[Federal Register Volume 74, Number 148 (Tuesday, August 4, 2009)]
[Proposed Rules]
[Pages 38564-38572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-18567]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 985, 989
FEDERAL HOUSING FINANCE AGENCY
12 CFR Parts 1273, 1274
RIN 2590-AA30
Board of Directors of Federal Home Loan Bank System Office of
Finance
AGENCY: Federal Housing Finance Agency; Federal Housing Finance Board.
ACTION: Notice of proposed rulemaking; request for comment.
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SUMMARY: Governed by the Federal Housing Finance Agency's (FHFA)
regulations, the Federal Home Loan Bank System's (System) Office of
Finance, issues debt (``consolidated obligations'') on which the
Federal Home Loan Banks (Banks) are jointly and severally liable and
publishes combined financial reports on the Banks so that investors in
the consolidated obligations can assess the strength of the System that
stands behind them. The Office of Finance (OF) is governed by a board
of directors, the composition and functions of which are determined by
FHFA's regulations. The FHFA's experience with the System and with the
OF's combined financial reports during the recent period of market
stress suggests that the OF and the System could benefit from a
reconstituted and strengthened board. This proposed regulation is
intended to achieve that.
DATES: Comments on the proposed regulation must be received on or
before October 5, 2009. For additional information, see SUPPLEMENTARY
INFORMATION.
ADDRESSES: You may submit your comments on the proposed regulation,
identified by regulatory information number (RIN) 2590-AA30 by any of
the following methods:
U.S. Mail, United Parcel Service, Federal Express, or
Other Mail Service: The mailing address for comments is: Alfred M.
Pollard, General Counsel, Attention: Comments/RIN 2590-AA30, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552.
Hand Delivery/Courier: The hand delivery address is:
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA30,
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW.,
Washington, DC 20552. The package should be logged at the Guard Desk,
First Floor, on business days between 9 a.m. and 5 p.m.
E-mail: Comments to Alfred M. Pollard, General Counsel may
be sent by e-mail at RegComments@FHFA.gov. Please include ``RIN 2590-
AA30'' in the subject line of the message.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, 202-408-2845,
Division of Federal Home Loan Bank Regulation, Federal Housing Finance
Agency, 1625 Eye Street, NW., Washington, DC 20006; or Neil Crowley,
Deputy General Counsel, 202-343-1316, or Thomas E. Joseph, Senior
Attorney-Advisor, 202-414-3095, Office of General Counsel, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552. The telephone number for the Telecommunications Device for
the Deaf is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Comments
The FHFA invites comments on all aspects of the proposed
regulation, and will adopt a final regulation with appropriate changes
after taking all comments into consideration. Copies of all comments
will be posted on the Internet Web site at https://www.fhfa.gov. In
addition, copies of all comments received will be available for
examination by the public on business days between the hours of 10 a.m.
and 3 p.m., at the Federal Housing Finance Agency, Fourth Floor, 1700 G
Street, NW., Washington, DC 20552. To make an appointment to inspect
comments, please call the Office of General Counsel at (202) 414-6924.
II. Background
A. Creation of the Federal Housing Finance Agency and Recent
Legislation
Effective July 30, 2008, the Housing and Economic Recovery Act of
2008 (HERA), Public Law 110-289, 122 Stat. 2654, transferred the
supervisory and oversight responsibilities of the Office of Federal
Housing Enterprise Oversight (OFHEO) over the Federal National Mortgage
Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac) (collectively, the Enterprises), the
oversight responsibilities of the Federal Housing Finance Board (FHFB
or Finance Board) over the Banks and the Office of Finance (OF) (which
acts as the Banks' fiscal agent) and certain functions of the
Department of Housing and Urban Development to a new independent
executive branch agency, the FHFA. See id. at Sec. 1101, 122 Stat.
2661-62 (amending 12 U.S.C. 4511). The FHFA
[[Page 38565]]
is responsible for ensuring that the Enterprises and the Banks operate
in a safe and sound manner, including that they maintain adequate
capital and internal controls, that their activities foster liquid,
efficient, competitive and resilient national housing finance markets,
and that they carry out their public policy missions through authorized
activities. See id. at Sec. 1102, 122 Stat. 2663-64. The Enterprises,
the Banks, and the OF continue to operate under regulations promulgated
by OFHEO and the FHFB until the FHFA issues its own regulations. See
id. at Sec. Sec. 1302, 1313, 122 Stat. 2795, 2798.
B. The Bank System Generally
The twelve Banks are instrumentalities of the United States
organized under the Federal Home Loan Bank Act (Bank Act).\1\ See 12
U.S.C. 1423, 1432(a). The Banks are cooperatives; only members of a
Bank may purchase the capital stock of a Bank, and only members or
certain eligible housing associates (such as State housing finance
agencies) may obtain access to secured loans, known as advances or
other products provided by a Bank. See 12 U.S.C. 1426(a)(4), 1430(a),
1430b. Each Bank is managed by its own board of directors and serves
the public interest by enhancing the availability of residential
mortgage and community lending credit through its member institutions.
See 12 U.S.C. 1427. Any eligible institution (generally a Federally
insured depository institution or State-regulated insurance company)
may become a member of a Bank if it satisfies certain criteria and
purchases a specified amount of the Bank's capital stock. See 12 U.S.C.
1424; 12 CFR part 925.
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\1\ Each Bank is generally referred to by the name of the city
in which it is located. The twelve Banks are located in: Boston, New
York, Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des
Moines, Dallas, Topeka, San Francisco, and Seattle.
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As government-sponsored enterprises (GSEs), the Banks are granted
certain privileges under Federal law. In light of those privileges and
their status as GSEs, the Banks typically can borrow funds at spreads
over the rates on U.S. Treasury securities of comparable maturity lower
than most other entities. The Banks pass along a portion of their GSE
funding advantage to their members--and ultimately to consumers--by
providing advances and other financial services at rates that would not
otherwise be available to their members. Consolidated obligations
(COs), consisting of bonds and discount notes, are the principal
funding source for the Banks. The OF issues all COs on behalf of the
twelve Banks. Although each Bank is primarily liable for the portion of
consolidated obligations corresponding to the proceeds received by that
Bank, each Bank is also jointly and severally liable with the other
eleven Banks for the payment of principal and interest on all COs. See
12 CFR 966.9.
C. The OF
The OF was one of a number of joint Bank offices established by
regulation by the former Federal Home Loan Bank Board (FHLBB), a
predecessor agency to the FHFA. See 65 FR 324, 326 (Jan. 4, 2000). The
OF was originally formed from two other joint Bank Offices, the Office
of System Finance and the Office of Fiscal Agent. Among other things,
OF was assigned the duties previously vested in the Fiscal Agent which
included facilitating the issuance of COs. Id.
In 1989, as part of the amendments made to the Bank Act by the
Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA),\2\ all joint offices of the Bank System other than the OF
were abolished. The FHLBB was also abolished and its regulatory
authority over the Bank System, including OF, was transferred to the
Finance Board. The FHLBB's regulations were also transferred to the
Finance Board. Id. In 1992, the Finance Board reorganized the OF as
fiscal agent of the Finance Board for issuing COs under section 11(c)
of the Bank Act, and set forth other duties for OF.\3\ See 57 FR 11429
(Apr. 3, 1992) (adopting 12 CFR part 941). The regulation also
instituted a three-member board of directors for the oversight and
management of the OF, made up of two Bank presidents and a private
United States citizen with demonstrated expertise in financial markets.
Id.
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\2\ Public Law 101-73, 103 Stat. 183 (Aug. 9, 1989).
\3\ As it existed in 1992, section 11(c) of the Bank Act
provided the Finance Board authority to issue the debt on which the
Banks were jointly and severally liable. 12 U.S.C. 1431(c)(1992).
HERA recently amended this provision and removed authority from the
regulator to issue such debt on behalf of the Banks and provided the
OF as agent for the Banks with authority to issue the COs. See Sec.
1204(3)(B), Public Law 110-289, 122 Stat. 2786.
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In January 2000, the Finance Board proposed changes to its
regulations to alter how COs were issued under section 11of the Bank
Act, reorganize the OF and its board of directors, and expand the
duties of the OF, including assigning OF the duty to prepare the Bank
System combined annual and quarterly financial reports. See 65 FR 324.
As proposed, the January 2000 regulation transferred authority for
issuance of the Bank COs from the Finance Board, which had been issuing
debt pursuant to then-existing authority under section 11(c) of the
Bank Act, to the Banks themselves pursuant to authority under section
11(a) of the Bank Act and subject to the requirement, among other
things, that all such debt issued by the Banks be the joint and several
obligations of all twelve Banks and be issued through OF as their
agent. Id. Under the proposed regulation, the Finance Board retained
the option to issue COs itself under section 11(c) of the Bank Act at
any point in the future.
The Finance Board also believed that ``[a]s a natural and necessary
adjunct to the issuance of COs, the Banks also should be responsible
for the preparation of the disclosure documents that facilitate CO
issuance and for the periodic combined financial statements for the
Bank System.'' Id. at 325. The Finance Board therefore proposed that
OF, as the only joint Bank System office and existing agent for CO
issuance, be assigned the duty of preparing the Bank System's combined
financial reports. Id. The Finance Board also proposed to codify
disclosure standards in the regulation, many of which had been set
forth in a Finance Board policy statement. Other duties related to debt
issuance and management were also proposed to be assigned to OF.
In light of the expanded duties assigned to OF as well as
amendments to the Bank Act that had recently been made by the Gramm-
Leach-Bliley Act (GLB Act),\4\ the Finance Board also thought it was
appropriate to alter both the size and composition of the OF board. Id.
at 326. The Finance Board had two main goals in proposing its changes.
First, it wanted to build on the governance structure in the Bank Act
by which the Banks should be provided greater autonomy to manage their
affairs. Second, it wanted to assure each Bank had representation on
the OF board to help achieve operational goals and wanted to assure
that the OF board itself had directors with experience and
qualification to help OF meet the evolving needs of the Bank System.
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\4\ Public Law 106-102, 113 Stat. 1338 (Nov. 12, 1999).
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Under the 2000 proposal, the OF board of directors would have been
expanded to 24 members, 12 of whom would have been appointed by the
Banks, 6 of whom would have been elected by Bank members and 6 of whom
would have been appointed by the Finance Board. The Finance Board also
proposed that the chair and vice chair of the board be appointed by the
Finance Board. The proposal would have required the OF board of
directors
[[Page 38566]]
to establish an audit committee with duties similar to those
established under the regulations for the Banks' audit committees, an
executive committee, and a committee to coordinate the issuance and
servicing of COs.
After consideration of the comments on the proposed regulation, the
Finance Board adopted many of the changes including those authorizing
the Banks to issue COs under section 11(a) of the Bank Act and
assigning to OF the function of preparing the Bank System's combined
financial reports, along with additional duties. See 65 FR 36290 (June
7, 2000) (adopting among other parts 12 CFR parts 966 and 985). The
Finance Board did not, however, adopt the proposed changes to the OF
board structure or composition. Instead, the new regulation
incorporated the prior three-person board structure. The Finance Board
also specified some additional duties for the OF board consistent with
the additional functions that had been assigned to OF over the years.
Since the 2000 rulemaking, no significant changes to the regulations
governing the OF have been proposed.
D. Considerations of Differences Between the Banks and the Enterprises
Section 1201 of HERA requires the Director, when promulgating
regulations relating to the Banks, to consider the following
differences between the Banks and the Enterprises: Cooperative
ownership structure; Mission of providing liquidity to members;
Affordable housing and community development mission; capital
structure; and Joint and several liability. See Sec. 1201 Public Law
110-289, 122 Stat. 2782-83 (amending 12 U.S.C. 4513). The Director also
may consider any other differences that are deemed appropriate. In
preparing this proposed regulation, the FHFA considered the differences
between the Banks and the Enterprises as they relate to the above
factors. The FHFA requests comments from the public about whether
differences related to these factors should result in any revisions to
the proposal.
III. The Proposed Regulation
A. Reasons for the Proposed Regulation Changes
As discussed in detail below, the FHFA is proposing a number of
changes to the size and structure of the OF board of directors and how
the OF board exercises oversight over the process for preparing the
Bank System's combined financial reports. The FHFA believes that these
changes will assist the Banks in coordinating among themselves the
process of providing OF the necessary information to prepare the System
combined financial reports, and that these changes will facilitate
accurate and meaningful disclosure in the combined reports and,
thereby, garner market confidence.
Because the Bank System's main source of funding is COs on which
the Banks are jointly and severely liable, the combined financial
reports prepared by OF remain an important source of information about
the financial state of the Bank System as a whole and are an important
tool in marketing System debt and in assuring the Banks' access to
domestic and international financial markets. For these purposes, the
combined financial reports provide a single source of information about
the Bank System. Assuring that this information is consistent and can
readily be compared across all Banks is important to market acceptance
of Bank debt and hence to the continued financial health of the Banks.
The proposed regulation would achieve these purposes with two
principal elements: first, by expanding the OF's board to include all
of the Federal Home Loan Bank presidents plus an audit committee
comprising three to five independent directors; and second; by
empowering the audit committee to ensure that the combined financial
reports are compiled using common accounting policies and procedures
across the twelve Banks. The FHFA's authority to adopt this regulation
is grounded in its general supervisory authority over the OF and the
Banks, 12 U.S.C. 1311(b)(2), 1313(a)(1), 1319G, 1431.
B. Overview of the Proposed Regulation
The proposed regulation would re-adopt many of the provisions in
current 12 CFR part 985, which established the OF and governs the
duties and function of OF and its board of directors, and in 12 CFR
part 989, which address audit requirements and financial statements for
the Banks. It would, however, make a number of amendments to the
current regulations, most significantly with regard to the structure
and duties of both the OF board of directors and its audit committee.
The proposed regulation also would make some changes with regard to the
standards governing the Bank System's combined financial reports and
would amend some of the current part 985 provisions to conform the
regulatory language to statutory changes made by HERA. Under the
proposed regulation, the regulations that had been set forth in the
parts 985 and 989 of the former Finance Board regulations, would be
removed and adopted by the FHFA, respectively, as 12 CFR parts 1273 and
1274.
Proposed part 1273 would provide regulations which re-establish the
OF and set forth its duties, and functions. Under part 1273 as
proposed, the specification of the OF's authority and functions would
remain substantially unchanged, although the language in the
regulations would be altered to reflect the fact that the FHFA is no
longer authorized to issue debt on behalf of the Banks and the OF would
thus be acting only as a agent for the Banks with respect to its debt
issuance duties. See n.3 supra. The Banks would also remain responsible
for jointly funding the OF, and the process and requirements for
providing such funding would not change to any great degree. Under
proposed Sec. 1273.5, however, the formula for calculating each Bank's
pro rata share of the reimbursement owed the OF would no longer be
based on a formula set forth in the regulation. Instead, the OF board
of directors would be allowed to establish any reasonable formula,
subject to the right of the FHFA to review such formula and require
changes to it.
The debt management functions and duties assigned to OF also would
also remain much the same under the proposed regulation as currently,
although, as discussed more fully below, the FHFA is proposing some
changes to the standards governing the preparation of the combined
financial reports. Under the proposed regulation, the OF would also
still be required to monitor the unsecured credit exposure of the Banks
and would be required to compile relevant data on such exposures.
As proposed, the specific requirements now set forth in 12 CFR part
989 would be readopted in part 12 CFR part 1274 almost in their
entirety. The proposed regulation would make some conforming changes in
Sec. 1274.2 to reflect the fact that the FHFA is proposing an audit
committee to be established for OF which would have a composition that
is different from that of the OF board of directors as a whole. In
addition, current section 989.4 of this title, which relates to
voluntary Bank disclosure of financials, would not be re-adopted as
part of the proposed part 1274 regulations. This particular provision
pre-dated the Banks' registration of their stock with the Securities
and Exchange Commission (SEC). Given that an individual Bank's
disclosure of financial information is now subject to the SEC's
regulations and oversight, the FHFA does not see a need to maintain
this provision going forward.
[[Page 38567]]
C. Proposed Changes in OF Board Structure and Process for Selecting
Directors
The new structure being proposed for the OF board of directors is
set forth in proposed Sec. 1273.7. Under this provision, the OF board
of directors would be composed of 15 to17 part-time members--the twelve
Bank presidents and three to five independent directors. The
independent directors would be required to be citizens of the United
States and none could be an officer, employee, or director of any Bank
or Bank System member, nor could the independent director have any
substantial financial interest in a Bank System member. Persons
affiliated with or having substantial financial interests in any CO
seller or dealer group member under contract with OF would not qualify
to be an independent director. The proposed regulation would also
require the independent directors, as a group, to have substantial
experience in financial and accounting matters.
Under the proposed regulation, the FHFA would appoint the first
independent directors that serve on the board after the effective date
of the regulation from candidates nominated by the Banks. Thereafter,
the independent directors would be elected by majority vote of the OF
board of directors. If the FHFA objected to the election of any
individual independent director, the FHFA would retain the ability to
appoint a more qualified director. As a practical matter, the FHFA
would expect the OF board of directors to provide the names of, and
background information on, nominees for board positions in sufficient
time for the FHFA to raise any concerns prior to the actual election.
Terms for independent directors would be set at five years,
although the proposal would require staggering of the seats to assure
that no more than one seat would be scheduled to become vacant in any
one year, so the initial terms could range from one to five years. If
an independent director's seat became vacant for any reason before the
end of a scheduled term, the proposed regulation would allow that seat
to be filled by majority vote of the OF board, but only for the
remainder of the original term.
The proposed regulation would also allow the FHFA to appoint the
initial chair and vice chair of the OF board. The chair would be one of
the independent directors while the vice chair could be appointed from
among any of the directors. After the term of the initial chair or vice
chair expired or became vacant for any other reason, the proposal would
allow subsequent chairs and vice chairs to be elected by majority vote
of the OF board. The chair would be elected from among the independent
directors while the vice chair could be elected from among any of the
directors. Under the proposal, the FHFA would retain the authority to
object to the election of any chair or vice chair by providing the OF
board of directors written notice within 20 calendar-days, upon FHFA
receipt of notification of the election, and the board of OF would then
be required to promptly elect a new chair or vice chair as appropriate.
The OF board of directors would be authorized to create committees,
such as an executive committee, and to delegate authority to such
committees, although the regulation would specifically require that an
audit committee be established and would specify the duties of that
committee. The functions and duties of any committee (including the
scope of any delegation) would be specified in the board's bylaws or in
specific committee charters. The bylaws and charters would be subject
to review and approval by the FHFA. The OF board, or any committee
thereof including the audit committee, would be authorized to hire
outside counsel, independent accountants, or other outside experts at
the expense of the OF to help it carry out its duties.
As under the current regulations, the proposed regulation would
specify that Bank presidents would serve without additional
compensation. The compensation for the independent directors would be
set in accordance with 12 CFR part 918, which currently governs
compensation for directors and chairs of the Banks' boards of
directors. The current indemnification provision would also be carried
over to the new regulation as now proposed.
The proposed duties of the OF board of directors are set forth in
proposed Sec. 1273.8. These duties closely correspond to those in the
current regulations. Duties and functions related to the preparation of
the combined financial reports and oversight of the internal and
external audit function for OF and the combined reports, which are
currently among the duties of the OF board of directors, would be
specifically transferred to the audit committee, as is discussed in the
next section.
D. Proposed Changes for Audit Committee
Under the proposed regulation, the audit committee, constituted as
described above, would assume the board's responsibilities for
overseeing the audit function of the OF and the OF's preparation of
accurate combined financial reports, including selection and
appointment of the OF's internal and external auditors. As part of its
responsibilities, the audit committee would be specifically authorized
to ensure that the Banks adopt consistent accounting policies and
procedures so that the combined financial reports will continue to be
accurate and meaningful. If the Banks are not able to agree on such
consistent accounting policies and procedures, the audit committee, in
consultation with the FHFA, may prescribe them.
E. Proposed Changes in Disclosure Standards
Consistent with the responsibility of the audit committee to ensure
consistency of accounting policies and procedures across the Bank
System, the regulations governing the content of the combined financial
reports would be amended to include a requirement that information
about the Banks be presented using consistent accounting policies and
procedures (proposed Sec. 1273.6(b)(2)). In addition, in
acknowledgement of the increasingly national business models of major
holding companies who can access multiple Banks through subsidiaries in
different Bank districts, the regulations would be amended to include
requirements that the combined financial reports include lists of the
top ten holders of advances and of stock in the Bank System by holding
company (proposed Part 1273 Appendix A, paragraphs A and G).
IV. Paperwork Reduction Act
The proposed regulation does not contain any collections of
information pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.). Therefore, the FHFA has not submitted any information to
the Office of Management and Budget for review.
V. Regulatory Flexibility Act
The proposed regulation 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, the FHFA certifies that this proposed
regulation, if promulgated as a final regulation, will not have
significant economic impact on a substantial number of small entities.
List of Subjects
12 CFR Part 985
Federal home loan bank, Securities.
[[Page 38568]]
12 CFR Part 989
Accounting, Federal home loan banks, financial disclosure.
12 CFR Part 1273
Federal home loan banks, securities.
12 CFR Part 1274
Accounting, Federal home loan banks, financial disclosure.
Accordingly, for reasons stated in the the preamble, under the
authority of 12 U.S.C. 1311(b)(2), 1313(a)(1), 1319G and 1431, the FHFA
proposes to amend chapters IX and XII of title 12 of the Code of
Federal Regulations as follows:
CHAPTER IX--FEDERAL HOUSING FINANCE BOARD
Subchapter K--Office of Finance
PART 985--THE OFFICE OF FINANCE
1. Remove 12 CFR part 985.
PART 989--FINANCIAL STATEMENT OF THE BANKS
2. Remove 12 CFR part 989.
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
Subchapter D--Federal Home Loan Banks
3. Add part 1273 to subchapter D to read as follows:
PART 1273--OFFICE OF FINANCE
Sec.
1273.1 Definitions.
1273.2 Authority of the OF.
1273.3 Functions of the OF.
1273.4 FHFA oversight.
1273.5 Funding of the OF.
1273.6 Debt management duties of the OF.
1273.7 Structure of the OF board of directors.
1273.8 General duties of the OF board of directors.
1273.9 Audit committee.
Appendix A to Part 1273--Exceptions to the General Disclosure
Standards
Authority: 12 U.S.C. 1431(a) and (c), 1440, 4511(b), 4513,
4514(a), 4526(a).
Sec. 1273.1 Definitions.
For purposes of this part:
Audit Committee means the OF Independent Directors acting as the
committee established in accordance with Sec. 1273.9 of this part.
Bank written in title case, means a Federal Home Loan Bank
established under section 12 of the Bank Act (12 U.S.C. 1432).
Bank Act means the Federal Home Loan Bank Act, as amended (12
U.S.C. 1421 through 1449).
Bank System means the Federal Home Loan Bank System, consisting of
the twelve Banks and the Office of Finance.
Chair means the chairperson of the board of directors of the Office
of Finance.
Chief Executive Officer or CEO means the chief executive officer of
the Office of Finance.
Consolidated obligations means any bond, debenture or note on which
the Banks are jointly and severally liable and which was issued under
section 11 of the Bank Act (12 U.S.C. 1431) and any implementing
regulations, whether or not such instrument was originally issued
jointly by the Banks or by the Federal Housing Finance Board on behalf
of the Banks.
FHFA means the Federal Housing Finance Agency.
Financing Corporation or FICO means the Financing Corporation
established and supervised by the FHFA under section 21 of the Bank Act
(12 U.S.C. 1441).
Generally accepted accounting principles or GAAP means accounting
principles generally accepted in the United States.
Independent Director means a member of the OF board of directors
who meets the qualifications set forth in Sec. 1273.7(a)(2) of this
part.
NRSRO means a credit rating organization registered as a Nationally
Recognized Statistical Rating Organization with the Securities and
Exchange Commission.
Office of Finance or OF means the Office of Finance, a joint office
of the Banks established under this part 1273 and referenced in the
Bank Act and the Safety and Soundness Act.
Resolution Funding Corporation or REFCORP means the Resolution
Funding Corporation established by section 21B of the Bank Act (12
U.S.C. 1441b).
Safety and Soundness Act means the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.), as
amended.
Sec. 1273.2 Authority of the OF.
(a) General. The OF shall enjoy such incidental powers under
section 12(a) of the Bank Act (12 U.S.C. 1432(a)), as are necessary,
convenient and proper to accomplish the efficient execution of its
duties and functions pursuant to this part, including the authority to
contract with a Bank or Banks for the use of Bank facilities or
personnel in order to perform its functions or duties.
(b) Agent. The OF, in the performance of its duties, shall have the
power to act on behalf of the Banks in issuing consolidated obligations
and in paying principal and interest due on the consolidated
obligations, or other obligations of the Banks.
(c) Assessments. The OF shall have authority to assess the Banks
for the funding of its operations in accordance with Sec. 1273.5 of
this part.
Sec. 1273.3 Functions of the OF.
(a) Joint debt issuance. Subject to parts 965 and 966 of this
title, and this part, the OF as agent shall offer, issue and service
(including making timely payments on principal and interest due)
consolidated obligations.
(b) Preparation of combined financial reports. The OF shall prepare
and issue the combined annual and quarterly financial reports for the
Bank System in accordance with the requirements of Sec. 1273.6(b) and
Appendix A of this part, using consistent accounting policies and
procedures as established under Sec. 1273.9 of this part.
(c) Fiscal agent. The OF shall function as the fiscal agent of the
Banks.
(d) Financing Corporation and Resolution Funding Corporation. The
OF shall perform such duties and responsibilities for FICO as may be
required under part 995 of this title, or for REFCORP as may be
required under part 996 of this title or authorized by the FHFA
pursuant to section 21B(c)(6)(B) of the Bank Act (12 U.S.C.
1441b(c)(6)(B)).
Sec. 1273.4 FHFA oversight.
(a) Oversight and enforcement actions. The FHFA shall have the same
regulatory oversight authority over the OF, the OF board of directors,
the officers, employees, agents, attorneys, accountants, or other OF
staff, as it has over a Bank and its respective directors, officers,
employees, agents, attorneys, accountants, or other staff.
(b) Examinations. Pursuant to section 20 of the Bank Act (12 U.S.C.
1440), the FHFA shall examine the OF, all funds and accounts that may
be established pursuant to this part 1273, and the operations and
activities of the OF, as provided for in the Bank Act, the Safety and
Soundness Act, or any regulations promulgated pursuant thereto.
(c) Combined financial reports. The FHFA shall determine whether a
combined Bank System annual or quarterly financial report complies with
the standards of this part.
Sec. 1273.5 Funding of the OF.
(a) Generally. The Banks are responsible for jointly funding all
the expenses of the Office of Finance, including the costs of
indemnifying the members of the OF board of directors, the Chief
Executive Officer, and other officers and employees of the OF, as
provided for in this part.
(b) Funding policies. (1) At the direction of and pursuant to
policies
[[Page 38569]]
and procedures adopted by the OF board of directors, the Banks shall
periodically reimburse the OF in order to maintain sufficient operating
funds under the budget approved by the OF board of directors. The OF
operating funds shall be:
(i) Available for expenses of the OF and the OF board of directors,
according to their approved budgets; and
(ii) Subject to withdrawal by check, wire transfer or draft signed
by the Chief Executive Officer or other persons designated by the OF
board of directors.
(2) Each Bank's respective pro rata share of the reimbursement
described in paragraph (b)(1) of this section shall be based on a
reasonable formula approved by the OF board of directors. Such formula
shall be subject to the review of the FHFA, and the OF board of
directors shall make any changes to the formula as may be ordered by
the FHFA from time to time.
(c) Alternative funding method. With the prior approval of the
FHFA, the OF board of directors may, by contract with a Bank or Banks,
choose to be reimbursed through a fee structure, in lieu of or in
addition to assessment, for services provided to the Bank or Banks.
(d) Prompt reimbursement. Each Bank from time to time shall
promptly forward funds to the OF in an amount representing its share of
the reimbursement described in paragraph (b) of this section when
directed to do so by the Chief Executive Officer pursuant to the
procedures of the OF board of directors.
(e) Indemnification expenses. All expenses incident to
indemnification of the members of the OF board of directors, the Chief
Executive Officer, and other officers and employees of the OF shall be
treated as an expense of the OF to be reimbursed by the Banks under the
provisions of this part.
(f) Operating funds segregated. Any funds received by the OF from
the Banks pursuant to this section for OF operating expenses promptly
shall be deposited into one or more accounts and shall not be
commingled with any proceeds from the sale of consolidated obligations
in any manner.
Sec. 1273.6 Debt management duties of the OF.
(a) Issuing and servicing of consolidated obligations. The OF shall
issue and service (including making timely payments on principal and
interest due, subject to Sec. Sec. 966.8 and 966.9 of this title)
consolidated obligations pursuant to and in accordance with the
policies and procedures established by the OF board of directors under
this part.
(b) Combined financial reports requirements. The OF, under the
oversight of the Audit Committee, shall prepare and distribute the
combined annual and quarterly financial reports for the Bank System in
accordance with the following requirements:
(1) The scope, form and content of the disclosure generally shall
be consistent with the requirements of the Securities and Exchange
Commission Regulations S-K and S-X (17 CFR parts 229 and 210).
(2) Information about each Bank shall be presented as a segment of
the Bank System as if generally accepted accounting principles
regarding business segment disclosure applied to the combined annual
and quarterly financial reports of the Bank System, and shall be
presented using consistent accounting policies and procedures.
(3) The standards set forth in paragraphs (b)(1) and (b)(2) of this
section are subject to the exceptions set forth in Appendix A to this
part.
(4) The combined Bank System annual financial reports shall be
filed with the FHFA and distributed to each Bank and Bank member within
90 days after the end of the fiscal year. The combined Bank System
quarterly financial reports shall be filed with the FHFA and
distributed to each Bank and Bank member within 45 days after the end
of the of the first three fiscal quarters of each year.
(5) The Audit Committee shall ensure that the combined Bank System
annual or quarterly financial reports comply with the standards of this
part.
(6) The OF and the OF board of directors, including the Audit
Committee, shall comply promptly with any directive of the FHFA
regarding the preparation, filing, amendment, or distribution of the
combined Bank System annual or quarterly financial reports.
(7) Nothing in this section shall create or be deemed to create any
rights in any third party.
(c) Capital markets data. The OF shall provide capital markets
information concerning debt to the Banks.
(d) NRSROs. The OF shall manage the relationships with NRSROs in
connection with their rating of consolidated obligations.
(e) Research. The OF shall conduct research reasonably related to
the issuance or servicing of consolidated obligations.
(f) Monitor Banks' credit exposure. The OF shall timely monitor,
and compile relevant data on, each Bank's and the Bank System's
unsecured credit exposure to individual counterparties.
Sec. 1273.7 Structure of the OF board of directors.
(a) Membership. The OF board of directors shall consist of fifteen
to seventeen part-time members as follows:
(1) The twelve Bank presidents, ex officio, provided that if the
presidency of any Bank becomes vacant, the person temporarily
fulfilling the duties of president of that Bank may sit on the OF board
of directors until the presidency is filled permanently; and
(2)(i) Three to five Independent Directors who each shall be a
citizen of the United States and who, as a group, shall have
substantial experience in financial and accounting matters. Such
Independent Directors may not be officers, directors, or employees of
any Bank or Bank System member, be affiliated with any consolidated-
obligations selling or dealer group member under contract with OF, or
hold shares or any other financial interest in any member of a Bank or
in any such dealer group member in an amount greater than the lesser
of--
(A) $250,000 or
(B) 0.01% of the market capitalization of the member or dealer.
(ii) For purposes of this paragraph (a)(2), a holding company of a
member of a Bank or a dealer group member shall be deemed to be a
member if the assets of the holding company's member subsidiaries
constitute 35% or more of the consolidated assets of the holding
company.
(b) Terms. (1) Except as provided in paragraphs (b)(2) and (c)(1)
of this section, each Independent Director shall serve for five-year
terms (which shall be staggered so that no more than one Independent
Director seat would be scheduled to become vacant in any one year), and
shall be subject to removal or suspension or other enforcement action
in accordance with Sec. 1273.4(a) of this section. An Independent
Director may not serve more than two full, consecutive terms. Time
served by a private citizen member of the OF Board pursuant to an
appointment made prior to the effective date of this part shall not
count as a term for purposes of this restriction.
(2) The OF board of directors shall fill any vacancy among the
Independent Directors occurring prior to the scheduled end of a term by
majority vote, subject to the FHFA's review of, and non-objection to,
the new Independent Director. The OF board of directors shall provide
the FHFA with relevant biographic and background information, including
information demonstrating that the new Independent Director meets the
requirements of paragraph (a)(2) of this
[[Page 38570]]
section, at least 20 business days before the person assumes any duties
as a member of the OF board of directors. A person elected under this
paragraph to fill a vacancy on the OF board of directors shall serve
only for the remainder of the term associated with the vacant
directorship.
(c) Initial selection of Independent Directors. (1) As soon as
practicable after the effective date of this regulation, the FHFA shall
fill the initial Independent Director positions by appointment. The
Independent Directors shall be appointed for such periods of time, not
to exceed five years, to assure the terms are staggered in accordance
with paragraph (b)(1) of this section.
(2) Each Bank shall have the right to nominate one person for
consideration for appointment as an Independent Director by the FHFA
under this paragraph (c). The nominations will be made according to any
procedures established by the FHFA. The FHFA may appoint persons
nominated by the Banks, or other persons meeting the requirements of
paragraph (a)(2) of this section, or some combination.
(d) Election of Independent Directors after the initial terms. Once
the terms of the Independent Directors initially appointed by the FHFA
expire or the positions otherwise become vacant, the Independent
Directors subsequently shall elected by majority vote of the OF board
of directors, subject to FHFA's review of, and non-objection to, each
new Independent Director. The OF board of directors shall provide the
FHFA with relevant biographic and background information, including
information demonstrating that the new Independent Director meets the
requirements of paragraph (a)(2) of this section, at least 20 business
days before the person assumes any duties as a member of the OF board
of directors. If the OF board of directors, in the FHFA's judgment,
fails to elect a suitably qualified person, the FHFA may appoint some
other person who meets the requirements of paragraph (a)(2) of this
section.
(e) Initial Selection of Chair and Vice Chair. The first Chair and
Vice Chair of the OF board of directors after the effective date of
this regulation shall be appointed by the FHFA. The Chair shall be
selected from among the Independent Directors appointed under paragraph
(c)(1) of this section. The Vice-chair shall be selected from among all
OF board directors.
(f) Subsequent Election of Chair and Vice-Chair. After the terms of
the persons selected under paragraph (e) of this section expire or the
positions otherwise become vacant:
(1) Subsequent Chairs shall be elected by majority vote of the OF
board of directors from among the Independent Directors then serving on
the OF board of directors; and
(2) Subsequent Vice Chairs shall be elected by majority vote of the
OF board of directors from among all directors.
(3) The OF board of directors shall promptly inform the FHFA of the
election of a Chair or Vice Chair. If the FHFA objects to any Chair or
Vice Chair elected by the OF board of directors, the FHFA shall provide
written notice of its objection within 20 business days of the date
that the FHFA first receives the notice of the election of the Chair
and or Vice Chair, and the OF board of directors must then promptly
elect a new Chair or Vice Chair, as appropriate.
(g) Committees. In addition to the Audit Committee required under
Sec. 1273.9 of this part, the OF board of directors may establish
other committees, including an Executive Committee. The duties and
powers of such committee, including any powers delegated by the OF
board of directors, shall be specified in the by-laws of the board of
directors or the charter of the committee, which shall be subject to
review and approval by the FHFA.
(h) Compensation. (1) The Bank presidents shall not receive any
additional compensation or reimbursement as a result of their service
as a director of the OF board.
(2) The OF shall pay compensation and expenses to the Independent
Directors in accordance with the requirements for payment of
compensation and expenses to Bank chairs and directors as set forth in
part 918 of this title.
(i) Indemnification. The OF shall indemnify its directors, the CEO,
and other officers and employees of the OF under such terms and
conditions as shall be determined by the OF board of directors,
provided that such terms and conditions are consistent with the terms
and conditions of indemnification of directors, officers, and employees
of the Bank System generally.
(j) Delegation. In addition to any delegation to a committee
allowed under paragraph (g) of this section, the OF board of directors
may delegate any of its authority or duties to any employee of the OF
in order to enable OF to carry out its functions, provided that such
delegation remains subject to the review of the FHFA, and the FHFA
reserves the right in its sole discretion to require the OF board of
directors to withdraw or change the scope of the delegation.
(k) Outside staff and consultants. In carrying out its duties and
responsibilities, the OF board of directors, or any committee thereof,
shall have authority to retain staff and outside counsel, independent
accountants, or other outside consultants at the expense of the OF.
Sec. 1273.8 General duties of the OF board of directors.
(a) General. (1) Conduct of business. Each director shall have the
duties described in Sec. 917.2(b) of this title, as appropriate.
(2) Bylaws. The OF board of directors shall adopt bylaws in
accordance with the provisions of Sec. 917.10 of this title.
(b) Meetings and quorum. The OF board of directors shall conduct
its business by majority vote of its members at meetings convened in
accordance with its bylaws, and shall hold no fewer than six in-person
meetings annually. Due notice shall be given to the FHFA by the Chair
prior to each meeting. A quorum, for purposes of meetings of the OF
board of directors, shall not be less than ten members.
(c) Duties regarding COs. The OF board of directors shall oversee
the establishment of policies regarding COs that shall:
(1) Govern the frequency and timing of issuance, issue size,
minimum denomination, CO concessions, underwriter qualifications,
currency of issuance, interest-rate change or conversion features, call
features, principal indexing features, selection and retention of
outside counsel, selection of clearing organizations, and the selection
and compensation of underwriters for consolidated obligations, which
shall be in accordance with the requirements and limitations set forth
in paragraph (c)(4) of this section;
(2) Prohibit the issuance of COs intended to be privately placed
with or sold without the participation of an underwriter to retail
investors, or issued with a concession structure designed to facilitate
the placement of the COs in retail accounts, unless the OF has given
notice to the board of directors of each Bank describing a policy
permitting such issuances, soliciting comments from each Bank's board
of directors, and considering the comments received before adopting a
policy permitting such issuance activities;
(3) Require all broker-dealers or underwriters under contract to
the OF to have and maintain adequate suitability sales practices and
policies, which shall be acceptable to, and subject to review by, the
OF;
[[Page 38571]]
(4) Require that COs shall be issued efficiently and at the lowest
all-in funding costs over time, consistent with--
(i) Prudent risk-management practices, prudential debt parameters,
short and long-term market conditions, and the Banks' role as GSEs;
(ii) Maintaining reliable access to the short-term and long-term
capital markets; and
(iii) Positioning the issuance of debt to take advantage of current
and future capital market opportunities.
(d) Other duties. The OF board of directors shall:
(1) Set policies for management and operation of the OF;
(2) Approve a strategic business plan for the OF in accordance with
the provisions of Sec. 917.5 of this title, as appropriate;
(3) Review, adopt and monitor annual operating and capital budgets
of the OF in accordance with the provisions of Sec. 917.8 of this
title, as appropriate;
(4) Select, employ, determine the compensation for, and assign the
duties and functions of a Chief Executive Officer of the OF who
shall[boxh]
(i) Be head of the OF and direct the implementation of the OF board
of directors' policies;
(ii) Serve as a member of the Directorate of the FICO, pursuant to
section 21(b)(1)(A) of the Bank Act (12 U.S.C. 1441(b)(1)(A)); and
(iii) Serve as a member of the Directorate of the REFCORP, pursuant
to section 21B(c)(1)(A) of the Bank Act (12 U.S.C. 1441b(c)(1)(A)).
(5) Review and approve all contracts of the OF; and
(6) Assume any other responsibilities that may from time to time be
assigned to it by the FHFA.
(e) No rights created. Nothing in this part shall create or be
deemed to create any rights in any third party.
Sec. 1273.9 Audit committee.
(a) Composition. The Independent Directors shall serve as the Audit
Committee.
(b) Responsibilities. (1) The Audit Committee shall be responsible
for overseeing the audit function of the OF and the preparation and
accuracy of the Bank System's combined financial reports.
(2) For purposes of the combined financial reports, the Audit
Committee shall ensure that the Banks adopt consistent accounting
policies and procedures such that the information submitted by the
Banks to OF may be combined to create accurate and meaningful combined
financial reports.
(3) The Audit Committee, in consultation with the FHFA, may
establish common accounting policies and procedures for the information
submitted by the Banks to the OF for the combined financial reports
where the Committee determines such information provided by the several
Banks is inconsistent and that consistent policies and procedures
regarding that information are necessary to create accurate and
meaningful combined financial reports.
(4) To the extent possible the Audit Committee shall operate
consistent with--
(i) The requirements of Sec. 917.7 of this title; and
(ii) The requirements pertaining to audit committee reports set
forth in Item 306 of Regulation S-K promulgated by the Securities and
Exchange Commission.
(5) The Audit Committee shall oversee internal audit activities,
including the selection, evaluation, compensation and, where
appropriate, replacement of the internal auditor. The internal auditor
shall report directly to the Audit Committee and administratively to
executive management.
(6) The Audit Committee shall have the exclusive authority to
employ and contract for the services of an independent, external
auditor for the Banks' annual and quarterly combined financial
statements.
(c) No delegation. The Audit Committee may not delegate the
responsibilities assigned to it under this section to any person, or to
any other committee or sub-committee of the OF board of directors.
Appendix A to Part 1273--Exceptions to the General Disclosure Standards
A. Related-party transactions. Item 404 of Regulation S-K, 17
CFR 229.404, requires the disclosure of certain relationships and
related party transactions. In light of the cooperative nature of
the Bank System, related-party transactions are to be expected, and
a disclosure of all related-party transactions that meet the
threshold would not be meaningful. Instead, the combined annual
report will disclose the percent of advances to members an officer
of which serves as a Bank director, and list the top ten holders of
advances in the Bank System and the top five holders of advances by
Bank, with a further disclosure indicating which of these members
had an officer that served as a Bank director. The combined
financial report will also disclose the top ten holders of advances
in the Bank System by holding company, where the advances of all
affiliates within a holding company are aggregated.
B. Biographical information. The biographical information
required by Items 401 and 405 of Regulation S-K, 17 CFR 229.401 and
405, will be provided only for members of the OF board of directors,
including the Bank presidents, the chair and vice chair of the board
of directors of each Bank, and the Chief Executive Officer of OF.
C. Compensation. The information on compensation required by
Item 402 of Regulation S-K, 17 CFR 229.402, will be provided only
for Bank presidents and the CEO of the OF. Since stock in each Bank
trades at par, the OF will not include the performance graph
specified in Item 402(1) of Regulation S-K, 17 CFR 229.402(1).
D. Submission of matters to a vote of stockholders. No
information will be presented on matters submitted to shareholders
for a vote, as otherwise required by Item 4 of the SEC's form 10-K,
17 CFR 249.310. The only item shareholders vote upon is the annual
election of directors.
E. Exhibits. The exhibits required by Item 601 of Regulation S-
K, 17 CFR 229.601, are not applicable and will not be provided.
F. Per share information. The statement of financial information
required by Items 301 and 302 of Rule S-K, 17 CFR 229.301 and 302,
is inapplicable because the shares of the Banks are subscription
capital that trades at par, and the shares expand or contract with
changes in member assets or advance levels.
G. Beneficial ownership. Item 403 of Rule S-K, 17 CFR 229.403,
requires the disclosure of security ownership of certain beneficial
owners and management. The combined financial report will provide a
listing of the ten largest holders of capital stock in the Bank
System and a listing of the five largest holders of capital stock by
Bank. This listing will also indicate which members had an officer
that served as a director of a Bank. The combined financial report
will also disclose the top ten holders of Bank stock in the Bank
System by holding company, where the Bank stock of all affiliates
within a holding company is aggregated.
4. Add part 1274 to subchapter D to read as follows:
PART 1274--FINANCIAL STATEMENTS OF THE BANKS
Sec.
1274.1 Definitions.
1274.2 Audit requirements.
1274.3 Requirements to provide financial and other information to
the FHFA and the OF.
Authority: 12 U.S.C. 1426, 1431, 4511(b), 4513, 4526(a).
Sec. 1274.1 Definitions.
For purposes of this part:
Audit means an examination of the financial statements by an
independent accountant in accordance with generally accepted auditing
standards for the purpose of expressing an opinion thereon.
Audit report means a document in which an independent accountant
indicates the scope the audit made and sets forth an opinion regarding
the financial statement taken as a whole, or an assertion to the effect
that an overall opinion cannot be expressed. When an
[[Page 38572]]
overall opinion cannot be expressed, the reasons therefor shall be
stated.
Bank written in title case, means a Federal Home Loan Bank
established under section 12 of the Bank Act (12 U.S.C. 1432).
Bank System means the Federal Home Loan Bank System, consisting of
the twelve Banks and the Office of Finance.
FHFA means the Federal Housing Finance Agency.
Financing Corporation or FICO means the Financing Corporation
established and supervised by the FHFA under section 21 of the Bank Act
(12 U.S.C. 1441).
Office of Finance or OF has the same meaning as set forth in Sec.
1273.1 of this chapter.
Sec. 1274.2 Audit requirements.
(a) Each Bank, the OF and the FICO shall obtain annually an
independent external audit of and an audit report on its individual
financial statement.
(b) The OF audit committee shall obtain an audit and an audit
report on the combined annual financial statements for the Bank System.
(c) All audits must be conducted in accordance with generally
accepted auditing standards and in accordance with the most current
government auditing standards issued by the Office of the Comptroller
General of the United States.
(d) An independent, external auditor must meet at least twice each
year with the audit committee of each Bank, the audit committee of OF,
and the FICO Directorate.
(e) FHFA examiners shall have unrestricted access to all auditors'
work papers and to the auditors to address substantive accounting
issues that may arise during the course of any audit.
Sec. 1274.3 Requirement to provide financial and other information to
the FHFA and the OF.
In order to facilitate the preparation by the OF of combined Bank
System annual and quarterly reports, each Bank shall provide to the OF
in such form and within such timeframes as the FHFA or the OF shall
specify, all financial and other information and assistance that the OF
shall request for that purpose. Nothing in this section shall
contravene or be deemed to circumscribe in any manner the authority of
the FHFA to obtain any information from any Bank related to the
preparation or review of any financial report.
Dated: July 29, 2009.
James B. Lockhart III,
Director, Federal Housing Finance Agency.
[FR Doc. E9-18567 Filed 8-3-09; 8:45 am]
BILLING CODE P