report of Special Examination, among other things, 
made specific recommendations with respect to best practices in 
corporate governance that Freddie Mac should follow and that OFHEO 
should require.\4\ For example, included are recommendations that 
functions of the chief executive officer and the chairperson of the 
board of directors should be separated; board members should become 
more actively involved in the oversight of the Enterprise; adequate and 
appropriate information should be provided to the board of directors; 
financial incentives for board members, executive officers, and 
employees should be developed based on long-term goals, not short-term 
earnings; strict term limits should be placed on board members; firms 
that audit the Enterprises, not merely the audit partners, should be 
changed periodically; and formal compliance and risk management 
programs should be established. A Consent Order, issued by OFHEO to 
Freddie Mac on December 9, 2003, required Freddie Mac to implement 
certain corporate governance best practices that were recommended in 
the Report of Special Examination, as well as other remedial steps.\5\
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    \3\ Id., at 4 (footnote omitted).
    \4\ Id., at 163--171.
    \5\ OFHEO Order No. 2003-02, ``Consent Order, In the Matter of 
the Federal Home Loan Mortgage Corporation'' (Dec. 9, 2003) (Consent 
Order), which may be found at http://www.ofheo.gov/media/pdf/consentorder12903.pdf.
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    The lessons learned by OFHEO through the special examination

[[Page 19127]]

provided new insights as to the appropriate best practices for both 
Enterprises. Thus, OFHEO is proposing to add prudential requirements 
that would have general applicability to its corporate governance 
regulation consistent with the practices recommended or required by the 
Report of Special Examination or the Consent Order.
    OFHEO notes that the Enterprises are privately owned but federally 
chartered companies. Created by Congress to facilitate liquidity and 
stability in mortgage markets and to advance affordable housing, they 
receive in exchange special benefits from their Government sponsorship. 
Since their creation, the Enterprises have grown to become two of the 
largest financial companies in the world, yet the Enterprises are 
highly leveraged. Between them, Fannie Mae and Freddie Mac control a 
majority share of the conforming mortgage market. Given their Federal 
charters, public mission, and the size and significance of their 
operations in capital markets and the banking system, OFHEO has 
determined that Fannie Mae and Freddie Mac should adhere to certain 
policies that may not be applicable to all companies but should 
nevertheless apply to them.
    With respect to recent developments, the New York Stock Exchange 
(NYSE) has issued amendments to its corporate governance rules that are 
applicable to companies listed on the NYSE, including the 
Enterprises.\6\ In addition, Congress passed the Sarbanes-Oxley Act of 
2002 (SOA),\7\ which contains corporate governance requirements, and 
the U.S. Securities and Exchange Commission (Commission) has issued 
regulations to implement the SOA. Fannie Mae has voluntarily registered 
its common stock with the Commission effective March 31, 2003; Freddie 
Mac has announced its intention to register.\8\
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    \6\ Final NYSE Corporate Governance Rules (Nov. 4, 2003), 
Section 303A. The NYSE final Corporate Governance Rules may be found 
at http://www.nyse.com. Note that except for final NYSE rule Section 
303A.08, which became effective June 30, 2003, listed companies have 
until the earliest of their first annual meeting after January 15, 
2004, or October 31, 2004, to comply with the new rules. The 
Enterprises are companies listed on the NYSE. As listed companies, 
the rules of the NYSE, including those addressing corporate 
governance, are applicable to the Enterprises.
    \7\ Pub. L. 107-204 (Jul. 30, 2002).
    \8\ See http://www.fanniemae.com/ir/sec/index.jtml?s=SEC+filings 
for Fannie Mae and http://www.freddiemac.com/news/archives/investors/2003/restatement_112103.html for Freddie Mac.
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    Since registration, Fannie Mae files periodic financial disclosures 
with the Commission as required by the Securities Exchange Act of 1934 
and is subject to the requirements of the SOA and implementing rules 
and regulations of the Commission.\9\ Upon registration, Freddie Mac 
will be subject to the same requirements. OFHEO intends to ensure that 
such requirements and implementing rules and regulations are or remain 
applicable to the Enterprises even if Freddie Mac does not register 
with the Commission or if one or both Enterprises deregister. In 
connection with any conduct regulated by the Commission, OFHEO would 
look to any rules, regulations, and interpretations issued by the 
Commission and its requirements. OFHEO may initiate an enforcement 
action in the area of the corporate governance in response to a 
violation of its corporate governance regulation, including behavior 
that violates laws or requirements set forth therein.
    The proposed amendments to strengthen corporate governance of the 
Enterprises will support the supervisory program of OFHEO. Strengthened 
corporate governance will help to ensure the continued safe and sound 
operation of the Enterprises.

Section-by-Section Analysis

Section 1710.11 Board of Directors

    OFHEO is proposing a section that would add requirements and 
consolidate existing requirements relating to the board of directors of 
an Enterprise. One requirement would require an Enterprise to prohibit 
the chairperson of the board from also serving as chief executive 
officer of the Enterprise. Separating the functions of chairperson and 
chief executive officer is prudent for safe and sound operations 
because it would strengthen board independence and oversight of 
management on behalf of shareholders consistent with the public mission 
of the Enterprises. Separating the role of chief executive officer 
would similarly clarify the role and responsibility of the individual 
charged with leading the management team.\10\ OFHEO recognizes that 
this is a different standard than is required of many other private 
corporations but it is appropriate for the Enterprises, not only 
because of their government sponsorship and dominance within their 
market, but also in light of the recent experience at Freddie Mac. In 
that case, separation of the two roles could have caused the board to 
provide stronger independent guidance to management and identify 
problems sooner. A separation of the chairperson and chief executive 
officer functions would be in the best interest of the companies and 
would enhance the effectiveness of changes being proposed for the board 
of directors to meet its obligations. This reasonable step will assist 
both in the perception and reality that these specialized institutions 
maintain the highest standards of corporate governance. The effective 
date of this requirement would be January 1, 2007.
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    \9\ The existing corporate governance regulation provides that 
the corporate governance practices and procedures of the Enterprises 
must comply with their respective chartering act and other Federal 
law, rules, and regulations, and that they must be consistent with 
the safe and sound operations of the Enterprise. 12 CFR 1710.10(a), 
67 FR 38361, 38370 (Jun. 4, 2002).
    \10\ See Report of Special Examination, supra, note 2, at 164. 
The concept of a non-executive chairman has support in recent 
discussions on improvements to corporate governance. For example, 
see General Accounting Office, Testimony of Comptroller General 
Walker before Senate Banking Committee, Government-Sponsored 
Enterprises: A Framework for Strengthening GSE Governance and 
Oversight, GAO-04-269T (February 10, 2004) (calling for separation 
of Chairman and CEO positions at Fannie Mae and Freddie Mac).
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    Another new requirement would limit the service of a board member 
to no more than 10 years or past the age of 72, whichever comes first. 
OFHEO believes that a limit on years of service and age would promote 
the highest level of functioning of the board of directors. This 
approach has been undertaken by the Enterprises in various forms and 
has acceptance in a number of corporate governance programs.\11\ OFHEO 
invites comments on alternative age limits or term of service limits.
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    \11\ Report of Special Examination, supra, note 2, at 166. An 
age limit and term limit will work well in tandem and have been part 
of Enterprise bylaws in one form or another.
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    OFHEO requires conformance with certain rules of the NYSE in its 
current corporate governance regulation. OFHEO is proposing that a 
majority of the board members of an Enterprise be independent under the 
rules of the NYSE.\12\ Notably, OFHEO makes no distinction between 
those board members who are elected by shareholders and those who are 
appointed by the President. Thus, if one or more vacancies exist on a 
board among either elected or appointed shareholders, a majority of 
seated board members is required. Under the final NSYE rule Section 
303A.02:
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    \12\ Final NYSE rule Section 303A.

    (a) No board member qualifies as ``independent'' unless the 
board of directors affirmatively determines that the director has no 
material relationship with the listed company (either directly, or 
as a partner, shareholder, or officer of an organization that has a 
relationship with the company). Companies must disclose these 
determinations.
* * * * *
    (b) In addition:

[[Page 19128]]

    (i) A director who is an employee, or whose immediate family 
member is an executive officer, of the company is not independent 
until three years after the end of such employment relationship.
* * * * *
    (ii) A director who receives, or whose immediate family member 
receives, more than $100,000 per year in direct compensation from 
the listed company, other than director and committee fees and 
pension or other forms of deferred compensation for prior service 
(provided such compensation is not contingent in any way on 
continued service), is not independent until three years after he or 
she ceases to receive more than $100,000 per year in such 
compensation.
* * * * *
    (iii) A director who is affiliated with or employed by, or whose 
immediate family member is affiliated with or employed in a 
professional capacity by, a present or former internal or external 
auditor of the listed company is not ``independent'' until three 
years after the end of affiliation or the employment or auditing 
relationship.
    (iv) A director who is employed, or whose immediate family 
member is employed, as an executive officer of another company where 
any of the listed company's present executives serve on that 
company's compensation committee is not ``independent'' until three 
years after the end of such service or the employment relationship.
    (v) A director who is an executive officer or an employee, or 
whose immediate family member is an executive officer, of a company 
that makes payments to, or receives payments from, the listed 
company for property or services in an amount which, in any single 
fiscal year, exceeds the greater of $1 million, or 2% of such other 
company's consolidated gross revenues, is not ``independent'' until 
three years after falling below such threshold.

    OFHEO is proposing to incorporate the NYSE rule by reference 
because the rule adequately covers what constitutes independence. As 
expressly provided by proposed Sec.  1710.30, discussed below, OFHEO 
would have the authority to provide for a different definition of the 
term ``independent board member'' or to provide additional guidance 
covering general or specific circumstances, if necessary in light of 
the special characteristics of the two Enterprises, including but not 
limited to circumstances where a board member has prior affiliation 
with an accounting firm currently serving as auditor of the Enterprise.
    In addition, the proposed section would address board meetings. It 
would require that the board of directors of an Enterprise meet at 
least twice a quarter to carry out its obligations and duties under 
applicable laws, rules, regulations, and guidelines. Meetings must be 
frequent enough to ensure that the board of directors can exercise 
adequate oversight of management. OFHEO determined in its review that 
the meetings of the board of directors of Freddie Mac were too 
infrequent to address the issues presented by a company of its size and 
complexity and also were less frequent than those of other public 
companies. To meet the responsibilities of directors in their oversight 
of a major financial firm, additional meetings are merited.\13\
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    \13\ See Report of Special Examination, supra, note 2, at 166.
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    The proposed section would also require that the non-management 
directors of an Enterprise meet at regularly scheduled executive 
sessions without management participation in order to promote open 
discussion.\14\ The proposed section would consolidate without 
substantive change the existing requirement of the current corporate 
governance regulation with respect to the constitution of a quorum of 
the board of directors and the prohibition against a board member 
voting by proxy.
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    \14\ See final NYSE rule Section 303A.03.
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    Furthermore, the proposed section would require that management of 
an Enterprise must provide board members with such adequate and 
appropriate information that a reasonable board member would find 
important to the fulfillment of his or her fiduciary duties and 
obligations.\15\
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    \15\ See Report of Special Examination, supra, note 2, at 166.
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    Finally, the proposed section would require, at least annually, the 
board of directors to review, with appropriate professional assistance, 
requirements of laws, regulations, rules, and guidelines that are 
applicable to its activities and duties.\16\
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    \16\ See Consent Order, supra, note 5, at Art. II, Para. 10.
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Section 1710.12 Committees of Board of Directors

    OFHEO is proposing to add a requirement to Sec.  1710.11, 
redesignated as Sec.  1710.12, that a committee of the board of 
directors of an Enterprise meet as frequently as necessary to carry out 
its obligations and duties and to exercise adequate oversight of 
management.\17\
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    \17\ See Report of Special Examination, supra, note 2, at 166.
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    The current corporate governance regulation requires that an 
Enterprise establish audit and compensation committees of the board of 
directors. OFHEO is proposing to add the requirement that an Enterprise 
establish a nominating/corporate governance committee consistent with 
the final NYSE rules.\18\
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    \18\ Final NYSE rule Section 303A.04.
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    The amended section would continue to require that committees of 
the board of directors comply with NYSE rules.\19\ The NYSE rules 
address, among other things, the independence of audit committee 
members; the audit committee's responsibility to select and oversee the 
issuer's independent accountant; procedures for handling complaints 
regarding the issuer's accounting practices; the authority of the audit 
committee to engage advisors; and, funding for the independent auditor 
and any outside advisors engaged by the audit committee.
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    \19\ See final NYSE rules Section 303A.06 and .07. The final 
NYSE rule Section 303A.06 requires with respect to the audit 
committee that listed companies must have an audit committee that 
satisfies the requirements of Rule 10A-3 under the Securities 
Exchange Act of 1934.
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    The amended section would also require that audit committees comply 
with the requirements set forth in section 301 of the SOA, which 
address, among other things, audit committee responsibilities, 
independence, establishment of complaint procedures, and authority to 
engage advisers, as well as adequate funding of the committee. The 
reference to the SOA and the final NYSE rules would not restrict the 
authority of OFHEO to mandate additional requirements by regulation, 
guideline, or order.

Section 1710.13 Compensation of Board Members, Executive Officers, and 
Employees

    OFHEO is proposing to amend Sec.  1710.12, redesignated as Sec.  
1710.13, by adding language that would prohibit compensation in excess 
of what is appropriate for these government sponsored enterprises, in 
addition to what is reasonable (as the section currently reads) and 
consistent with their long-term goals. The addition of this language is 
intended to underscore the impropriety of compensation incentives that 
excessively focus the attention of management and employees on short-
term earnings performance. Incentives focused primarily on short-term 
earnings may lead to improper conduct at an Enterprise, as OFHEO 
discovered in its investigation of Freddie Mac.\20\ Financial 
incentives at the Enterprises should foster a management culture in 
which effective consideration is given to operational stability and 
legal and regulatory compliance.\21\ As noted above, OFHEO

[[Page 19129]]

has determined, in light of its experience with Freddie Mac and given 
the Federal charters, public mission, and size and role in capital 
markets of the Enterprises, that Fannie Mae and Freddie Mac should be 
required to adhere to certain policies that may not be applicable to 
all companies but should nevertheless apply to them. The proposed 
compensation requirement in no way detracts from the obligations of 
board members and management to meet their responsibilities 
shareholders, but reflects the attention that needs to be paid as well 
to other important considerations in directing the course and conduct 
of an Enterprise.
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    \20\ See Report of Special Examination, supra, note 2, at 164.
    \21\ Consent Order, supra, note 5, at Art. 2, Para. 14.
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    A new paragraph would require the chief executive officer and chief 
financial officer to reimburse the Enterprise if the Enterprise is 
required to prepare an accounting restatement due to the material 
noncompliance of the Enterprise, as a result of misconduct, with any 
financial reporting requirement. Reimbursement would be made in 
accordance with section 304 of the SOA. Section 304 would require 
reimbursement of (1) any bonus or other incentive-based, equity or 
option-based compensation received by such person from the Enterprise 
during the 12-month period following the first public issuance of the 
financial document embodying such financial reporting requirement; and 
(2) any profits realized from the sale or disposition of securities of 
the Enterprise that such person owned or controlled during that 12-
month period.
    The provisions of the proposed paragraph would in no manner limit 
the authority of OFHEO to take any appropriate enforcement action 
against an Enterprise or any of its board members or executive 
officers.

Section 1710.14 Code of Conduct and Ethics

    OFHEO is proposing to amend Sec.  1710.14 by revising the section 
heading to read ``Code of Conduct and Ethics,'' and by referencing the 
standards set forth under section 406 of the SOA. Section 406 would 
provide that the code of conduct and ethics include standards as are 
reasonably necessary to promote (1) honest and ethical conduct, 
including the ethical handling of actual or apparent conflicts of 
interest between personal and professional relationships; (2) full, 
fair, accurate, timely, and understandable disclosure in the periodic 
reports required to be filed by the issuer of the report, and (3) 
compliance with applicable governmental rules and regulations. In 
conducting its supervisory examination process, OFHEO would ensure the 
adequacy of the code of conduct and ethics of an Enterprise.
    In addition, the proposal would require that, at least every three 
years, an Enterprise must review the adequacy of its code of conduct 
and ethics to ensure that it is consistent with best practices.

Section 1710.15 Conduct and Responsibilities of Board of Directors

    Section 1710.15 of the current corporate governance regulation 
establishes minimum standards for the conduct and responsibilities of 
the board of directors of an Enterprise. OFHEO is proposing to amend 
Sec.  1710.15 to add a requirement with respect to the conduct and 
responsibilities of the board of directors. The proposal would require 
that the board of directors must remain reasonably informed of the 
condition, activities, and operations of the Enterprise. The proposal 
would also describe the responsibility of the board of directors to 
have in place policies and procedures to assure its oversight of 
corporate strategy, major plans of action, risk policy, programs for 
legal and regulatory compliance, and corporate performance to include 
prudent plans for growth and allocation of adequate resources to manage 
operations risk.\22\
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    \22\ See Special Report of Examination, supra, note 2, at 165-
168.
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    Finally, the proposal would add a paragraph expressly addressing 
the oversight responsibility related to extensions of credit to board 
members and executive officers, consistent with the proposed Sec.  
1710.16, discussed below. In conducting its supervisory examination 
process, OFHEO would ensure that adequate policies and procedures are 
in place.

Section 1710.16 Prohibition of Extensions of Credit to Board Members 
and Executive Officers

    OFHEO is proposing to add Sec.  1710.16, which would limit 
extensions of credit to board members and other insiders as provided by 
section 402 of the SOA. Section 402 of the SOA would prohibit an 
Enterprise from directly or indirectly, including through any 
subsidiary, extending credit or arranging for the extension of credit 
in the form of a personal loan to or for any board member or executive 
officer of the Enterprise. The proposed section would conform OFHEO's 
regulation to that of other financial service regulators in addressing 
extensions of credit by companies they supervise.

Section 1710.17 Certification of Disclosures by Chief Executive Officer 
and Chief Financial Officer

    OFHEO is proposing to add Sec.  1710.17, which would require 
compliance with sections 302 of the SOA that mandates certain 
certifications of quarterly and annual reports by the chief executive 
officer and chief financial officer of an Enterprise. The proposed 
section would conform OFHEO's supervisory regime to those of other 
financial regulators. The proposal would assure review, endorsement, 
and undertaking of responsibility by individuals required to certify 
public disclosures. It would not limit OFHEO from requiring 
certifications by additional parties or additional disclosures.

Section 1710.18 Change of External Audit Partner and Audit Firm

    OFHEO is proposing to add Sec.  1710.18, which would prohibit an 
Enterprise from accepting audit services from an external auditor if 
either the lead (or coordinating) external audit partner, who has 
primary responsibility for the external audit of the Enterprise, or the 
external audit partner, who has primary responsibility for reviewing 
the external audit, has performed audit services for the Enterprise in 
each of the five previous fiscal years. This prohibition is consistent 
with Section 203 of the SOA that makes it unlawful for a registered 
public accounting firm to provide audit services to a public company by 
such audit partners in excess of five previous fiscal years.
    OFHEO is also proposing a requirement that, at least every ten 
years, an Enterprise must change its external audit firm. Public 
companies are currently required to rotate their audit partners, but 
not the audit firm. In light of its experience with Freddie Mac, OFHEO 
has determined that Fannie Mae and Freddie Mac should be required to 
adhere to certain policies that may not be applicable to all companies 
but should nevertheless apply to them. Given the importance of having 
the most impartial oversight and review of accounting and other 
matters, OFHEO is proposing that the Enterprises should secure a 
different external audit firm on a periodic basis.
    To allow a transition, OFHEO would require that Fannie Mae change 
its external auditor no later than January 1, 2006, and thereafter no 
less frequently than every ten years; and that Freddie Mac change its 
external auditor no later than January 1, 2009, and thereafter no less 
frequently than every ten years.

[[Page 19130]]

Section 1710.19 Compliance and Risk Management Programs

    Proposed Sec.  1710.19 would require an Enterprise to establish and 
maintain a compliance program headed by a person who reports directly 
to the chief executive officer. The program would be required to ensure 
compliance with all applicable laws, rules, regulations, and 
guidelines, and adherence to best practices; establish written internal 
controls and disclosure controls and procedures; and provide for 
periodic meetings of the board of directors to ensure the board is able 
to assess adherence to and adequacy of current policies and procedures 
of the Enterprise regarding compliance and adjust such policies and 
procedures, as required.
    In addition, the proposed section would require an Enterprise to 
establish and maintain a risk management program, headed by a person 
who would manage the overall risk oversight function of the Enterprise. 
The program would also be required to provide for periodic meetings of 
the board of directors to ensure the board is able to assess adherence 
to and adequacy of current policies and procedures of the Enterprise 
regarding risk management and adjust such policies and procedures, as 
required. For example, in order to assure that the board of directors 
may assess adherence to compliance and risk management policies, 
periodic meetings may be established between management personnel 
heading such programs and the audit committee and other relevant 
committees of the board of directors of the Enterprise.
    The establishment and maintenance of compliance and risk management 
programs are essential for the continued safe and sound operations of 
the Enterprises.\23\ The establishment of such programs will assist the 
board of directors in managing their responsibilities to oversee the 
adequacy of policies and procedures for compliance and risk management.
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    \23\ See Special Report of Examination, Recommended Actions, 
Nos. 9 and 10, supra, note 2, at 165-168, and Consent Order, supra, 
note 5.
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    Finally, the proposed section would provide that if an Enterprise 
deregisters or does not register its common stock with the Commission, 
the Enterprise must continue to comply with sections 301, 302, 404, 
402, and 406 of the SOA, subject to such additional requirements as 
provided by Sec.  1710.30. It would also require that a registered 
Enterprise maintain its registered status, unless it provides 60 days 
prior written notice to the Director stating its intent to deregister 
and its understanding that it will remain subject to certain 
requirements of the SOA, as provided above.

Subpart D--Modification of Certain Provisions

Section 1710.30 Modification of Certain Provisions

    OFHEO is proposing to move provisions of its existing regulation 
and to maintain similar treatment for new provisions in Sec.  1710.30 
to make clear that OFHEO, in referencing other sources for corporate 
governance standards, may modify such standards to meet its statutory 
responsibilities. References to standards of Federal or state law 
(including the Revised Model Corporation Act), or NYSE rules in 
Sec. Sec.  1710.10,\24\ 1710.11, 1710.12, 1710.17, and 1710.19 do not 
limit the ability of OFHEO to modify such standards as necessary with 
notice to the Enterprises.
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    \24\ Section 1710.10 provides generally that an Enterprise must 
follow the corporate governance practices and procedures of the law 
of the jurisdiction in which the principal office of the Enterprise 
is located, Delawre General Corporation Law, or the Revised Model 
Business Corporation Act.
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Regulatory Impact

Executive Order 12866, Regulatory Planning and Review

    The proposed amendments to the corporate governance regulation are 
not classified as an economically significant rule under Executive 
Order 12866 because they 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. This proposed 
regulation, however, has been submitted to the Office of Management and 
Budget for review under other provisions of Executive Order 12866 as a 
significant regulatory action.

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 corporate governance regulation and the 
proposed amendments thereto set forth minimum corporate governance 
standards with which the Enterprises must comply for Federal 
supervisory purposes. The corporate governance regulation requires that 
an 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 corporate governance regulation and the proposed 
amendments thereto do 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 Federal and state 
levels of government. Therefore, OFHEO has determined that the 
corporate governance regulation and the proposed amendments thereto, if 
adopted, have 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 regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). OFHEO has considered the impact of the 
proposed amendments to the corporate governance regulation under the 
Regulatory Flexibility Act. The General Counsel of OFHEO certifies that 
the corporate governance regulation and the proposed amendments 
thereto, if adopted, are 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.

[[Page 19131]]

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

PART 1710--CORPORATE GOVERNANCE

    1. The authority citation for part 1710 continues to read as 
follows:

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


Sec.  1710.13  [Removed]

    2. Remove Sec.  1710.13.


Sec. Sec.  1710.11 and 1710.12  [Redesignated]

    3. Redesignate Sec. Sec.  1710.11 and 1710.12 as new Sec. Sec.  
1710.12 and 1710.13, respectively;
    4. Add a new Sec.  1710.11 to read as follows:


Sec.  1710.11  Board of directors.

    (a) Membership.
    (1) Chairperson and chief executive officer. Effective January 1, 
2007, the chairperson of the board of directors of an Enterprise may 
not also serve as the chief executive officer of the Enterprise.
    (2) Limits on service of board members. No director of an 
Enterprise may serve on the board of directors for more than 10 years 
or past the age of 72, whichever comes first.
    (3) Independence of board members. A majority of seated members of 
the board of directors of an Enterprise shall be independent board 
members, as defined under rules set forth by the NYSE.
    (b) Meetings, quorum and proxies, information, and annual review.
    (1) Frequency of meetings. The board of directors of an Enterprise 
shall meet at least twice a quarter to carry out its obligations and 
duties under applicable laws, rules, regulations, and guidelines.
    (2) Non-management board member meetings. Non-management directors 
of an Enterprise shall meet at regularly scheduled executive sessions 
without management participation.
    (3) Quorum of board of directors; proxies not permissible. For the 
transaction of business, a quorum of the board of directors of an 
Enterprise is at least a majority of the seated board of directors and 
a board member may not vote by proxy.
    (4) Information. Management of an Enterprise shall provide a board 
member of the Enterprise with such adequate and appropriate information 
that a reasonable board member would find important to the fulfillment 
of his or her fiduciary duties and obligations.
    (5) Annual review. At least annually, the board of directors of an 
Enterprise shall review, with appropriate professional assistance, the 
requirements of laws, regulations, rules, and guidelines that are 
applicable to its activities and duties.
    5. Amend newly designated Sec.  1710.12 by revising paragraph (b) 
and by adding new paragraph (c) to read as follows:


Sec.  1710.12  Committees of board of directors.

* * * * *
    (b) Frequency of meetings. A committee of the board of directors of 
an Enterprise shall meet with sufficient frequency to carry out its 
obligations and duties under applicable laws, rules, regulations, and 
guidelines.
    (c) Required committees. An Enterprise shall provide for the 
establishment of, however styled, the following committees of the board 
of directors, which committees shall be in compliance with the charter, 
independence, composition, expertise, duties, responsibilities, and 
other requirements set forth under section 301 of the Sarbanes-Oxley 
Act of 2002, Public Law 107-204 (Jul. 30, 2002), as from time to time 
amended (SOA), with respect to the audit committee, and under rules 
issued by the NYSE, as from time to time amended (NYSE rules):
    (1) Audit committee;
    (2) Compensation committee; and
    (3) Nominating/corporate governance committee.
    6. Amend newly designated Sec.  1710.13 by revising newly 
designated paragraph (a) and by adding a new paragraph (b) to read as 
follows:


Sec.  1710.13  Compensation of board members, executive officers, and 
employees.

    (a) General. Compensation of board members, executive officers, and 
employees of an Enterprise shall not be in excess of that which is 
reasonable and appropriate, shall be commensurate with the duties and 
responsibilities of such persons, shall be consistent with the long-
term goals of the Enterprise, shall not focus solely on earnings 
performance, but shall take into account operational stability and 
legal and regulatory compliance as well, and shall be undertaken in a 
manner that complies with applicable laws, rules, and regulations.
    (b) Disgorgement. If an Enterprise is required to prepare an 
accounting restatement due to the material noncompliance of the 
Enterprise, as a result of misconduct, with any financial reporting 
requirement under law or regulation, the chief executive officer and 
chief financial officer of the Enterprise shall reimburse the 
Enterprise as provided under section 304 of the SOA.
    7. Amend Sec.  1710.14 by revising the section heading, revising 
newly designated paragraph (a) and adding new paragraphs (b) and (c) to 
read as follows:


Sec.  1710.14  Code of conduct and ethics.

    (a) General. An Enterprise shall establish and administer a written 
code of conduct and ethics that is 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, and that includes 
standards required under section 406 of the SOA.
    (b) Review. Not less than once every three years, an Enterprise 
shall review the adequacy of its code of conduct and ethics to ensure 
that it is consistent with best practices.
    8. Amend Sec.  1710.15 by revising paragraph (b) to read as 
follows:


Sec.  1710.15  Conduct and responsibilities of board of directors.

* * * * *
    (b) Conduct and responsibilities. The board of directors of an 
Enterprise is responsible for directing the conduct and affairs of the 
Enterprise in furtherance of the safe and sound operation of the 
Enterprise and shall 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, 
programs for legal and regulatory compliance and corporate performance, 
including but not limited to prudent plans for growth and allocation of 
adequate resources to manage operations risk;
    (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;
    (6) Extensions of credit to board members and executive officers; 
and
    (7) Responsiveness of executive officers in providing accurate and 
timely reports to Federal regulators and in addressing the supervisory 
concerns

[[Page 19132]]

of Federal regulators in a timely and appropriate manner.
* * * * *
    9. Add new Sec.  1710.16 to read as follows:


Sec.  1710.16  Prohibition of extensions of credit to board members and 
executive officers.

    An Enterprise may not directly or indirectly, including through any 
subsidiary, extend or maintain credit, arrange for the extension of 
credit, or renew an extension of credit, in the form of a personal loan 
to or for any board member or executive officer of the Enterprise, as 
provided by section 402 of the SOA.
    10. Add new Sec.  1710.17 to read as follows:


Sec.  1710.17  Certification of disclosures by chief executive officer 
and chief financial officer.

    The chief executive officer and the chief financial officer of an 
Enterprise shall read each quarterly report and annual report issued by 
the Enterprise and such reports shall include certifications by such 
officers as required by section 302 of the SOA.
    11. Add new Sec.  1710.18 to read as follows:


Sec.  1710.18  Change of external audit partner and audit firm.

    (a) Change of external audit partner. An Enterprise may not accept 
audit services from an external auditor if either the lead (or 
coordinating) external audit partner who has primary responsibility for 
the external audit of the Enterprise or the external audit partner who 
has primary responsibility for reviewing the external audit has 
performed audit services for the Enterprise in each of the five 
previous fiscal years.
    (b) Change of external audit firm. The Federal National Mortgage 
Association shall change its external auditor no later than January 1, 
2006, and thereafter no less frequently than every ten years; and the 
Federal Home Loan Mortgage Corporation shall change its external 
auditor no later than January 1, 2009, and thereafter no less 
frequently than every ten years.
    12. Add new Sec.  1710.19 to read as follows:


Sec.  1710.19  Compliance and risk management programs; compliance with 
other laws.

    (a) Compliance program. An Enterprise shall establish and maintain 
a compliance program, headed by a person who reports directly to the 
chief executive officer of the Enterprise, that shall--
    (1) Ensure that the Enterprise complies with all applicable laws, 
rules, regulations, and guidelines, and adheres to best practices;
    (2) Establish written internal controls and disclosure controls and 
procedures;
    (3) Provide for periodic meetings of the board of directors to 
ensure the board is able to assess adherence to and adequacy of current 
policies and procedures of the Enterprise regarding compliance and 
adjust such policies and procedures, as required.
    (b) Risk management program. An Enterprise shall establish and 
maintain a risk management program, headed by a person who reports 
directly to the chief executive officer of the Enterprise, that shall--
    (1) Manage the overall risk oversight function of the Enterprise;
    (2) Provide for periodic meetings of the board of directors to 
ensure the board is able to assess adherence to and adequacy of current 
policies and procedures of the Enterprise regarding risk management and 
adjust such policies and procedures, as required.
    (c) Compliance with other laws.
    (1) If an Enterprise deregisters or does not register its common 
stock with the U.S. Securities and Exchange Commission (Commission) 
under the Securities Exchange Act of 1934, the Enterprise shall 
continue to comply with sections 301, 302, 304, 402, and 406 of the 
SOA, subject to such requirements as provided by Sec.  1710.30 of this 
part.
    (2) An Enterprise that has its common stock registered with the 
Commission shall maintain such registered status, unless it provides 60 
days prior written notice to the Director stating its intent to 
deregister and its understanding that it will remain subject to the 
requirements of sections 301, 302, 304, 402, and 406 of the SOA, 
subject to such requirements as provided by Sec.  1710.30 of this part.
    13. Add new subpart D to read as follows:

Subpart D--Modification of Certain Provisions


Sec.  1710.30  Modification of certain provisions.

    In connection with standards of Federal or state law (including the 
Revised Model Corporation Act) or NYSE rules that are made applicable 
to an Enterprise by Sec. Sec.  1710.10, 1710.11, 1710.12, 1710.17, and 
1710.19 of this part, the Director, in his or her sole discretion, may 
modify such standards upon written notice to the Enterprise.

    Dated: April 7, 2004.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 04-8236 Filed 4-9-04; 8:45 am]
BILLING CODE 4220-01-P