[Federal Register Volume 69, Number 124 (Tuesday, June 29, 2004)]
[Rules and Regulations]
[Pages 38799-38811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14696]



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 Rules and Regulations
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  Federal Register / Vol. 69, No. 124 / Tuesday, June 29, 2004 / Rules 
and Regulations  

[[Page 38799]]



FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 900 and 998

[No. 2004-07]
RIN 3069-AB22


Registration of Federal Home Loan Bank Equity Securities

AGENCY: Federal Housing Finance Board.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is issuing a 
final rule requiring each Federal Home Loan Bank (Bank) to register a 
class of its equity securities with the Securities and Exchange 
Commission (SEC) under the registration provisions of section 12(g)(1) 
of the Securities Exchange Act of 1934 (1934 Act).\1\ Each Bank shall 
thereafter be required to comply with the disclosure requirements of 
the 1934 Act by preparing and filing with the SEC the annual, 
quarterly, and current reports required under that Act, as well as any 
other materials required by the SEC, including those related to audited 
financial statements.
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    \1\ 15 U.S.C. 78a et seq.

DATES: Effective Date: The final rule will be effective on July 29, 
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2004.

FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, Deputy Chief 
Economist, Office of Supervision, 202-408-2845, [email protected]; 
Neil R. Crowley, Deputy General Counsel, 202-408-2990, 
[email protected]; John Harry Jorgenson, Of Counsel, 202-408-2560, 
[email protected]; John P. Foley, Senior Attorney-Advisor, Office of 
General Counsel, 202-408-2932, [email protected], Federal Housing Finance 
Board, 1777 F Street, NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION: To assist readers, below is an outline of 
the discussion contained in this SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background
    A. The Federal Home Loan Bank (Bank System)
    B. Bank Securities
    C. Current Bank System Disclosure
    1. Bank System Combined Reports
    2. Individual Bank Annual and Quarterly Reports
    D. Exemptions for Bank Securities From the Registration 
Provisions of the 1933 Act and 1934 Act
    E. Registration Pursuant to the Voluntary Registration 
Provisions of Section 12(g)(1) of the 1934 Act
    F. Proposed Rule
II. Finance Board Findings Supporting Adoption of the Final Rule
    A. Legal Authority To Require Registration
    1. Authority To Require Enhanced Disclosures
    2. Authority To Require Registration With the SEC
    B. Reasonable Exercise of Finance Board Authority
    1. Benefits of Enhanced Disclosure Generally
    2. Benefits of Disclosures That Are Consistent With Industry 
Standards
    3. Benefits of Registration With the SEC Versus Registration 
With the Finance Board
    4. Costs of SEC Registration
    a. Compliance Costs
    b. Liquidity Costs
    c. Funding Costs
    5. Resolution of Operational Issues
III. Analysis of Final Rule
IV. Regulatory Analyses
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act

I. Statutory and Regulatory Background

A. The Federal Home Loan Bank System (Bank System)

    The Bank System consists of 12 Banks and the Office of Finance 
(OF). The Banks are instrumentalities of the United States organized 
under the authority of the Federal Home Loan Bank Act (Bank Act).\2\ 
The Banks also are ``government sponsored enterprises'' (GSEs), i.e., 
federally-chartered but privately-owned institutions created by 
Congress to support the financing of housing and community lending by 
their members.\3\ OF is a joint office of the Banks created by the 
Federal Home Loan Bank Board, which was the predecessor agency to the 
Finance Board. As a ``joint office,'' OF is not a separate legal 
entity.
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    \2\ 12 U.S.C. 1421 et seq.
    \3\ See 12 U.S.C. 1422a(a)(3)(B)(ii), 1430(i), and 1430(j).
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    By virtue of their GSE status and the AAA credit rating awarded to 
Bank System debt, the Banks are able to borrow in the capital markets 
at favorable rates. The Banks then pass along that funding advantage to 
their members--and ultimately to consumers--by providing advances 
(secured loans) and other financial services to their members 
(principally, depository institutions) at rates that the members 
generally could not obtain elsewhere. In recent years, the Banks have 
established acquired member asset (AMA) programs under which the Banks 
acquire certain residential mortgage loans from their members and 
certain eligible housing associates (such as state housing finance 
agencies). The AMA programs represent a means of advancing the Banks' 
housing finance mission, pursuant to criteria established in Finance 
Board regulations.\4\
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    \4\ See 12 CFR part 955.
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    The Banks are cooperatives, meaning that only their members may own 
the capital stock and share in the profits of the Banks and only their 
members and certain eligible housing associates may borrow from or use 
the other products and services provided by the Banks.\5\ An 
institution that is eligible may become a member of a Bank if it 
satisfies certain statutory and regulatory criteria and purchases a 
specified amount of the Bank's capital stock.\6\
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    \5\ See 12 U.S.C. 1426, 1430(a), and 1430b.
    \6\ See 12 U.S.C. 1424 and 1426; 12 CFR part 925.
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    The Bank System operates under the supervision of the Finance 
Board, an independent agency created in 1989 within the executive 
branch of the U.S. government.\7\ The primary duty of the Finance Board 
is to ensure that the Banks operate in a financially safe and sound 
manner. Consistent with that duty, the Finance Board is required to 
supervise the Banks, ensure that they carry out their housing finance 
mission, and ensure that they remain adequately capitalized and able to 
raise funds in the capital markets.\8\
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    \7\ See Financial Institutions Reform, Recovery, and Enforcement 
Act of 1989, Pub. L. 101-73, Title VII, sec. 702(a), 103 Stat. 413 
(codified at 12 U.S.C. 1422a and 1422b).
    \8\ See 12 U.S.C. 1422a(a)(3)(A) and (B).

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[[Page 38800]]

B. Bank Securities

    Each Bank individually issues equity securities to its members.\9\ 
A member is required to purchase and hold stock of its district Bank as 
a condition both of membership in the Bank and of doing business with 
the Bank. Members also may acquire stock, often referred to as ``excess 
stock,'' in excess of the levels required to maintain membership or to 
support its business with its Bank.
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    \9\ See 12 U.S.C. 1426a(4)(A).
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    Until the enactment of the Gramm-Leach-Bliley Act in 1999,\10\ the 
Bank Act authorized the Banks to issue only one class of stock to their 
members.\11\ This stock was redeemable in cash at par value six months 
after a member filed a notice to withdraw from the Bank.\12\ The GLB 
Act altered the capital structure of the Banks. Under the GLB Act's 
amendments to the Bank Act, a Bank may issue one or both of two classes 
of stock. Class A stock is redeemable at par value six months after a 
member files a notice with the Bank to redeem the stock, and Class B 
stock is redeemable at par value five years after a member files a 
redemption notice.\13\ A Bank also may repurchase, at par value, any 
excess stock acquired by a member. All stock purchases and redemptions 
are subject to certain limits relating to the Bank's capital 
adequacy.\14\
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    \10\ Pub. L. 106-102, 133 Stat. 1338 (Nov. 12, 1999) (GLB Act).
    \11\ See 12 U.S.C. 1426 (1994).
    \12\ Id.
    \13\ See 12 U.S.C. 1426(a)(4)(A).
    \14\ See 12 U.S.C. 1426(e)(1) (2004); 12 U.S.C. 1426 (1994); 12 
CFR 931.7(b).
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    The GLB Act also required each Bank to adopt a capital plan in 
which the Bank must set forth, among other items, the attributes 
associated with each class (or subclass) of stock that the Bank intends 
to issue, including each class of stock's par value, dividend rights 
and preferences, and liquidation rights.\15\ Until a Bank implements 
its capital plan, its capital structure, including its authority with 
regard to issuance of stock, is governed by the Bank Act requirements 
that were in effect immediately prior to the passage of the GLB 
Act.\16\
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    \15\ See 12 U.S.C. 1426(c); 12 CFR 933.2.
    \16\ See 12 U.S.C. 1426(a)(6). All of the Banks have had their 
capital plans approved by the Finance Board, and eight Banks have 
implemented their capital plans as of the date of the adoption of 
this final rule.
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    The Banks also issue debt securities, known as consolidated 
obligations (COs), to investors throughout the United States and the 
rest of the world, pursuant to section 11(a) of the Bank Act, subject 
to certain conditions.\17\ Among the conditions are that the COs may 
only be issued through OF as agent for the Banks jointly, and that the 
Banks shall be jointly and severally liable on all COs issued by OF on 
the Banks' behalf.\18\ While the Banks may issue debt jointly through 
OF, a Bank is not allowed to issue debt individually in its own name. 
As of March 31, 2004, the Bank System had $603.0 billion of CO bonds 
(with a maturity of one year or more) and $161.9 billion of CO discount 
notes (with a maturity of less than one year) outstanding.
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    \17\ Section 11 of the Bank Act provides three options for 
raising funds in the capital markets for the Banks. Section 11(a) 
authorizes the individual Banks to issue debt securities, subject to 
rules and regulations, terms and conditions prescribed by the 
Finance Board. 12 U.S.C. 1431(a). Section 11(b) authorizes the 
Finance Board to issue consolidated debentures, within stated 
limitations, and upon such terms and conditions as the Finance Board 
may prescribe, which shall be the joint and several obligations of 
all of the Banks. See 12 U.S.C. 1431(b). Section 11(c) authorizes 
the Finance Board to issue secured consolidated bonds, upon such 
terms and conditions as the Finance Board may prescribe, which shall 
be the joint and several obligations of the Banks. See 12 U.S.C. 
1431(c).
    Under section 15 of the Bank Act, obligations of the Banks 
issued with the approval of the Finance Board must state that they 
are not the obligations of, and are not guaranteed by, the United 
States. See 12 U.S.C. 1435. The Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 provides that none of the 
housing GSE obligations or securities is backed by the full faith 
and credit of the United States. See Pub. L. 102-550, Tit. XIII, 
sec. 1304, 106 Stat. 3944 (Oct. 28, 1992) (codified at 12 U.S.C. 
4503). Notwithstanding these statements, the capital markets often 
view debt issued by or on behalf of the Banks as having an implied 
government guarantee based on the GSE status of the Banks, the joint 
and several liability of the Banks on the COs, and the existence of 
section 11(i) of the Bank Act (12 U.S.C. 1431(i)), which provides 
that the Secretary of the Treasury is authorized, in his discretion, 
to purchase up to $4 billion of obligations of the Banks issued 
under section 11. The Secretary's purchase or sale of such 
obligations would be treated as ``public-debt transactions of the 
United States.''
    \18\ See 12 CFR 966.2(b), 966.9, 985.3(a), and 985.6(a). Prior 
to 2001, the Finance Board issued COs pursuant to section 11(c) of 
the Bank Act through OF. The functions currently performed by OF as 
agent for the Banks with regard to the CO issuance are largely 
identical to the functions it performed on behalf of the Finance 
Board when the Finance Board issued the COs. While the Finance Board 
has retained the authority to issue debt on behalf of the Banks 
pursuant to section 11(c) of the Bank Act, it currently does not do 
so. See 12 CFR 966.2(a).
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C. Current Bank System Disclosure

1. Bank System Combined Reports
    The Finance Board's regulations currently require OF to prepare and 
distribute combined annual and quarterly financial reports for the Bank 
System (Bank System Combined Reports).\19\ The disclosure in the Bank 
System Combined Reports must be generally consistent in scope, form, 
and content with the requirements of SEC Regulations S-X and S-K,\20\ 
subject to exceptions that the Finance Board has approved for certain 
non-financial statement information.\21\
    The Bank System Combined Reports also contain discussions of 
certain non-financial information on an aggregate Bank System level, 
such as a description of Bank System businesses, and a financial 
discussion and analysis. Information about each Bank is required to be 
presented in the Bank System Combined Reports as a segment of the Bank 
System as if Statement of Financial Accounting Standards No. 131, 
titled ``Disclosures about Segments of an Enterprise and Related 
Information'' (FASB 131), applied to the Bank System Combined 
Reports.\22\
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    \19\ See 12 CFR 985.6(b).
    \20\ SEC Regulation S-K specifies disclosure rules for non-
financial items to be included in registration statements, annual 
reports, and proxy statements. See 17 CFR part 229. Major items 
include a description of a registrant's business, management's 
discussion and analysis, and disagreements with accountants. SEC 
Regulation S-X, and the SEC's financial reporting releases, set 
forth the accounting principles that must be utilized in preparing 
financial statements for inclusion in SEC filings. See 17 CFR part 
210.
    \21\ See 12 CFR part 985 Appendix A.
    \22\ See 12 CFR 985.6(b)(2).
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    To facilitate OF's preparation of the annual and quarterly Bank 
System Combined Reports, the Finance Board's regulations require each 
Bank to provide to OF, in such form and within such timeframes as the 
Finance Board or OF shall specify, all financial and other information 
and assistance OF shall request for that purpose.\23\ The financial 
statements of the Banks must be audited in accordance with generally 
accepted auditing standards (GAAS) and Federal government auditing 
standards.\24\
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    \23\ See 12 CFR 989.3.
    \24\ See 12 CFR 989.2. OF also distributes various offering 
documents to investors in connection with issuances of Bank System 
COs. These OF discloure documents are modeled on the disclosure 
documents that are prepared by issuers of investment grade debt.
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2. Individual Bank Annual and Quarterly Reports
    Each Bank currently prepares and distributes to its members an 
annual report containing audited financial statements, a section 
containing some level of management discussion and analysis, and 
discussions of other aspects of Bank operations. Each Bank also 
distributes unaudited quarterly or semi-annual summary financial 
reports to its members, with most of the reports being brief. The 
Finance Board's regulations require that any financial statements 
contained in an annual or quarterly financial report issued by an

[[Page 38801]]

individual Bank be consistent in both form and content with the 
financial statements presented in the Bank System Combined Reports 
prepared by OF.\25\ Except for this requirement, there is no other 
Finance Board regulatory requirement that individual Bank annual or 
quarterly reports be in scope, form, or content generally consistent 
with the requirements of SEC Regulations S-K and S-X.
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    \25\ See 12 CFR 989.4.
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    While the financial statements in the Banks' annual and quarterly 
reports are generally consistent with SEC Regulation S-X, the level of 
discussions in these reports of non-financial statement information 
varies from Bank to Bank and is not in all cases generally consistent 
with 1934 Act disclosure standards.\26\ Thus, the major effect of 
requiring the Banks to register a class of securities with the SEC and 
subject themselves to an SEC-administered 1934 Act periodic disclosure 
regime would be greater disclosure by the Banks at the individual Bank 
level of non-financial statement information, with the attendant 
benefits discussed below in section II.B.
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    \26\ See section II.B.2, below, for additional discussion of the 
differences between current Bank disclosures required under Federal 
securities laws.
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D. Exemptions for Bank Securities From the Registration Provisions of 
the 1933 Act and 1934 Act

    The Securities Act of 1933 (the 1933 Act) \27\ regulates public 
offerings of securities and prohibits offers and sales of securities 
that are not registered with the SEC, subject to certain exemptions for 
enumerated kinds of securities and transactions. The 1934 Act regulates 
trading in certain securities that are already issued and outstanding 
and prescribes a robust disclosure regimen for registered entities.
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    \27\ 15 U.S.C. 77a et seq.
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    Since enactment of the Bank Act in 1932, the Banks have never 
registered their debt or equity securities under either the 1933 Act or 
the 1934 Act. Neither the 1933 Act nor the 1934 Act, however, exempts 
the Banks from registration by name or otherwise provides special 
status or unique exemptions for the Banks, although there are generally 
available exemptions from registration under those Acts for which the 
Banks may be eligible.
    Under section 3(a)(2) of the 1933 Act, securities issued ``by any 
person 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'' are exempt from the registration 
requirements of that Act.\28\ Because the Banks are instrumentalities 
of the Federal government, both the equity and debt securities of the 
Banks are exempt from the registration requirements of the 1933 Act 
under this provision.\29\
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    \28\ See 15 U.S.C. 77c(a)(2).
    \29\ See 12 U.S.C. 1431(e)(1). See also Fahey v. O'Melveny & 
Myers, 200 F. 2d 420 (9th Cir. 1952), cert. denied, 345 U.S. 952 
(1953); Merrill Lynch, Pierce, Fenner & Smith, SEC No Action Letter, 
1986 SEC No-Act. LEXIS 2877 (Nov. 5, 1986).
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    Under the 1934 Act, the term ``exempted securities'' is defined to 
include, among other things, ``government securities.'' \30\ The term 
``government securities'' is, in turn, defined to include ``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.'' \31\ The 
debt securities of the Banks have been exempted from the registration 
requirements of the 1934 Act as a result of action taken by the 
Secretary of the Treasury in 1937 pursuant to these provisions. In 
Release 34-1168, dated April 28, 1937, the SEC announced that the 
Secretary of the Treasury had designated for exemption those debt 
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.\32\ The designation specified that the 
``exemption may be revoked, modified or amended at any time with 
respect to securities not issued prior to such time.'' Outstanding Bank 
COs have been issued under the authority of sections 11(a) and 11(c) of 
the Bank Act, respectively, and therefore are included within the scope 
of the Secretary of the Treasury's 1937 designation. By contrast, the 
Secretary of the Treasury has never designated the equity securities 
issued by the Banks as being exempted under this provision.
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    \30\ See 15 U.S.C. 78c(a)(12)(A).
    \31\ See 15 U.S.C. 78c(a)(42)(B) (emphasis added).
    \32\ SEC Exchange Act Release 1168 (April 28, 1937) (1937 WL 
3510).
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E. Registration Pursuant to the Voluntary Registration Provisions of 
Section 12(g)(1) of the 1934 Act

    Notwithstanding any exemptions for issuers or securities under the 
1933 and 1934 Acts, section 12(g)(1) of the 1934 Act provides a 
mechanism by which equity securities not otherwise required to be 
registered may nevertheless be registered under provisions of the 1934 
Act. Section 12(g)(1) provides, among other things, that an issuer may 
register any class of equity securities not required to be registered 
by filing a registration statement pursuant to the provisions of 
section 12(g).\33\ Registration pursuant to section 12(g)(1) subjects 
registrants to the periodic disclosure requirements put in place under 
the 1934 Act, as interpreted and administered by the SEC. For the 
reasons discussed in part II below, the Finance Board has determined, 
consistent with the proposed rule, to require each Bank to register a 
class of its equity securities pursuant to the voluntary registration 
provisions of section 12(g)(1).
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    \33\ See 15 U.S.C. 78l(g)(1).
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F. Proposed Rule

    In July 2002, the Undersecretary for Domestic Finance of the United 
States Department of the Treasury called on all GSEs to follow the lead 
of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the 
Federal National Mortgage Association (Fannie Mae) and begin working 
with the SEC to achieve a 1934 Act securities disclosure regime 
administered by the SEC.\34\ Shortly thereafter, Finance Board staff 
held a number of meetings with Bank System representatives 
(collectively, the Bank Disclosure Task Force) to discuss SEC 
registration and related disclosure requirements. The Finance Board 
subsequently relayed the Banks' principal concerns on registration 
issues to SEC staff. On December 2, 2002, the Finance Board held a 
public hearing to consider enhanced Bank disclosure generally and 
possible Bank registration under the 1934 Act in particular.\35\ 
Finance Board staff also had numerous discussions with SEC staff on 
registration issues. In addition, SEC staff met with several Banks to 
resolve certain accounting and disclosure issues raised by 1934 Act 
registration.
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    \34\ Fannie Mae subsequently registered its common stock with 
the SEC under the voluntary registration provisions of section 12(g) 
of the 1934 Act. Freddie Mac has agreed to register, but has not 
done so.
    \35\ Testimony and comments submitted at that hearing may be 
located at http://www.fhfb.gov/pressroom/PR02_testimony4.htm.
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    After gathering information and analyses through these various 
forums, on September 17, 2003, the Finance Board published for comment 
a proposed rule that would have required each Bank to agree to register 
a class of its securities with the SEC under section 12(g) of the 1934 
Act within 120 days of the adoption of the rule as a final rule.\36\ 
Registration, and the resulting periodic disclosure requirements under

[[Page 38802]]

the 1934 Act, would result in the Banks disclosing at the individual 
Bank level more comprehensive information than currently is provided in 
individual Bank quarterly and annual reports. The major effect of this 
new disclosure requirement would be greater disclosure of non-financial 
statement information by the Banks at the individual Bank level.
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    \36\ See 68 FR 54396 (Sept. 17, 2003).
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    The proposed rule also would have required the Banks to provide to 
the Finance Board on a concurrent basis copies of all disclosure 
documents filed with the SEC. The proposal expressly provided that it 
would not limit or restrict the Finance Board's ability to carry out 
its responsibilities under the Bank Act, including its responsibility 
to ensure that the Banks operate in a financially safe and sound manner 
and are able to raise funds in the capital markets.
    The Finance Board cited in the SUPPLEMENTARY INFORMATION section of 
the proposed rule three bases for adoption of the rule.\37\ First, 
comprehensive, fully transparent securities disclosure by each Bank 
under an SEC-administered disclosure regime may help maintain the long-
term confidence of the investment community and the national rating 
agencies, thereby better securing the Bank System's ability to access 
the capital markets. The SEC establishes the best-practices standard 
for disclosure, has the resources and expertise to ensure that 
individual Bank disclosure documents meet this standard, and enhances 
the credibility of registrants' financial statements through its review 
of those disclosures.
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    \37\ See 68 FR 54398.
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    Second, Bank accounting and financial statement reporting issues 
have become significantly more complex in recent years due to new 
Financial Accounting Standards Board (FASB) statements on reporting 
requirements, necessitating more comprehensive and detailed disclosures 
by individual Banks. As noted in the proposal, the SEC staff has the 
extensive accounting expertise required to review this Bank disclosure.
    Third, Fannie Mae has voluntarily registered its common stock with 
the SEC under section 12(g) of the 1934 Act, and Freddie Mac has agreed 
to do so upon completion of its restatement of its financial 
statements. The proposal recognized that there may be merit in having 
the core securities disclosures of all of the housing GSEs overseen by 
the same disclosure regulator.
    The proposed rule provided for a 120-day comment period, which 
closed on January 15, 2004. The Finance Board received 24 comment 
letters on the proposed rule. Commenters included: 11 Banks; one Bank 
member; five financial institution trade associations (with one 
commenter submitting two separate comments); two housing trade 
associations; one nonprofit social services organization; one nonprofit 
community development organization; one Congressional Representative 
(forwarding the above-mentioned letters from one of the housing trade 
associations, the social services organization and the community 
development organization); and one law student.
    In general, the commenters supported more comprehensive securities 
disclosure by the individual Banks, provided such enhanced disclosure 
takes into account the unique structure of the Banks. Commenters 
expressed differing views on whether such enhanced disclosures should 
be overseen by the SEC or the Finance Board, and on the appropriate 
process for achieving an SEC-administered disclosure regime. Some 
commenters argued that the Finance Board lacks the legal authority to 
require SEC registration. Commenters stated that the record lacked 
factual or empirical evidence supporting the bases for adopting the 
rule and an analysis of the potential costs and benefits of the rule. 
The comments, and the Finance Board's responses thereto, are discussed 
further in part II of this SUPPLEMENTARY INFORMATION section.

II. Finance Board Findings Supporting Adoption of the Final Rule

    The Finance Board has carefully reviewed the issues raised by the 
commenters. The Finance Board's review encompassed analysis of: the 
Finance Board's legal authority to adopt the rule; the individual 
Banks'' current securities disclosure as compared to the enhanced 
disclosure requirements, and what exceptions to 1934 Act disclosure 
requirements might be appropriate due to the unique structure of the 
Banks; the effect of enhanced disclosure on market discipline, access 
to the capital markets, and the safe and sound operations of the Banks; 
and the potential costs and benefits of enhanced disclosure under an 
SEC-administered, versus a Finance Board-administered, disclosure 
regime. In conducting this review, the Finance Board considered the 
comments received on the proposed rule, as well as Finance Board staff 
analyses and other documents included in the administrative record.
    Based on this review, the Finance Board has determined to adopt the 
proposed rule as a final rule, in substantially similar form and 
subject to a date by which all Banks must become SEC registrants. The 
Finance Board's findings supporting the adoption of the final rule are 
discussed below.

A. Legal Authority To Require Registration

    Several commenters stated that the Finance Board lacks the legal 
authority under the Bank Act to require each Bank to register a class 
of its securities with the SEC under the voluntary registration 
provisions of section 12(g) of the 1934 Act.\38\ The Finance Board's 
authority to adopt the rule at issue involves two distinct questions: 
First, whether the Finance Board may require the Banks to provide 
enhanced disclosures in furtherance of its mission as the Banks' safety 
and soundness regulator; and second, if the authority exists as a 
general matter, whether the Finance Board has the authority to require 
that the registration be with the SEC.
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    \38\ One commenter requested that the Finance Board seek an 
advisory opinion from the U.S. Department of Justice's Office of 
Legal Counsel (OLC) on this issue. The Board of Directors of the 
Finance Board considered this issue and determined, at its February 
11, 2004 meeting, not to seek such an advisory opinion from the OLC. 
A review by Finance Board staff of numerous OLC opinions requested 
by or covering federal financial institution regulatory agencies 
from 1984 to date did not reveal any instances in which such an 
agency requested an opinion on whether the agency's enabling statute 
allowed it to take an action relating to its primary statutory 
mission.
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1. Authority To Require Enhanced Disclosures
    As a general proposition, any action taken by a federal regulatory 
agency must be within the scope of the authority conferred on it by 
Congress.\39\ With respect to the Bank System, Congress has vested 
supervisory authority with the Finance Board, which is charged with 
ensuring both the safety and soundness of the Banks and the achievement 
of their housing

[[Page 38803]]

finance mission.\40\ The Finance Board has plenary authority over the 
Banks, which is derived from numerous provisions of the Bank Act.\41\
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    \39\ An agency has the power to issue binding legislative rules 
only to the extent that Congress has delegated such authority to the 
agency. See R. Pierce, Administrative Law Treatise, 4th Ed., Sec.  
6.4 (Pierce), citing United States v. Storer Broadcasting Co., 351 
U.S. 192 (1956); National Broadcasting Co. v. United States, 319 
U.S. 190 (1943); National Petroleum Refiners Ass'n v. FTC, 482 F.2d 
672 (D.C. Cir. 1973), cert. denied, 415 U.S. 951 (1974). As long as 
the Finance Board's rule is addressed to, and reasonably adapted to, 
the enforcement of the Bank Act, it will have the ``force and effect 
of law if it be not in conflict with express statutory provision.'' 
See Pierce, Sec.  6.4 citing Maryland Casualty Co. v. United States, 
251 U.S. 342, 349 (1920). Generally, Congress has authorized federal 
agencies to issue binding rules through the use of the notice and 
comment procedure set forth in section 553 of the Administrative 
Procedure Act (APA), 5 U.S.C. 551 et seq. See generally Pierce, 
Sec.  6.4, at 341.
    \40\ See U.S.C. 1422a(a)(3).
    \41\ See 12 U.S.C. 1422b(a)(1) (rulemaking) and 1422a(a)(3) 
(statutory duties). Other provisions of the Bank Act that confer 
supervisory authority on the Finance Board include: Section 
2B(a)(2), which authorizes the Finance Board to suspend or remove 
any officer, director, employee or agent of any Bank or joint office 
for cause, 12 U.S.C. 1422b(a)(2); section 2B(a)(5), which confers 
administrative enforcement powers that are substantially the same as 
those possessed by other federal financial institution regulators, 
12 U.S.C. 1422b(a)(5); and section 20, which authorizes the Finance 
Board to examine the Banks and to require reports of condition of 
all Banks, and which confers on the Finance Board examiners the same 
powers, duties, privileges, and obligations as federal bank 
examiners have under the Federal Reserve Act and the National Bank 
Act, 12 U.S.C. 1440.
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    Congress has given the Finance Board broad rulemaking authority to 
carry out its oversight responsibilities. Specifically, section 
2B(a)(1) of the Bank Act authorizes the Finance Board ``[t]o supervise 
the Federal Home Loan Banks and to promulgate and enforce such 
regulations and orders as are necessary from time to time to carry out 
the provisions of [the Bank Act].'' \42\ The language of that provision 
includes no limitations on the authority of the Finance Board to 
regulate the Banks or on its authority to adopt regulations, other than 
that the regulation be necessary to carry out the provisions of the 
Bank Act. The statute leaves to the Finance Board the discretion to 
determine what regulations or orders are ``necessary'' to carry out the 
provisions of the Bank Act.
---------------------------------------------------------------------------

    \42\ See 12 U.S.C. 1422b(a)(1).
---------------------------------------------------------------------------

    The Finance Board's authority to promulgate regulations is 
sufficiently broad to authorize any regulation duly promulgated by the 
Finance Board that has the purpose or effect of advancing the safety or 
soundness of the Banks or any other of the statutory duties of the 
Finance Board (as well as implementing any specific provision of the 
Bank Act).\43\ As applied to the instant rulemaking, the intent of the 
Finance Board in adopting a final rule requiring the Banks to provide 
enhanced disclosures is to advance or promote both the safe and sound 
operation of the Banks and their continued access to the capital 
markets through enhanced disclosures. Accordingly, it is within the 
authority of the Board to require enhanced disclosures.
---------------------------------------------------------------------------

    \43\ See, e.g., Fidelity Federal Savings and Loan Association v. 
De La Cuesta, 458 U.S. 141, 159--162 (1982) (upholding rule 
addressing lending practices of savings associations as within scope 
of delegation from Congress and in furtherance of the purposes of 
the statute); Texas Savings & Community Bankers Association, et al. 
v. Federal Housing Finance Board, No. 98-50758 (5th Cir. 2000) 
(upholding Finance Board approval of a Bank mortgage loan purchase 
program); and WFS Financial Inc. v. Dean, 79 F. Supp. 1024, 1026 
(W.D. Wis. (1999)) (upholding rule addressing operating subsidiaries 
as within delegation of authority from Congress and consistent with 
advancing purposes of the statute).
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    As courts have recognized, an agency need not show that a 
particular action is, by itself, crucial to the ability of the agency 
to fulfill its duties.\44\ If the action is ``reasonably useful'' or 
``proper'' within the context of the agency's overall responsibilities, 
then it may be adopted pursuant to the authority to issue regulations 
that are ``necessary'' to implement other statutory provisions.
---------------------------------------------------------------------------

    \44\ See, e.g., Shinn v. Encore Mortgage Services, Inc., 96 F. 
Supp. 2d 419, 424 (D.N.J. 2000) (upholding Office of Thrift 
Supervision (OTS) rule regulating alternative mortgage transactions 
as an appropriate exercise of its authority to ``prescribe such 
regulations and issue such orders as the Director may determine to 
be necessary for carrying out this chapter and all other laws within 
the Director's jurisdiction.''); Home Mortgage Bank v. Ryan, 986 
F.2d 372, 377 (10th Cir. 1993) (upholding OTS merger regulation as a 
``permissible exercise of OTS's regulatory responsibility over 
state-chartered savings associations''); Federal Labor Relations 
Authority v. United States Department of the Navy, 96 F.2d 747, 752 
(3rd Cir. 1992) (upholding the Fair Labor Relations Authority 
determination that disclosure of home addresses was ``necessary'' 
for collective bargaining, and stating that ``Congress delegated 
this sort of specific determination to the FLRA in the Labor 
Statute.''). As stated by the United States Supreme Court, ``An 
agency `must be given ample latitude to adapt [its] rules and 
polices to the demands of changing circumstances.' '' Rust v. 
Sullivan, 500 U.S. 173, 186-187 (1991).
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2. Authority To Require Registration With the SEC
    The Finance Board has analyzed whether Congress has curtailed the 
agency's authority to require enhanced disclosures. The precise issue 
before the Finance Board is whether Congress has expressed its intent 
regarding the registration of Bank securities with the SEC. For the 
reasons outlined below, we believe that the answer to that question is 
no.
    The Bank Act is a comprehensive statute that addresses virtually 
all aspects of the Bank System. Among other things, the Bank Act 
provides for the incorporation of the Banks, their corporate structure, 
their capital structure, their powers and duties, their membership 
base, their lending and investment powers, their borrowing authority, 
their tax status, and the circumstances under which they may be 
liquidated. In a similar fashion, the Bank Act provides for the 
creation of the Finance Board, confers on it both general and specific 
supervisory responsibilities and powers, and generally gives it 
``cradle to grave'' supervisory authority over the Banks.\45\ Nowhere, 
however, does the Bank Act speak expressly to the issue of Bank 
securities disclosure, either by establishing a unique disclosure 
regime for the Banks or by constraining the authority of the Finance 
Board to do so. Moreover, the Bank Act does not affirmatively exempt 
the Banks from the registration requirements of the 1934 Act, as do the 
chartering statutes for the other two housing GSEs, Fannie Mae and 
Freddie Mac.\46\
---------------------------------------------------------------------------

    \45\ See 12 U.S.C. 1422a (creation), 1422b (general powers), 
1426 (capital standards), 1427 (designation of directorships/
appointment of directors), 1431 (approval/oversight of borrowing), 
1440 (examinations), and 1446 (authority to liquidate/reorganize).
    \46\ Congress has expressly provided that all securities issued 
by Fannie Mae and Freddie Mac shall be treated as exempt securities 
under federal securities laws to the same extent as securities that 
are the direct obligations of the United States. See 12 U.S.C. 
1723(c) (Fannie Mae's securities) and 12 U.S.C. 1455(g) (Freddie 
Mac's securities).
---------------------------------------------------------------------------

    In considering whether Congress has addressed the question of the 
appropriate disclosure regime for the Banks, we also have reviewed 
provisions of the 1933 Act and the 1934 Act. As discussed in section 
I.D, above, Bank securities are not currently registered under either 
the 1933 Act or the 1934 Act. The reasons why Bank securities have not 
been registered under those Acts vary. For example, under the 1933 Act, 
Bank debt and equity securities are exempted from the registration 
provisions as securities issued by a ``government instrumentality.'' 
Under the 1934 Act, Bank debt and equity securities are not generally 
exempted (although they may qualify under a more limited exemption or 
otherwise not be subject to the 1934 Act registration requirements). 
The Secretary of the Treasury has designated Bank debt securities as 
exempt from registration, but has not so exempted Bank equity 
securities.
    This lack of uniformity in how Bank securities are treated suggests 
that Congress had no intention to establish a particular disclosure 
regime for the Banks under the federal securities laws. Although there 
are certain exemptions from registration that may be available to the 
Banks under various provisions of both the 1933 Act and the 1934 Act, 
none of those exemptions is targeted specifically toward the Banks. 
Rather, they are generally available to any issuer or type of security 
that meets the particular requirements for each exemption. As 
previously noted, Congress has not enacted an express exemption for 
Bank securities, as it has done in the Charter Acts of Fannie Mae and 
Freddie Mac, nor has it conferred 1934 Act jurisdiction over the Banks 
on the Finance Board, as it has done with respect to the regulators of 
federally

[[Page 38804]]

insured depository institutions.\47\ Based on the absence of any Bank-
specific provisions in these laws, and the inconsistent treatment 
generally afforded to Bank securities, we believe that there is no 
evidence that Congress intended to establish a particular disclosure 
regime for the Banks pursuant to the provisions of the federal 
securities laws or the Bank Act.
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    \47\ See section 12(i) of the 1934 Act, codified at 15 U.S.C. 
78l(i). Under section 12(i), certain federally insured depository 
institutions that are subject to the 1934 Act registration 
requirements must make their 1934 Act disclosure filings with the 
federal banking regulator that supervises their operations. Section 
12(i) requires the banking agency to adopt substantially similar 
disclosure regulations as those adopted by the SEC, unless it finds 
that implementation of a regulation is not necessary or appropriate 
in the public interest or for the protection of investors. The 
agency must publish a detailed explanation of the reasons for its 
departure from the 1934 Act rules in the Federal Register. The 
number of depository institutions making 1934 Act filings with their 
banking regulators is rather small. For example, 17 state member 
banks (out of 949 such banks) made such filings with the Federal 
Reserve (as of December 31, 2002), and 15 savings associations (out 
of 928 such associations) make such filings with the OTS.
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    In the view of one commenter, the proposal constituted an 
impermissible delegation of authority by one agency of its 
responsibilities to another. That commenter cited several cases as 
supporting the proposition that a federal agency may not delegate 
statutory decision-making authority to an outside entity without 
express authority from Congress.\48\
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    \48\ The primary cases cited by the commenter include United 
States Telecom Ass'n (USTA) v. FCC, 2004 WL 374262 (D.C. Cir. March 
2, 2004); and National Park Service (NPS) v. Stanton, 54 F. Supp. 2d 
7 (D.D.C. 1999).
---------------------------------------------------------------------------

    We do not believe that these cases are controlling in the current 
rulemaking. In each of the cases cited, the courts were faced with 
specific delegations of authority by Congress to an agency, which the 
agency then subdelegated to a third party. In short, the agency at 
issue was relying on a third party to fulfill the agency's 
responsibilities. In USTA v. FCC, for instance, the court rejected the 
FCC's attempt to delegate to state utility commissions its 
responsibility to make determinations related to requiring 
telecommunication carriers to open up their infrastructure to 
competition. Similarly, in NPS v. Stanton, the court rejected the NPS's 
attempt to delegate to an outside entity its responsibilities for 
managing a national scenic river. The common element in the cited cases 
is that the agency had delegated to an outside party decision-making 
authority that a statute had required it to perform.\49\
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    \49\ Other cases cited by the commenter also are not persuasive 
or applicable to this rule-making. The other cases deal with 
situations in which: (i) An agency attempted to exercise authority 
which Congress clearly had not granted it (ETSI Pipeline Project v. 
Missouri, 484 U.S. 495 (1988)); (ii) a party (unsuccessfully) 
challenged the constitutionality of the delegation by Congress of 
decision-making authority to an agency as lacking sufficient 
standards (Touby v. United States, 500 U.S. 160 (1991)); or (iii) 
the delegation was in violation of the clear terms of the statute in 
question (Shook v. DC Financial Responsibility and Management 
Assistance Authority, 132 F.3d 775 (DC Cir. 1998)).
---------------------------------------------------------------------------

    In contrast to the central facts of those cases, the Finance Board, 
in requiring the Banks to register a class of securities under the 1934 
Act, is not delegating to the SEC any of the statutory responsibilities 
assigned to the Finance Board by section 2A(a)(3) of the Bank Act. The 
Finance Board remains the sole entity responsible for ensuring that the 
Banks operate in a financially safe and sound manner and that they 
remain adequately capitalized and able to raise funds in the capital 
markets. Instead, the Finance Board, having determined that enhanced 
disclosure would further its duty to ensure the safety and soundness of 
the Banks--a point with which the commenters agree--has determined 
further that registration with the SEC under the 1934 Act would be the 
most appropriate means to fulfill the Finance Board's statutory duties.
    By adopting the regulation, the Finance Board is not abdicating its 
role as Bank supervisor or giving up any enforcement power but instead 
is requiring the Banks to subject themselves to a disclosure review by 
a specialized outside entity. Rather than delegating decision-making 
authority, the Finance Board is using authority granted under the Bank 
Act to direct the Banks to avail themselves of an established 
securities registration regime so that the Finance Board may do its job 
better. Such action does not violate any explicit prohibition in the 
Bank Act or the 1934 Act, nor is it contrary to any express intent of 
Congress.
    The ability of the Finance Board to fulfill its responsibilities as 
the Banks' safety and soundness regulator will be enhanced by improved 
disclosures that are on a par with disclosures in other businesses, 
including the other housing GSEs.\50\ The discipline imposed by debt 
and equity investors on the operations of financial institutions has 
come to be viewed as an important complement to minimum capital 
requirements and the supervisory review process in ensuring the safe 
and sound operation of a financial institution. Adequate and consistent 
disclosure is an important element in achieving market discipline, 
since it is through such disclosure that market participants gain 
access to information on the risks faced by the institution in 
question. Critical to that process is the ability to compare 
information across similar institutions at a point in time and over 
time.
---------------------------------------------------------------------------

    \50\ This point is discussed in greater detail in Section II.B 
of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------

    As is well recognized, public disclosure is not a replacement for 
regulatory oversight but is an important complement to the regulatory 
and supervisory oversight process in ensuring the safe and sound 
operation of a financial institution.\51\ In this respect, the 
registration rule is analogous to existing requirements that Banks and 
OF annually submit to accounting audits by an independent external 
auditor.\52\ The rule also is analogous to the Finance Board regulation 
that conditions the acceptability of certain investments on ratings 
received from a nationally recognized statistical rating organization 
(NRSRO).\53\
---------------------------------------------------------------------------

    \51\ See, e.g., Basel Committee on Banking Supervision, 
Consultative Document: The New Basel Capital Accord Part 4 (April 
2003) (Basel II).
    \52\ See 12 CFR 989.2.
    \53\ 12 CFR 955.3(a) and 956.3.
---------------------------------------------------------------------------

    In several of the cases cited by the commenter, the entity 
receiving delegated powers had no independent authority to act. Here, 
the SEC's authority to accept the Banks as registrants and to oversee 
disclosure comes from the 1934 Act itself, not from any power delegated 
to it by the Finance Board.\54\ Given the SEC's well-established 
authority to regulate securities disclosure, it is reasonable for the 
Finance Board to rely on the SEC's expertise in this area, absent a 
specific expression that Congress did not intend such an outcome.
---------------------------------------------------------------------------

    \54\ In fact, the SEC registration rule appears to be closer to 
the use of an outside entity that the D.C. Circuit distinguished as 
not covered by the non-delegation doctrine in one of the cases cited 
by the commenter. USTA v. FCC, 2004 WL 374262. The USTA court 
distinguished the delegation at issue before it with the facts of 
U.S. v. Matherson, 367 F. Supp. 779 (E.D.N.Y. 1973), in which the 
court upheld the regulations by an official of the Department of the 
Interior requiring an applicant for a permit to drive in a national 
seashore park to first obtain a permit from one of the neighboring 
municipalities. The Matherson Court found that the Superintendent's 
regulation ``is in no way an abdication of the Superintendent's 
power to administer the National Seashore. Rather, the instant 
section merely exemplifies an effort by the Superintendent to 
facilitate an orderly prevention of erosion on the land.''
---------------------------------------------------------------------------

    Congress specifically provided that issuers that are not required 
to register under the 1934 Act could avail themselves of the benefits 
of SEC disclosure by ``voluntarily'' registering their stock, and 
authorized the SEC to accept such registration.\55\ One

[[Page 38805]]

commenter criticized the Finance Board's proposal on the ground that 
there was nothing voluntary about the proposal and, therefore, the 
provisions in the 1934 Act governing voluntary registrations are 
inapplicable. The Finance Board agrees that its rule makes registration 
of securities with the SEC mandatory. However, it does so as a 
requirement stemming from the Bank Act. References in the proposal to 
voluntary registration with the SEC simply underscore that those not 
otherwise required by the federal securities laws may register with the 
SEC. Thus, there is no inconsistency to say that registration is 
mandatory under the banking laws while done so in accordance with the 
procedures available to those who are not otherwise subject to 1934 Act 
registration requirements.
---------------------------------------------------------------------------

    \55\ See 15 U.S.C. 78l(g).
---------------------------------------------------------------------------

    The issue of whether voluntary registration under the 1934 Act is 
available for disclosures that are mandated by some other law is a 
question of interpretation of the securities law. In that regard, the 
Finance Board is persuaded by the views of the SEC. In testimony 
delivered before the Committee on Banking, Housing, and Urban Affairs 
of the United States Senate on February 10, 2004, by Alan L. Beller, 
Director of the Division of Corporation Finance of the SEC (the Beller 
Testimony), Mr. Beller stated:

Since at least 1992, the Commission has expressed the view that, 
because the GSEs, most prominently Fannie Mae and Freddie Mac, but 
also including the Federal Home Loan Banks, sell securities to the 
public and have public investors, and do not have the ``full faith 
and credit'' government backing of government securities, their 
disclosures should comply with the disclosure requirements of the 
federal securities laws. * * * [T]he manner by which mandatory 
compliance is achieved--including through voluntary registration 
with the Commission--may be less significant.\56\

    \56\ Beller Testimony at 1 (emphasis added). The Beller 
Testimony may be located at http://www.sec.gov/news/testimony/ts021004alb.htm. SEC staff recently confirmed to the Finance Board 
that the statements made in that testimony ``continue to be accurate 
and to reflect the views of the [SEC] staff.'' Letter from Alan 
Beller to Alicia R. Castaneda, Chairman, Federal Housing Finance 
Board, June 1, 2004, at 1.
---------------------------------------------------------------------------

    Thus, the SEC interprets the 1934 Act in a way that permits filings 
under the provisions governing voluntary registration, notwithstanding 
that the registration is required by some other law or regulation.

B. Reasonable Exercise of Finance Board Authority

    Based on its review and analysis of the record, the Finance Board 
has determined that there is a reasonable basis to conclude that 
requiring enhanced Bank securities disclosure under an SEC-administered 
periodic disclosure regime under the 1934 Act will assist the Finance 
Board in carrying out its primary duty to ensure that the Banks operate 
in a financially safe and sound manner and that they have access to 
capital markets.
1. Benefits of Enhanced Disclosure Generally
    The benefits of enhanced disclosure have been well documented. A 
leading study in this area, conducted by staff at the Federal Reserve 
Board (FRB Study), documents how enhanced disclosure of a commercial 
bank's business risks and financial information can supplement the 
existing oversight regime for such banks.\57\ The FRB Study notes that 
banking regulators have increasingly accepted the fact that market 
discipline can serve as one element of an effective program of bank 
supervision, and discusses in detail how the concepts of financial 
disclosure, market discipline, and bank supervision are interrelated.
---------------------------------------------------------------------------

    \57\ Staff Study 173, Improving Public Disclosure in Banking, 
Federal Reserve Study Group on Disclosure (March 2000).
---------------------------------------------------------------------------

    Briefly stated, the stakeholders of a banking institution, by 
deciding what return they are willing to accept on their investments in 
a bank's securities, can effectively determine the availability and 
cost of the bank's funding and thereby influence the bank's business 
decisions. This ability to ``discipline'' a bank's risk-taking through 
market forces is accepted by banking regulators as contributing to the 
stability of the banking system. The ability of the stakeholders to 
exert such influence on a bank, however, depends in large part on 
whether they can accurately assess its financial condition, risks, and 
earnings prospects, which, in turn, depends on the quality and extent 
of the institution's financial disclosures. The FRB Study notes that 
this recognition of the value of market discipline as a supplement to 
the regulatory regime has prompted banking regulators to focus on 
methods of improving the transparency of commercial banks' financial 
condition through enhanced disclosure. It also has led the other 
housing GSEs to take steps voluntarily to promote market discipline.
    Basel II also underscores the importance of enhanced disclosure. 
Basel II will establish new international standards on bank capital 
adequacy, and is intended to improve the existing regulatory capital 
framework for commercial banking organizations. The Accord is based on 
three separate ``pillars'' of supervision. The first pillar consists of 
the minimum regulatory capital requirements for each banking 
organization, which will be much the same as the existing Basel capital 
requirements. The second pillar relates to supervisory review of 
banking institutions by their regulators, which in part entails an 
assessment of capital adequacy in light of the overall risks to the 
bank. The third pillar is market discipline, which the Basel Committee 
expects will complement both the minimum capital requirements of Pillar 
1 and the supervisory review process of Pillar 2 and thereby promote 
safety and soundness in banks and the financial system. The Basel 
Committee has explained that ``the rationale for Pillar 3 is 
sufficiently strong to warrant the introduction of disclosure 
requirements for banks using the New Accord,'' and that it intends ``to 
encourage market discipline by developing a set of disclosure 
requirements which will allow market participants to assess key pieces 
of information on the scope of application, capital, risk exposures, 
risk assessment processes, and hence the capital adequacy of the 
institution.'' \58\
---------------------------------------------------------------------------

    \58\ Basel II, ] 757 and ] 758.
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2. Benefits of Disclosures That Are Consistent With Industry Standards
    Both the FRB Study and Basel II demonstrate that market discipline 
has become an accepted element of effective bank supervision, 
particularly with regard to the adequacy of a banking institution's 
capital. Full and consistent disclosure is an important element in 
achieving market discipline because it is only through such disclosure 
that market participants can obtain, and assess, information on the 
risks faced by individual financial institutions. Moreover, a common 
and consistent framework for such disclosure will enhance the ability 
of market participants to compare information across similar 
institutions and over time. The Office of Federal Housing Enterprise 
Oversight (OFHEO) made similar observations about the importance of 
public disclosure to safety and soundness oversight when it recently 
adopted disclosure requirements for Fannie Mae and Freddie Mac.\59\
---------------------------------------------------------------------------

    \59\ See 68 FR 16715 (April 7, 2003) (adopting 12 CFR part 1730) 
(``As users of and participants in the financial markets, the 
success of the Enterprises [i.e., Fannie Mae and Freddie Mac] in 
meeting their public policy missions and in maintaining their safe 
and sound operations is inextricably tied to full and robust 
disclosure. * * * Full and adequate disclosure of information by the 
Enterprises regarding their financial conditions and risks is an 
important part of the OFHEO's supervisory program. Full disclosure 
enhances market discipline.''). 68 FR at 16715, 16716 (footnotes 
omitted).

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[[Page 38806]]

    At present, the annual or quarterly financial statements prepared 
by a Bank are required to be consistent, in both form and content, with 
the combined financial statements prepared by OF for the entire Bank 
System.\60\ The practices among the Banks, however, vary from Bank to 
Bank as to the level of detail that is provided by the annual and 
quarterly financial reports of the individual Banks. In conjunction 
with this rulemaking process, Finance Board staff has reviewed past 
quarterly and annual Bank disclosure documents of several Banks. As a 
result of that comparison, staff has concluded that the current 
individual Bank disclosures fall short, in certain respects, of the 
requirements for 1934 Act-compliant financial disclosures.
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    \60\ See 12 CFR 989.4. OF prepares the combined annual and 
quarterly financial statements for all twelve of the Banks, the 
scope, form, and content of which must be consistent with the 
requirements of SEC Regulations S-K and S-X.
---------------------------------------------------------------------------

    Areas where some of the Banks' current disclosures in annual 
reports were found by Finance Board staff to fall short of SEC-
administered 1934 Act standards include:
     A description of Bank businesses and operations;
     The discussions of dividend payments, including why 
dividends are paid in the form of cash or stock, factors that could 
cause dividends to increase or decrease, and the interrelationship 
between advance rates and dividend payments;
     The discussions of selected financial data that highlight 
significant trends in the institution's financial condition and results 
of operations;
     Management discussion and analysis, particularly with 
respect to the risks associated with Bank mortgage assets;
     Qualitative and quantitative disclosures of interest rate, 
credit, and operational risks;
     Disclosures regarding accounting issues;
     Disclosures about officers and directors of the Banks, 
including disclosures about the compensation awarded to, earned by, or 
paid to directors and certain senior executive officers;
     Evaluations of the effectiveness of disclosure controls 
and procedures, or internal controls and procedures;
     CEO and CFO certifications as to the accuracy of the 
content of the Bank's annual report, the effectiveness of disclosure 
controls and procedures, and any deficiencies in internal controls and 
procedures; and
     Disclosures of certain accounting-related fees and 
services.
    The final rule adopted by the Finance Board will lead to the 
elimination of these deficiencies, resulting in an increase in both the 
quality and quantity of individual Bank disclosures.
    In addition to facilitating the Finance Board's efforts to ensure 
the safety and soundness of the Banks through increased market 
discipline, disclosures by the Banks that are consistent with industry 
standards will help the Finance Board in its efforts to ensure that the 
Banks remain able to raise funds in the capital markets. When issuing 
COs in the debt markets, the Banks compete primarily against the other 
two housing GSEs, Fannie Mae and Freddie Mac. As noted previously, both 
Fannie Mae and Freddie Mac have agreed to register their stock with the 
SEC under the 1934 Act. Fannie Mae has already done so, and Freddie Mac 
has stated that it will do so after it resolves certain accounting 
matters. Thus, unless the Finance Board requires the Banks to enhance 
their disclosures, once Freddie Mac has registered with the SEC, the 
Banks will be the only housing GSEs that are competing for funds in the 
capital markets with financial disclosures that are not subject to SEC 
scrutiny under the 1934 Act.
    This may have negative effects in several ways. First, member 
interest in holding Bank stock may be diminished. Members of a Bank 
must hold a certain level of Bank stock, with the amount of stock that 
must be purchased determined by the capital plan of each Bank.\61\ 
However, many Banks permit members to buy and hold ``excess'' stock, 
which is stock beyond what is required to remain a member of, or to do 
business with, the Bank. Members may be more reluctant to purchase or 
hold Bank ``excess'' stock if they conclude that they lack adequate 
information about the Bank issuer.
---------------------------------------------------------------------------

    \61\ In the case of the four Banks that have not implemented 
their new capital plans, the amount of stock that members must hold 
is determined by the Bank Act rules that applied before they were 
amended by the GLB Act.
---------------------------------------------------------------------------

    Second, since Bank membership is now voluntary,\62\ the 
attractiveness of holding Bank stock may be adversely affected by a 
member's inability to obtain information that permits it to evaluate 
fully its investment. The change to all-voluntary membership increases 
the importance of disclosure in maintaining member confidence and 
thereby in maintaining adequate Bank capitalization.
---------------------------------------------------------------------------

    \62\ Both before and after its amendment by the GLB Act, section 
6 of the Bank Act required members to buy and hold stock to 
capitalize the Bank. See 12 U.S.C. 1426. Prior to the GLB Act 
amendments, section 6 set uniform stock purchase requirements 
applicable to members of each Bank. The GLB Act changed the Bank Act 
by requiring each Bank to adopt stock purchase requirements for its 
members in its capital plan. In addition, the GLB Act made 
membership in the Bank System voluntary for all members when it 
removed provisions from section 5(f) of the Home Owners' Loan Act 
that required a federal savings association to become a member of 
and maintain membership in the Bank district in which it maintained 
its principal place of business. GLB Act sec. 603.
---------------------------------------------------------------------------

    Moreover, a perception, right or wrong, by the capital markets that 
non-SEC reviewed disclosures about the Bank System are less complete 
than are the disclosures of Fannie Mae and Freddie Mac also may 
adversely affect the ability of the Bank System to compete with the 
other housing GSEs for funding. As described more fully in section 
I.C.1, above, OF currently prepares combined disclosures based on 
information provided to it by the 12 Banks. The quality of the 
disclosures made by OF depends, therefore, on the quality of the 
information it receives from each of the Banks.\63\
---------------------------------------------------------------------------

    \63\ OF would not be required under the final rule to register a 
class of securities with the SEC and, therefore, would not be 
subject to SEC oversight. OF is a joint office of the 12 Banks, and 
was established to facilitate the issuing and servicing of the COs 
of the Banks. OF, like the Banks, is regulated by the Finance Board. 
As recognized by the SEC, because of the structure of the Bank 
System, there is no issuer tied to the Bank System Combined Reports 
and, therefore, no issuer to register with the SEC. See Beller 
Testimony, at 7. However, Finance Board regulations require that the 
Reports prepared by OF be consistent with SEC Regulations S-K and 
Regulation S-X in scope, form, and content generally. See 12 CFR 
985.6(b)(1). These Reports are to be filed with, and reviewed by, 
the Finance Board. The SEC has requested the opportunity to review 
the Reports and provide the Finance Board with whatever comments the 
SEC may have, and the Finance Board intends to provide the SEC with 
this opportunity.
---------------------------------------------------------------------------

    Whether the prospective disparity between the quality of the 
disclosures provided by Fannie Mae and Freddie Mac and the Banks, 
respectively, is apt to affect significantly the ability of the Banks 
to raise funds in the capital markets is difficult to quantify, 
especially before the fact. By requiring the Banks to publish financial 
disclosures that are equivalent to those provided by their principal 
competitors, the Finance Board is eliminating the possibility that the 
Banks' access to the capital markets will be disadvantaged because of 
any perceived differences in the quality of their financial 
disclosures.
3. Benefits of Registration With the SEC Versus Registration With the 
Finance Board
    Many of the commenters raised questions about the appropriateness 
of requiring registration by the Banks with

[[Page 38807]]

the SEC. These commenters noted that the Finance Board has a much 
better understanding of the Banks' business than does the SEC and would 
be better able to tailor disclosure requirements in a manner that will 
yield the most appropriate disclosures from the Banks. Commenters 
proposed that the Finance Board establish a disclosure regime modeled 
on section 12(i) of the 1934 Act, which requires various depository 
institutions to file their 1934 Act disclosure documents with their 
respective primary Federal banking regulatory agencies.\64\ The 
commenters suggested that, because the SEC's emphasis is on investor 
protection while the Finance Board's emphasis is on the Banks' safety 
and soundness, registration with the SEC risks subjecting the Banks to 
conflicting regulatory directives. These commenters cited a 
disagreement in 1998 between the SEC and bank regulators over the 
appropriate treatment of a financial institution's loan loss reserves 
as an example of the problems that may arise.
---------------------------------------------------------------------------

    \64\ As previously noted, section 12(i) explicitly assigns to 
the respective Federal banking regulatory agencies responsibility 
and authority to perform this function. The Finance Board and the 
Banks are not listed in section 12(i).
---------------------------------------------------------------------------

    After carefully considering the benefits and disadvantages of 
requiring disclosures to be filed with the SEC as opposed to the 
Finance Board, the Finance Board has determined that registration with 
the SEC is appropriate, for the reasons set forth below.
    a. The SEC is the nation's functional disclosure regulator. As a 
matter of national policy, Congress has designated the SEC as the 
securities disclosure authority. Since its creation in 1934, the SEC 
has been at the forefront of investor protection and is generally 
recognized as significantly contributing to the integrity of the United 
States securities markets. The rules and regulations that form the 
SEC's disclosure system are widely recognized as establishing the best 
practices for disclosure, both domestically and internationally.
    SEC staff is the nation's expert in the interpretation of 
disclosure and accounting rules. This is especially important in light 
of the changes in recent years in Bank activities, and the resulting 
increase in the complexity and sophistication of the Banks' accounting 
and financial statements. Furthermore, new FASB statements on reporting 
requirements, which will result in more comprehensive and detailed 
disclosures by the Banks, have given rise to interpretive complexities 
with regard to accounting and financial reporting. The SEC staff has 
the extensive accounting expertise required to review these types of 
disclosures.
    b. While improved disclosure likely would mean greater transparency 
and more effective market discipline irrespective of who administers 
the disclosure regime, only Bank disclosures held to the same standards 
required of Fannie Mae, Freddie Mac, and other competitors for funding 
will enable investors to evaluate potential investments without concern 
that the information they are reviewing may differ due to inconsistent 
standards applied from one agency to the next. Investors in equity and 
debt securities have become familiar with disclosure documents filed 
with the SEC. Disclosures that diverge from what investors have come to 
expect would make it difficult for investors to make meaningful 
comparisons between the Banks, the other housing GSEs, and other 
companies seeking investors.
    Departure from the standard practices followed by other market 
participants--including Fannie Mae and Freddie Mac--could lead the 
markets to draw negative inferences no matter how unwarranted. Only by 
registering with the SEC, and therefore submitting to SEC review, will 
the Banks be able to declare unambiguously that Bank disclosures comply 
with 1934 Act standards.
    c. The unique characteristics of the Bank System can be 
accommodated by the SEC disclosure regime. The Finance Board recognizes 
that the Banks are different from virtually every other SEC registrant 
because they are cooperatives and they issue debt on a joint and 
several basis. However, the SEC has, as a result of extensive 
conversations with Bank representatives, demonstrated a willingness and 
ability to accommodate the Banks' unique status where appropriate.\65\
---------------------------------------------------------------------------

    \65\ For a more detailed discussion of the unique issues 
presented by the Bank System and the manner in which the SEC intends 
to address those issues, see section II.B.5, below.
---------------------------------------------------------------------------

    d. The SEC effectively coordinates its actions with other 
regulators. For instance, the SEC is the regulator responsible for 
reviewing 1934 Act disclosures of bank holding companies in the United 
States. The Federal Reserve Board (FRB) is the regulator responsible 
for the safety and soundness supervision of bank holding companies. In 
reviewing the coordination of the FRB's and SEC's roles, respectively, 
we found no instance of significant costs due to regulatory overlap 
between the two agencies. SEC officials have indicated that it is the 
SEC's operating policy to contact a registrant's primary regulator 
before taking action, including public release of information on an SEC 
enforcement action. SEC officials also have indicated that in such 
instances the primary regulator often is aware of the underlying issues 
through its examination program.
    Bank supervision and disclosure review are independent, but 
complementary, missions. Enhanced disclosures, on a par with 
disclosures in other businesses, including the other housing GSEs, 
should help to promote safety and soundness. As previously discussed, 
the market discipline imposed by debt and equity investors on the 
operations of financial institutions has come to be viewed as an 
important complement to minimum capital requirements and the 
supervisory review process in ensuring the safe and sound operation of 
a financial institution.\66\ Adequate and consistent disclosure is an 
important element in achieving market discipline since it is through 
such disclosure that market participants gain access to information on 
the risks faced by the institution in question. Critical to that 
process is the ability to compare information across similar 
institutions at a point in time and over time.
---------------------------------------------------------------------------

    \66\ See, e.g., Basel II.
---------------------------------------------------------------------------

    An effective structure for protecting the safety and soundness of 
the Bank System and the interests of investors in Bank debt and equity 
securities requires a regime in which the Finance Board, as safety and 
soundness regulator, is not the final arbiter for accounting and 
disclosure standards for the Banks. The principal responsibility of the 
Finance Board is to ensure that the Banks operate in a financially safe 
and sound manner and to keep any unsafe and unsound practices from 
creating unsafe and unsound conditions among the Banks. At the same 
time, the principal responsibility of the SEC is to ensure consistent 
and accurate disclosures for the benefit of debt and equity investors. 
The SEC is best able to ensure that the disclosures of the Banks are 
appropriately consistent with and on a par with those of other SEC 
registrants. This point was made in a ``Joint Report on the Government 
Securities Market,'' prepared in 1992 by the Department of Treasury, 
the SEC, and the FRB.
    While issues like the one noted by the commenters may arise where 
the SEC and the Finance Board disagree on the appropriate resolution of 
a particular issue, there is no reason to assume that these issues will 
be insurmountable. Indeed, in the one example provided concerning the 
appropriate treatment of loan loss reserves, the SEC and the bank

[[Page 38808]]

regulator were able to resolve the issue and, in so doing, developed a 
better understanding of each other's respective interests.
    e. SEC administration of Bank disclosures could be achieved 
quickly. The SEC disclosure standards are well established, and the SEC 
has the personnel in place to administer and enforce those standards on 
the Banks. A disclosure regime administered and enforced by the SEC 
could be implemented quickly, without the need for additional staff, 
and without a direct charge to the Banks. Finance Board staff would not 
be able to match the SEC staff's background or its access to 
comparative information. Disclosure review carried out by the Finance 
Board would likely take longer to implement as the Finance Board hired 
additional, highly expert staff. Moreover, regardless of how expert the 
Finance Board staff would become with 1934 Act disclosure standards, 
the limited universe subject to their review would make it difficult 
for them to obtain the depth and breadth of experience of SEC staff.
4. Costs of SEC Registration
    A number of commenters cited a study commissioned by the Banks and 
prepared by First Manhattan Consulting Group (FMCG Study),\67\ which 
attempted to assess the potential economic costs and benefits of 
requiring Bank registration of a class of securities with the SEC. The 
FMCG Study concluded that the Banks' compliance, liquidity, and funding 
costs under an SEC-administered disclosure regime could be 
significantly higher than comparable costs under a Finance Board-
administered disclosure regime.
---------------------------------------------------------------------------

    \67\ See Study entitled ``Potential Costs Related to the SEC 
Registration of the FHL Banks' Stock,'' dated October 15, 2003.
---------------------------------------------------------------------------

    The Finance Board has reviewed and evaluated the FMCG Study and, 
for the reasons discussed below, has determined that the FMCG Study's 
conclusions are unfounded. While improving their level of disclosure 
from current levels to 1934 Act disclosure standards would increase the 
Banks' overall compliance costs, those costs would not be higher under 
an SEC-administered disclosure regime than under a Finance Board-
administered disclosure regime. In addition, there is no evidence that 
the Banks' liquidity and funding costs under an SEC-administered 
disclosure regime would be higher than those under a Finance Board-
administered disclosure regime.
    a. Compliance Costs. Given that any disclosure regime instituted by 
the Finance Board would be designed to achieve parity with that of the 
SEC, there likely would be no additional compliance costs to the Banks 
under the SEC-administered disclosure regime stemming from the 
preparation and submission of the relevant documents. In fact, the 
compliance costs of SEC-administered registration are likely to be 
somewhat lower than would be the costs of filing with the Finance 
Board. As previously discussed, the SEC has the resources to review 
Bank disclosures, unlike the Finance Board. The SEC does not currently 
charge a filing fee for basic 1934 Act periodic disclosure documents, 
whereas the Finance Board would recover its increased costs of 
implementing a 1934 Act-compliant disclosure regime through higher 
assessments on the Banks. Thus, the costs of an SEC-administered 
disclosure regime compared to the costs of one administered by the 
Finance Board are likely to be somewhat lower for the Banks.
    Compliance costs would be higher under an SEC-administered 
disclosure regime if (i) disclosures to the Finance Board would be less 
robust than what would be required by the SEC, or (ii) the Finance 
Board would review the disclosures and follow up on issues with less 
vigor (or at least a greater willingness to sanction selective non-
disclosure) than would the SEC. Neither of these outcomes would be true 
if Banks were to register with the Finance Board, but, even if they 
were, they would simply serve to underscore the appropriateness of 
registration with the SEC.
    b. Liquidity Costs. The FMCG Study contended that the Banks could 
face significantly higher liquidity costs under an SEC-administered 
regime than a Finance Board-administered regime, because SEC 
registration would increase the possibility of a future disruption in 
Bank System debt issuance, thereby requiring the Banks to substantially 
increase their liquidity holdings. The FMCG Study conclusions are 
premised on the assumption that SEC registration will cause investors 
to focus more on Bank-level events that are not material on a Bank 
System-wide level. The FMCG Study concludes that, as a result, it is 
reasonable to assume an anticipated funding disruption of 30 to 60 days 
and a mixed strategy of adding more liquid assets and purchasing 
liquidity back-up facilities.
    However, the FMCG Study estimated additional liquidity costs based 
on worst-case scenarios, not expected outcomes, and the estimates make 
no reference to the likelihood that the worst-case scenarios would ever 
be realized. The FMCG estimates are little more than conjecture and 
apparently are based on an unfounded assumption that the SEC would 
respond more rigorously to disclosure issues than would the Finance 
Board. Moreover, the Finance Board is unconvinced that funding sources 
will be unable or unwilling to distinguish issues arising at a 
particular Bank from the combined condition of the 12 Banks. Neither 
the FMCG Study nor any other comment disagrees with the benefits of 
enhanced disclosure by the Banks. To suggest, as the FMCG Study does, 
that the Banks will be disadvantaged compared to Freddie Mac and Fannie 
Mae because the latter two GSEs disclose only those events that are 
material to their nationwide operations is inconsistent with the stated 
support by the commenters for enhanced disclosure at the Bank level. 
Thus, the Finance Board has determined that the FMCG Study's 
conclusions concerning the likely increase in liquidity costs when 
comparing the disclosure alternatives are unpersuasive.
    Even assuming that SEC registration will result in a greater need 
for liquidity than would be the case if registration were with the 
Finance Board, the Finance Board notes that the Banks already maintain 
substantial liquidity. Finance Board staff analysis has concluded that 
aggregate Bank System liquidity is sufficient for a period of 
interrupted market access as long as 30 days, and may be sufficient for 
even longer periods. Thus, there is ample liquidity in the Bank System 
to accommodate the disruptions to market access that the FMCG Study has 
hypothesized could result as a result of SEC registration.
    c. Funding Costs. The FMCG Study contended that the Banks could 
face substantially higher funding costs under an SEC-administered 
regime than under a Finance Board-administered regime, because SEC 
registration may diminish the market's perception of the GSE status of 
the Banks.\68\
---------------------------------------------------------------------------

    \68\ The FMCG Study also noted that several accounting issues 
may arise as a result of SEC registration that are, in the words of 
FMCG, ``red herring'' in nature but which may nevertheless raise 
investor concerns. The accounting issues noted in the FMCG Study 
have been addressed by the SEC. See Beller Testimony.
---------------------------------------------------------------------------

    The Finance Board is unconvinced that SEC registration necessarily 
will lead to increased funding costs due to a diminution in the Banks' 
status as GSEs. As the FMCG Study acknowledges, Fannie Mae's debt 
spreads compared to Treasury obligations improved slightly after it 
registered with the SEC. Finance Board staff analysis of bond spread 
data during

[[Page 38809]]

the period surrounding Fannie Mae's SEC registration indicated there 
was no discernible effect on spreads. While there may be many reasons 
for these findings, one possibility is that the markets found the newly 
disclosed information slightly better than they expected or that the 
increased market discipline and regulatory scrutiny inherent in SEC 
oversight led the market to view Fannie Mae's debt more favorably.
    Whether enhanced disclosures will affect funding costs will depend 
on the disclosure. It is possible that funding costs will decrease, 
either because investors are reassured by the availability of 
disclosures that meet the same level of scrutiny that other companies 
face or because there may be unfounded concerns that are allayed 
through better disclosure.
    Regardless of the effect on funding costs, the Finance Board takes 
issue with any suggestion that it is preferable to withhold information 
that may cause concern among funding sources. The responsiveness of 
funding costs to favorable or unfavorable information is exactly the 
type of market discipline that financial transparency is meant to 
produce. It likely will encourage the Banks to manage the risks in 
their portfolios proactively to maintain low funding costs, rather than 
to manage them reactively in response to pressure from the Finance 
Board.
5. Resolution of Operational Issues
    Several commenters did not oppose registration with the SEC, but 
stated that the registration date should be delayed until operational 
issues related to the unique structure of the Banks are resolved with 
the SEC. Several commenters recommended that the Finance Board and the 
SEC enter into a Memorandum of Understanding (MOU) to resolve the 
operational issues, and indicated their preferred outcome with respect 
to those issues. These commenters requested that the MOU relieve the 
Banks of the registration requirement in the event that the positions 
reached by the SEC change or if the SEC takes an action that impairs 
the Banks' access to the capital markets. Some commenters also 
recommended that the Banks be parties to, or third-party beneficiaries 
of, the MOU.
    Examples of operational issues cited by commenters include: the 
accounting treatment of Bank joint and several liabilities; the 
accounting treatment of the Banks' Resolution Funding Corporation 
(REFCORP) payments; the characterization of Bank stock as ``puttable'' 
or ``redeemable;'' the short-cut hedge accounting treatment for swaps 
associated with swapped callable debt; the preparation of Bank System 
Combined Reports rather than reports that consolidate the financial 
statements of the 12 Banks; the requirement to make the certifications 
required by the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley); \69\ the 
requirement to prepare annual meeting proxies; and the requirement that 
certain member stockholders file an insider trading form with the SEC 
each time the stockholder conducts a transaction in the registrant's 
stock.
---------------------------------------------------------------------------

    \69\ Pub. L. 107-204.
---------------------------------------------------------------------------

    SEC staff testified recently that many of these issues have been 
resolved. For instance, the SEC does not object to the treatment of 
REFCORP payments as the equivalent of a tax, with the result being that 
the capitalized obligation would not appear on a Bank's balance sheet. 
The SEC also has agreed that a Bank's stock, though ``puttable'' 
(meaning that the stock is, as a general matter, redeemable), may be 
treated as equity by the Bank.\70\ Moreover, the SEC will permit each 
Bank to include on its balance sheet as long-term indebtedness only the 
amount of COs for which that Bank is the primary obligor.\71\ SEC staff 
has advised that certain other disclosure requirements and changes to 
the Banks' existing accounting policies would not be imposed on the 
Banks if the Banks were to register, and has indicated that it would 
continue to work with the Banks to determine the appropriateness of 
certain disclosures under the 1934 Act.\72\ The Finance Board 
understands that the SEC will issue to Banks a ``No Action'' letter 
addressing various disclosure issues as well as an interpretive letter 
addressing a number of issues, including those discussed in the Beller 
Testimony.
---------------------------------------------------------------------------

    \70\ SEC staff noted, however, that the SEC will continue to 
have a dialogue with the Banks on the proper accounting treatment in 
the event that a stockholder puts the stock to a Bank. Beller 
Testimony at 7.
    \71\ See Beller Testimony at 6-7.
    \72\ Congress has assigned to the SEC the authority and 
responsibility to prescribe the methods to be followed in the 
preparation of financial accounts and the form and content of 
financial statements to be filed under the securities laws. See, 
e.g., sections 7, 19(a), and Schedule A, items (25) and (26) of the 
1933 Act (15 U.S.C. 77g, 77s(a), 77aa(25) and (26)); and sections 
3(b), 12(b), and 13(b) of the 1934 Act (15 U.S.C. 78c(b), 78l(b), 
and 78m(b)). Subject to SEC oversight, the Financial Accounting 
Standards Board (FASB) has been delegated the authority to set 
accounting standards to be used by public companies. See SEC Policy 
Statement Reaffirming the Status of FASB as a Designated Private-
Sector Standard Setter (Release Nos. 33-8221; 34-47743; IC-26028; 
FR-70), 68 FR 23333 (May 1, 2003). The Banks' disclosures are 
required to satisfy the generally accepted accounting standards 
established by FASB. Accordingly, all Finance Board regulatory 
interpretations concerning accounting issues are superceded by SEC 
and FASB pronouncements on point.
---------------------------------------------------------------------------

    In its deliberations leading up to adoption of the final rule, the 
Finance Board has explored with the SEC whether the SEC's and the 
Banks' resolution of the various accounting and disclosure issues that 
were raised because of the cooperative nature of the Bank System would 
be changed unilaterally by the SEC. In conversations involving 
representatives of the SEC and the Finance Board, SEC staff has stated 
that the SEC has never rescinded a No Action letter, and that, absent a 
change in the facts or applicable law, recipients of such a letter may 
rely on it even if the SEC were to reach a different conclusion when 
considering the issue at a later time. In addition, the SEC staff 
stated that it will communicate with the Finance Board before changing 
any of the SEC's views as stated in the Beller Testimony and reiterated 
in the letter from the SEC to the Finance Board dated June 1, 2004. The 
Finance Board has adopted this final rule relying on the SEC's staff 
representations concerning the effectiveness of No Action letters as 
well as the statements made by the SEC in the Beller Testimony and 
subsequent communications with the Finance Board. The Finance Board 
will consult with the SEC to achieve a satisfactory resolution of any 
issue that arises that interferes with the Finance Board's authority 
under the Bank Act.
    Commenters proposed varying dates that would trigger the 
requirement to register, including: 2005; the filing date for the 2005 
annual report (2006); 18 months from the effective date of the final 
rule; and 18 months from the later of (i) the effective date of the 
final rule, (ii) the effective date of an MOU on operational issues, or 
(iii) the resolution of the relevant operational issues. Commenters 
stated that if these unique accounting, regulatory, and economic issues 
were not resolved before the Banks are required to register with the 
SEC, the Banks' access to the capital markets could be disrupted or 
delayed.
    Given the successful resolution of many of the issues raised by 
commenters with the SEC and the significant period of time that has 
elapsed since the Finance Board began considering this issue, the 
Finance Board believes that it is appropriate to set a date certain in 
the final rule by which registration with the SEC is to be effective. 
Based on information obtained from the SEC staff concerning the steps 
required to have an effective registration of a class of equity 
securities under the 1934 Act, the Finance Board has

[[Page 38810]]

determined that it is appropriate for each Bank to file a registration 
statement under the 1934 Act with the SEC by no later than June 30, 
2005, and have the registration effective no later than August 29, 
2005. These dates may be extended if the Finance Board determines, upon 
a written request by one or more of the Banks, that good cause exists 
for extending the deadline for registration.
    Some commenters noted that bills are pending in Congress that could 
restructure the Bank System's regulatory regime, and suggested that the 
Finance Board delay action on a final rule until the legislative 
uncertainties are resolved. However, the Finance Board believes that it 
has the duty to fulfill the responsibilities entrusted to it under the 
Bank Act, and, unless and until those responsibilities are changed by 
Congress, the Finance Board must continue to conduct business 
accordingly. It is in furtherance of those duties that the Finance 
Board adopts this final rule.
    A few commenters suggested that the Finance Board postpone acting 
on the proposed SEC registration regulation until each Bank completes 
its conversion to a new capital plan, in accordance with the provisions 
of the GLB Act. The Finance Board recognizes that Banks in transition 
may have some unique issues to address in their registration filings. 
However, the Finance Board believes that it is best to realize the 
benefits of registration, as outlined above, as soon as possible, 
without waiting for the remaining Banks to convert. The Finance Board 
notes that the availability of SEC-reviewed disclosure documents prior 
to a capital plan conversion may assist Bank members in understanding 
issues related to the implementation of a new capital plan by their 
Bank.

III. Analysis of Final Rule

    In light of the preceding discussion, the Finance Board has 
determined to adopt in substantially similar form the proposed rule as 
a final rule. The specific provisions of the final rule, which amends 
existing Sec.  900.3 and adds a new part 998, are described in the 
following sections. These provisions, and substantive changes made to 
language contained in the proposed rule, are discussed below.

Part 900--General Definitions Applying to All Finance Board Regulations

Section 900.3
    The final rule amends Sec.  900.3 of the Finance Board's 
regulations, 12 CFR 900.3, to include the following three additional 
definitions of terms related to securities disclosures that are used in 
the final rule: ``GLB Act,'' meaning the Gramm-Leach-Bliley Act (Pub. 
L. 106-102 (1999)); ``SEC,'' meaning the United States Securities and 
Exchange Commission; and ``1934 Act,'' meaning the Securities Exchange 
Act of 1934 (15 U.S.C. 78a et seq.). The Finance Board received no 
comments on the proposed addition of these three defined terms to Sec.  
900.3, and has adopted them as proposed.

Part 998--Registration of Federal Home Loan Bank Equity Securities

Section 998.1--Purpose
    Section 998.1 of the proposed rule noted that the purpose of new 
part 998 is to require each Bank to prepare and publicly distribute 
certain financial and other disclosures. It also noted that the 
disclosure requirements set forth in part 998 did not limit or restrict 
the Finance Board's ability to act pursuant to its safety and soundness 
authority.
    The final rule retains a description of the purposes of the rule, 
but amplifies on that description by stating that the purposes of part 
998 are to enhance the quality of the financial disclosures provided by 
each Bank, to promote a greater degree of consistency and uniformity of 
such disclosures from Bank to Bank, to provide a greater degree of 
transparency regarding the financial condition of each Bank, and to 
conform the disclosure practices of the Banks to those of other 
financial institutions who raise funds in the global debt markets. The 
Finance Board believes that this is a more accurate and complete 
statement of the purposes of the securities disclosure regulation.
    The discussion concerning the Finance Board's continued authority 
to require Banks to take steps in addition to those required by part 
998, including the authority to require additional disclosures as 
appropriate, has been set out in a separate Sec.  998.3, as discussed 
below.
Section 998.2--Registration and Periodic Disclosures
    Proposed Sec.  998.2 contained four requirements. First, it 
required each Bank to prepare and make public disclosures relating to 
financial condition, results of operations, trends or uncertainties 
affecting its business, and management's assessment of the Bank's 
business and financial condition. Second, it required each Bank to 
satisfy the disclosure requirement by subjecting itself to the 1934 
Act's periodic disclosure regime. Third, the proposed rule required 
each Bank to subject itself to the 1934 Act's periodic disclosure 
requirements by registering a class of securities with the SEC within 
120 days of the adoption of a final rule by the Finance Board. Lastly, 
the proposed rule required each Bank to provide to the Finance Board, 
on a concurrent basis, copies of all disclosure documents filed with 
the SEC, unless otherwise directed by the Finance Board.
    The final rule retains the basic requirements set out in the 
proposed rule, but revises them so that they are now set out more 
clearly. Paragraph (a)(1) of Sec.  998.2 states that each Bank shall 
file a registration statement by no later than June 30, 2005 to 
register a class of its equity securities pursuant to the provisions of 
section 12(g)(1) of the 1934 Act. Each Bank shall ensure that its 
registration statement becomes effective as provided in section 12 no 
later than August 29, 2005. This will require each Bank to file a Form 
10 with the SEC and have the Form 10 become effective as contemplated 
by 1934 Act rule 12b-6. A Bank that files a Form 10 and then withdraws 
it will not be deemed in compliance with this requirement. Thereafter, 
Banks will be required to maintain such registration in effect at all 
times. Paragraph (a)(2) of Sec.  998.2 states that the Finance Board 
may by order extend the registration date for one or more Banks if it 
determines, based on factors presented in a written request to the 
Finance Board, that good cause exists to do so.
    Paragraph (b) requires Banks to comply with periodic disclosure 
requirements under the 1934 Act and disclose any other information 
required by SEC rules, regulations, or interpretations. These 
requirements will be modified to the extent relief is granted to the 
Banks by the SEC in No Action letters or interpretive letters.
    Paragraph (c) sets forth the general requirement that Banks provide 
to the Finance Board on a concurrent basis copies of all disclosure 
documents that are filed with the SEC.
Section 998.3--Reservation of Authority
    Section 998.1(b) of the proposed rule explicitly retained the 
authority of the Finance Board to exercise any other authority that has 
been vested in it by Congress, specifically including the authority to 
require additional disclosures as appropriate. That reservation of 
authority has been relocated to a new Sec.  998.3 and revised to 
improve the rule's clarity. As set forth in the final rule, the 
requirements of part 998 do not diminish, or otherwise restrict the 
ability of the Finance Board to exercise, any and all authority 
conferred by the Bank Act to ensure that

[[Page 38811]]

the Banks operate in a financially safe and sound manner, that they 
carry out their housing finance mission, and that they remain 
adequately capitalized and able to raise funds in the capital markets. 
Nor do the requirements of part 998 diminish or otherwise restrict the 
Finance Board's authority to supervise the Banks, to conduct 
examinations, to require reports and other disclosures, and to enforce 
compliance with applicable laws, rules, orders or agreements.

IV. Regulatory Analyses

A. Paperwork Reduction Act

    One commenter stated that the Finance Board failed to comply with 
the requirements of the Paperwork Reduction Act of 1995 (PRA) by 
failing to submit the disclosure requirements in the proposed rule to 
the Office of Management and Budget (OMB) for review.\73\ However, as 
noted in the SUPPLEMENTARY INFORMATION section of the proposed rule, 
the proposed rule does not contain any collections of information as 
defined by the PRA, nor does the final rule. Under the OMB's 
implementing PRA regulation, the term ``collection of information'' 
includes the collecting of information from instrumentalities of the 
United States only if the results are to be used for general 
statistical purposes.\74\ Although the Banks are instrumentalities of 
the United States, the required disclosures will not be used for 
general statistical purposes, and thus they do not constitute a 
``collection of information'' subject to the PRA. Consequently, the 
Finance Board has not submitted any information to the OMB for review.
---------------------------------------------------------------------------

    \73\ See 44 U.S.C. 3501 et seq.
    \74\ See 5 CFR 1320.3(c)(3).
---------------------------------------------------------------------------

B. Regulatory Flexibility Act

    The final rule will apply only to the Banks, which do not come 
within the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act (RFA).\75\ Therefore, in accordance with section 605(b) 
of the RFA,\76\ the Finance Board hereby certifies that the final rule 
will not have a significant economic impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \75\ See 5 U.S.C. 601(6).
    \76\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

List of Subjects in 12 CFR Parts 900 and 998

    Credit, Federal home loan banks, Financial disclosure, Government-
sponsored enterprises, Records, Reporting and recordkeeping 
requirements, and Securities disclosure.


0
Accordingly, the Finance Board hereby amends title 12, chapter IX, Code 
of Federal Regulations, as follows:

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

0
1. The authority citation for part 900 continues to read as follows:

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


0
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 United States Securities and Exchange Commission.
* * * * *
    ``1934 Act'' means the Securities Exchange Act of 1934 (15 U.S.C. 
78a et seq.).
* * * * *

0
3. Add Subchapter M (part 998) to title 12, chapter IX, to read as 
follows:

Subchapter M--Federal Home Loan Bank Disclosures

PART 998--REGISTRATION OF FEDERAL HOME LOAN BANK EQUITY SECURITIES

Sec.
998.1 Purpose.
998.2 Registration and periodic disclosures.
998.3 Reservation of authority.

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a)(1).


Sec.  998.1  Purpose.

    The purposes of this part are to enhance the quality of the 
financial disclosures provided by each Bank, to promote a greater 
degree of consistency and uniformity of such disclosures from Bank to 
Bank, to provide a greater degree of transparency regarding the 
financial condition of each Bank, and to conform the disclosure 
practices of the Banks to those of other financial institutions who 
raise funds in the global debt markets.


Sec.  998.2  Registration and periodic disclosures.

    (a) Registration. (1) Each Bank shall file a registration statement 
by no later than June 30, 2005 to register a class of its equity 
securities pursuant to the provisions of section 12(g)(1) of the 1934 
Act. Each Bank shall ensure that its registration statement becomes 
effective as provided in section 12 no later than August 29, 2005.
    (2) Notwithstanding paragraph (a)(1) of this section, the Finance 
Board may by order extend the registration date for one or more Banks 
if it determines, based on factors presented in a written request to 
the Finance Board, that good cause exists to do so.
    (b) Periodic disclosures. Consistent with the registration required 
pursuant to paragraph (a) of this section, each Bank, after registering 
a class of equity securities with the SEC, shall comply with the 
periodic disclosure requirements of the 1934 Act by preparing and 
filing with the SEC such annual, quarterly, and current reports, as 
well as any other materials required pursuant to SEC rules, 
regulations, or interpretations, including those related to audited 
financial statements, as may be required by the SEC under the 1934 Act.
    (c) Submission to Finance Board. Unless otherwise directed 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.


Sec.  998.3  Reservation of authority.

    The requirements of this part do not diminish, or otherwise 
restrict the ability of the Finance Board to exercise, any and all 
authority conferred by the Bank Act to ensure that the Banks operate in 
a financially safe and sound manner, that they carry out their housing 
finance mission, and that they remain adequately capitalized and able 
to raise funds in the capital markets. Nor do the requirements of part 
998 diminish or otherwise restrict the Finance Board's authority to 
supervise the Banks, to conduct examinations, to require reports and 
other disclosures, and to enforce compliance with applicable laws, 
rules, orders or agreements.

    Dated: June 23, 2004.

    By the Board of Directors of the Federal Housing Finance Board.
Alicia R. Castaneda,
Chairman.
[FR Doc. 04-14696 Filed 6-28-04; 8:45 am]
BILLING CODE 6725-01-P