[Federal Register Volume 73, Number 221 (Friday, November 14, 2008)]
[Proposed Rules]
[Pages 67424-67427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26831]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1231

RIN 2590-AA08


Golden Parachute and Indemnification Payments

AGENCY: Federal Housing Finance Agency.

ACTION: Proposed amendment.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing to 
amend the interim final Golden Parachute Payments regulation published 
in the Federal Register on September 16, 2008 (73 FR 53356), and as 
corrected on September 19, 2008 (73 FR 54309), and on September 23, 
2008 (73 FR 54673). This proposed amendment addresses prohibited and 
permissible indemnification payments with regard to any administrative 
proceeding brought by the FHFA against an entity-affiliated party of 
the Federal National Mortgage Association, the Federal Home Loan 
Mortgage Corporation, and the Federal Home Loan Banks in light of the 
statutory requirements set forth in 12 U.S.C. 4514(e), as amended by 
the Housing and Economic Recovery Act of 2008.

DATES: Written comments on the proposed amendment to the Interim Final 
Regulation must be received on or before December 29, 2008. For 
additional information, see SUPPLEMENTARY INFORMATION.

ADDRESSES: You may submit your comments on the proposed amendment, 
identified by regulatory information number ``RIN 2590-AA08,'' by any 
of the following methods:
     U.S. Mail, United Parcel Post, Federal Express, or Other 
Mail Service: The mailing address for comments is: Alfred M. Pollard, 
General Counsel, and Christopher Curtis, General Counsel; Attention: 
Comments/RIN 2590-AA08, Federal Housing Finance Agency, Fourth Floor, 
1700 G Street, NW., Washington, DC 20552.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, and Christopher Curtis, General 
Counsel; Attention: Comments/RIN 2590-AA08, Federal Housing Finance 
Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. The 
package should be logged at the Guard Desk, First Floor, on business 
days between 9 a.m. and 5 p.m.
     E-mail: Comments to Alfred M. Pollard, General Counsel, 
and Christopher Curtis, General Counsel, may be sent by e-mail at

[[Page 67425]]

[email protected]. Please include ``RIN 2590-AA08'' in the subject 
line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel, 
telephone (202) 414-3788; or Christopher Curtis, General Counsel, 
telephone (202) 408-2802 (not toll-free numbers), Federal Housing 
Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. 
The telephone number for the Telecommunications Device for the Deaf is 
(800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Comments

    The FHFA invites comments on all aspects of the proposed amendment 
and will take all comments into consideration before issuing the final 
regulation. The FHFA requests that comments submitted in hard copy also 
be accompanied by the electronic version in Microsoft[supreg] Word or 
in portable document format (PDF) on 3.5'' disk or CD-ROM.
    Copies of all comments will be posted on the internet Web site at 
http://www.FHFA.gov. In addition, copies of all comments received will 
be available for examination by the public on business days between the 
hours of 10 a.m. and 3 p.m., at the Federal Housing Finance Agency, 
Fourth Floor, 1700 G Street, NW., Washington, DC 20552. To make an 
appointment to inspect comments, please call the Office of General 
Counsel at (202) 414-3751.

II. Background

    The Housing and Economic Recovery Act of 2008 (HERA), Public Law 
110-289, 122 Stat. 2654, amended the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) 
(Act) to establish FHFA as an independent agency of the Federal 
Government.\1\ FHFA was established to oversee the prudential 
operations of the Federal National Mortgage Association and the Federal 
Home Loan Mortgage Corporation (collectively, the Enterprises), and the 
Federal Home Loan Banks (Banks) (collectively, the regulated entities), 
and to ensure that they operate in a safe and sound manner including 
being capitalized adequately; foster liquid, efficient, competitive and 
resilient national housing finance markets; comply with the Act and 
rules, regulation, guidelines and orders issued under the Act, and the 
respective authorizing statutes of the regulated entities; and carry 
out their missions through activities authorized and consistent with 
the Act and their authorizing statutes; and, that the activities and 
operations of the regulated entities are consistent with the public 
interest.
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    \1\ See Division A, titled the ``Federal Housing Finance 
Regulatory Reform Act of 2008,'' Title I, Section 1101 of HERA.
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III. Proposed Amendment to Interim Final Regulation

    The FHFA published the Interim Final Regulation on Golden Parachute 
and Indemnification Payments in the Federal Register on September 16, 
2008 (73 FR 53356). Subsequently, it published corrections rescinding 
that portion of the regulation that addressed indemnification payments 
on September 19, 2008 (73 FR 54309), and on September 23, 2008 (73 FR 
54673).
    Section 1114 of HERA amended 12 U.S.C. 4518 to provide additional 
authorities to FHFA in addressing certain compensation and benefits, 
including ``golden parachute'' and ``indemnification payments'' as 
those terms are defined therein. The proposed amendment would describe 
prohibited and permissible indemnification payments that a regulated 
entity may make to an entity-affiliated party in connection with 
administrative proceedings or civil actions instituted by FHFA. The 
provisions of the proposed amendment addressing indemnification 
payments are substantially similar to the regulation that limits 
indemnification by insured depository institutions to institution-
affiliated parties.
    In proposing the amendment, FHFA recognizes that prior to the 
enactment of HERA, the regulated entities may have entered into 
indemnification agreements that provide for indemnification beyond that 
which is proposed to be permissible under 12 U.S.C. 4518(e) and the 
proposed amendment. The FHFA intends that the proposed amendment would 
apply to agreements entered into by a regulated entity with an entity-
affiliated party on or after the date the regulation is effective.
    The FHFA is also of the view that the enactment of section 1114 of 
HERA makes clear that Congress has authorized FHFA to limit or prohibit 
a regulated entity from indemnifying an entity-affiliated party for any 
civil money penalty, notwithstanding the language of 12 U.S.C. 4636(g). 
Nevertheless, FHFA is of the view that it would be in the best 
interests of the regulated entities to permit indemnification of first 
and second tier civil money penalties where the administrative 
proceeding or civil action relates to conduct occurring while the 
regulated entity was in conservatorship. FHFA specifically requests 
comments on this point.
    Section 1313(f) of the Act, as amended by section 1201 of HERA, 
requires the Director, when promulgating regulations relating to the 
Banks, to consider the differences between the Banks and the 
Enterprises with respect to the Banks' cooperative ownership structure; 
mission of providing liquidity to members; affordable housing and 
community development mission; capital structure; and joint and several 
liability. The Director may also consider any other differences that 
are deemed appropriate. In preparing the proposed amendment, the 
Director considered the differences between the Banks and the 
Enterprises as they relate to the above factors. The Director requests 
comments from the public about whether differences related to these 
factors should result in a revision of the proposed amendment as it 
relates to the Banks.

Regulatory Impact

Paperwork Reduction Act

    The proposed amendment does not contain any information collection 
requirement that requires the approval of OMB under the Paperwork 
Reduction Act (44 U.S.C. 3501 et seq.).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that 
a regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). The FHFA has considered the impact of the 
proposed amendment under the Regulatory Flexibility Act. The FHFA 
certifies that the proposed amendment is not likely to have a 
significant economic impact on a substantial number of small business 
entities because the regulation is applicable only to the regulated 
entities, which are not small entities for the purposes of the 
Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1231

    Golden Parachutes, Government-sponsored enterprises, 
Indemnification.


[[Page 67426]]


    Accordingly, for the reasons stated in the preamble, under the 
authority of 12 U.S.C. 4518(e) and 4526, the Federal Housing Finance 
Agency proposes to amend part 1231 of subchapter B of title 12 CFR 
Chapter XII by making the following amendments:

Subchapter B--Entity Regulations

PART 1231--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS

    1. The authority citation for part 1231 is revised to read as 
follows:

    Authority: 12 U.S.C. 4518(e); 12 U.S.C. 4526.

    2. Section 1231.1 is revised to read as follows:


Sec.  1231.1  Purpose and scope.

    The purpose of this part is to implement section 1318(e) of the Act 
(12 U.S.C. 4518(e)) by setting forth the standards that the Director 
will take into consideration in determining whether to limit or 
prohibit golden parachute payments and by setting forth prohibited and 
permissible indemnification payments that regulated entities may make 
to entity-affiliated parties.
    3. Section 1231.2 is amended by:
    a. Removing the paragraph designations before each definition.
    b. Removing the reserved paragraphs (l) through (n).
    b. Placing the definition for FHFA in alphabetical order.
    c. Adding the definitions for ``Liability or legal expenses,'' 
``Payment'' and ``Prohibited indemnification payment'' in alphabetical 
order.
    The additions read as follows:


Sec.  1231.2  Definitions.

* * * * *
    Liability or legal expense means--
    (1) Any legal or other professional expense incurred in connection 
with any claim, proceeding, or action;
    (2) The amount of, and the cost incurred in connection with, any 
settlement of any claim, proceeding, or action; and
    (3) The amount of, and any cost incurred in connection with, any 
judgment or penalty imposed with respect to any claim, proceeding, or 
action.
* * * * *
    Payment, as set forth in the definition of the term ``prohibited 
indemnification payment,'' includes--
    (1) Any direct or indirect transfer of any funds or any asset; and
    (2) Any segregation of any funds or assets for the purpose of 
making, or pursuant to an agreement to make, any payment after the date 
on which such funds or assets are segregated, without regard to whether 
the obligation to make such payment is contingent on--
    (i) The determination, after such date, of the liability for the 
payment of such amount; or
    (ii) The liquidation, after such date, of the amount of such 
payment.
    Prohibited indemnification payment. (1) The term prohibited 
indemnification payment means any payment (or any agreement to make any 
payment) by any regulated entity for the benefit of any person who is 
or was an entity-affiliated party, to pay or reimburse such person for 
any civil money penalty or judgment resulting from any administrative 
or civil action instituted by FHFA, or for any other liability or legal 
expense with regard to any administrative proceeding or civil action 
instituted by FHFA that results in a final order or settlement pursuant 
to which such person:
    (i) Is assessed a civil money penalty;
    (ii) Is removed from office or prohibited from participating in the 
conduct of the affairs of the regulated entity; or
    (iii) Is required to cease and desist from or take any affirmative 
action described in section 1371 of the Act (12 U.S.C. 4631) with 
respect to the regulated entity.
    (2) Exceptions.
    (i) The term prohibited indemnification payment shall not include 
any reasonable payment by a regulated entity that is used to purchase 
any commercial insurance policy or fidelity bond, provided that such 
insurance policy or fidelity bond shall not be used to pay or reimburse 
an entity-affiliated party for the cost of any judgment or civil money 
penalty assessed against such person in an administrative proceeding or 
civil action commenced by FHFA, but may pay any legal or professional 
expenses incurred in connection with such proceeding or action or the 
amount of any restitution to the regulated entity or receiver.
    (ii) The term prohibited indemnification payment shall not include 
any reasonable payment by a regulated entity that represents partial 
indemnification for legal or professional expenses specifically 
attributable to particular charges for which there has been a formal 
and final adjudication or finding in connection with a settlement that 
the entity-affiliated party has not violated certain laws or 
regulations or has not engaged in certain unsafe or unsound practices 
or breaches of fiduciary duty, unless the administrative proceeding or 
civil action has resulted in a final prohibition order against the 
entity-affiliated party.
    (iii) The term prohibited indemnification payment shall not include 
a payment by a regulated entity for a civil money penalty under section 
1376(b)(1) and (2) of the Act (12 U.S.C. 4636(b)(1) and (2)) where the 
regulated entity has been placed in conservatorship.
    4. Section 1231.4 is added to read as follows:


Sec.  1231.4   Indemnification payments.

    (a) Scope. (1) This section applies only after an administrative 
proceeding or civil action has been instituted by FHFA through issuance 
of a notice of charges under regulations issued by the Director.
    (2) The provisions of this section shall remain in full force and 
effect with respect to a regulated entity that is in conservatorship.
    (b) Prohibited indemnification payments. No regulated entity shall 
make or agree to make any prohibited indemnification payment, except as 
provided in this part.
    (c) Permissible indemnification payments. (1) A regulated entity 
may make or agree to make reasonable indemnification payments to an 
entity-affiliated party with respect to an administrative proceeding or 
civil action initiated by the FHFA, including payment for a civil money 
penalty pursuant to Sec.  1231.2(l)(2)(iii), if:
    (i) The board of directors of the regulated entity, in good faith, 
determines in writing after due investigation and consideration that 
the entity-affiliated party acted in good faith and in a manner he or 
she believed to be in the best interests of the regulated entity;
    (ii) The board of directors of the regulated entity, in good faith, 
determines in writing after due investigation and consideration that 
such payments will not materially adversely affect the safety and 
soundness of the regulated entity;
    (iii) The indemnification payments do not constitute prohibited 
indemnification payments as that term is defined in Sec.  1231.2(l); 
and
    (iv) The entity-affiliated party agrees in writing to reimburse the 
regulated entity, to the extent not covered by payments from insurance 
or bonds purchased pursuant to Sec.  1231.2(l)(2), for that portion of 
any advanced indemnification payments that subsequently become 
prohibited indemnification payments, as defined in Sec.  1231.2(l).
    (2) An entity-affiliated party requesting indemnification payments

[[Page 67427]]

shall not participate in any way in the board's discussion and approval 
of such payments; provided, however, that such entity-affiliated party 
may present his or her request to the board of directors and respond to 
any inquiries from the board of directors concerning his or her 
involvement in the circumstances giving rise to the administrative 
proceeding or civil action.
    (3) In the event that a majority of the members of the board of 
directors are named as respondents in an administrative proceeding or 
civil action and request indemnification, the remaining members of the 
board may authorize independent legal counsel to review the 
indemnification request and provide the remaining members of the board 
with a written opinion of counsel as to whether the conditions 
delineated in paragraph (c)(1) of this section have been met. If 
independent legal counsel opines that said conditions have been met, 
the remaining members of the board of directors may rely on such 
opinion in authorizing the requested indemnification.
    (4) In the event that all of the members of the board of directors 
are named as respondents in an administrative proceeding or civil 
action and request indemnification, the board shall authorize 
independent legal counsel to review the indemnification request and 
provide the board with a written opinion of counsel as to whether the 
conditions delineated in paragraph (c)(1) of this section have been 
met. If independent legal counsel opines that said conditions have been 
met, the board of directors may rely on such opinion in authorizing the 
requested indemnification.
    5. Section 1231.6 is added to read as follows:


Sec.  1231.6   Applicability in the event of receivership.

    The provisions of this part, or any consent or approval granted 
under the provisions of this part by the FHFA, shall not in any way 
bind any receiver of a regulated entity in receivership. Any consent or 
approval granted under the provisions of this part by the FHFA shall 
not in any way obligate the FHFA or receiver to pay any claim or 
obligation pursuant to any golden parachute, severance, 
indemnification, or other agreement. Claims for employee welfare 
benefits or other benefits which are contingent, even if otherwise 
vested, when a receiver is appointed for any regulated entity, 
including any contingency for termination of employment, are not 
provable claims or actual, direct compensatory damage claims against 
such receiver. Nothing in this part may be construed to permit the 
payment of salary or any liability or legal expense of an entity-
affiliated party contrary to section 1318(e)(3) of the Act (12 U.S.C. 
4518(e)(3)).

    Dated: November 5, 2008.
James B. Lockhart III,
Director, Federal Housing Finance Agency.
 [FR Doc. E8-26831 Filed 11-13-08; 8:45 am]
BILLING CODE 8070-01-P