[Federal Register Volume 81, Number 182 (Tuesday, September 20, 2016)]
[Proposed Rules]
[Pages 64357-64360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22483]
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Proposed Rules
Federal Register
________________________________________________________________________
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. 81, No. 182 / Tuesday, September 20, 2016 /
Proposed Rules
[[Page 64357]]
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1231
RIN 2590-AA68
Indemnification Payments
AGENCY: Federal Housing Finance Agency.
ACTION: Notice of proposed rulemaking; request for comments.
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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a Notice
of Proposed Rulemaking that would establish standards for identifying
whether an indemnification payment by the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, any of the
Federal Home Loan Banks (regulated entities), or the Federal Home Loan
Bank System's Office of Finance (OF) to an entity-affiliated party in
connection with an administrative proceeding or civil action instituted
by FHFA is prohibited or permissible. This proposed rule would not
apply to a regulated entity operating in conservatorship or
receivership, or to a limited-life regulated entity. It would apply to
all regulated entities, each Federal Home Loan Bank, the OF, the
Federal National Mortgage Association, and the Federal Home Loan
Mortgage Association, when not in conservatorship or receivership. This
proposed rule takes into account public comments received by FHFA at
various stages of the regulation's rulemaking process, including after
the initial proposal published in 2009.
DATES: Comments must be received on or before November 21, 2016. For
additional information, see SUPPLEMENTARY INFORMATION.
ADDRESSES: You may submit your comments on the proposed rule,
identified by regulatory information number (RIN) 2590-AA68, by any of
the following methods:
Agency Web site: www.fhfa.gov/open-for-comment-or-input.
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 email
to FHFA at [email protected] to ensure timely receipt by the agency.
Please include Comments/RIN 2590-AA68 in the subject line of the
message.
Courier/Hand Delivery: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA68,
Federal Housing Finance Agency, 400 Seventh Street SW., Eighth Floor,
Washington, DC 20219. Deliver the package to the Seventh Street
entrance Guard Desk, First Floor, on business days between 9 a.m. to 5
p.m.
U.S. Mail, United Parcel Service, Federal Express or Other
Mail Service: The mailing address for comments is: Alfred M. Pollard,
General Counsel, Attention: Comments/RIN 2590-AA68, Federal Housing
Finance Agency, 400 Seventh Street SW., Eighth Floor, Washington, DC
20219.
FOR FURTHER INFORMATION CONTACT: Mark D. Laponsky, Deputy General
Counsel, [email protected], (202) 649-3054 (this is not a toll-
free number), Office of General Counsel (OGC), Federal Housing Finance
Agency, Constitution Center, 400 Seventh Street SW., Washington, DC
20219. The telephone number for the Telecommunications Device for the
Deaf is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Comments
FHFA invites comments on all aspects of this 2016 proposed
rulemaking and will take all comments into consideration before issuing
the final rule. Copies of all comments will be posted without change,
including any personal information you provide, such as your name,
address, email address, and telephone number, on the FHFA 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,
Constitution Center, Eighth Floor, 400 Seventh Street, SW., Washington,
DC 20219. To make an appointment to inspect comments, please call the
Office of General Counsel at (202) 649-3804.
II. Background
FHFA published an Interim Final Rule 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). On November 14, 2008, a proposed amendment to the Interim Final
Rule was published in the Federal Register (73 FR 67424). FHFA
specifically requested comments on whether 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 related to conduct occurring while the
regulated entity was in conservatorship. The public notice and comment
period closed on December 29, 2008. On January 29, 2009 (74 FR 5101),
FHFA published a final rule on Golden Parachute Payments. On June 29,
2009 (74 FR 30975), FHFA published a proposed amendment to that 2009
Golden Parachute final rule. At the same time, FHFA re-proposed the
November 14, 2008 proposed amendment on indemnification payments (2009
re-proposal). The 2009 re-proposal noted that comments received in
response to the November 14, 2008 publication on indemnification
payments would be considered along with comments received in response
to the 2009 re-proposal. The golden parachute provisions of the rule
were re-proposed in 2013 (78 FR 28452, May 14, 2013), adopted in final
form in 2014 (79 FR 4394, Jan. 28, 2014), and codified as 12 CFR
1231.1, 1231.2, and 1231.5.
In this 2016 proposed rulemaking, FHFA redrafted the proposed
indemnification payments rule to make it simpler and easier to
understand. The substance of this 2016 proposed rulemaking has not
changed since the 2009 re-proposal, other than to replace a provision
concerning indemnification payments by regulated entities in
conservatorship with one that clearly states that the regulation does
not apply to such entities. FHFA further desires to clarify that it
does not consider
[[Page 64358]]
indemnification payments to be subject to FHFA rules and procedures
related to compensation, including 12 CFR part 1230.
The 2009 re-proposal structured its indemnification provisions in a
manner similar to the indemnification provisions of the Federal Deposit
Insurance Corporation's (FDIC) regulation. 12 CFR part 369. This 2016
proposed rulemaking generally carries over the structure from the 2009
re-proposal, but clarifies several provisions. Consistent with the
Director's statutory discretion to ``prohibit or limit any . . .
indemnification payment,'' \1\ the 2009 re-proposal defined most
indemnification payments to entity-affiliated parties as impermissible.
Like the FDIC's regulation, it also identified exceptions to that
definition based on stated standards and criteria and defined the
characteristics required for a payment to be permissible. These
criteria and standards, as they are carried over into this 2016
proposed rulemaking, constitute the ``factors'' that would be used for
the Director to ``prohibit or limit'' indemnification payments by this
regulation. In application, each regulated entity would be required to
ensure that no indemnification payments under this rule were made
unless the criteria and standards were met.
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\1\ 12 U.S.C. 4518(e)(1).
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III. Comments on the 2009 Re-Proposal
In response to the 2009 re-proposal, FHFA received comments from
the following: The 12 Federal Home Loan Banks (Banks); \2\ the Council
of Federal Home Loan Banks, the Banks' Office of Finance (OF); Fannie
Mae; and Freddie Mac. FHFA gave careful consideration to all issues
raised by the commenters.
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\2\ In 2015, the Seattle and Des Moines Federal Home Loan Banks
merged. There are now 11 Federal Home Loan Banks.
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In response to FHFA's request for comments regarding
indemnification of first and second tier civil money penalties under
section 1376(b)(1) and (2) of the Federal Housing Enterprises Financial
Safety and Soundness Act (the Safety and Soundness Act) (12 U.S.C.
4636(b)(1) and (2)) where the administrative proceeding or civil action
initiated by FHFA relates to conduct occurring while the regulated
entity was in conservatorship, several Banks requested that FHFA expand
indemnification authority for first and second tier civil money
penalties to all regulated entities, not just those that are in
conservatorship (currently, Fannie Mae and Freddie Mac). The commenters
assert that, by not extending the indemnification authority to all
regulated entities, healthy, solvent institutions would be penalized by
the regulation. FHFA has considered the comments and determined not to
extend first and second tier civil money penalties indemnification to
all regulated entities. The basis for the 2009 re-proposal's provision
for regulated entities in conservatorship was that such regulated
entities are operating with directors and some executives who govern
and manage the entities in accordance with conservator or receiver
instructions of varying levels of specificity and have significant
limitations on their ability to take independent action. Given these
circumstances, FHFA concluded that it was appropriate that regulated
entities in conservatorship or receivership (or a limited-life
regulated entity) and their entity-affiliated parties be subject to a
different indemnification regime. FHFA continues to be of this view and
has decided that they should be excluded from the rulemaking to avoid
restricting a conservator's or receiver's options. In this 2016
proposed rulemaking, new Sec. 1231.4(d) \3\ would provide that the
regulation does not apply to regulated entities in conservatorship or
receivership or to limited-life regulated entities. In each
circumstance, FHFA's power over such a regulated entity is sufficiently
extensive that FHFA as conservator itself can directly require the
adoption of an indemnification regime appropriate to administrating the
conservatorship or receivership (or limited-life regulated entity) in
the circumstances and environment actually encountered by that
regulated entity.\4\
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\3\ This 2016 proposed rulemaking includes changes to the
numbering of several sections. In this Supplementary Information,
the sections affected by this 2016 proposed rulemaking are
identified by numbers used in the current proposal rather than those
used in the 2009 re-proposal. Where necessary, a cross-reference to
the 2009 re-proposal is provided in a footnote at the first
appearance of an affected section number.
\4\ See 12 U.S.C. 4617(b)(2)(A) (powers of FHFA as conservator
or receiver), 4617(i)(2)(D), and 4617(i)(2)(E) (FHFA appoints the
directors of a limited-life regulated entity and must approve its
bylaws, in which an institution's indemnification policies commonly
are embodied).
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The 2009 re-proposal would have permitted partial indemnification
when there has been a final adjudication, settlement, or finding
favorable to the entity-affiliated party on some, but not all, charges,
unless the proceeding or action resulted in a final prohibition order.
Several Banks requested clarification of this provision with a
definition of the term ``final prohibition order.'' FHFA has considered
the comment. The 2016 proposal clarifies that a final prohibition order
is an order under section 1377 of the Act (12 U.S.C. 4636a) prohibiting
an entity-affiliated party from continuing or commencing to hold any
office in, or participate in any manner in the conduct of the affairs
of, a regulated entity, which order has become and remains effective as
described in section 1377(c)(5) of the Safety and Soundness Act (12
U.S.C. 4636a(c)(5)).
One commenter noted that, as a practical matter, most settlements
do not include affirmative findings of non-violation; instead
settlements typically include broad language stating that the
settlement is entered into without admission. That commenter therefore
requested that FHFA revise the language of the exception to
``prohibited indemnification payment'' in the previously proposed Sec.
1231.2 to state that, unless the proceeding results in a final
prohibition order, indemnification is permissible in connection with a
settlement in which the entity-affiliated party does not admit
wrongdoing. FHFA has considered the comment. This 2016 proposed
rulemaking would permit payment of expenses of defending an action,
subject to the entity-affiliated party's agreeing to repay those
expenses if the entity-affiliated party: Is not exonerated of the
charges to which the expenses specifically relate; enters into a
settlement of those charges in which the entity-affiliated party admits
culpability with respect to them; or is subject to a final order
prohibiting the entity-affiliated party from participating in the
affairs of the regulated entity. FHFA believes that within these
reasonably flexible boundaries for permissible and impermissible
indemnification, the parties involved will be able to negotiate an
appropriate resolution of legal expenses, which may itself bar or
significantly limit indemnification. This flexibility, in FHFA's view,
is preferable to strictly dictating a result in a regulation.
Several Banks requested clarification of the scope of Sec. 1231.4,
in the 2009 re-proposal, with respect to application of its process
involving specific findings by the regulated entity's board of
directors after a good faith inquiry, reflected in Sec. 1231.4(c).
Specifically, the Banks sought clarity about whether the process was
considered a precondition to the advancement of legal or professional
expenses by a third-party insurer under insurance or bonds purchased by
the regulated entity pursuant to the definition of ``prohibited
indemnification payments'' in Sec. 1231.4(b)(2)(i) of the 2009 re-
[[Page 64359]]
proposal.\5\ Under this 2016 proposed rulemaking, FHFA would not
require a board of directors' inquiry and findings as a precondition
for legal and professional expense advances paid directly to the
entity-affiliated party by a third-party insurer under such insurance
or bonds purchased by the regulated entity.
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\5\ This provision was designated in the 2009 re-proposal as
Sec. 1231.2(2)(i).
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Several Banks requested confirmation that the issuance of a notice
of charges in an administrative action and the filing of a complaint in
a civil action would be the triggers for the indemnification provisions
of Sec. 1231.4(a), in these respective circumstances. These Banks are
correct. Section 1231.4(a) is triggered by the Director issuing a
notice of charges; or by the filing of a complaint in a civil action.
In connection with partial indemnification, one commenter requested
a revision to the provision on ``prohibited indemnification payments''
in Sec. 1231.4(b)(2)(i) \6\ to provide that legal and professional
fees incurred may be reimbursed on a proportional basis using the ratio
of charges as to which the entity-affiliated party is entitled to
reimbursement to the total charges. FHFA has considered the requested
revision and has determined not to accept it. In many cases the
appropriate amount of partial indemnification will be difficult to
ascertain with certainty. The value of each charge may not equal each
other charge. Services provided often will relate to multiple charges
or all charges and cannot conveniently be segregated. FHFA believes
that the appropriate amount of any partial indemnification is best
determined on a case-by-case basis rather than by applying a
predetermined formula.
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\6\ This provision was designated in the 2009 re-proposal as
Sec. 1231.2(2)(i).
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The OF requested that the restriction on indemnification payments
not apply to the OF; and further, confirmation that there is no
intention by FHFA to assert that any funding provided by a Bank to the
OF that might ultimately be used to indemnify an OF director or officer
would be considered to be an indemnification payment by the Bank for
purposes of the rule. FHFA considered the comment in connection with
the Golden Parachute Final Rule (79 FR 4395) and determined that the OF
is appropriately included in that final rule and for reasons of
prudential supervision this 2016 proposed rulemaking also extends to
the OF. In the Golden Parachute Final Rule, the definition of ``entity-
affiliated party,'' applying to all of part 1231, reads: ``(1) With
respect to the Office of Finance, any director, officer, or manager of
the Office of Finance.'' 12 CFR 1231.2. This definition is appropriate
because of those persons' participation in the conduct of the affairs
of the Banks, specifically their funding activities.
Only the OF, including its board of directors, is responsible for
OF's compliance; Banks themselves are not responsible for any improper
indemnification payments by OF simply because the OF draws its funding
from the Banks. However, a majority of the OF's board comprises the 11
Bank presidents, who would be responsible in their capacity as OF
directors for approving indemnification payments in violation of this
regulation. The issue does not require additional examination in the
context of this 2016 proposal.
One commenter requested that the grandfathering provision relating
to existing indemnification agreements (now reflected in Sec.
1231.4(b)(4) of this 2016 proposed rulemaking) also be applicable to
bylaw indemnification provisions that are asserted to be contractual in
nature. The commenter also sought confirmation that any person who is
covered by such an existing indemnification bylaw provision, which may
be considered contractual, or an existing separate indemnification
agreement will not be subject to any new restrictions contained in a
final indemnification rule. FHFA considered the comment and determined
that the grandfathering provisions are applicable only to specific
indemnification agreements entered into by a regulated entity or the OF
with a named entity-affiliated party on or before the day this 2016
proposed rulemaking is published in the Federal Register. In FHFA's
view, only agreements of that type present equities that justify
grandfathering. Accepting the argument that a Bank's bylaws are
contractual in nature and that general indemnification provisions
contained in them should be considered specific agreements and
grandfathered could immunize a Bank's entire corps of managers and
directors from the effect of this regulation in perpetuity.\7\
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\7\ The restriction, of course, will not apply until a final
rule reflecting it is adopted. FHFA considers it important to the
integrity of indemnification regulation that bylaws are not
routinely converted to individualized contracts, and therefore
grandfathered, before a final rule becomes effective. FHFA believes
it best to set the date of this 2016 proposed rulemaking's
publication as the grandfathering date for individualized
indemnification agreements.
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One commenter raised the issue of the standard to be used by a
board of directors in conducting an investigation and making findings
with respect to an entity-affiliated party. The comment suggested that
for an entity-affiliated party to be eligible for advancement of
expenses to the individual, the board of directors should find that the
entity-affiliated party acted in good faith and in a manner that he or
she believed to be in the best interests of the regulated entity. FHFA
confirms that this 2016 proposed rulemaking intends that the board of
directors conclude, after a good faith inquiry based on the information
reasonably available to it and before agreeing to advance expenses,
that the individual acted in a way that he or she believed to be in the
best interest of the regulated entity or the OF. FHFA reminds the
regulated entities and the OF that in addition to the standard set
forth in this 2016 proposed rulemaking, they also have a concurrent
obligation to follow proper corporate governance procedures in
conducting their investigations.
A commenter asked about the selection of applicable state law for
purposes of corporate governance practices and procedures, and
indemnification consistent with the Office of Federal Housing
Enterprise Oversight Corporate Governance Rule.\8\ After considering
the comment, FHFA has determined not to address the subject in this
rulemaking. FHFA published a final rule on corporate governance that
addresses this issue.\9\ The regulated entities are reminded that an OF
rule \10\ authorizes the OF to select an appropriate body of governance
law and to follow it with respect to practices and procedures related
to indemnification, which would apply to the extent not inconsistent
with this regulation.
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\8\ 12 CFR 1710.10, relocated and consolidated with revisions at
80 FR 72327 (Nov. 19, 2015), recodified at 12 CFR 1239.3.
\9\ 12 CFR 1239.3, 80 FR 72327 (Nov. 19, 2015).
\10\ 12 CFR 1273.7(i)(2).
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FHFA considered a request by one Bank to allow indemnification by a
ruling from the judge before whom the underlying case was heard,
asserting that some jurisdictions recognize this as an alternative
means by which a person may obtain indemnification. FHFA has determined
not to accept the suggestion. FHFA believes that in actions brought by
the Agency, the standards prescribed in this rule, within the framework
of the Safety and Soundness Act, are the appropriate standards.
IV. Consideration of Differences between the Banks and the Enterprises
Section 1313(f) of the Safety and Soundness Act, as amended,
requires
[[Page 64360]]
the Director, when promulgating regulations relating to the Banks, to
consider the differences between Fannie Mae and Freddie Mac
(collectively, the Enterprises) and the Banks with respect to: the
Banks' cooperative ownership structure; mission of providing liquidity
to members; affordable housing and community development mission;
capital structure; joint and several liability; and any other
differences the Director considers appropriate. See 12 U.S.C. 4513(f).
In preparing this 2016 proposed rulemaking, the Director considered the
differences between the Banks and the Enterprises as they relate to the
above factors, and determined that the Banks should not be treated
differently from the Enterprises for purposes of this 2016 proposed
rulemaking. Any regulated entity in conservatorship (or receivership or
a limited-life regulated entity), whether a Bank or an Enterprise,
would be outside the scope of the proposed rule.
V. Paperwork Reduction Act
This proposed rulemaking does not contain any information
collection requirement that requires the approval of the Office of
Management and Budget (OMB) under the Paperwork Reduction Act (44
U.S.C. 3501 et seq.). Therefore, FHFA has not submitted any information
to OMB for review.
VI. 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). FHFA has considered the impact of the 2016
proposed rulemaking under the Regulatory Flexibility Act. The General
Counsel of FHFA certifies that this 2016 proposed rulemaking, if
adopted as a final rule, is not likely to have a significant economic
impact on a substantial number of small entities because it would apply
primarily to the regulated entities and the OF, which are not small
entities for purposes of the Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 1231
Indemnification payments, Government-sponsored enterprises.
Accordingly, for reasons stated in the preamble, under the
authority of 12 U.S.C. 4518(e) and 4526, FHFA proposes to amend part
1231 of subchapter B of chapter XII of title 12 of the CFR as follows:
PART 1231--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS
0
1. The authority citation for part 1231 continues to read as follows:
Authority: 12 U.S.C. 4518(e), 4518a, 4526.
0
2. In Sec. 1231.2 add the definitions of ``Indemnification payment''
and ``Liability or legal expense'' in alphabetical order to read as
follows:
Sec. 1231.2 Definitions.
* * * * *
Indemnification payment means any payment (or any agreement to make
any payment) by any regulated entity or the OF for the benefit of any
current or former entity-affiliated party, to pay or reimburse such
person for any liability or legal expense.
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.
* * * * *
0
3. Add Sec. 1231.4 to read as follows:
Sec. 1231.4 Indemnification payments.
(a) Prohibited indemnification payments. Except as permitted in
paragraph (b) of this section, a regulated entity or the OF may not
make indemnification payments with respect to an administrative
proceeding or civil action that has been initiated by FHFA.
(b) Permissible indemnification payments. A regulated entity or the
OF may pay:
(1) Premiums for professional liability insurance or fidelity bonds
for directors and officers, to the extent that the insurance or
fidelity bond covers expenses and restitution, but not a judgment in
favor of FHFA or a civil money penalty.
(2) Expenses of defending an action, subject to the entity-
affiliated party's agreement to repay those expenses if the entity-
affiliated party either:
(i) When the proceeding results in an order, is not exonerated of
the charges that the expenses specifically relate to; or
(ii) Enters into a settlement of those charges in which the entity-
affiliated party admits culpability with respect to them; or
(iii) Is subject to a final prohibition order under 12 U.S.C.
4636a.
(3) Amounts due under an indemnification agreement entered into
with a named entity-affiliated party on or prior to [DATE OF
PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER].
(c) Process; factors. With respect to payments under paragraph
(b)(2) of this section:
(1) The board of directors of the regulated entity or the OF must
conduct a due investigation and make a written determination in good
faith that:
(i) The entity-affiliated party acted in good faith and in a manner
that he or she reasonably believed to be in the best interests of the
regulated entity or the OF; and
(ii) Such payments will not materially adversely affect the safety
and soundness of the regulated entity or the OF.
(2) The entity-affiliated party may not participate in the board's
deliberations or decision.
(3) If a majority of the board are respondents in the action, the
remaining board members may approve payment after obtaining written
opinion of outside counsel that the conditions of this regulation have
been met.
(4) If all of the board members are respondents, they may approve
payment after obtaining written opinion of outside counsel that the
conditions of this regulation have been met.
(d) Scope. This section does not apply to a regulated entity
operating in conservatorship or receivership or to a limited-life
regulated entity.
Dated: September 13, 2016.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2016-22483 Filed 9-19-16; 8:45 am]
BILLING CODE 8070-01-P