[Federal Register Volume 66, Number 208 (Friday, October 26, 2001)]
[Rules and Regulations]
[Pages 54097-54109]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 01-26963]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 66, No. 208 / Friday, October 26, 2001 /
Rules and Regulations
[[Page 54097]]
FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 925, 930, 931, 932, and 933
[No. 2001-24]
RIN 3069-AB06
Capital Requirements for Federal Home Loan Banks
AGENCY: Federal Housing Finance Board.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Board (Finance Board) is modifying
the capital and related regulations that were adopted on December 20,
2000. Many of the changes were identified in response to an advance
notice of proposed rulemaking (ANPR) relating to unforeseen issues that
were not addressed by the final capital rule. In addition to making
certain conforming amendments, the Finance Board is clarifying that the
Federal Home Loan Banks (Banks) may pay dividends on Class A stock from
retained earnings; providing Banks with discretion to prohibit members
from transferring Bank stock; defining the phrase ``charges against the
capital of the Bank;'' clarifying the off-balance sheet conversion
factors for commitments to make advances and commitments to acquire
loans; changing the provision governing the membership termination date
for members seeking to voluntarily withdraw from the Bank System; and
adding a requirement that a Bank make certain disclosures to its
members before its capital plan can be implemented. The Finance Board
is also: providing Banks with authority to suspend the redemption of
Class A or Class B stock if continued redemption would seriously affect
the Bank's capital position or raise other safety or soundness concerns
and adopting a provision requiring Banks to establish a deadline in
their capital plans by which a member must opt-out of the stock
conversion process.
DATES: The final rule is effective November 26, 2001.
FOR FURTHER INFORMATION CONTACT: James L. Bothwell, Managing Director,
(202) 408-2821; Scott L. Smith, Acting Director, (202) 408-2991; Ellen
Hancock, Senior Financial Analyst, (202) 408-2906; or Christina
Muradian, Senior Financial Analyst, (202) 408-2584, Office of Policy,
Research and Analysis; or Arnold Intrater, Acting General Counsel,
(202) 408-2536; Neil R. Crowley, Deputy General Counsel, (202) 408-
2990; Thomas F. Hearn, Senior Attorney-Advisor, (202) 408-2976; or
Thomas E. Joseph, Senior Attorney-Advisor, (202) 408-2512, Office of
General Counsel, Federal Housing Finance Board, 1777 F Street, NW.,
Washington, DC 20006.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
The Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 133 Stat. 1338
(November 12, 1999) (GLB Act), amended the Federal Home Loan Bank Act
(Bank Act) to change, among other things, the capital structure of the
Banks from a ``subscription'' structure to one that includes both risk-
based and minimum leverage requirements. The GLB Act also required the
Finance Board to prescribe uniform capital standards for the Banks and
required each Bank to adopt and implement a capital plan consistent
with provisions of the GLB Act and Finance Board regulations.
On March 2, 2001, the Finance Board approved an ANPR to help
identify issues or uncertainties that had not been contemplated by, or
fully addressed in, the final capital rule or that had arisen only
after the Banks had begun to develop their capital plans. See 66 FR
14093 (Mar. 9, 2001). On August 8, 2001, the Finance Board published
for notice and comment a notice of proposed rulemaking (proposed rule)
addressing a small number of modifications to the capital and related
regulations. See 66 FR 41462 (Aug. 8, 2001). Many of the changes
proposed were identified in response to the ANPR. In addition to
proposing certain conforming amendments, the Finance Board proposed to:
clarify that the Banks may pay dividends on Class A stock from retained
earnings; provide Banks with discretion to prohibit members from
transferring Bank stock; define the phrase ``charges against the
capital of the Bank;'' clarify the off-balance sheet conversion factor
for commitments to make advances and commitments to acquire loans;
change the provision governing the membership termination date for
members seeking to withdraw voluntarily from the Bank System; and add a
requirement that a Bank make certain disclosures to its members before
its capital plan can be implemented. The proposed rule also addressed
other issues arising under the capital rule that, based on the ANPR
comments, appeared to require additional explanation, even though no
amendment to the regulation with respect to these issues was proposed.
After considering the comments on the proposed rule, the Finance
Board is adopting many of the changes as proposed, and is substantially
modifying a number of others. The Finance Board is also adopting a few
changes after commenters prompted the Finance Board to reconsider
issues that, when proposing the rule amendments, the Finance Board had
indicated such issues would not require rule changes. The final rule
being adopted herein will become effective 30 days from its date of
publication in the Federal Register, in accordance with the
Administrative Procedure Act. See 5 U.S.C. 553(d). Banks, however, may
immediately rely on the changes adopted herein in developing their
capital plans. Further, because some Banks have already submitted their
respective capital plans to the Finance Board for approval or others
may not have sufficient time to alter a capital plan already approved
by the their boards of directors before October 29, 2001 (when final
plans are to be submitted to the Finance Board), the Finance Board
emphasizes that Banks' boards of directors may amend their capital plan
submissions at any time up until the time the Finance Board considers
the capital plan for approval.
II. Comments on and Changes to the Proposed Regulations
The Finance Board received seven comment letters related to the
proposed rule. One comment, from a Bank, was sent on behalf of all
twelve Banks. Four Banks submitted separate comments. Comment letters
were also submitted by
[[Page 54098]]
two trade associations. On August 20, 2001, Finance Board staff met
with representatives of three Banks, along with a law firm representing
the Banks, to discuss disclosure requirements in the proposed rule. A
summary of this meeting was designated as a comment. After considering
these comments the Finance Board has made a number of changes to the
proposed regulations. In other cases, the Finance Board believes that
no change to the proposed rule is warranted or that the Finance Board
could address the comment by clarifying the meaning of regulatory text
or a statutory provision. The Finance Board discusses below those
comments that referenced provisions in the proposed rule amendments or
that raised issues that the Finance Board has not previously fully or
clearly addressed.
Voluntary withdrawal from membership. In the proposed rule, the
Finance Board proposed amending Sec. 925.26(b) to address a membership
termination issue raised by a scenario described in comments to the
ANPR. See 66 FR at 41463, 41473. Under that scenario, a member was
required to hold Class B shares to support outstanding borrowing from a
Bank and to hold Class A shares as a condition of membership. As
adopted in December 2000, Sec. 925.26(b) set the effective date of a
member's termination as of the date on which the last of the applicable
stock redemption periods ended for the member's stock, whether the
stock in question was held as membership stock, as activity-based
stock, or as excess stock. Thus, this provision prevented the Bank from
redeeming Class A stock at the end of the six-month redemption period
because that stock would have been required to be held as a condition
of continued membership in the Bank until the membership terminated at
the end of the five-year redemption period applicable to the member's
outstanding Class B stock.
Because the rule appeared effectively to extend the redemption
notice period for Class A stock in the situation described above by
linking the membership termination to activity-based stock purchase
requirements, thereby burdening members unnecessarily, the Finance
Board proposed to change it. Under the proposed change, the membership
of an institution that had submitted a notice of withdrawal would have
terminated as of the date on which the last of the applicable stock
redemption periods ended for the stock held as a condition of
membership, as that requirement was set out in the Bank's capital plan,
unless the institution decided not to withdraw and cancelled its notice
of withdrawal prior to that date. This proposed change would have, in
situations like those described above, enabled the Bank to redeem the
Class A shares that were held as a condition of membership at the end
of six months, unless a Bank also required a member to hold Class B
stock as a condition of membership. In most cases, however, the Finance
Board believed that the rule change would have helped assure that the
redemption date for the Class A stock held as a condition of membership
would have corresponded to the date on which the member's withdrawal
became effective.
No commenter objected to the proposed change. One commenter,
however, raised a question about how the effective date of a member's
voluntary withdrawal would be affected by the member's purchase, after
it had submitted its notice of withdrawal, of additional stock to
satisfy an increase in its membership stock requirement. Under
925.26(b) as proposed, if a Bank's capital plan required a member to
hold Class B stock as a condition of membership, voluntary termination
of membership would ordinarily occur five years from the date the
member submitted its notice to withdraw. However, if two years into the
five-year redemption period, the membership requirement increased and
the member purchased additional Class B stock to satisfy the increase,
the language in Sec. 925.26(b), as proposed, could be read to suggest
that the effective date of the member's voluntary withdrawal would
become five years after the purchase of the additional stock, or in
effect, seven years after the member first submitted its notice of
voluntary withdrawal. Such an outcome was not intended by the Finance
Board. Therefore, the Finance Board, in adopting this provision, has
altered the proposed language to make clear that the effective date of
termination for a member that voluntarily withdraws from membership is
the date on which the last of the applicable stock redemption periods
ends for membership stock that the member held on the date it submitted
its withdrawal notice.
An example illustrates how a member's voluntary termination would
operate under the amendment to section 925.26(b). At the time it
submits its notice of voluntary withdrawal, a member holds 100 shares
of Class B stock to satisfy its membership stock requirement. Two years
into its five-year redemption period, the member purchases 20 shares of
Class B stock to satisfy an increase in its membership stock
requirement. The effective date of the member's voluntary withdrawal
would be unchanged by the purchase of additional stock, and on that
date, the membership stock held as of the date the member filed the
notice to withdraw would become subject to redemption while, as
explained below, the additional 20 shares purchased to satisfy the
increase in the membership stock requirement would become excess.
Stock purchased by withdrawing member. In response to the proposed
rule, a commenter raised two concerns regarding stock purchased by a
withdrawing member. First, the commenter raised the scenario of a
member that, after filing its withdrawal notice, purchased additional
stock, either to satisfy its membership stock purchase requirement, or
to support additional business activity. Assuming such stock were Class
B stock, unless the redemption period for such stock were deemed to
have begun on the date of the member's withdrawal notice, the commenter
argued, the redemption period for such stock could extend well after
the termination of the institution's membership.
The Finance Board believes that, with respect to stock purchased by
a withdrawing member to support additional business activity, such a
scenario does not require a regulatory change. It is true that in this
scenario, if the stock purchased to support additional activity is
Class B stock, the redemption period would extend beyond the effective
date of the member's voluntary withdrawal. However, once the activity
related to the stock was liquidated, the stock would become excess and
subject to repurchase at the Bank's discretion.
For example, assume that two years into its five-year redemption
period, a withdrawing member takes down a four-year advance, supporting
it by purchasing additional Class B stock on which it immediately files
a notice of redemption. When the membership expires in year five, there
would still be one year left on the member's advance. When the advance
is paid off one year later, the stock supporting that activity would
become excess, subject to repurchase at the Bank's discretion, even
though one year still remains to run on that stock's five-year
redemption period.
Similarly, with respect to Class B stock that a withdrawing member
purchases to satisfy an increase in its membership stock requirement,
such stock would not be subject to redemption until some time after the
effective date of the member's voluntary termination. However, as
explained more fully below, this stock would be
[[Page 54099]]
considered excess stock as of the effective date of the member's
voluntary termination. As excess, such stock could be repurchased at
the Bank's discretion under the terms of the capital plan.
The example used previously also illustrates how a member's
voluntary termination would operate under the amendment to
Sec. 925.26(b). At the time it submits its notice of voluntary
withdrawal, a member holds 100 shares of Class B stock to satisfy its
membership stock requirement. Two years into its five year redemption
period, the member purchases 20 shares of Class B stock to satisfy an
increase in its membership stock requirement. The effective date of the
member's voluntary withdrawal would be unchanged by the purchase of
additional stock, and would remain five years from the date it
submitted its notice to withdraw from the Bank.\1\ Further, assuming
the member filed a redemption notice for the additional 20 shares at
the time they were purchased, such shares could be redeemed three years
after the member's voluntary termination was effective. Such shares
could be repurchased by the Bank under the terms of its capital plan,
however, at any time after the effective date of voluntary termination
because after such date, such shares would be considered excess.
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\1\ Of course, a Bank could provide in its capital plan a
provision which automatically commences the redemption period upon
purchase, for stock purchased after a member submits a notice of
voluntary withdrawal. See 66 FR at 41463.
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With regard to this latter point, some question may arise as to
whether membership stock held after membership has been voluntarily
terminated may be considered excess because of a provision in section
6(e)(2) of the Bank Act which provides:
Excess Stock: Shares of stock held by a member shall not be
deemed to be ``excess stock'' for purposes [of a Bank's discretion
to repurchase excess stock under section 6(e)(1)] by virtue of a
member's submission of a notice of intent to withdraw from
membership or termination of its membership in any other manner.
The Finance Board, however, believes that section 6(e)(2) of the
Bank Act does not preclude membership stock becoming excess upon the
termination of membership pursuant to a member's voluntary withdrawal.
Instead, the Finance Board interprets section 6(e)(2) as preventing a
Bank from deeming excess the membership stock of a member that
voluntarily withdraws from membership merely because the member has
filed a notice of withdrawal. Nothing precludes a Bank, however, from
considering stock as excess when membership actually terminates
pursuant to a voluntary withdrawal because, under the statute, the
stock is no longer required as a condition of membership. The Finance
Board believes this interpretation is also consistent with the
statutory provision governing voluntary termination of membership which
sets forth that the applicable stock redemption notice period begins
when the member files its notice to withdraw and that stock may be
redeemed at the end of that period. See 12 U.S.C. 1426(d)(1).
Furthermore, the Finance Board believes that use of the phrase
``termination * * * in any other manner'' means that the second
restriction in Section 6(e)(2) of the Bank Act applies to termination
of membership by a process other than the filing of a voluntary notice
of withdrawal, in other words as applying to members that are
involuntarily terminated, or terminated through merger or consolidation
with a nonmember or member of another Bank. Thus, section 6(e)(2) of
the Bank Act prevents a Bank from deeming stock as excess because a
member is involuntarily terminated or its membership terminates because
of a merger or consolidation. This interpretation is consistent with
the clear legislative intent, expressed in section 6(d)(2)(B)(i) of the
Bank Act, 12 U.S.C. 1426(d)(2)(B)(i), that a Bank pay a member whose
membership was terminated involuntarily ``* * * in cash the par value
of [its] stock, upon the expiration of the applicable notice period * *
* (emphasis added).'' Id. See also, 12 U.S.C. 1426(d)(2)(C)
(automatically commencing redemption period for stock upon involuntary
termination of membership). The wording concerning excess stock in
section 6(e)(2) of the Bank Act in conjunction with the termination
provisions of section 6(d) of the Bank Act, therefore, effectively
establishes different points at which stock may be deemed excess during
the membership termination process for institutions that withdraw from
membership voluntarily and for institutions whose membership is
terminated through other means.
It should also be noted that, unlike with voluntary terminations,
when a membership is terminated involuntarily or because of a merger or
consolidation, termination is effective immediately. Thus a Bank would
never face the scenario where increases in the Bank's membership stock
requirement would result in an involuntarily terminated member
purchasing additional stock while it awaited redemption of its stock.
The commenter also expressed a second concern about dividends
received as Bank stock (stock dividends) during the period after a
member had filed a withdrawal notice. The commenter believed that
unless the redemption period for such stock dividends were deemed to
have begun on the date of the notice of withdrawal, a member would
never be able to redeem all its stock because it would continue to
receive stock dividends, and stock dividends on the stock dividends, ad
infinitum.
The Finance Board does not believe that the above scenario requires
an amendment to the capital rule because a Bank could address this
issue in its capital plan. For example, a capital plan could provide
that withdrawing members would receive cash dividends instead of stock
dividends or that such dividends be paid in Class A stock, which would
allow redemption after six months. More importantly, to the extent that
shares received as stock dividends exceed the amount a member is
required to hold under a capital plan's minimum investment provisions,
the stock would be excess, subject to repurchase under the terms of a
Bank's capital plan.
Merger and excess stock calculation. One commenter expressed
concern about statements in the proposed rule regarding whether stock
held by a member of one Bank may be considered to be excess stock,
which would be eligible for repurchase by the Bank, whenever that
institution merges into a member of another Bank or into a non-member.
See 66 FR at 41471. The Finance Board indicated that, under the Bank
Act such a merger could not, in and of itself, cause the disappearing
member's stock to be deemed excess stock. The Finance Board also
stated, however, that as a practical matter, some or all of the stock
owned by that member could become excess stock as a result of the
Bank's next calculation of each member's minimum stock purchase
requirement, depending on the terms of a Bank's membership
requirements.\2\ Id. The commenter indicated that at a Bank where Class
B stock was used to satisfy the membership stock requirement, the
membership stock of a disappearing member should remain at the same
level
[[Page 54100]]
during the stock's five-year redemption period, and should not be
subject to being deemed excess stock.
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\2\ For example, an institution that had its charter cancelled
because of a merger or consolidation would no longer exist as a
separate entity, and upon normal recalculation of the membership
requirement, a Bank would have no basis to apply the membership
requirement. The membership requirement, therefore, would become
zero upoon recalculation not because membership was terminated, but
because the former member no longer existed. This reasoning would
not be applicable to an institution that continued to exist as a
separate entity after termination of its membership.
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The Finance Board does not believe that the comment requires any
regulatory change. Even if the Bank stock of a withdrawing member were
deemed excess stock, it would remain part of the Bank's capital for the
duration of the redemption period, unless the Bank exercised its
discretion to repurchase it. Thus, whether such stock ceases to be part
of the Bank's capital before the end of the redemption period is a
decision that is at the complete discretion of the Bank.
Rolling redemption. In the proposed rule, the Finance Board
responded to a concern raised by a Bank that Sec. 931.7(a) could permit
a member to file a redemption notice against all of its stock, even
while such stock was needed to support membership or activity
requirements, allowing what the commenter described as a ``rolling
redemption.'' The Finance Board concluded that members would not have
had a great deal of incentive to engage in rolling redemptions,
especially if the Bank intended to aggressively manage its excess stock
position. Further, the Finance Board pointed out that Sec. 931.7(a)
permitted a Bank to impose a fee, to be specified in its capital plan,
on a member that canceled a pending notice of redemption, and that fee
could have also reduced the incentive to engage in rolling redemptions.
Thus, the Finance Board did not propose any changes to its rules in
response to the concern about rolling redemptions. See 66 FR at 41471.
The Finance Board received one comment on this issue. The commenter
disagreed with the Finance Board's conclusion that the redemption
notice cancellation fee would deter a member from maintaining standing
notices to redeem all their stock and provided examples of how the fee
could be evaded. The commenter recommended amending the capital rule to
permit the Banks to require a member to cancel a redemption notice
associated with stock when the member seeks to use such stock to
support a business activity that extends beyond, or matures after, the
original redemption period.
The Finance Board has reconsidered its previous reasoning and finds
merit in the arguments put forth by the commenter. To address the
commenter's concerns, the Finance Board is adopting an amendment to
Sec. 931.7(a) of its rules to provide that a member's redemption
request will be automatically cancelled if the Bank is unable to redeem
the member's stock within five business days after the completion of
the statutory redemption period. For example, under this change, if
Class B stock specified for redemption were being used to support an
activity at the completion of the five-year redemption period, the
redemption notice would be cancelled if the activity were not
liquidated within five business days and a new notice would have to be
filed, starting anew the waiting period, if the member still wished to
redeem the stock. This cancellation would still be subject to
applicable fees specified in the Bank's capital plan. The five-day
business period which a Bank must wait before canceling the redemption
notice is intended to allow a member the option of liquidating the
activity which is supported by the stock, if such early liquidation of
the transaction is allowed under agreements with the Bank.
The automatic cancellation of a redemption request, of course,
would also be applied to stock if the stock were required to be held as
a condition of membership at the time the applicable redemption period
ended. The Finance Board notes, however, that this provision only
applies if the stock cannot be redeemed because it must be held by the
member to fulfill one of its minimum investment requirements. Thus, the
provision would not apply where the Bank could not redeem stock because
the Bank would be below its regulatory capital requirements after the
redemption or for a reason set forth in Sec. 931.8 of the Finance Board
rules, as that rule is being amended today, 12 CFR 931.8.
Discretionary redemption of stock. In response to the ANPR, a few
commenters noted that Finance Board rules appeared to require a Bank to
redeem a member's excess stock at the end of the statutory redemption
period, unless certain statutory or regulatory restrictions applied.
These commenters stated their belief that this approach was contrary to
the Bank Act. See 66 FR at 41470-71. The Finance Board disagreed with
this assessment and noted the discretion maintained by the Banks to
repurchase stock and reiterated its position that it was not apparent
from the GLB Act that a Bank could deny a redemption request if certain
statutory or regulatory limitations on redemption did not apply. Id.
One commenter urged the Finance Board again to reconsider its
position on this issue, citing concerns that the redemption rules, as
written, may affect tax treatment of stock dividends and accounting
treatment of Bank stock. In response to this comment, the Finance Board
has carefully reconsidered its position on discretionary redemption.
The Finance Board, however, continues to believe its earlier statements
on this issue are correct. Id. at 41470. Further, the Finance Board's
view is based in part on the fact that Congress in considering the GLB
Act specifically rejected a class of non-redeemable stock. See H.R.
Conf. Rep. No. 106-434 (discussing section 608 of the GLB Act).
Interpreting the statute to allow the Banks sole discretion to redeem
excess stock would effectively give the Banks the right to create a
class of non-redeemable stock.
The Finance Board also believes that the Bank Act provides a large
degree of discretion to a Bank to affect the amount of stock that it
must redeem. In this respect, a Bank may adjust minimum investment
provisions in its capital plan to require members to hold additional
stock, effectively rendering such stock ineligible for redemption. This
is especially true in light the amendments to Sec. 931.7(a) being
adopted herein, and discussed above. Further, the Finance Board has
interpreted its rules to allow a Bank to provide minimum investment
ranges in its capital plan so a Bank may adjust its minimum investment
requirement within such range quickly. In cases where a Bank must amend
its capital plan to change the minimum investment requirements, the
Bank would need to seek Finance Board approval of the amendment, but
the Finance Board intends to consider such requests expeditiously.
Authority for Banks to suspend redemption of stock. In considering
the issue of a Bank's discretion to redeem stock, the Finance Board
carefully reviewed its current regulations and weighed whether its
current regulations were sufficiently flexible to allow a Bank to
address an unforeseen or quickly arising situation in which the cash
out-flow associated with redemptions would affect the Bank's ability to
continue operating in a safe and sound manner or would weaken its
capital position. In this respect, Finance Board regulations clearly
prohibit the redemption of stock in situations where a Bank would be
below its regulatory capital requirements after such redemption or
where a Bank has experienced losses or projects future losses that
would impair capital. See 12 CFR 931.7(c) and 931.8. The Finance Board
also retains the right for reasons of safety and soundness to require
the Banks to hold capital above the minimum total capital or risk-based
capital requirements. See 12 CFR 932.2(b) and 932.3(b). By exercising
such right, the Finance Board would effectively reduce the amount of
stock that the Bank could redeem.
[[Page 54101]]
However, it is less clear whether the rules give a Bank clear
authority to suspend redemption if it believes that its capital
requirement may be rising in the future or if it believes that the
capital requirements do not fully reflect the risk on the Bank's
balance sheet. For example, the risk of certain newly-developed
financial instruments may not become apparent until certain market
conditions evolve, and a Bank may feel that such newly-apparent risks
are not fully captured in the Finance Board credit or market-risk
rules, or will result in a steady rise in a Bank's regulatory capital
requirements over a period of time. While the Finance Board has
authority to address such situations by raising capital requirements or
changing its rules, it may be more prudent for the Banks to act
immediately to stop redemptions in particularly volatile situations and
let the Finance Board adjust its regulatory requirements in a more
deliberate fashion.
The Bank Act also clearly provides certain statutory prohibitions
on the redemption or repurchase of Bank stock so that the redemption or
repurchase of such stock does not endanger a Bank's capital position.
See 12 U.S.C. 1426(f). The Finance Board interprets this goal as
applying both to immediate situations in which redemption or repurchase
would bring a Bank below regulatory capital requirements and to
situations in which a Bank has a reasonable belief that current
redemption or repurchase of stock would cause the Bank to fail to
maintain adequate capital in the near-term. It is less clear, however,
that the Finance Board regulations address this latter situation.
In addition, the Bank Act imposes various obligations on the Banks
and on the Finance Board. Among the duties imposed on the Finance Board
are the requirements that it ensures that the Banks operate in a
financially safe and sound manner, that the Banks remain adequately
capitalized, and that the Banks carry out their housing finance
mission. See 12 U.S.C. 1422a(a)(3). The Finance Board recognizes that
cash out-flow associated with redemption of stock could affect the
Banks' ability to carry out other obligations or otherwise operate in a
safe and sound manner. The Finance Board believes that, given its
statutory duties and obligations, it maintains full authority to
restrict the redemption or repurchase of stock on safety and soundness
grounds. Again, however, the Finance Board is concerned that its rules
do not clearly give a Bank flexibility to exercise their judgment in
situations that are fast evolving and moving in directions that cannot
be readily ascertained.
To assure that its regulations address these situations, the
Finance Board is, pursuant to authority in 12 U.S.C. 1422a, 1422b and
1426(a), adopting Sec. 931.8(b). This regulation provides a Bank's
board of directors, or a subcommittee of the board, with authority and
discretion to suspend the redemption of stock if the continued
redemption of stock would cause (at some future date) the Bank to fail
to meet its regulatory capital requirements, would prevent the Bank
from maintaining adequate capital against a risk or potential risk not
fully captured in the Finance Board's regulations, or would otherwise
prevent the Bank from operating in a safe and sound manner. Moreover,
as safety and soundness regulator, the Finance Board believes that it
would need to be informed of any condition that caused a Bank to invoke
the authority granted by this provision. Thus, the provision requires a
Bank to inform the Finance Board in writing within two business days
that it has invoked the authority granted it under Sec. 931.8(b). In
addition, the Bank must provide the Finance Board with its reasons for
suspending stock redemptions, including a description of the conditions
that led to the suspension, and describe the Bank's strategies and time
frame for addressing those conditions. The regulation also makes clear
that in granting the Banks this discretion, the Finance Board retains
authority to require the Banks to re-institute redemptions subject to
whatever terms and conditions the Finance Board may set. The rule also
prohibits a Bank from exercising its discretion to repurchase excess
stock without the Finance Board's written permission during such time
as a suspension of redemption under Sec. 931.8(b) is in effect.
The Finance Board believes that the rule is needed for contingency
purposes. In addition, the Finance Board emphasizes that the condition
related to the failure to meet a minimum capital requirement in
Sec. 931.8(b) differs from the limitation set forth in Sec. 931.7(c) in
that it is forward looking and is intended to address a situation in
which the Bank projects that continued redemptions over the near term
will leave the Bank without sufficient capital to meet its regulatory
requirements in the future. Thus, if current redemptions would cause a
Bank to fall below regulatory capital requirements, the limitations in
Sec. 931.7(c) would apply and the Bank would not need to comply with
the conditions of Sec. 931.8(b).
Opt-out provision. In their joint comment letter, the twelve Banks
urged the Finance Board to address the question of members who would be
in the process of withdrawing on the effective date of the capital
plan. The issue arose in part because of the proposed requirement in
the disclosure rule that a Bank provide the required disclosure at
least 20 days before the effective date of its capital plan. The Banks
pointed out that they had wanted to put in their capital plans a firm
opt-out date by which a member must submit its notice to withdraw if
the member did not want to have its existing capital stock converted
into Class A or Class B stock. If a capital plan contained such an opt-
out date, the Banks stated, disclosure should be made before that date.
Some Banks, in their individual comment letters, also pointed out
that Finance Board staff's position concerning draft capital plans was
that the Banks could not use an opt-out provision to restrict the
members' rights to withdraw from the System upon six-months prior
notice. Thus, Finance Board staff believed a member could withdraw from
the System and, in effect, opt out of the conversion process up until
the effective date of the capital plan. Further, the staff believed
that if the withdrawal notice were submitted before the effective date
of a capital plan, the member's right to withdraw on six-months notice
would have been reserved and should have been applied to any Class A or
Class B stock received by the member upon conversion. One Bank's
comment letter expressed concern about the operational problems related
to conversion procedures and capital stock programming requirements if
members were allowed to opt out of conversion up to the effective date.
The Banks in their joint comment letter also questioned whether there
would be statutory authority to allow Banks to redeem Class B stock on
less than five years notice, as the Finance Board staff suggested.
The Banks reviewed various options for addressing the opt-out
issue, but they believed some of these approaches raised legal or
operational issues. They pointed out, however, that the Finance Board
previously determined that it had authority to waive the six-month
notice period for withdrawal and urged the Finance Board to use this
authority to address the unique circumstances associated with the
transition to the new capital structure. Specifically, the Banks wished
to be able to adopt a flexible opt-out deadline and allow all members
who withdrew from a Bank before this deadline to terminate membership
and
[[Page 54102]]
have their old stock redeemed on or before the effective date of a
Bank's capital plan. The Banks also suggested that the Finance Board
adopt a rule requiring members that did not file a notice of withdrawal
before the opt-out date to have their existing stock converted into
Class A or Class B stock as required under a capital plan and to be
subject to the new, applicable notice periods associated with those
classes of stock. One Bank also urged the Finance Board explicitly to
allow the Banks to convert to cash the stock of institutions whose
membership would be terminated as of the effective date, but
nevertheless had outstanding advances, and to hold that cash as
collateral against the outstanding advances.\3\ The Bank also urged the
Finance Board to deem receipt by a Bank of a notice to withdraw as
receipt by the Finance Board of that notice.
---------------------------------------------------------------------------
\3\ The Finance Board will consider addressing this situation on
a case-by-case basis should it arise.
---------------------------------------------------------------------------
The Finance Board has carefully considered the Banks' comments and
finds many of the Banks arguments persuasive. As a starting point, the
Finance Board recognizes that the Bank Act does not explicitly address
how a Bank is to handle a member that, as of the effective date of a
capital plan, has submitted a notice to withdraw from the Bank but for
which the statutory six-month notice period has not yet been completed.
See 12 U.S.C. 1426(e)(1994). Nor has the Finance Board previously
addressed how this withdrawal issue should be addressed by the Banks in
light of the statutory silence on this issue. The Finance Board does
believe, however, that the preliminary position voiced by its staff
that the statute allows a member to withdraw from the System on six-
months notice up until the effective date of the capital plan raises
questions from both an operational and a legal perspective, and,
therefore, declines to adopt that position.
The GLB Act holds that a Bank shall apply the stock purchase and
retention requirements that were in effect immediately prior to its
enactment until the capital plan of that Bank is implemented. Under the
regulatory structure adopted by the Finance Board, a Bank's capital
plan is considered implemented on its effective date when the stock
purchase and retention requirements (i.e., the minimum investment
requirements) for members adopted in the capital plan and the capital
requirements (and transition provisions) adopted by the Finance Board
under the authority set forth in the GLB Act would be applied. See 12
CFR 931.9. See also 66 FR 8262, 8279-80 (Jan. 30, 2001)(discussing 12
CFR 931.9). Thus, while the six month notice period for withdrawal from
membership are applied up until the effective date of a Bank's capital
plan, the withdrawal provisions set forth in the GLB Act amendments to
the Bank Act should be applied after the capital plan's effective date.
See 12 U.S.C. 1426(d).
The Finance Board believes that this view is also the most
consistent with other provisions of the GLB Act. The GLB Act provides
that the Finance Board may permit Banks to issue only those classes of
stock authorized thereunder, and sets forth specific redemption periods
for both Class A and Class B stock. See 12 U.S.C. 1426(a)(4). Deeming
the six-month notice period for withdrawal to apply to Class B stock
issued on the effective date of the capital plan would raise questions
whether the Finance Board were allowing an unauthorized class of
``old'' stock to be issued, or alternatively, allowing a redemption
period that differs from the statutory requirement. Thus, the approach
that requires the pre-GLB Act withdrawal provision to apply up to the
effective date but that applies the withdrawal provision set forth in
the GLB Act to membership termination and the accompanying redemption
of stock after such date appears to be the most consistent with the
Bank Act, as amended.
The Finance Board also has, on at least one occasion, waived the
statutory six-month notice period for withdrawal. See Fin. Bd. Res. No.
97-89 (Dec. 30, 1997). In that case, the Finance Board noted that it
acted pursuant to an opinion of the Office of General Counsel that the
Finance Board had authority as a matter of law, to waive the statutory
six-month notice period provided that the waiver did not: (1) endanger
the financial stability of the Bank from which the member was
withdrawing; (2) endanger the safety and soundness of the Bank System
as a whole, or (3) frustrate the purposes of the statutory provision.
Id. In this regard, the Finance Board recognizes that some Banks may
wish to allow members to opt out of the conversion process on less than
six-months notice, either to speed up the transition process or to
allow members to make their decision closer to the effective date.
Thus, as a general matter, the Finance Board recognizes that applying
its waiver authority to allow the Banks some flexibility in managing
the unique issues related to the transition from the old subscription-
based capital to the new risk-based capital system may strengthen the
transition process and advance the overall statutory goals of the Bank
Act as amended by the GLB Act.
To codify its view of the withdrawal provisions discussed above and
in response to the concerns raised in comments on the proposed rule,
the Finance Board has decided to adopt Sec. 933.2(e) as part of this
final rulemaking to require each Bank to establish in its capital plan
an opt-out date by which a member that does not wish to convert to the
new Class A or Class B stock must file its notice to withdraw with the
Finance Board. This opt-out date can be no more than six months prior
to the effective date of the capital plan, assuring that a Bank does
not extend the withdrawal notice period beyond the six months currently
required under the Bank Act.
The rule, however, in reliance on the Finance Board's waiver
authority discussed above, will allow a Bank to set its opt-out date
less than six months prior to the effective date of the capital plan.
The Finance Board, by approving a capital plan that has an opt-out date
that is less than six months before the effective date of the capital
plan, will be simultaneously waiving the six-month notice period for
withdrawal contained in Sec. 6(e) of the Bank Act prior to its
amendment by the GLB Act. When considering a capital plan with such an
opt-out date, the Finance Board, therefore, will have to be satisfied
that the opt-date will not endanger the safety and soundness of the
Bank in question or the Bank System more generally nor be contrary to
the withdrawal provision in the statute. Among the factors the Finance
Board will consider in this regard are whether the opt-out date
provides the Bank with sufficient time to adjust to unexpected
withdrawals prior to the effective date and whether the Bank expects or
is reasonably certain that member withdrawal will not negatively affect
its conversion plans. The Finance Board also wishes to emphasize that
it expects the opt-out date to be a specific date keyed to the
effective date (e.g., four months before the effective date) and will
not consider a range of dates.
Section 933.2(e), as adopted, also requires each Bank's capital
plan to provide that a member that does not file its notice to withdraw
from the Bank on or before the opt-out date will be subject to the
withdrawal requirements set forth in the Bank's capital plan. For a
member of a Bank that requires an institution to hold Class B stock as
a condition of membership, this would mean that the member would become
subject to the five-year redemption period associated with Class B
stock upon the conversion of its existing stock to Class B stock,
[[Page 54103]]
even though the member may have filed its notice to withdraw prior to
the effective date of the capital plan. In this regard, the Finance
Board will consider using its waiver authority to allow members that
missed an opt-out date filing to terminate their membership on the
effective date of the capital plan, upon a request of the Bank. In
considering such a waiver, the Finance Board will review the effects of
letting the member leave the System on its Bank's capital position, as
well as review other safety and soundness implications of the request.
Section 933.2(e), as adopted, also makes clear that a Bank shall
consider the period of time after the member files its notice to
withdraw but before the effective date of the capital plan in
calculating the applicable stock redemption periods for the Class A or
Class B stock that are converted from existing stock on the effective
date of the capital plan. The voluntary withdrawal provisions in the
Bank Act both before and after its amendment by the GLB Act required
the withdrawal notice period to commence upon the member's filing of
its notice to withdraw. Cf. 12 U.S.C. 1426(e)(1994) and 12 U.S.C.
1426(d)(1). The Finance Board, therefore, believes that it is
consistent with the GLB Act provisions to allow the date that the
member's notice of withdrawal was first filed with the Finance Board to
carry over when existing stock is converted into Class A or Class B
stock. This approach also results in the applicable stock redemption
periods remaining five years from the date the notice was filed for
Class B stock and six months from the date the notice was filed for
Class A stock, as required by the GLB Act. Section 933.2(e), as
adopted, does not alter current procedures which require that a notice
to withdraw be filed with the Finance Board to become effective. This
long standing practice is required by the Bank Act and has not
generally resulted in delays in member filings. Of course, on the
effective date of a Bank's capital plan, voluntary withdrawal from that
Bank would be governed by Sec. 925.26 of the Finance Board's rules, 12
CFR 925.26, which requires that members provide their notices of
withdrawal to the Bank.
This final provision being adopted by the Finance Board also does
not alter the current practices for calculating the effective date of
termination of membership. Under these procedures, a member whose
notice of withdrawal is received by the Finance Board on February 1
would be given a membership termination date of August 1 (i.e., the
count is six months not 180 days). Thus, by the same token, a Bank that
wished to have an effective date of August 1, 2003, could set its opt-
out date no earlier than February 1, 2003.
In adopting Sec. 933.2(e), the Finance Board is requiring all Banks
to set an opt-out date in their capital plans. The Finance Board fully
expects this change may require some Banks to amend the plans that they
initially submitted and has no objection to a Bank's altering its
capital plan after the submission date.
The Finance Board also agrees with the Banks' comments that the
disclosure requirement should be tied to the opt-out date to assure
that members have information that would aid in their decisions whether
to convert existing stock to the new Class A and/or Class B stock.
Therefore, the Finance Board is adopting in the final disclosure rule
(more fully discussed below) a requirement that all information
required to be provided to members by Sec. 933.5 be transmitted, sent,
or given to members between forty-five and sixty days before the opt-
out date established in a Bank's capital plan. The Finance Board
believes that this deadline will provide members sufficient time to
review the information provided by the Bank and to make follow-up
inquiries if necessary while still being sufficiently close to the opt-
out date.
Furthermore, to assure that members fully understand the
ramifications of the opt-out provision, Sec. 933.5(c)(4)(iv) of the
final disclosure rule requires a Bank to provide the opt-out date in
the disclosure materials. Because a Bank will know the intended
effective date of its capital plan by the time the disclosure document
is provided, the Finance Board expects that Bank to provide the
calendar date for the opt-out deadline. Along with disclosing this opt-
out date, the Bank also must explain the consequences to members of not
filing the withdrawal notice on or before the opt-out date.
Disclosure to members. In proposing Sec. 933.5, the Finance Board
intended to provide a baseline for a Bank's disclosure about its
financial condition, its capital plan, and the capital conversion
process. The Finance Board decided to propose this rule after the Banks
requested further clarification of Finance Board staff guidance that
had outlined the types of communications with members that staff
believed would help the Banks demonstrate the feasibility of
implementation of their capital plans, as is required by Sec. 933.2(g)
of the Finance Board's rules, 12 CFR 933.2(g). The Finance Board noted
that because use of disclosure documents could play an important role
in member outreach and that the quality of a Bank's disclosure on a
number of issues would play an important role in the Finance Board's
review of the Banks' capital plans, there was merit in responding to
the requests for additional guidance by adopting a rule in this area.
See 66 FR at 41467-68.
Proposed Sec. 933.5 would have required a Bank to provide a member
with certain specified information at least 20 days before the
effective date of the capital plan. In developing this proposed
requirement, the Finance Board looked to disclosure standards
established by the Securities and Exchange Commission (SEC), and
specifically, the rule would have required the Banks to provide
disclosure meeting the requirements of Item 11(a) through (d) and Item
12(a) and (e) of Schedule 14A of the SEC's proxy rules (17 CFR 240.14a-
101, Items 11 and 12). The Finance Board noted that Items 11 and 12 are
``usually thought of as mutually exclusive provisions,'' but given the
unique nature of the Banks and the conversion process, the Finance
Board believed that appropriate disclosures from both Items should be
provided to members. Id. The proposed rule would also have required the
Banks to provide certain specific financial information to the members
that was in scope, form, and content consistent with SEC's regulations
S-X and S-K (17 CFR parts 210 and 229), as well as to provide pro forma
balance sheet and income statements. The proposal would have allowed
the Banks to incorporate by reference any of the financial information
that had been incorporated in any Bank or Bank System report or that
had been filed along with the capital plan with the Finance Board.
Under proposed Sec. 933.5, the Banks would also have had to provide
members with a brief statement as to the anticipated accounting
treatment and the federal income tax consequences of the transaction
and with other information.
The Finance Board received four comment letters on various aspects
of the disclosure requirements. One of the letters was on behalf of all
twelve Banks. Three Banks also commented separately on specific aspects
of the proposed disclosure rule. To the extent that the commenters
addressed the same issues, the comment letters were generally
consistent in their requests for changing the proposed rule.
In their joint comment letter, the twelve Banks stated that it was
important for the Finance Board to clarify the premise under, which it
was adopting the disclosure regulation. They noted that the Finance
Board had explained that the proposed disclosure
[[Page 54104]]
regulations were intended to help the Banks satisfy the disclosure
criteria suggested by Finance Board staff in the Capital Plan
Feasibility Guidance that had been provided by letter to the Bank
presidents in May 2001. The Banks, however, viewed the staff guidance
as applicable only to the outreach process which should be completed
before the Banks filed their capital plans on October 29, 2001, while
the disclosure required under the proposed rule would not occur until
after approval of the capital plan.
The Finance Board agrees that clarification on this point is
necessary. The criteria contained in the staff's guidance concerning
the Banks' communications with their members indicated that a Bank was
expected to disclose information about specific requirements in its
capital plan. Because the Finance Board expects that the review process
of a capital plan is likely to result in changes to the capital plan as
originally submitted, information about specific provisions cannot be
disclosed with certainty until after the Finance Board actually
approves the plan.\4\ This fact creates a timing problem under the
staff guidance in that a Bank cannot submit complete information about
its outreach effort until after a capital plan is approved, but at the
same time, the guidance suggested that a capital plan could not be
approved until after such information was submitted. Section 933.5(a),
as adopted, addresses this timing problem by stating that a capital
plan cannot become effective until the disclosure required under the
rule is provided to the members. In this respect, the disclosure rule
is intended to replace the staff guidance concerning a Bank's
communication with its membership.
---------------------------------------------------------------------------
\4\ These changes may result from comments made by the Finance
Board staff or from a Bank's reconsideration of its capital plan.
---------------------------------------------------------------------------
The Finance Board notes, however, that a Bank may wish to provide a
narrative as supplemental information supporting the approval of the
capital plan which describes member reaction to the version of the
capital plan that it submits for approval and describes any issues that
members saw as key to their acceptance of the capital plan. The Finance
Board also emphasizes that Sec. 933.5 as adopted only sets forth the
minimum disclosure requirements, and does not prevent the Banks from
undertaking additional outreach or disclosing additional information at
any time.
The Banks in their joint comment letter also raised concerns about
the approach to disclosure proposed in Sec. 933.5 and about some of the
specific information that the Finance Board was proposing be disclosed
under the rule. Most importantly, the Banks emphasized that the
wholesale incorporation of the SEC's rules was problematic for several
reasons. First, the Banks stated that the specific proxy disclosure
items from the SEC rules cited by the Finance Board were in some cases
mutually exclusive and in other cases overlapping. This fact, the Banks
believed, made it difficult to determine what information had to be
disclosed and could lead to different Banks applying different
standards. Moreover, the Banks believed that the SEC regulations were
not designed to address either the unique capital structure of the
Banks or the unique circumstances surrounding the re-capitalization
which created additional difficulties in discerning what disclosure
would be required. The Banks also questioned whether SEC precedent
would be applied to its disclosure and cited the expense and
difficulties for the Banks, which have not been subject to the SEC
requirements, to develop the expertise in this area necessary to
prepare their disclosure documents.
The Banks also objected to the provisions in proposed
Sec. 933.5(b)(1)(ii) which would have required the Banks to provide
members with quarterly pro forma balance sheet and income statements.
The Banks believed that this information would be so highly speculative
and be based on such a detailed set of assumptions so as to be of
little use to members. The Banks also voiced concern about the
liability associated with requiring disclosure of such highly
speculative financial information. As an alternative to the disclosure
of the pro forma financial information, the Banks suggested that they
be required to provide members with a pro forma capitalization table
that would reflect the new capital structure of a Bank and with a
narrative discussion of known material trends that could affect the
liquidity, capital resources or continuing operations of the Bank. Two
Banks also submitted separate comment letters emphasizing these points
with one of the Banks suggesting that the narrative discussion may also
include a statement of management's plans and objectives for future
operations.
In developing the proposed disclosure rule, the Finance Board had
turned to the SEC proxy rules (and related precedent) because it
believed these rules provide a valuable model and a degree of certainty
for the Banks as to the disclosure requirements. The Finance Board
continues to believe that the SEC rules provide the best model for
disclosure requirements but also understands the Banks' concerns that
their unique capital structure makes the wholesale adoption of these
rules confusing. The Finance Board has also reconsidered the proposed
requirement that the Banks provide specific pro forma financial
information to their members in light of the Banks' comments. As a
result, the Finance Board has restructured the final disclosure rule to
address the Banks' concerns and to more closely relate the SEC
disclosure requirements to the capital plans of the Banks and is
adopting Sec. 933.5 as discussed below.
First, the Finance Board has deleted the specific references in its
rules to the SEC proxy requirements. Instead, the Finance Board now
describes in Sec. 933.5(b) of the final rule the specific information
that a Bank must disclose about the Class A and/or Class B stock that
the Bank intends to issue on the effective date of its plan. (Thus, to
the extent that a Bank's capital plan does not call for the issuance of
Class A stock, the Bank's disclosure document would not be required to
address Class A stock.) Specifically, Sec. 933.5(b), as adopted,
requires a Bank to briefly outline with regard to the Class A and/or
Class B stock that it intends to issue: dividend rights, the terms of
the conversion, the terms and conditions of a member's rights to have
the Class A and/or Class B stock redeemed or repurchased, voting rights
and preferences associated with the stock, liquidation rights, and a
member's liability to further calls or to assessments by the Banks. The
final disclosure provision also requires the Banks to describe any
differences with regard to these rights between existing Bank stock and
the new Class A and Class B stock. The Banks will also be required to
discuss briefly the reasons for the conversion, the general effect of
the conversion on a member's rights, and outline any other material
features concerning the conversion.
Further, to assure that each Bank adequately discloses how
provisions in its capital plan may affect a member's rights, the
Finance Board has adopted Sec. 933.5(c)(4) to require a Bank to
disclose certain additional information related to its capital plan to
the extent that the information was not provided to fulfill the
requirements of Sec. 933.5(b). Specifically, Sec. 933.5(c)(4) requires
each Bank to describe the minimum stock investment requirements set
forth in the capital plan, to review the procedures for the Bank to
amend the capital plan, to describe any restrictions (not
[[Page 54105]]
disclosed elsewhere) on a member's right to redeem or to have its stock
repurchased or to make use of its stock to fulfill its minimum stock
investment requirement, and to describe a member's rights to have its
stock redeemed or repurchased upon the member's voluntary or
involuntary termination of membership.
As already discussed above, Sec. 933.5(c)(4), as adopted, also
requires a Bank to disclose the last date by which a member's written
notice to withdraw from membership must be received by the Finance
Board for the member not to have its existing stock converted to Class
A and/or Class B stock and to explain the ramifications of not filing a
notice to withdraw on or before that date. As also discussed more fully
above, the date by which a Bank must make the disclosure required by
Sec. 933.5 is tied to the opt-out date set in a Bank's capital plan,
and under Sec. 933.5(a), as adopted, a Bank must transmit the required
disclosure to members between forty-five and sixty days before the opt-
out date.
The Finance Board has also modified Sec. 933.5 with regard to the
proposed disclosure of pro forma financial information, and, as
requested by the Banks, Sec. 933.5, as adopted, no longer requires the
Banks to provide members with quarterly pro forma balance sheets and
income statements. Instead, Sec. 933.5(c)(1)(ii) requires each Bank to
provide a pro forma capitalization table that reflects the expected new
capital structure of the Bank, an estimate of the Bank's risk-based
capital requirement under Sec. 932.3 of the Finance Board rules, and an
estimate of the Bank's total capital-to-asset ratio (where total
capital would be regulatory total capital as defined in part 930 of the
Finance Board's rules, 12 CFR part 930). This information should be
based on actual financial data as of the date of the latest balance
sheet required to be provided by Sec. 933.5(c)(1)(i) of the disclosure
regulation. Thus, the rule requires a Bank to show an estimate of what
its capitalization, risk-based capital requirement, and total capital-
to-asset ratio would have been, if the conversion process had occurred
as of the applicable year-end date. The Banks are also required to
disclose any material assumptions, and the basis for these assumptions,
underlying the pro forma capitalization table, the estimated risk-based
capital requirement, and the total capital-to-asset ratio.
Furthermore, Sec. 933.5(c)(2) has been added to the final rule to
require the Banks to provide members with a narrative discussing
anticipated developments that could materially affect the liquidity,
capital, earnings or continuing operations of a Bank, including those
developments that could affect dividends, product volumes, investment
volumes, new business lines, and risk profile. Because this narrative
is viewed as a replacement for the proposed disclosure of the pro forma
financial information, the Finance Board expects that the narrative
will be forward looking. At the same time, however, the Finance Board
used the term ``anticipated developments'' to indicate that it expects
the Banks to discuss in its narrative those developments that, in the
Bank's opinion, may be likely to unfold, given important trends, the
Bank's business strategies, and the general economic conditions
existing at the time the disclosure is made. The Finance Board also
expects that the narrative will provide members with sufficient
information to understand the underlying reasons for a Bank's views.
The Banks also requested that the Finance Board make some
additional changes to the proposed rule to clarify some of the
disclosure requirements. With regard to the requirement in proposed
Sec. 933.5(b)(1)(i) that the audited balance sheets and statements of
income and cash flows be consistent in scope, form, and content with
Regulation S-X and S-K, the Banks commented in their joint letter that
this standard may be viewed as different from the current standard
required of the Banks. In this respect, they pointed out that
Sec. 989.4 of the Finance Board rules, 12 CFR 989.4, stated that
quarterly or annual statements issued by an individual Bank should be
consistent in both form and content with the financial statements
presented in the combined Bank System annual or quarterly financial
reports. Two Banks reiterated this point in their individual letters.
The Finance Board did not intend that the financial disclosure required
under Sec. 933.5 be different in form or content from what is currently
required for an individual Bank's or the Bank System's financial
reports. Thus, Sec. 933.5(c)(1)(i), as adopted, requires that the
audited balance sheets and statements of income and cash flow meet the
requirements of Sec. 989.4 of the Finance Board rules in form and
content. As did the proposed rule, the final disclosure regulation
still requires the Banks to provide members with audited balance sheets
as of the end of the two most recent fiscal years, audited statements
of income and cash flows for each of the three fiscal years preceding
the date of the most recent audited balance sheet being presented, and
unaudited interim financial statements as of and for appropriate
interim dates.
The disclosure rule, as adopted, also allows the Banks to
incorporate by reference any of the financial information required to
be disclosed under Sec. 933.5(c)(1), if that information was contained
in an annual or quarterly Bank report, so long as that report conformed
with the requirements of Sec. 989.4 of the Finance Board rules, or an
annual or quarterly Bank System report. See Sec. 933.5(c)(1)(iii). To
incorporate this information by reference, the final rule, as proposed,
requires a Bank only to identify the incorporated information in the
disclosure to members, and no other steps need be taken by a Bank. The
final rule, as adopted, however, did not carry over from the proposed
rule the right to incorporate by reference information that would have
been filed with the Finance Board along with the Bank's capital plan.
This provision had been proposed mainly to facilitate the incorporation
by reference of the pro forma financial information that the proposed
rule would have required Banks to provide to members. Because the pro
forma financial information no longer must be disclosed to members and
because filing information with the Finance Board would not necessarily
mean the information is readily available to Bank members, the Finance
Board has deleted this provision from the final rule.
The Banks in their joint comment letter also expressed concern with
the wording of proposed Sec. 933.5(b)(4), which would have required the
Banks to provide members with a brief statement as to the anticipated
accounting treatment and the federal income tax consequences of the
conversion transaction. The Banks felt that the use of the phrase
``federal income tax consequences'' raised the issue of whether the
Finance Board intended the Banks to provide tax advice to their
members. The Banks suggested that the rule be rewritten to require the
Banks to provide a statement of the federal income tax considerations
that may be relevant to members as a result of the transaction. The
Finance Board notes that it is common practice in disclosure documents
to provide information on the potential tax implications of a
transaction and such disclosure does not generally raise concerns that
the disclosing party is acting as a tax advisor. The Finance Board,
however, also did not intend to imply that the Banks were to act, or
would in any way be acting, as tax advisors to the members with regard
to the conversion transaction. Thus, in adopting the final disclosure
rule, the wording of this
[[Page 54106]]
requirement, now set forth at Sec. 933.5(c)(6), has been changed to
state that a Bank shall provide its members with a statement as to the
anticipated accounting treatment for the conversion transaction and the
federal income tax implications of the transaction that members should
consider in consultation with their own accounting and tax advisors.
A number of disclosure requirements have also been adopted as
proposed, although the requirements appear in a different section of
the final rule. Thus, a Bank is required to provide members, if
applicable, with a description of any amendments that it anticipates
making to its by-laws or other governance documents as a result of the
implementation of its capital plan. See Sec. 933.5(c)(3).The Bank must
also state in its disclosure document a name, address and telephone
number for members to direct a written or oral request to obtain, free
of charge, a copy of the capital plan and any other instrument or
document that defines the member's rights. See Sec. 933.5(c)(5). The
final disclosure rule also makes clear (in Sec. 933.5(d)) that nothing
in Sec. 933.5 shall create or shall be deemed to create any rights in
any third party. As the Finance Board explained when proposing this
provision, the disclosure rule is meant to add consistency, clarity,
and precision to the disclosure process, and it is not the Finance
Board's intention to impose liability under the federal securities laws
on the Banks, or to create any private right of action in any third
party. See 66 FR at 41468.
The Finance Board also notes that it is not prescribing a form to
be used by Banks in providing the disclosure, which provides a great
deal of flexibility to the Banks in this respect. However, the Finance
Board expects that no matter what form is chosen, the disclosure
documents will provide the required information to members in clear
narratives and will not merely incorporate language taken directly from
a capital plan or the Finance Board rules. The disclosure should also
be referenced to the specific rights or obligations set forth in the
Bank's capital plan. For example, a Bank that requires that only Class
A stock be held as a condition of membership would be expected to
discuss its withdrawal provisions in terms of the six month applicable
notice period related to that class of stock while Banks that require
Class B stock be held as a condition of membership would discuss
withdrawal as requiring a five-year notice period.
III. Other Provisions Adopted in the Final Rule
The Finance Board did not receive any comments or received only
favorable comments on a number of the rule changes that it proposed in
August 2001. As discussed below, these provisions are being adopted in
substance, as proposed.
Charges against capital. In comments to the ANPR, seven Banks
stated that the phrase ``charges against the capital of the Bank'' as
used in Sec. 931.8 of the Finance Board rules was ambiguous. The main
concern was that the phrase could be read to require the Banks to seek
written permission of the Finance Board to redeem or repurchase stock
anytime a Bank expected to incur, or actually had incurred, even a
small loss. See 66 FR at 41465-66. As the Finance Board pointed out,
the phrase itself was used in the Bank Act. See 12 U.S.C. 1426(f).
After applying rules of statutory construction and considering the
goals of and other relevant provisions in the Bank Act, the Finance
Board concluded that the phrase was not meant to trigger the
requirements of Sec. 931.8 whenever a Bank projected or experienced
loss. See 66 FR at 41465-66. The Finance Board therefore proposed to
define in Sec. 930.1 the phrase ``charges against the capital of the
Bank'' as meaning an other than temporary decline in the Bank's total
equity that causes the value of total equity to fall below the Bank's
aggregate capital stock amount. This definition would effectively
trigger the requirements of Sec. 931.8 (which given other changes
adopted as part of this final rulemaking are now found at
Sec. 931.8(a)) only when a Bank experiences a charge against its
capital stock.
The Finance Board received one comment on this matter in response
to the proposed rule, and that comment supported adoption of the
definition as proposed. Therefore, for the reasons set forth in the
SUPPLEMENTARY INFORMATION section of the preamble of the proposing
release for this rule, the Finance Board is adopting in Sec. 930.1 the
definition of ``charges against the capital of the Bank,'' as proposed.
Dividends on Class A stock. In the proposed rule, the Finance Board
proposed to amend Sec. 931.4 to state expressly that a Bank may pay
dividends on both Class A and Class B stock from either of the sources
specified in 12 U.S.C. 1436(a), i.e., retained earnings and current net
earnings. See 66 FR at 41464, 41473. This change was proposed to
address concern that because section 6(h) of the Bank Act, 12 U.S.C.
1426(h), granted Class B stockholders an ownership interest in their
Bank's retained earnings, the Bank's authority to pay dividends on
Class A stock from retained earnings could be called into question.
In the proposed rule, the Finance Board concluded that, given the
intent of Congress to allow an individual Bank, subject to Finance
Board regulation, to determine the dividend rights for any class of
stock that it issues, it appeared unlikely that the Congress also
intended to preclude a Bank from paying any dividends on the Class A
stock. The Finance Board further indicated that if the Congress had
intended that result, it was more likely that the Congress would have
done so expressly, rather than indirectly by enacting a new provision
that was somewhat at odds with a long-standing provision of the Bank
Act regarding the available sources of dividends for Bank stock.
Moreover, the Finance Board continued, construing these provisions of
the Bank Act in a manner that would effectively have precluded the
payment of dividends on the Class A stock could have made it difficult,
if not impossible, for a Bank to sell Class A stock to its members.
That would have been an absurd result, in light of the clear intent of
the Congress to create a new capital structure for the Banks and
ultimately, the Finance Board determined that it should construe these
provisions to allow the payment of dividends on Class A stock from
retained earnings, as those amounts may be calculated under GAAP. See
66 FR at 41464.
The Finance Board received no comments objecting to the proposed
change to Sec. 931.4, and adopts it as proposed for the reasons set
forth in the preamble of the proposing release.
Transfer of capital stock. In the proposed rule, the Finance Board
proposed amending Sec. 931.6 to allow a Bank the option of generally
prohibiting its members from transferring Bank stock. If a Bank chose
to allow transfers, the transfers clearly would have been subject to
the Bank's approval. See 66 FR at 41465, 41473. A conforming change
regarding transfer of stock was also proposed to Secs. 933.2(e)(3) and
(4). Id. at 41465, 41474.
This proposal arose out of a comment received in response to the
ANPR. Upon consideration of this comment, the Finance Board stated that
it would have been consistent with the discretion afforded a Bank in
the GLB Act ``to establish standards, criteria, and requirements for
the * * * transfer * * * of stock issued by that bank,'' id. at 12
U.S.C. 1426(c)(5)(B), to allow a Bank, as part of its capital plan,
either
[[Page 54107]]
to prohibit any transfers of its stock among its members or to permit
these transfers subject to the conditions currently set forth in
Sec. 931.6.
Under the proposed change, each Bank would have been required to
state in its capital plan whether a member may transfer capital stock
of the Bank, and, if such transfers were allowed, to specify the
procedures that a member must follow to effect the transfer, and to
specify that any transfer may only have been undertaken in the limited
circumstances set forth in Sec. 931.6. The proposed amendment also
expressly provided that a Bank, in its capital plan, may have required
a member to obtain the Bank's approval to effect the transfer of stock.
The Finance Board received no comment opposing the amendment to
Sec. 931.6, and is adopting it as proposed. The Finance Board also
adopted in substance the conforming changes proposed to
Secs. 933.2(e)(3) and (4), although, because of other amendments
adopted in this final rule, these amended paragraphs have been
redesignated and adopted as Secs. 933.2(f)(3) and (f)(4).
Off-balance sheet credit conversion factors. In the proposed rule,
the Finance Board proposed amending Table 2 of Sec. 932.4(f) so that
the 100 percent credit conversion factor for off-balance sheet items
would have applied only to commitments to make advances with certain
drawdowns and commitments to acquire loans subject to certain drawdown.
Further, the Finance Board proposed to define certain drawdown in
Sec. 930.1 to mean a legally binding agreement that committed the Bank
to make an advance or to acquire a loan, at or by a specified date in
the future. See 66 FR at 41466-67.
These changes were proposed in response to concerns that the 100
percent credit conversion factor for commitments to make advances and
to acquire loans as adopted in Table 2 in December 2000 were broader
than the requirements of other federal bank regulators. For instance,
Table 2 as adopted appeared to require a 100 percent conversion factor
for ``master commitments'' to acquire loans under Acquired Member Asset
(AMA) programs even though such commitments were not an accurate
indicator of future acquisition. It was pointed out that other federal
bank regulators would have applied a 100 percent conversion factor only
to commitments subject to certain drawdown, (i.e., commitments that an
institution is legally obligated to honor at a specified future date no
matter what change may have occurred in the counterparty's financial
situation.) Because it was generally the intent of the Finance Board to
conform to the extent possible its credit risk charges to the Basle
Accord as currently incorporated by the federal bank regulatory
agencies, the Finance Board proposed to revise the credit conversion
factors of Table 2 so that the 100 percent credit conversion factor
applies only to commitments subject to certain drawdown and to provide
a definition of certain drawdown to assure this result.
The Finance Board received one comment from a Bank supporting the
proposed changes to Secs. 930.1 and 932.4(f) and, therefore, adopts
them as proposed.
Conforming changes. No comments were received on the conforming
changes as described in the SUPPLEMENTARY INFORMATION section of the
proposed rule. See 66 FR at 41468. These conforming changes are being
adopted by the Finance Board as proposed.
IV. Regulatory Flexibility Act
The final rule applies only to the Banks, which do not come within
the meaning of small entities as defined in the Regulatory Flexibility
Act (RFA). See 5 U.S.C. 601(6). Therefore, in accordance with section
605(b) of the RFA, 5 U.S.C. 605(b), the Finance Board hereby certifies
that this final rule will not have a significant economic effect on a
substantial number of small entities.
V. Paperwork Reduction Act
The final rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995. See 44 U.S.C. 3501 et
seq. Therefore, the Finance Board has not submitted any information to
the Office of Management and Budget for review.
Lists of Subjects
12 CFR Part 925
Credit, Federal home loan banks, Reporting and recordkeeping
requirements.
12 CFR Parts 930, 931, 932, and 933
Capital, Credit, Federal home loan banks, Investments, Reporting
and recordkeeping requirements.
Accordingly, the Federal Housing Finance Board amends title 12,
chapter IX of the Code of Federal Regulations as follows:
PART 925--MEMBERS OF THE BANKS
1. The authority citation for part 925 continues to read as
follows:
Authority: 12 U.S.C. 1422, 1422a, 1422b, 1423, 1424, 1426, 1430,
1442.
2. Amend Sec. 925.26 by revising paragraph (b) to read as follows:
Sec. 925.26 Voluntary withdrawal from membership.
* * * * *
(b) Effective date of withdrawal. The membership of an institution
that has submitted a notice of withdrawal shall terminate as of the
date on which the last of the applicable stock redemption periods ends
for the stock that the member is required to hold, as of the date that
the notice of withdrawal is submitted, under the terms of a Bank's
capital plan as a condition of membership, unless the institution has
cancelled its notice of withdrawal prior to the effective date of the
termination of its membership.
* * * * *
3. Amend Sec. 925.27 by revising paragraph (c) to read as follows:
Sec. 925.27 Involuntary termination of membership.
* * * * *
(c) Membership rights. An institution whose membership is
terminated involuntarily under this section shall cease being a member
as of the date on which the board of directors of the Bank acts to
terminate the membership, and the institution shall have no right to
obtain any of the benefits of membership after that date, but shall be
entitled to receive any dividends declared on its stock until the stock
is redeemed or repurchased by the Bank.
PART 930--DEFINITIONS APPLYING TO RISK MANAGEMENT AND CAPITAL
REGULATIONS
4. The authority citation for part 930 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443,
1446.
5. In Sec. 930.1 add, in correct alphabetical order the definitions
for Certain drawdown and Charges against the capital of the Bank, to
read as follows:
Sec. 930.1 Definitions.
* * * * *
Certain drawdown means a legally binding agreement that commits the
Bank to make an advance or acquire a loan, at or by a specified future
date.
Charges against the capital of the Bank means an other than
temporary decline in the Bank's total equity that causes the value of
total equity to fall below the Bank's aggregate capital stock amount.
* * * * *
[[Page 54108]]
PART 931--FEDERAL HOME LOAN BANK CAPITAL STOCK
6. The authority citation for part 931 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443,
1446.
7. Amend Sec. 931.4 by revising the first sentence of paragraph (a)
to read as follows:
Sec. 931.4 Dividends.
(a) * * * A Bank may pay dividends on Class A or Class B stock,
including any subclasses of such stock, only out of previously retained
earnings or current net earnings, and shall declare and pay dividends
only as provided by its capital plan. * * *
* * * * *
8. Amend Sec. 931.6 by revising the first sentence of the section
and adding a new sentence at the end of the section to read as follows:
Sec. 931.6 Transfer of capital stock.
A Bank in its capital plan may allow a member to transfer any
excess capital stock of the Bank to another member of that Bank or to
an institution that has been approved for membership in that Bank and
that has satisfied all conditions for becoming a member, other than the
purchase of the minimum amount of Bank stock that it is required to
hold as a condition of membership. * * * The Bank may, in its capital
plan, require a member to receive the approval of the Bank before a
transfer of the Bank's stock, as allowed under this section, is
completed.
9. Amend Sec. 931.7 by adding, before the last sentence of
paragraph (a), two new sentences to read as follows:
Sec. 931.7 Redemption and repurchase of capital stock.
(a) * * * A request by a member (whose membership has not been
terminated) to redeem specific shares of stock shall automatically be
cancelled if the Bank is prevented from redeeming the member's stock by
paragraph (c) of this section within five business days from the end of
the expiration of the applicable redemption notice period because the
member would fail to maintain its minimum investment in the stock of
the Bank after such redemption. The automatic cancellation of a
member's redemption request shall have the same effect as if the member
had cancelled its notice to redeem stock prior to the end of the
redemption notice period, and a Bank may impose a fee (to be specified
in its capital plan) for automatic cancellation of a redemption
request. * * *
* * * * *
10. Amend Sec. 931.8 by revising the heading of the section,
redesignating the current text as paragraph (a), adding a new heading
to paragraph (a), and adding new paragraph (b) to read as follows:
Sec. 931.8 Other restrictions on the repurchase or redemption of Bank
stock.
(a) Capital impairment. * * *
(b) Bank discretion to suspend redemption. A Bank, upon the
approval of its board of directors, or of a subcommittee thereof, may
suspend redemption of stock if the Bank reasonably believes that
continued redemption of stock would cause the Bank to fail to meet its
minimum capital requirements as set forth in Secs. 932.2 or 932.3 of
this chapter, would prevent the Bank from maintaining adequate capital
against a potential risk that may not be adequately reflected in its
minimum capital requirements, or would otherwise prevent the Bank from
operating in a safe and sound manner. A Bank shall notify the Finance
Board in writing within two business days of the date of the decision
to suspend the redemption of stock, informing the Finance Board of the
reasons for the suspension and of the Bank's strategies and time frames
for addressing the conditions that led to the suspension. The Finance
Board may require the Bank to re-institute the redemption of member
stock. A Bank shall not repurchase any stock without the written
permission of the Finance Board during any period in which the Bank has
suspended redemption of stock under this paragraph.
PART 932--FEDERAL HOME LOAN BANK CAPITAL REQUIREMENTS
11. The authority citation for part 932 continues to read as
follows:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443,
1446.
12. Amend Sec. 932.4 by revising paragraph (d) heading, revising
the first sentence in paragraph (e)(2)(ii)(E) and revising Table 2,
which follows paragraph (f)(1), to read as follows:
Sec. 932.4 Credit risk capital requirement.
* * * * *
(d) Credit risk capital charge for derivative contracts. * * *
(e) * * *
(2) * * *
(ii) * * *
(E) The credit risk percentage requirement for mortgage assets that
are acquired member assets described in Sec. 955.2 of this chapter
shall be assigned from Table 1.2 of this part based on the rating of
those assets after taking into account any credit enhancement required
by Sec. 955.3 of this chapter. * * *
* * * * *
(f) * * *
(1) * * *
TABLE 2.--CREDIT CONVERSION FACTORS FOR OFF-BALANCE SHEET ITEMS
------------------------------------------------------------------------
Credit
conversion
Instrument factor (In
percent)
------------------------------------------------------------------------
Asset sales with recourse where the credit risk remains 100
with the Bank..........................................
Commitments to make advances subject to certain drawdown
Commitments to acquire loans subject to certain drawdown
Standby letters of credit............................... 50
Other commitments with original maturity of over one
year...................................................
Other commitments with original maturity of one year or 20
less...................................................
------------------------------------------------------------------------
* * * * *
PART 933--BANK CAPITAL STRUCTURE PLANS
13. The authority citation for part 933 continues to read:
Authority: 12 U.S.C. 1422a(a)(3), 1422b(a), 1426, 1440, 1443,
1446.
14. Amend Sec. 933.2 by redesignating paragraphs (e), (f) and (g)
as paragraphs (f), (g), and (h), respectively, adding new paragraph
(e), redesignating newly designated paragraphs (f)(4), (f)(5) and
(f)(6) as paragraphs (f)(5), (f)(6) and (f)(7), respectively, revising
newly designated paragraph (f)(3), and adding new paragraph (f)(4) to
read as follows:
Sec. 933.2 Contents of plan.
* * * * *
(e) Members wishing not to convert existing stock. The capital plan
shall establish an opt-out date on or before which a member that does
not wish to convert its existing stock into Class A and/or Class B
stock must file a written notice to withdraw from membership with the
Finance Board. This opt-out date shall not be more than six months
before the effective date of the capital plan. (For purposes of
applying this provision, the membership of an institution that files
its notice to withdraw with the Finance Board on or before the opt-out
date established in a capital plan shall terminate six months from the
date that the notice of withdrawal was filed with the Finance
[[Page 54109]]
Board or on the effective date of the Bank's capital plan, whichever
date is earlier.) The capital plan shall further provide that any
member that is in the process of withdrawing on the effective date of
the capital plan but did not file its written notice to withdraw from
membership with the Finance Board on or before this opt-out date, shall
have its existing stock converted into Class A and/or Class B stock as
required by the capital plan, and that the effective date of withdrawal
for such member shall be established in accordance with Secs. 925.26(b)
and (c) of this chapter, provided, however, that the applicable stock
redemption periods calculated under Sec. 925.26(c) of this chapter
shall commence on date the member first submitted its written notice to
withdraw to the Finance Board.
(f) * * *
(3) Shall specify whether the stock of the Bank may be transferred
among members, and, if such transfer is allowed, shall specify the
procedures that a member should follow to effect such transfer, and
that the transfer shall be undertaken only in accordance with
Sec. 931.6 of this chapter;
(4) Shall specify that the stock of the Bank may be traded only
between the Bank and its members;
* * * * *
15. Add new Sec. 933.5 to read as follows:
Sec. 933.5 Disclosure to members concerning capital plan and capital
stock conversion.
(a) No capital plan shall become effective until disclosure
required by paragraphs (b) and (c) of this section has been provided to
members. All disclosure required under this section shall be
transmitted, sent or given to members not less than 45 days and not
more than 60 days prior to the opt-out date established in the Bank's
capital plan in accordance with Sec. 933.2(e).
(b) The following information shall be provided to members about
the Class A and/or Class B stock that a Bank intends to issue on the
effective date of its capital plan:
(1) With regard to each class or subclass of authorized stock, a
description of:
(i) Dividend rights;
(ii) The terms of conversion;
(iii) Redemption and repurchase rights;
(iv) Voting rights and preferences,
(v) Liquidation rights; and
(vi) Any liability to further calls or to assessments by the Banks;
(2) A description of any material differences between the
securities to be converted into Class A and/or Class B stock and the
Class A and/or Class B stock with regard to the rights addressed in
paragraph (b)(1) of this section.
(3) A statement of the reasons for the conversion to Class A and/or
Class B stock and of the general effect thereof upon the rights of
existing members; and
(4) A description of any other material features concerning the
Bank's initial issuance of Class A and/or Class B stock.
(c) In addition to the disclosure about Class A and/or Class B
stock, the following information shall be provided to members:
(1) The Bank shall disclose financial information as follows:
(i) Audited balance sheets as of the end of the two most recent
fiscal years, audited statements of income and cash flows for each of
the three fiscal years preceding the date of the most recent audited
balance sheet being presented, and unaudited interim balance sheets and
statements of income and cash flows as of and for appropriate interim
dates that in form and content meet the requirements of Sec. 989.4 of
this chapter;
(ii) A pro forma capitalization table that reflects the Bank's
projected new capital structure relative to its actual capitalization
as of the date of the latest balance sheet required to be provided to
members by paragraph (c)(1)(i) of this section. The Bank shall also
provide a description of any material assumptions underlying the pro
forma capitalization table and the basis for these assumptions, and
shall provide estimates of its risk-based capital requirement,
calculated in accordance with Sec. 932.3 of this chapter, and of its
total capital-to-asset ratio (both of which shall be based on the same
financial data used for the capitalization table), along with a
discussion of material assumptions underlying these estimates and the
basis for these assumptions; and
(iii) Any of the financial information required to be disclosed by
paragraph (c)(1) of this section may be incorporated by reference,
provided the information being incorporated is contained in an annual
or quarterly Bank report prepared in accordance with Sec. 989.4 of this
chapter or an annual or quarterly Bank System report, and the
disclosure identifies the information being incorporated by reference;
(2) A narrative discussion of anticipated developments that could
materially affect the liquidity, capital, earnings or continuing
operations of the Bank, including those affecting dividends, product
volumes, investment volumes, new business lines and risk profile.
(3) A description of any amendments anticipated to be made to the
Bank's by-laws, policies or other governance documents as a result of
the implementation of the capital plan;
(4) To the extent that such information has not been provided under
paragraph (b) of this section, the Bank shall disclose information
related to the capital plan as follows:
(i) A description of the minimum stock investment requirements set
forth in the capital plan;
(ii) A statement outlining the requirements for amending the
capital plan;
(iii) A description of any restrictions or limitations under a
Bank's capital plan on a member's rights to buy, or redeem its class A
or class B stock, to have such stock repurchased, or otherwise to make
use of such stock to fulfill the member's minimum stock investment
requirement;
(iv) A statement setting forth the opt-out date, on or before which
a member's written notice to withdraw must be filed with the Finance
Board (as established in accordance with Sec. 933.2(e) of this part)
for the member not to have its existing Bank stock converted to Class A
or Class B stock on the effective date of the Bank's capital plan and
describing the effect on a member's effective date of withdrawal of
failing to file its notice to withdraw on or before the opt-out date;
and
(v) A description of a member's rights under the capital plan to
have its stock redeemed or repurchased upon voluntary or involuntary
termination of its membership;
(5) The Bank should state the name, address and telephone number
where members may direct written or oral requests for a copy of the
capital plan and any other instrument or document that defines the
rights of the member/stockholders. This information shall be provided
to the members without charge; and
(6) The Bank shall provide a statement as to the anticipated
accounting treatment for the transaction and the federal income tax
implications of the transaction that members should consider in
consultation with their own accounting and tax advisors.
(d) Nothing in this section shall create or be deemed to create any
rights in any third party.
Dated: October 19, 2001.
By the Board of Directors of the Federal Housing Finance Board.
J. Timothy O'Neill,
Chairman.
[FR Doc. 01-26963 Filed 10-25-01; 8:45 am]
BILLING CODE 6725-01-P