Federal Housing Finance Agency, Federal Housing Finance Board.
Final rule.
In this rulemaking, the Federal Housing Finance Agency (FHFA) is adopting a final rule that implements two separate proposed rules, which relate to Federal Home Loan Bank (Bank) director elections and director compensation, respectively. As to director elections, FHFA is amending its regulations relating to the process by which successor Bank directors are chosen after a directorship is redesignated to a new state prior to the end of the term as a result of the annual designation of Bank directorships. Under the final rule, the redesignation causes the original directorship to terminate and creates a new directorship that will be filled by an election of the members.
As to director compensation, FHFA is implementing section 1202 of the Housing and Economic Recovery Act of 2008 (HERA), which amended section 7(i) of the Federal Home Loan Bank Act (Bank Act) by repealing the statutory caps on the annual compensation that can be paid to Bank directors. This aspect of the final rule allows each Bank to pay its directors reasonable compensation and expenses, subject to the authority of the FHFA Director to object to, and to prohibit prospectively, compensation and/or expenses that the Director determines are not reasonable.
This rule is effective May 5, 2010.
Daniel Coates, Associate Director, Division of FHLBank Regulation, 202–408–2959,
On July 30, 2008, HERA, Public Law 110–289, 122 Stat. 2654 (2008), became law and created FHFA as an independent agency of the Federal government. Among other things, HERA transferred to FHFA the supervisory and oversight responsibilities over the Banks that formerly had been vested in the now abolished Federal Housing Finance Board (Finance Board). The Banks continue to operate under regulations promulgated by the Finance Board until such time as the existing regulations are supplanted by regulations promulgated by FHFA.
Section 1202 of HERA amended section 7 of the Bank Act, which governs the eligibility, election, compensation and expenses of Bank directors.
Section 1201 of HERA (codified at 12 U.S.C. 4513(f)) requires the Director of FHFA 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, whenever promulgating regulations that affect the Banks. The Director may also consider any other differences that are deemed appropriate. In preparing this final rule, the Director considered the differences between the Banks and the Enterprises as they relate to the above factors and determined that the rule is appropriate, particularly because this final rule applies only to the Banks.
In December 2009, FHFA published a proposed rule that would deem terminated a directorship that is redesignated to a new state prior to the end of its term as a result of the annual designation of Bank directorships, with a new directorship created for the new state.
FHFA received one comment on the proposed rule, which was from a Bank and related to an aspect of the term limit provisions. Section 1261.4(d)(2) implements the term limit provision of section 7(d) of the Bank Act.
FHFA also is making a technical change to part 1261. It is creating a new subpart A, which contains definitions common to all subparts. These definitions include the terms Act, Bank, FHFA, and Director. These terms no longer will appear in other subparts of part 1261. The succeeding subparts will be redesignated subparts B (eligibility and elections), C (compensation and expenses), and D (reserved). In the newly redesignated subpart B, FHFA is renumbering §§ 1261.1 through 1261.7 as §§ 1261.2 through 1261.8, respectively. It is removing § 1261.8, which was reserved. FHFA is correcting the cross-references within subpart B to take into account the new numbering.
In October 2009, FHFA published a proposed rule to address changes HERA section 1202 made to section 7(i) of the Bank Act.
FHFA received six public comments on the proposed rule, three from Banks, one from the Council of Banks, which is a trade group representing all twelve Banks, one from a trade association representing home builders, and one from a public interest group. All commenters generally supported the rule and the goal of increased transparency.
For aspects of the proposed rule with respect to which FHFA received no comments, FHFA is adopting those provisions as proposed, and they generally are not addressed in this preamble. One comment concerned provisions of part 1261 that were not the focus of this rulemaking, such as board diversity and differences between elected and independent Bank directors. Because those matters are beyond the scope of the proposed rules, FHFA is not addressing them in either the regulation or this supplementary information. FHFA discusses issues raised by the other comments in the analysis of the appropriate section of the final rule below.
FHFA received no comments on the definition section. However, because the term “expense” is used throughout the subpart and because reimbursable expenses are described as part of proposed § 1261.24, FHFA has decided to relocate the substance of the description of reimbursable expenses into a new definition. The final rule adds the term “expenses” to the definition section without making any substantive changes from proposed § 1261.24, which is deleted from the final rule. FHFA received no comments on § 1261.24.
FHFA has separated proposed § 1261.21(b) into two parts—the first concerns annual reporting requirements relating to anticipated compensation for the coming year and the second concerns annual reporting requirements relating to compensation and expenses for the prior year. FHFA received comments on two aspects of the reporting requirements. The first comment concerned the report on compensation a Bank expects to pay in the upcoming year. A Bank suggested that FHFA change the due date for the report from December 1 to December 31 because some Banks address compensation issues at the last meeting of the year, which may occur later in December. FHFA has made this amendment in § 1261.21(b)(1).
The second group of comments concerned the reporting requirements for compensation and expenses that a Bank has paid in the prior year. In response to these comments, FHFA is making certain revisions to § 1261.21(b) and is deleting proposed § 1261.25, which would have required the Banks to disclose certain information about compensation practices in their annual reports to members. Finance Board regulations long had required the annual reports the Banks provide to their members to include certain information about the compensation and expenses paid to Bank directors. Section 1261.25 of the proposed rule would have expanded the elements a Bank had to include in the annual reports to provide members with additional information about director compensation, expenses, and meeting attendance. That proposal prompted comments questioning whether it effectively would require the Banks to include items in their filings with the U.S. Securities and Exchange Commission (SEC) that are not required by the federal securities laws. Since the Banks became registered with the SEC, they generally have ceased providing their members an annual report separate from the Form 10–K that they file with SEC, which includes information about director and officer compensation. FHFA agrees that the expanded provisions of § 1261.25 of the proposed rule could have the unintended consequence of requiring a Bank to include in its Form 10–K information that differs from what otherwise is required for SEC registrants, and has determined that the appropriate course is to delete from the final rule any requirements relating to the content of the Banks' annual reports.
Because FHFA needs information about director compensation and expenses for its own supervisory and regulatory purposes,
FHFA received several comments about group expenses, such as dinners in conjunction with board or committee meetings that a Bank does not reimburse back to individual directors. Commenters suggested three different methods for dealing with group expenses: (1) Do not report it as an expense; (2) treat it as an aggregated expense that FHFA will review during exam process; or (3) aggregate it, with the average cost allocated back to each director. FHFA believes that these group expenses are “expenses” relating to the directors' attendance at board meetings, but agrees that allocating them among the attending directors might be burdensome. Therefore, FHFA has decided that the Banks need only provide an aggregate sum of group expenses as part of the report on prior year payments.
Several commenters asked FHFA to clarify that a director can attend a board or committee meeting either in person or through electronic means, such as video or teleconferencing. FHFA encourages in-person attendance by all directors, but will deem an individual director's participation in the entire meeting via video or teleconferencing as attendance solely for purposes of reporting that director's attendance under § 1261.21(b)(2)(vii). The board of directors is still required by § 1261.24(a) to hold a minimum of six in-person meetings each year, which requirement is separate from the reporting requirements of § 1261.21.
FHFA received several comments on proposed § 1261.23, which addresses the FHFA Director's authority to disapprove compensation arrangements that do not conform to the reasonableness standard imposed by section 7(i) of the Bank Act. One commenter asked FHFA to clarify that the prospective disapproval determination or order does not apply to earned but unpaid compensation and expenses incurred but not yet
Two commenters suggested that the final rule establish a formal process for any determinations of unreasonable director compensation and that the Director provide a written factual analysis to a Bank along with any order directing a Bank to cease further payments at that level. FHFA does not see the need to establish a formal process for reviewing the reasonableness of a Bank's compensation practices, since there are in place already certain requirements to ensure the Agency makes decisions in a responsible manner. Under the Bank Act and principles of administrative law, FHFA must act reasonably in all cases and must have a reasonable factual basis for any regulatory or supervisory actions it takes. In light of these statutory requirements, FHFA believes that it is not necessary to create an additional formal process or to treat decisions made on director compensation any differently from the many other supervisory determinations FHFA makes. While FHFA may not issue a formal written analysis to a Bank whenever the Director deems its compensation arrangements to be unreasonable, it will endeavor to ensure that it provides an opportunity for the Bank to provide its views. Further, the Agency will provide guidance and will advise generally on the aspects of the compensation practices deemed objectionable and suggest improvements. The guidance likely will be in the form of a dialogue with the Bank, much like FHFA staff already engages in with respect to other matters of supervisory concern.
In § 1261.24 of the final rule, FHFA has combined two separate provisions of the proposed rule relating to board and committee meetings. Proposed § 1261.26, which concerned the number of board and committee meetings, now appears in § 1261.24(a) without substantive change. Proposed § 1261.27, which concerned the site of board and committee meetings, now appears in 1261.24(b) without substantive change. FHFA did not receive any comments on these sections.
The final rule does not contain any information collection requirements that require the approval of the Office of Management and Budget under the Paperwork Reduction Act (44 U.S.C. 3501
The final rule applies only to the Banks, which do not come within the meaning of “small entities” for purposes of the Regulatory Flexibility Act (RFA).
Banks, Banking, Community development, Conflicts of interest, Credit, Elections, Ethical conduct, Federal home loan banks, Financial disclosure, Housing, Reporting and recordkeeping requirements, Wages.
12 U.S.C. 1426, 1427, 1432, 4511, and 4526.
As used in this part:
As used in this Subpart B:
(d)
(e)
(e)
As used in this subpart C:
(a)
(b)
(2)
(i) The total compensation paid to each director;
(ii) The total expenses paid to each director;
(iii) The total compensation paid to all directors;
(iv) The total expenses paid to all directors;
(v) The total of all expenses incurred at group functions that are not reimbursed to individual directors, such as the cost of group meals in connection with board and committee meetings;
(vi) The total number of meetings held by the board and its designated committees; and
(vii) The number of board and designated committee meetings each director attended in-person or through electronic means such as video or teleconferencing.
(a)
(b)
(c)
(d)
The Director may determine, based upon his or her review of a Bank's
(a)
(b)