[Federal Register Volume 72, Number 62 (Monday, April 2, 2007)]
[Proposed Rules]
[Pages 15627-15633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-5973]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 72, No. 62 / Monday, April 2, 2007 / Proposed 
Rules  

[[Page 15627]]



FEDERAL HOUSING FINANCE BOARD

12 CFR Part 915

[No. 2007-05]
RIN 3069-AB34


Financial Interests of Appointive Directors

AGENCY: Federal Housing Finance Board.

ACTION: Proposed rule.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to clarify the types of financial interests a Federal Home Loan Bank 
(Bank) appointive director may own in a Bank member. The proposal would 
incorporate into Finance Board rules its long-standing policy that 
financial interests in a Bank member acquired though ownership of 
shares of a diversified mutual fund are permissible holdings for an 
appointive director. The proposal would extend the rationale for 
permitting mutual fund investments to other types of vehicles and 
accounts that share certain of the same key features as mutual funds 
and thus are unlikely to pose a risk of conflict of interest for an 
appointive director. The proposal also would set forth additional 
criteria to define when owning shares of a holding company, or having 
other types of financial interests in a member, would be permissible 
for an appointive director.

DATES: The Finance Board will accept written comments on the proposed 
rule on or before May 17, 2007.

ADDRESSES: Submit comments to the Finance Board using any one of the 
following methods:
    E-mail: [email protected].
    Fax: 202-408-2580.
    Mail/Hand Delivery: Federal Housing Finance Board, 1625 Eye Street 
NW., Washington DC 20006, Attention: Public Comments.
    Federal eRulemaking Portal: http://www.regulations.gov. Follow the 
instructions for submitting comments. If you submit your comment to the 
Federal eRulemaking Portal, please also send it by e-mail to the 
Finance Board at [email protected] to ensure timely receipt by the 
agency. Include the following information in the subject line of your 
submission: Federal Housing Finance Board. Proposed Rule: Financial 
Interests of Appointive Directors. RIN Number 3069-AB34. Docket Number 
2007-05.
    We will post all public comments we receive without change, 
including any personal information you provide, such as your name and 
address, on the Finance Board Web site at http://www.fhfb.gov/Default.aspx?Page=93&Top=93.

FOR FURTHER INFORMATION CONTACT: Neil R. Crowley, Acting General 
Counsel, [email protected] or 202-408-2990; or Thomas E. Joseph, Senior 
Attorney-Advisor, Office of General Counsel, [email protected] or 202-
408-2512. You can send regular mail to the Federal Housing Finance 
Board, 1625 Eye Street NW., Washington, DC 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 7(a) of the Federal Home Loan Bank Act (Bank Act) (12 
U.S.C. 1427(a)), provides for management of each Bank by a board of 
directors of at least 14 persons, with 8 directors elected by the 
members and 6 directors appointed by the Finance Board. This provision 
also states that any individual appointed by the Finance Board may not, 
``during such Bank director's term of office, serve as an officer of 
any Federal Home Loan Bank or a director or officer of any member of a 
Bank, or hold shares, or any other financial interest in, any member of 
a Bank.'' \1\ The provision concerning the qualifications for 
appointive directors was added to the Bank Act by section 706 of the 
Finance Institutions Reform, Recovery, and Enforcement Act of 1989 
(FIRREA) (Pub. L. 101-73, 103 Stat. 183 (Aug. 9, 1989)). In adopting 
the FIRREA amendments, Congress indicated that it did not intend these 
conflict of interest provisions to preclude an appointive director from 
investing in a diversified mutual fund that in turn may own shares in a 
Bank member. See H.R. Conf. Rep. 101-209 at 430 (1989). The Bank Act, 
however, does not further define the terms ``shares'' or ``financial 
interests,'' nor does it otherwise indicate how the provision should be 
applied. As a result, the Finance Board has had to interpret these 
terms whenever prospective appointive directors have asked whether 
certain of their investments were permissible under this provision. The 
Finance Board has provided guidance to these individuals in the past on 
a case-by-case basis, as well as through its regulations.
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    \1\ Should an appointive directorship become vacant during the 
term of the appointment because the director no longer meets any of 
the statutory or regulatory requirements for serving on a Bank's 
board or for any other reason, section 7(f) of the Bank Act (12 
U.S.C. 1427(f)) authorizes the Finance Board to fill the vacancy for 
the remainder of the unexpired term.
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    In January 1990, the Finance Board adopted an interim final rule 
implementing the FIRREA appointive director and conflict of interest 
provision. See Interim Final Rule: Election of Directors; Eligibility 
Requirements, 55 FR 1393 (Jan. 18, 1990), codified at 12 CFR 932.18 
(1991). The Finance Board later modified this rule somewhat based on 
the comments it received on the interim final rule. See Final Rule: 
Eligibility and Financial Disclosure Requirements for Directors of the 
Federal Home Loan Banks, 56 FR 55205 (Oct. 25, 1991). The rule, as 
amended in October 1991, provided among other things, that no 
appointive director may during his or her term of office have a 
financial interest in any member (or a subsidiary or non-diversified 
holding company thereof, or affiliate of such holding company) of the 
Bank on whose board the director served.\2\ It also specifically 
defined a financial interest to include the ownership or control, 
either directly or indirectly, of any shares of common or

[[Page 15628]]

preferred capital stock, any other equity security, any debt security 
or obligation (except deposit or savings accounts) including 
subordinated debt, but allowed an appointive director to hold such 
interests if they arose solely through ownership of shares or other 
investment units of one or more diversified mutual funds (as defined in 
section 5(a) and (b)(1) of the Investment Company Act of 1940, as 
amended).\3\ The rule also prohibited an appointive director from 
having other financial relationships, including loans or other 
extensions of credit, with a member of the Bank on whose board the 
director served, or with the member's subsidiary, or its non-
diversified holding company (or an affiliate of such holding company), 
which were not transacted in the ordinary course of business and on 
normal commercial terms, as discussed in the rule itself. 56 FR at 
55220.
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    \2\ See 56 FR at 55220. The 1991 amendments clarified the 
prohibition on serving on the board of, or ownership in, a member, 
member subsidiary or a non-diversified holding company of a member 
or affiliate of such holding company to make clear that the term 
``member'' meant only a member of the Bank on whose board an 
appointive director served and not a member of another Bank. See 56 
FR at 55206-207. The 1991 amendments also added a definition for the 
term ``diversified holding company'' that read:
    A holding company whose member subsidiary and related 
activities, as specified in 12 U.S.C. 1467a(c)(2), represented on 
either an actual or pro forma basis less than fifty (50) percent of 
both its consolidated net worth and its consolidated net earnings at 
the close of its preceding fiscal year. For purposes of the 
foregoing, consolidated net worth and consolidated net earnings 
shall be determined in accordance with generally accepted accounting 
principles. 56 FR at 55219.
    \3\ 56 FR at 55219, 55220. The definition of ``financial 
interest'' applied if the interest was held by an appointive 
director or director candidate or by his or her immediate family 
member and related interests, or the related interest of the 
immediate family member. 56 FR at 55219.
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    In 1998, the Finance Board substantially revised its rules 
governing elective and appointive directors.\4\ Among other things, the 
1998 amendments required the Banks to adopt conflict of interest 
policies that applied to both elective and appointive directors. The 
rule specifically required the conflict of interest policy to prohibit 
an appointive director from serving as an officer of any Bank or as an 
officer or director of any member or from owning any equity or debt 
security issued by a member or from having any other financial interest 
in a member. See 63 FR at 65690.
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    \4\ See Final Rule: Election of Federal Home Loan Bank 
Directors, 63 FR 65683 (Nov. 30, 1998). These rules are now found in 
part 915 of the Finance Board's regulations (12 CFR part 915).
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    The 1998 revisions also deleted the detailed provisions addressing 
appointive director qualifications and prohibited financial interests 
in favor of more general references to the Bank Act and somewhat more 
general definitions of terms such as ``financial interests.'' The new 
definition of ``financial interests'' specifically excluded deposit or 
savings accounts maintained with a member and loans and other 
extensions of credit from a member so long as they were obtained in the 
normal course of business on terms generally available to the public. 
See 63 FR at 65691. Among the provisions that were dropped in 1998, 
however, was the one that specifically had allowed an appointive 
director to hold shares or other financial interests in a member if 
they arose solely through ownership of one or more diversified mutual 
funds. Notwithstanding that change, the Finance Board has continued to 
interpret section 7(a) as it had done previously, and has allowed 
appointive directors to have indirect financial interests in a member 
if held through ownership of shares of a diversified mutual fund.
    The conflict of interest rules for appointive directors remain 
substantively the same as adopted in 1998, and currently are found at 
12 CFR Sec.  915.11. The Finance Board recently adopted an interim 
final rule to address procedures for how appointive directors are 
selected.\5\ Under the new procedures, the boards of directors of each 
Bank have to submit to the Finance Board a list of individuals who 
could serve in appointive directorships. Along with the list, the Banks 
must submit information regarding each individual's eligibility and 
qualifications to serve as a Bank director.
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    \5\ See Interim Final Rule: Federal Home Loan Bank Appointive 
Directors, 72 FR 3028 (Jan. 24, 2007) (adopting new Sec.  915.10). 
The Finance Board also solicited comments on this interim final 
rule. The Finance Board considered the comments received and adopted 
a final rule to address the selection process at the same meeting in 
which it approved this proposed rule for publication in the Federal 
Register.
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II. Analysis of the Proposed Rule

A. Reasons for the Proposed Changes

    The recent changes in the selection process for appointive 
directors have prompted questions to the Finance Board about whether 
specific investments held by potential candidates would be barred by 
section 7(a), and thus would have to be sold if the person were to 
accept an appointment to the board of a Bank. These questions have 
brought to light the extent to which developments in the financial 
services marketplace in recent years have created different types of 
investment accounts and investment vehicles that either did not exist 
when FIRREA was enacted or were not as widely held as they are today, 
and for which the Finance Board has not previously provided formal 
guidance.
    The Finance Board believes that the lack of a rule providing clear 
guidance as to what investments are encompassed by the terms ``shares'' 
and ``financial interests'' could cause some potential appointive 
director candidates to decline to consider an appointive directorship 
for fear that they would be required to divest certain investments in 
order to accept the position. Any such divestiture could prove 
financially costly and disruptive to their personal financial planning 
strategies. At the same time, the Finance Board recognizes that as the 
Banks have become involved in more complex financial activities, it is 
important that some of a Bank's individual appointive directors have 
more sophisticated skills and a deeper understanding of financial 
markets to provide strong oversight. Such persons can bring business 
and leadership skills to the boards that will complement the skills and 
expertise brought by the elective directors and the community interest 
directors. In some cases, persons who possess those analytical skills 
and related business experience may also be sophisticated investors in 
their own right and have investments that go beyond traditional stock, 
bond, and mutual fund holdings.
    The possibility that persons who can bring needed skills and 
experience to the board of a Bank might be discouraged from serving as 
appointive directors due to uncertainty about how the conflict of 
interest limitations may apply to their investments has caused the 
Finance Board to consider whether it should amend its regulations. The 
Finance Board hopes that in updating these provisions, a new rule will 
better reflect the range of investments or investment vehicles (beyond 
traditional investments) through which an appointive director may 
obtain some interest in a member but which, because of the director's 
lack of control over the investment or the minimal value of the 
interest obtained, would not present concerns that should disqualify 
such individual from serving as an appointive director. Thus, the 
Finance Board is proposing this rule in an attempt to balance the need 
to assure that appointive directors do not have actual or apparent 
conflicts that would undermine their ability to represent the public 
interest against the need to attract a sufficient pool of candidates 
with sophisticated skills in areas such as housing and finance to build 
boards of directors capable of overseeing the Banks as they evolve and 
undertake new activities.
    The proposal is based primarily on the Finance Board's experience 
to date in administering section 7(a) and the questions raised about 
potential conflicts as a result of interests in various investment 
vehicles and strategies. The Finance Board recognizes that it has had 
only limited experience in dealing with the types of investment 
products that are available in today's financial marketplace, 
particularly those that are available to high net worth individuals. In 
order to craft a final rule that will strike an appropriate balance 
between allowing investments that

[[Page 15629]]

share key characteristics associated with mutual fund shares, which 
were permitted by Congress, and barring investments that are more like 
direct ownership interests in member stock, the Finance Board will 
benefit greatly from the perspectives of persons more familiar with the 
universe of investment products currently available. Accordingly, the 
Finance Board welcomes all comments on how to further refine the 
proposal to assure that the rule will not unintentionally allow 
individuals to hold investments that may create conflicts with their 
duties as appointive directors but still remain flexible enough not to 
create unnecessary barriers to finding candidates with the skills and 
experience to be strong Bank directors.

B. Proposed Rule Changes

    General. The Finance Board is proposing to add a new paragraph (f) 
to Sec.  915.10 of its rules to address the issues described above.\6\ 
The proposed provision first would set out the general prohibition 
against an appointive director owning any debt or equity securities 
issued by, or otherwise having any financial interest in, a member of 
the Bank on whose board the director serves. The provision also would 
restate the statutory requirements that an appointive director may not 
serve as an officer of any Bank or as an officer or director of any 
member of the Bank on whose board the director serves.\7\ This proposed 
language closely follows the wording of section 7(a) of the Bank Act 
and the requirements of current Sec.  915.11(a)(2) of the Finance 
Board's rules.\8\ The proposal goes on to describe certain types of 
investments or contractual relationships that would not be deemed to 
constitute shares or financial interests in a member for purposes of 
determining whether an appointive director may hold such interests 
while serving on the board of a Bank.
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    \6\ As already noted, Sec.  915.10 sets forth the new process 
for the selection of appointive directors.
    \7\ For purposes of applying the prohibitions on financial 
interests in a member and on serving as an officer or director of a 
member, the Finance Board interprets the term ``member'' broadly to 
include the member institutions itself, as well as any subsidiary, 
holding company and affiliate. See Federal Home Loan Bank Appointive 
Director Application Form, Statutory Eligibility Requirements Sec.  
4, Conflict of Interests (reproduced at 72 FR at 3033). The Finance 
Board currently intends to continue to interpret the term ``member'' 
in this broad manner.
    \8\ See 12 U.S.C. 1427(a) and 12 CFR Sec.  915.11(a)(2). As 
discussed in the next section, the Finance Board also is proposing 
conforming changes to Sec.  915.11(a)(2) of its rules.
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    The Finance Board emphasizes that because it is not proposing to 
amend the broad definition of ``financial interests'' now contained in 
Sec.  915.11(f)(2), the proposed rule would not change the extent to, 
or the manner in which an individual Bank's disclosure and recusal 
policies must address the types of investments or activities identified 
in proposed Sec.  915.10(f), even if the investments themselves would 
no longer be deemed to disqualify an individual from serving as an 
appointive director. See 12 CFR Sec. Sec.  915.11(b) and (f)(2). The 
Finance Board views continued application of the rules related to the 
Bank's recusal and disclosures policies to the types of investments 
identified in proposed Sec.  915.10(f) as an additional safeguard to 
assure that these investments would not create a conflict of interest. 
The Finance Board, however, requests comments on whether this approach 
is appropriate or if some modification to Sec. Sec.  915.11(b) and 
(f)(2) may be warranted. The Finance Board also requests comment on 
whether it should require appointive directors to disclose their 
financial holdings to the Banks as part of their application so the 
Banks can verify that the investments--including the vehicles and 
accounts described below--do not create a conflict that would be barred 
by section 7(a).
    Investment Vehicles. Both the legislative history of FIRREA and the 
Finance Board's prior regulations expressly permitted an appointive 
director to own shares of a diversified mutual fund that in turn owned 
debt or equity securities issued by a member of the Bank on whose board 
the director served. The legislative history offers scant insight into 
the intent of Congress in adding this provision, but the use of the 
term ``diversified mutual fund'' appears to reflect a view that an 
appointive director can own indirectly securities he or she cannot own 
directly under certain circumstances. Thus, in the case of mutual 
funds, indirect ownership of member securities would be permissible, 
provided the securities are owned by a legally distinct entity (the 
fund), and the investment decisions are made by that entity (or by an 
investment adviser acting on its behalf), and the appointive director 
lacks any control over the purchase or sale of the securities owned by 
the entity. The proposed rule is intended to include within the 
universe of permissible investments other types of investment vehicles 
and accounts that share those key concepts, and thus should pose no 
greater risk of conflict than would exist in the case of ownership of 
shares through a mutual fund.
    Accordingly, proposed Sec.  915.11(f)(1) would allow an appointive 
director to own shares or other interests in certain investment 
vehicles, which in turn may own equity or debt securities issued by a 
member of the director's Bank, without violating section 7(a) of the 
Bank Act. In order for such an investment to be permissible, the 
investment vehicle must be a legally separate entity and the appointive 
director must not control the investment vehicle or play any role in 
the selection of the entity's underlying investments. By providing that 
the investment vehicle must be organized as a ``legally recognized 
entity,'' the proposal would require that the vehicle be a corporation, 
limited partnership, trust, or similar entity that is recognized as 
having its own corporate existence under state law and is legally 
separate and distinct from the individual appointive director. As 
drafted, the provision would include registered investment companies 
(mutual funds) as well as limited partnership interests and other 
passive interests in distinct entities, even if those investment 
vehicles were not required to register under the Investment Company 
Act.
    The proposal would require that an appointive director not control 
the investment entity or be involved in decisions involving investments 
or trading strategies, which is intended to assure that the director 
could not direct the entity to purchase or sell member securities or 
otherwise manipulate trading based on knowledge acquired as a result of 
the individual's duties on the Bank's board. Because a general partner 
typically is deemed under state law to have the ability to control or 
otherwise act on behalf of either a general or limited partnership, a 
general partnership interest would not be permissible under this 
proposal.
    Investment Accounts. Since the Congress adopted the limitation on 
appointive directors' financial interests in 1989, the financial 
investment marketplace has evolved considerably. It has come to the 
attention of the Finance Board that among the investment alternatives 
used with much greater frequency by the investing public are 
arrangements that, while structured differently than mutual funds, are 
functionally similar, especially with respect to the client's lack of 
control over the investment decisions for the portfolio. Such 
investments may have somewhat differing structures and may have 
different names depending on the company offering the investment. One 
such investment alternative has been described as a ``managed account'' 
or a ``separately managed account.'' Persons using these accounts may 
direct the

[[Page 15630]]

investment adviser to allocate the portfolio among certain classes of 
assets, such as growth stocks, value stocks, bonds, or foreign 
equities, but do not direct the purchase or sale of securities within 
those asset classes. A key distinction between a mutual fund and a 
managed account is that in the former case the investor owns shares of 
the fund, which in turn owns the portfolio securities in its own name, 
whereas in the latter case the investor will own the portfolio 
securities in his or her own name. A key similarity between the two is 
that in both cases the investor plays no role in the purchase or sale 
of the portfolio securities, as a typical requirement of the managed 
account is that the investor must confer full investment discretion on 
the investment adviser that manages the portfolio.
    Proposed Sec.  915.10(f)(2) is intended to allow appointive 
directors to hold securities of a member through such an account, based 
principally on the requirement that the director would have no control 
over the acquisition of securities for the account. Thus, the proposal 
would deem any debt or equity securities issued by a member that an 
appointive director owns through accounts where the director has no 
investment discretion not to constitute shares or financial interests 
in a member. To qualify for the exclusion under the proposed provision, 
however, the account would have to be managed by an investment adviser 
registered with the Securities and Exchange Commission under the 
Investment Advisers Act, the appointive director would have to pay a 
fee to the adviser for the advisory services that are provided as an 
integral component of the account, and the director would have to give 
the adviser complete discretion to buy or sell all securities in the 
account. The Finance Board believes that where an appointive director 
has turned over all investment decisions regarding the portfolio to a 
professional adviser and is not otherwise involved in the investment 
decisions concerning the account to have no greater interest in the 
member securities, in a practical sense, than does a director who owns 
such securities indirectly through a mutual fund. To further assure 
that the director could not indirectly influence the purchase or sale 
of securities within the portfolio, the proposal provides that the 
director could not be affiliated with the investment adviser and could 
not otherwise have control over the choice of securities acquired for 
the account. Given these proposed safeguards (coupled with the 
continued application of current disclosure and recusal policies), the 
Finance Board views accounts covered by this proposed provision as not 
presenting risks of a conflict of interest greater than those posed by 
investments in mutual funds or similar investments.
    In applying this provision, an investor's right to identify broad 
financial goals or broad investment strategies or asset classes (e.g., 
aggressive growth, value investing, etc.) would not constitute 
sufficient investment discretion to violate section 7(a), so long as 
the strategies would not allow a director to direct the purchase of 
individual securities. The Finance Board understands that persons 
investing through such accounts sometimes are able to direct an 
investment adviser not to purchase securities issued by a particular 
company, such as where the investor is an officer or director of a 
publicly traded company and instructs the adviser not to purchase any 
securities issued by that company. In such circumstances, the Finance 
Board would not be inclined to view that limited right to identify 
specific companies whose securities should be excluded from the account 
as violating the statute or the proposed rule. If the type of account 
held by an appointive director gives the director the ability to 
identify securities to sell on an ad hoc basis or based on current 
market conditions, however, such an arrangement would confer 
significant investment discretion in the client, and thus would not 
fall within the proposed exclusion established by this provision.
    Holding Companies. Section 7(a) of the Bank Act speaks in terms of 
shares or other financial interests in ``any member'' of the Bank, but 
does not refer expressly to treatment of securities issued by a holding 
company for a member. In the current financial services sector, many 
depository institutions are owned by one or more holding companies and 
thus do not issue their own equity securities to the public. Although 
the statute does not address this matter, the Finance Board previously 
had regulations that effectively exempted securities issued by certain 
holding companies from the reach of section 7(a). Under that 
regulation, which was in effect from 1991 to 1998, securities issued by 
a diversified holding company were permissible investments for an 
appointive director. A bank holding company or a savings and loan 
holding company was deemed to be ``diversified'' for these purposes if 
less than 50 percent of its net worth and net earnings, on a 
consolidated basis, were attributable to the depository institutions 
that it controlled. See n.2. The Finance Board is proposing to adopt a 
similar test for determining whether an appointive director may own 
securities issued by a holding company that controls one or more 
members of the Bank on whose board the director serves.
    Accordingly, proposed Sec.  915.10(f)(3) would deem debt or equity 
securities issued by a holding company that controls one or more 
members to not constitute ``shares'' or ``financial interests'' in a 
member, provided that the assets of all members of the Bank that are 
controlled by the holding company constitute less than 25 percent of 
the total assets of the holding company, on a consolidated basis. The 
Finance Board believes that where the assets of the institutions that 
are members of the Bank on whose board the director sits constitute 
less than 25 percent of the total assets of a holding company, the debt 
or equity instruments issued by the holding company represent interests 
that are predominately something other than an interest in a member.
    The Finance Board believes the proposed standard limiting members' 
assets to less than 25 percent of the consolidated assets would be more 
restrictive than the standard applied under the former the definition 
of ``diversified holding company'' (i.e., 50 percent of consolidated 
net worth and net earnings). The Finance Board also believes the 
proposed standard would be easier to apply and would be less subject to 
fluctuations over time (so that companies would be less likely to shift 
status under the exclusion from year-to-year). Nonetheless, the Finance 
Board specifically seeks comments on how best to measure the relative 
sizes of the holding company and its member subsidiaries (i.e., a 
percentage of assets or a percentage of capital or earnings) and 
whether some threshold other than 25 percent would be appropriate.
    Moreover, while proposed Sec.  915.10(f)(3) would deem interests in 
certain holding companies not to constitute shares or financial 
interests in a member, the proposed provision does not deal with other 
relationships with a holding company. Given the current practice, 
however, the Finance Board would not permit an appointive director to 
serve as an officer or director of any holding company that controls a 
member, even if the member constitutes less than 25 percent of the 
assets of the holding company.\9\ It would appear to

[[Page 15631]]

be incompatible with the independence expected of an appointive 
director and the public interests the director is expected to serve to 
allow that person simultaneously to serve as an officer or director of 
any holding company that controlled any member of the Bank. As an 
appointive director, the individual would owe fiduciary duties to the 
Bank and the Finance Board does not believe that an appointive director 
also should owe fiduciary duties to a member or its holding company. 
These competing duties could make it difficult for the appointive 
director to competently serve in either capacity. The Finance Board is 
requesting comment on whether it should apply the same standard for 
determining if a holding company's securities are permissible 
investments for an appointive director to other types of relationships, 
such as service as a director or officer of such company or contractual 
relationships with, or receipt of income from, such company.
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    \9\ While the prohibition on an appointive director serving as 
an officer or director of a holding company or an affiliate or a 
subsidiary of a member is not set out in the current rules, it has 
been agency policy to interpret the term ``member'' for purposes of 
applying the conflict of interest rules broadly to refer to the 
member itself, any subsidiary or affiliate of the member or any 
holding company of the member. See n.7. As previously noted, this 
interpretation currently is embodied in the explanation addressing 
conflict of interest provided in the application form for appointive 
directors, but the Finance Board specifically is requesting comment 
as to whether this interpretation should be clearly incorporated 
into the text of its rules.
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    Loans and Deposits. Proposed Sec.  915.10(f)(4) would provide that 
loans from, or deposits in, a member would not constitute a financial 
interest in the member if the transaction occurs in the normal course 
of business and on terms that are no more favorable than those 
available under like circumstances to members of the public. This 
provision does not represent a change in current Finance Board 
practices. Loans and deposits meeting the proposed criteria already are 
excluded from the definition of financial interest contained in Sec.  
915.11(f)(2) and holding such loans and deposits does not currently 
disqualify a candidate from consideration for an appointive 
directorship. See 12 CFR Sec.  915.11(f)(2); see also Federal Home Loan 
Bank Appointive Director Application Form, Statutory Eligibility 
Requirements Sec.  4, Conflict of Interest. Such items also had been 
permitted under the prior regulations. See, e.g., 56 FR at 55220 
(adopting Sec. Sec.  931.30 and 932.18 of the Finance Board's rules).
    Contractual Relationships. There have been instances in the past in 
which individuals have asked if certain contractual relationships with 
a member, such as those associated with serving as legal counsel or as 
auditor, would constitute a financial interest in the member that is 
prohibited by section 7(a).\10\ The answers to such questions are 
largely dependent on the facts of each case, and typically have been 
addressed by staff on a case-by-case basis. Although it is not 
practicable to create a regulation that would address all such 
circumstances, the Finance Board believes that the regulations could be 
revised to establish a type of safe harbor for contractual 
relationships that do not contribute a significant amount to the 
person's income. Accordingly, proposed Sec.  915.11(f)(5) would 
establish a presumption that an appointive director's contractual 
relationships with members of the Bank would not constitute a financial 
interest in a member if the money paid to the person under such 
contracts in any calendar year constitutes less than 10 percent of the 
appointive director's adjusted gross income for that year.
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    \10\ As already noted, when determining if a contractual 
relationship with a member exists, the Finance Board would interpret 
the term ``member'' broadly to include a member itself, any 
subsidiary or affiliate of a member, and any holding company of a 
member. See n.7 and n.9.
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    The Finance Board would intend the director to calculate his or her 
adjusted gross income for the purposes of this proposed test in the 
same manner as would be done for federal tax purposes. The Finance 
Board would also expect the director to aggregate all amounts earned 
(or to be earned) under contracts with all members of the Bank on whose 
board the director serves in determining the amount due the director 
for purposes of applying the proposed test. Given the attribution 
provision in proposed Sec.  915.11(f)(6), if an appointive director's 
spouse has contractual relationships with Bank members, the amounts due 
under those contracts also would be combined with those of the director 
(and the adjusted gross income would represent that of both the 
director and the spouse) to determine if the contracts exceed the 10 
percent threshold. If only the director's spouse had a contract with 
Bank members, the adjusted gross income used in applying the test would 
be that of the spouse only.
    The proposed rule also would require an appointive director to 
disclose all contractual relationships with members of the Bank on 
whose board the director serves (or will serve) whether or not the 
amounts due exceed 10 percent of the director's adjusted gross income, 
as well as those of a spouse. Where the amounts due under such 
contracts would be 10 percent or more of the director's adjusted gross 
income, the proposed rule would require the Finance Board to determine 
on a case-by-case basis whether the contractual relationships represent 
a financial interest that would disqualify an individual from serving 
as an appointive director. In making the determination, the Finance 
Board would consider, among other things, if the contractual 
relationships may result in the appointive director not fairly 
representing the public interest when considering matters that come 
before the board or otherwise causing the director to be partial toward 
or biased against any member or otherwise partial in his or her 
judgment. In weighing this matter, the Finance Board would consider 
whether the contractual relationships may create an appearance of 
partiality in deciding if the contractual relationship may disqualify a 
person from holding an appointive directorship.
    Attribution. Proposed Sec.  915.10(f)(6) would establish that debt 
or equity securities owned by a spouse or minor child of an appointive 
director are attributed to the appointive director for purposes of 
complying with proposed Sec.  915.10(f). This proposed provision also 
would make clear that any contractual relationships between a member 
and the spouse of a director would be attributed to the appointive 
director. How the calculation would be performed to determine whether 
such contracts exceeded the proposed threshold in Sec.  915.10(f)(5) 
has already been discussed above. The Finance Board has not included 
minor children in the proposed attribution provision with regard to 
contracts because it would not expect that minor children would, or 
could legally, enter into such agreements. The Finance Board believes 
that the financial interests of a spouse or minor child of a director 
would be so closely aligned with the interests of the director that 
these proposed attribution provisions are fair and are generally 
consistent with how attribution provisions dealing with conflict of 
interests and similar matters are generally structured.

C. Other Conforming Amendments

    The Finance Board also is proposing amendments to Sec.  
915.11(a)(2) to conform this provision to the changes proposed in new 
Sec.  915.10(f). As now written, Sec.  915.11(a)(2), given the broad 
definition of financial interest in Sec.  915.11, could be read to 
require the Banks to adopt policies for appointive directors that would 
be more restrictive with regard to allowable investments than the 
changes proposed in Sec.  915.10(f). Because the Bank Act provides the 
Finance Board the sole discretion to select appointive directors,

[[Page 15632]]

the Finance Board would not intend the Banks to apply more restrictive 
criteria in determining when an appointive director may hold certain 
investments than that set forth in the Finance Board rules and 
policies. Thus, proposed Sec.  915.11(a)(2) would state that a Bank's 
conflict of interest policy must require appointive directors to comply 
with Sec.  915.10(f).
    The Finance Board also is proposing to delete Sec. Sec.  915.16 and 
915.17, which applied only to election cycles that occurred between 
1999 and 2001 and primarily were needed to implement changes made by 
the Gramm-Leach-Bliley Act \11\ to the Bank Act's election and director 
provisions. Thus, the regulatory provisions in Sec. Sec.  915.16 and 
915.17 no longer serve any purpose and are not applicable to current or 
future election cycles. Similarly, the Finance Board is proposing to 
delete Appendix A to part 915, which includes matrices that were 
created in conjunction with earlier elections and appointments and 
related to the directorships of the Banks. Over the past few years, as 
part of its annual designation of elective directorships, the Finance 
Board has created updated versions of these matrices to reflect the 
revised board structure for each Bank for that year, and expects to 
continue to create new matrices as part of each annual designation 
exercise. Because the matrices in Appendix A relate to prior years and 
have been superseded by more current versions, it no longer is 
necessary to include them in the regulations.
---------------------------------------------------------------------------

    \11\ Pub. L. No. 106-102, 133 Stat. 1338 (Nov. 12, 1999).
---------------------------------------------------------------------------

III. Paperwork Reduction Act

    The appointive director application form is part of the information 
collection entitled ``Federal Home Loan Bank Directors.'' Under the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Office of 
Management and Budget (OMB) has assigned control number 3069-0002, 
which is due to expire on November 30, 2007. The Finance Board and the 
Banks use the information contained in the application form to 
determine whether prospective appointive Bank directors satisfy the 
statutory and regulatory eligibility requirements and are well 
qualified to serve as a Bank director. Only individuals meeting these 
requirements may serve as Bank directors. See 12 U.S.C. 1427. The 
proposed rule, if adopted as a final rule, would not make substantive 
or material modifications to the ``Federal Home Loan Bank Directors'' 
information collection. Consequently, the Finance Board has not 
submitted any information to OMB for review.

IV. Regulatory Flexibility Act

    The proposed rule would apply only to the Banks and to individuals 
who may be willing to serve as Bank appointive directors. Neither the 
Banks nor individuals come within the meaning of ``small entities'' as 
defined in the Regulatory Flexibility Act (RFA). See 5 U.S.C. 601(6). 
Thus, in accordance with section 605(b) of the RFA, 5 U.S.C. 605(b), 
the Finance Board hereby certifies that the proposed rule, if 
promulgated as a final rule, will not have a significant economic 
impact on a substantial number of small entities.

Lists of Subjects in 12 CFR Part 915

    Conflict of interests, Elections, Federal home loan banks, 
Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Finance Board is 
proposing to amend 12 CFR Part 915 as follows:

PART 915--BANK DIRECTOR ELIGIBILITY, APPOINTMENT, AND ELECTIONS

    1. The authority citation for part 915 continues to read as 
follows:

    Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1427, and 
1432.

    2. Amend Sec.  915.10 by adding a new paragraph (f) to read as 
follows:


Sec.  915.10  Selection of appointive directors.

* * * * *
    (f) Financial interests. Except as otherwise provided in this 
section, an appointive director may not own any debt or equity 
securities issued by, or have any other financial interest in, a member 
of the Bank on whose board the director serves. An appointive director 
also may not serve as an officer or director of any member of the Bank 
on whose board the director serves or serve as an officer of any Bank.
    (1) Investment vehicles. An appointive director's investment in a 
legally recognized entity that owns debt or equity securities issued by 
a member shall not be deemed to constitute the shares or other 
financial interests in a member, provided that the appointive director 
does not control the entity and plays no role in the purchase or sale 
of the securities owned by the entity.
    (2) Investment accounts. Debt or equity securities owned by an 
appointive director through an account managed by an investment adviser 
registered under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 
et seq.), for which the director pays a fee for advisory services and 
with respect to which the director has given the investment adviser 
complete discretion to buy and sell all securities in the account, 
shall not be deemed to constitute the shares or other financial 
interests in a member, provided that the appointive director is not 
affiliated with the investment adviser and has no control over the 
selection of securities acquired for the account.
    (3) Holding companies. Debt or equity securities issued by a 
holding company that controls one or more members of the Bank on whose 
board an appointive director serves shall not be deemed to constitute 
the shares or other financial interest in a member, provided that the 
assets of all such members constitute less than 25 percent of the 
assets of the holding company, on a consolidated basis.
    (4) Loans and deposits. Loans obtained from a member and money 
placed on deposit with a member shall not be deemed to constitute a 
financial interest in a member, provided that the transactions occur in 
the normal course of business of the member and are on terms that are 
no more favorable than those that would be available under like 
circumstances to members of the public.
    (5) Contractual relationships. Any contractual relationship between 
an appointive director and one or more members of the Bank on whose 
board an appointive director serves, under which the director has a 
contractual right to the payment of money, shall be presumed not to 
constitute a financial interest in a member if the amount due to the 
director under such contracts in any calendar year is less than 10 
percent of the director's adjusted gross income for that calendar year. 
An appointive director with any such contractual relationships, or any 
contractual relationship involving amounts greater than the above 
threshold, shall disclose the relationship to the board of directors of 
the Bank and to the Finance Board. The Finance Board shall determine, 
on a case by case basis, whether any contractual relationships greater 
than the above threshold constitutes a financial interest in a member.
    (6) Attribution. Any debt or equity securities owned by the spouse 
or minor children of an appointive director shall be attributed to the 
director for purposes of complying with this section, as shall be any 
contractual relationships between a member and the spouse of an 
appointive director.
    3. Amend Sec.  915.11 by revising paragraph (a) to read as follows:

[[Page 15633]]

Sec.  915.11  Conflict of interests policy for Bank directors.

    (a) Adoption of conflict of interest policy. Each Bank shall adopt 
a written conflict of interest policy that shall apply to all Bank 
directors. At a minimum, the conflict of interest policy of each Bank 
shall:
    (1) Require the directors to administer the affairs of the Bank 
fairly and impartially and without discrimination in favor of or 
against any member or nonmember borrower;
    (2) Require appointive directors to comply with Sec.  915.10(f) of 
this part;
    (3) Prohibit the use of a director's official position for personal 
gain;
    (4) Require directors to disclose actual or apparent conflict of 
interests and establish procedures for addressing such conflicts;
    (5) Provide internal controls to ensure that reports are filed and 
that conflicts are disclosed and resolved in accordance with this 
section; and
    (6) Establish procedures to monitor compliance with the conflict of 
interests policy.
* * * * *


Sec.  915.16  [Removed]

    4. Remove Sec.  915.16.


Sec.  915.17  [Removed]

    5. Remove Sec.  915.17.

Appendix A to Part 915--[Removed]

    6. Remove Appendix A to part 915.

    Dated: March 27, 2007.

    By the Board of Directors of the Federal Housing Finance Board.
Ronald A. Rosenfeld,
Chairman.
[FR Doc. E7-5973 Filed 3-30-07; 8:45 am]
BILLING CODE 6725-01-P