[Federal Register Volume 79, Number 18 (Tuesday, January 28, 2014)]
[Rules and Regulations]
[Pages 4389-4394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01362]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
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Federal Register / Vol. 79, No. 18 / Tuesday, January 28, 2014 /
Rules and Regulations
[[Page 4389]]
FEDERAL HOUSING FINANCE AGENCY
12 CFR Part 1230
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of Federal Housing Enterprise Oversight
12 CFR Part 1770
RIN 2590-AA12
Executive Compensation
AGENCY: Federal Housing Finance Agency; Office of Federal Housing
Enterprise Oversight, HUD.
ACTION: Final rule.
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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a final
rule that sets forth requirements and processes with respect to
compensation provided to executive officers by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, the
Federal Home Loan Banks, and the Federal Home Loan Bank System's Office
of Finance, consistent with the safety and soundness responsibilities
of FHFA under the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended by the Housing and Economic Recovery
Act of 2008. This final rule affirms the establishment of 12 CFR part
1230 and removal of 12 CFR part 1770 by the interim final rule that is
already in effect.
DATES: The final rule is effective February 27, 2014. For additional
information see SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel,
(202) 649-3050, [email protected], or Lindsay Simmons, Assistant
General Counsel, (202) 649-3066, [email protected], (not toll-
free numbers), Federal Housing Finance Agency, Eighth Floor, 400
Seventh Street SW., Washington, DC 20024. The telephone number for the
Telecommunications Device for the Hearing Impaired is (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
FHFA published an interim final rule with request for comments on
Executive Compensation on May 14, 2013 (74 FR 28442). The public notice
and comment period closed on July 15, 2013. The interim final rule
superseded the Office of Federal Housing Enterprise Oversight (OFHEO)
Executive Compensation rule, 12 CFR part 1770.\1\ This rule finalizes
the interim final rule and responds to comments received.
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\1\ FHFA is continuing its work to merge existing regulations of
its predecessor agencies (OFHEO and the Federal Housing Finance
Board), and will consider the appropriate disposition of an OFHEO
corporate governance provision related to compensation of directors,
executive officers, and employees (at 12 CFR 1710.13), and the
relationship of that provision to this final rule, in conjunction
with that project.
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This final rule implements section 1113 of the Housing and Economic
Recovery Act of 2008 (HERA), Public Law 110-289, 122 Stat. 2654.
Section 1113, which amended section 1318 of the Federal Housing
Enterprises Financial Safety and Soundness Act (Safety and Soundness
Act) (12 U.S.C. 4518), requires the Director to prohibit and withhold
compensation of executive officers of the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation (collectively,
the Enterprises), and the Federal Home Loan Banks (Banks)
(collectively, the regulated entities).
FHFA issues this final rule also to continue the requirement under
the charter acts of the Enterprises that the Director approve any
agreements or contracts of executive officers that provide compensation
in connection with termination of employment.\2\ No similar prior
approval requirement for the Director over termination benefits for
executive officers of the Banks is contained in the Federal Home Loan
Bank Act or the Safety and Soundness Act, but the total payment or
value derived from termination benefits is included in FHFA's review of
compensation provided by the Banks to their executive officers, in
order to determine whether the overall compensation is reasonable and
comparable. This is because FHFA considers the term ``compensation'' to
include benefits to an executive officer that are derived from post-
employment benefit plans or programs and other compensatory benefit
arrangements containing termination benefits, which affect the
executive officer individually or as part of a group. As a result, FHFA
reviews the value of benefits provided under such plans, programs, and
arrangements on an ongoing basis in exercising its compensation review
authority. FHFA aggregates the benefits provided under such plans,
programs, and arrangements with all other payments of money or any
other thing of current or potential value to determine whether an
officer's overall compensation is reasonable and comparable.\3\ FHFA
may also determine that a particular element of compensation is not
reasonable or comparable. For example, incentive compensation that
provides incentives for unsound risk management could be prohibited on
that basis.
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\2\ See section 309(d)(3)(B) of the Federal National Mortgage
Association Charter Act (12 U.S.C. 1723a (d)(3)(B)) and section
303(h)(2) of the Federal Home Loan Mortgage Corporation Act (12
U.S.C. 1452(h)(2)).
\3\ See 74 FR at 26990 (June 5, 2009).
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This final rule, like the interim final rule, reflects the
enactment of the Stop Trading on Congressional Knowledge Act (the
``STOCK Act''), which followed FHFA's issuance of the proposed rule.\4\
Section 16 of the STOCK Act prohibits senior executives of any
Enterprise in conservatorship from receiving bonuses during any period
of conservatorship on or after the date of enactment. Section 1230.3(a)
in the interim final rule and in this final rule includes this
statutory prohibition. On March 9, 2012, FHFA announced new executive
compensation programs for the Enterprises, in its capacity as
conservator.\5\ These programs eliminate bonuses for Enterprise senior
executives (and other executives) and thus comply with Section 16 of
the STOCK Act.
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\4\ See Public Law 112-105, 126 Stat. 291 (April 4, 2012)
(codified at 12 U.S.C. 4518a).
\5\ See News Release dated March 9, 2012, at http://www.fhfa.gov/webfiles/23438/ExecComp3912F.pdf.
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Additionally, FHFA is adopting this final rule to ensure that the
regulated
[[Page 4390]]
entities and the Office of Finance (OF) comply with processes used by
FHFA in its oversight of executive compensation. The processes require
the submission of relevant information by the regulated entities and OF
on a timely basis, in a format deemed appropriate by FHFA, to enable
FHFA to efficiently carry out its executive compensation functions. For
reasons noted above, as with the Enterprises, information required to
be submitted to FHFA for its review and consideration by the Banks
includes information relating to compensation for services during
employment and to termination benefits for their executive officers.
FHFA had adopted the interim final rule to provide an opportunity
for additional comment in view of certain revisions to the proposed
rule. Further details about comments received and FHFA's responses can
be found below.
FHFA has conducted a separate rulemaking regarding golden parachute
payments. Section 1114 of HERA further amended section 1318 of the
Safety and Soundness Act (12 U.S.C. 4518) to authorize the Director to
prohibit or limit golden parachute payments and indemnification
payments by the Enterprises and the Banks to entity-affiliated parties.
Pursuant to this authority, FHFA adopted a final rule on golden
parachute payments in 2009, \6\ setting forth factors to be considered
by the Director of FHFA when exercising authority to limit golden
parachute payments that are paid to entity-affiliated parties of a
regulated entity or OF. Subsequently, FHFA proposed amendments to the
final golden parachute payments rule to address in more detail
prohibited and permissible golden parachute payments.\7\ Today, FHFA
also publishes in this issue of the Federal Register a final amendment
of the rule on golden parachute payments.
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\6\ Golden Parachute Payments, 74 FR 5101 (January 29, 2009),
codified at 12 CFR part 1231.
\7\ Golden Parachute and Indemnification Payments Proposed Rule,
74 FR 30975 (June 29, 2009).
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FHFA recently adopted a rule setting forth definitions of terms
commonly used in its regulations, and has removed duplicative
definitions in this final rule.\8\
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\8\ See 12 CFR 1201.1.
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II. Comments on the Interim Final Rule
FHFA received comments from one member of the public, and from the
twelve Federal Home Loan Banks and the Office of Finance. FHFA
considered all of the comments submitted, and explains its responses
below.
Rule's Effect on Compensation
The Banks made two comments regarding FHFA's review of compensation
that are similar to or continue comments they had made previously in
response to the proposed rule. The first is the Banks' allegation that
the rule in effect prescribes a level or range of executive
compensation. The second is that FHFA's review ``in whole or in part''
should instead be review ``taken as a whole.''
Congress provided in 12 U.S.C. 4518(d) that FHFA is not to
prescribe or set specific levels or ranges of compensation. Congress
required, however, that FHFA determine whether compensation is
reasonable and comparable with compensation for employment in other
similar businesses involving similar duties and responsibilities.
Accordingly, FHFA has defined the terms ``reasonable'' and
``comparable'' and has implemented the Congressional mandate in Sec.
1230.3(a) as follows: ``No regulated entity or the Office of Finance
shall pay compensation to an executive officer that is not reasonable
and comparable with compensation paid by such similar businesses
involving similar duties and responsibilities.''
The Banks argued that, despite changes FHFA made in the interim
final rule in response to comments the Banks made on the proposed rule,
the interim final rule allows FHFA to prescribe or set a specific level
or range of compensation, contrary to the statute. The Banks argue that
three provisions in combination create this result. First, as stated
above, FHFA implemented the Congressional mandate in Sec. 1230.3(a) of
the rule to state that regulated entities and the OF may not pay
compensation that is not reasonable and comparable according to the
statute. Second, the interim final rule defines ``comparable'' as
``compensation that, taking in whole or in part, does not materially
exceed compensation paid at institutions of similar size and function
for similar duties and responsibilities.'' Finally, in its discussion
of the proposed rule and of the interim final rule, FHFA identified the
Farm Credit Banks and Federal Reserve Banks as examples that may
appropriately be included as points of reference in assessing
reasonableness and comparability of compensation at the Federal Home
Loan Banks. The Banks assert that these provisions in effect (i)
prohibit the Banks from paying compensation that is not ``reasonable''
and ``comparable'' in a manner that prescribes or sets a specific level
of range of compensation, (ii) impose a presumptive cap of ``not
materially exceed[ing]'' compensation at similar institutions, and
(iii) designate particular comparator institutions that will determine
compliance with the rule.
FHFA has responded to the Banks' stated concerns on this subject in
this rulemaking, including making changes to the rule in response to
the Banks' previous comments, and must now reject this final comment as
being no more persuasive than the previous comments, to which FHFA has
already adequately responded.\9\ The first of the three provisions the
Banks' find objectionable, in Sec. 1230.3(a), is a reasonable
implementation of the Congressional mandate in the statute and in no
way authorizes FHFA to set compensation or a range of compensation.
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\9\ 78 FR 28442, 28444-45 (May 14, 2013).
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FHFA defined the term ``comparable'' in the way it deems to be
closest to Congressional intent, true to the meaning of the word in
plain English, and supported by market usage of the term. Comparison
with similar positions at similar institutions is a common practice for
setting compensation. It appears clear that a statutory requirement of
comparability would need to operate as a check on compensation that
materially exceeds compensation for comparable duties and
responsibilities at comparable institutions. Even so, FHFA avoided
translating this requirement into specific mandates to create a certain
peer group of a certain size, or even use of a certain process to
create the group of comparators, which could have limited the
flexibility of the Banks in implementing the mandate. FHFA reviews
comparability while also respecting the Banks' processes for setting
compensation. This review results in no specific level of compensation,
nor a range, communicated from FHFA to the regulated entities or OF, in
practice or in effect.
FHFA continues to believe that the Farm Credit Banks and the
Federal Reserve Banks are relevant points of reference in assessing the
reasonableness and comparability of Bank compensation, because they
have certain points in common with the Federal Home Loan Banks: they
are government-sponsored financial institutions; they have some measure
of government backing and therefore a potentially different risk
profile than non-government-sponsored institutions; and they do not
issue publicly traded stock that can be used as an element of long-term
compensation and therefore
[[Page 4391]]
must structure their compensation differently from publicly traded
companies. For these reasons it would be wrong to ignore the Farm
Credit Banks and the Federal Reserve Banks. While the Banks' comment
letters have correctly pointed out differences between them and the
Farm Credit Banks and the Federal Reserve Banks, there are also key
differences between the Federal Home Loan Banks and the commercial
banks and similar institutions that the Banks have identified as their
comparators. The fact is that there are no institutions that are
exactly comparable to the Federal Home Loan Banks.
FHFA had included these points in its previous response \10\ to the
Banks' previous comments and the Banks did not in their most recent
comment letter to the interim final rule provide any additional
responsive arguments about the appropriateness of comparability with
the Farm Credit Banks and the Federal Reserve Banks. FHFA maintains
that suggesting these entities be included as points of reference among
a group of comparators is fully responsive to its Congressional mandate
to determine whether compensation is comparable to that of similar
businesses with similar duties and responsibilities, and that doing so
does not result in setting a specific level or range of compensation.
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\10\ 78 FR 28442, 28444-45 (May 14, 2013).
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The unique member-controlled cooperative structure of the Federal
Home Loan Bank system was in place as of the time that Congress created
the statute that mandates FHFA's review for reasonableness and
comparability of compensation, and therefore cannot be adduced as a
basis for FHFA to abandon its role to review as the statute intended,
including for comparability with similar institutions, despite the
unique structure in place at the Banks.
FHFA received an additional comment from the Banks, noting that
FHFA had rejected the Banks' previous comment that FHFA's review of
executive compensation should be based on compensation that is ``taken
as a whole'' rather than ``in whole or in part.'' The Banks had stated
their belief that if an executive's compensation package taken as a
whole is reasonable and comparable to compensation at similar
institutions for similar duties, FHFA should not be permitted to reject
a discrete element of an executive's compensation as excessive. They
have further requested in response to the interim final rule that FHFA
recognize that the Banks are more restricted than other large financial
institutions in methods that they can use to compensate their
executives. For example, the Banks are unable to offer stock-related
executive compensation because they do not have publicly traded stock.
The Banks requested that FHFA take these distinguishing factors into
consideration.
FHFA responded to that earlier comment that in its ongoing
oversight of an executive's overall compensation, FHFA reviews all
components that compose the broadly defined term ``compensation.'' \11\
If any component's value is determined to be an outlier, it may still
be acceptable given the compensation taken as a whole. On the other
hand, it may also be deemed excessive by itself if it creates
questionable incentives, or in other ways draws undue negative
attention to itself. FHFA will advise the entity if it finds the
aggregate compensation package to be excessive. FHFA may specifically
note that a particular component appears to be the source of the
problem and should be reassessed by the entity in order to align the
total package with the reasonable and comparable standard. For these
reasons, FHFA has determined to retain the language, which is currently
effective in the interim final rule, in this final rule as well. FHFA
assures the Banks that it does take into account the particular
circumstances of the Banks in reviewing executive compensation. FHFA is
well aware that the Banks do not have publicly traded stock and pay
compensation in cash.
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\11\ 78 FR at 28445.
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FHFA recognizes that executive compensation oversight mandated by
HERA has resulted in a new area of regulatory compliance for the Banks.
For that reason, in addition to guidance, FHFA staff will continue to
work directly with the relevant staff, committees, and boards of the
Banks to ensure that FHFA's review process is well understood. FHFA
guidance and dialogue between staffs will, among other things, address
concerns raised by the Banks regarding how the provisions of the rule
will operate under specific circumstances.
Status as an Executive Officer
The Banks requested that the term ``executive officer'' apply only
to those individuals who qualify as executive officers as of the time
of a required notice regarding such individual's compensation. The
SUPPLEMENTARY INFORMATION to the interim final rule states that ``[a]n
executive officer for purposes of this regulation would cover officers
who were NEOs at the Bank's last filing, who would be NEOs if the
filing occurred today, and those expected to be NEOs in the future
based on current title, duties, or pay. (Consequently, the total number
of NEOs at any time may be more than five.)''
In order to address the Banks' request, FHFA has determined to
narrow its interpretation described above in the Supplementary
Information to the interim final rule. FHFA will apply the definition
more narrowly, in a manner which is intended to address the concern
expressed by the Banks, and which is reflective of the plain meaning of
the regulatory text. With respect to the Banks, the definition of
``executive officer'' adopts the language of the SEC's Regulation S-K,
17 CFR 229.402(a)(3), and therefore covers a Bank's most highly
compensated officers (generally referred to as the ``top 5'') who are
designated under SEC disclosure requirements as ``Named Executive
Officers'' (NEOs).
It is FHFA's intent to provide clarity and avoid undue burden on
the Banks by following the definition and practice of the SEC for
identifying NEOs in its definition for ``executive officer.'' However,
this final rule includes requirements that apply to ``executive
officers'' throughout the year, and not just at the time of securities
filings. Therefore, for purposes of clarification, and in response to
the request of the Banks, FHFA is now narrowing its interpretation that
was previously provided in the SUPPLEMENTARY INFORMATION to the interim
final rule as to how the definition of executive officer applies.
The definition of ``executive officer'' applies to a person who
qualifies as an ``executive officer'' as of the time of a required
notice under Sec. 1230.3(d)(1)-(4). In effect, this means that the
``top 5'' determined for purposes of securities filings\12\ will remain
the ``top 5'' for purposes of this regulation until either (1) one of
the ``top 5'' individuals vacates his or her position, or (2) the next
``top 5'' are identified the following year.
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\12\ Generally, the ``top 5'' are determined as of a certain
date based on current position (for the president or chief financial
officer) or the previous 12 months of compensation (for the most
highly compensated employees).
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In the case that one of the ``top 5'' vacates his or her position,
this regulation is intended to apply in the following manner. If the
position of president or chief financial officer is vacated, the new
president or chief financial officer will become one of the ``top 5''
immediately when the change is
[[Page 4392]]
effective.\13\ If a current employee is promoted with an increase in
compensation to fill the role vacated by one of the ``top 5'' or a new
hire is intended to fill the role vacated by one of the ``top 5''--and
it is reasonably foreseeable that if the individual remains in the role
that such individual will become a ``top 5'' employee under the SEC
rules--then the individual should be treated as an executive officer
for purposes of this final rule upon the promotion or hire becoming
effective.
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\13\ Employees who act in the capacity of the vacated position,
or who take on similar responsibilities until a successor is named,
with no corresponding change in compensation, are not intended to be
considered the ``top 5'' based solely on the temporary performance
of those responsibilities.
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Compensation Actions Requiring Advance Notice
The interim final rule requires prior notification before payment
to an executive officer of annual compensation, pay for performance or
incentive pay, ``or any other element of compensation.'' The Banks
requested clarification of what ``any other element of compensation''
is intended to include, and particularly, whether it includes
reimbursements for travel expenses, employee benefit plans such as
health benefit plans, and other general plans that executive officers
participate in along with other Bank employees.
Compensation is defined broadly to include any item of current or
potential value provided in connection with employment, including
benefits received under a broad-based benefit plan. This is because
FHFA reviews the value of benefits provided under such plans, programs,
and arrangements on an ongoing basis in exercising its review
authority. FHFA must be aware of the value of benefits provided under
such plans, programs, and arrangements in addition to all other
payments of money or any other thing of current or potential value to
determine whether an officer's overall ``compensation'' is reasonable
and comparable. With regard to the notice requirement, however,
approval of a broad-based benefit plan or policy (such as a travel
reimbursement policy) can serve to satisfy the notice requirement for
individual payments made under those plans. For purposes of clarity,
such blanket approval can apply to the periodic payments of base
salary, but is not intended to apply to any payments under incentive
plans, any pay for performance, any plans that apply principally to the
executive officers as defined in this final rule, or to any payments
under individually negotiated agreements.
Moreover, FHFA is responding to the Banks' comment by replacing the
phrase ``any other element of compensation'' with a more specific list
of the elements of compensation to which the notice requirement
applies. The revised regulatory text in Sec. 1230.3(d)(3) provides
that ``[a] regulated entity or the Office of Finance shall not, without
providing the Director at least 30 days' advance written notice, pay,
disburse, or transfer to any executive officer, annual compensation
(where the annual amount has changed); pay for performance or other
incentive pay; any amounts under a severance plan, change-in-control
agreement, or other separation agreement; any compensation that would
qualify as direct compensation for purposes of securities filings; or
any other element of compensation identified by the Director prior to
the notice period.'' Payments made under broad-based health benefit
plans, for example, are not subject to the notice requirement. This
change serves to narrow the scope of the notice requirement as compared
to the interim final rule and is therefore within the scope of the
interim final rule's request for comment.\14\
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\14\ This is the only change to the text of the interim final
rule that FHFA has made, other than to add ``supervisory'' to
paragraph (1)(iii) of the definition of ``reasonable and
comparable'' to clarify what kind of guidance is referred to,
consistent with the discussion at 78 FR 28445.
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Comments Regarding Additional Process
The Banks requested that the rule be amended to include additional
procedures. For example, the Banks requested that the rule include
procedures for notifying the Bank of any compensation review, provision
to the Banks of official explanation of any action FHFA is considering,
and procedures for FHFA to receive input from the Banks on such
actions. The Banks also reiterated comments they had made on the
proposed rule, to which FHFA responded in the Supplementary Information
to the interim final rule.
FHFA believes the input of the Banks is important in its decision-
making, and also appreciates that any directive it would issue to a
regulated entity to prohibit or withhold compensation of an executive
officer impacts the executive financially. For that reason, any such
decision is made only after thorough review and full understanding of
the facts on a case-by-case basis, and the application to the facts of
its authorities mandated by Congress. Such thorough review and full
understanding of relevant facts occurs with a regulated entity's full
cooperation and input. FHFA believes incorporating additional
procedures in this final rule is unnecessary in light of the extent of
communication that will occur with a regulated entity before making a
decision such as a determination that executive compensation is
excessive or that there had been employee misconduct, and would unduly
delay corrective action.
Grandfathering
The Banks requested grandfathering for compensation agreements in
place as of the effective date of the final rule (as opposed to the
date of the interim final rule, which was May 14, 2013.) The proposed
rule, which was issued prior to the interim final rule and provided
opportunity for notice and comment on FHFA's executive compensation
rulemaking, was issued June 5, 2009. FHFA believes the period of time
from the publication of the proposed rule to the interim final rule, in
addition to opportunity for notice and comment, has provided
satisfactory notice to the regulated entities of the provisions of the
executive compensation rulemaking.
Recapture of excessive compensation
As described in the Supplementary Information to the interim final
rule, FHFA plans to publish for comment a proposal to require the
regulated entities to develop and adopt policies to provide for
recapture of improvidently or improperly paid compensation in
appropriate circumstances.\15\
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\15\ See 78 FR at 28446. Such policies would speak more broadly
than those contemplated by section 954 of the Dodd-Frank Act, which
would address only the recovery of incentive compensation that had
been paid based on financial results that are later required to be
restated. See Securities Exchange Act of 1934 section 10D, 15 U.S.C.
78j-4.
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Regulatory Impact
Paperwork Reduction Act
The final rule does not contain any information collection
requirement that requires the approval of OMB under the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.).
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires that
a rule that has a significant economic impact on a substantial number
of small entities, small businesses, or small organizations must
include an initial regulatory flexibility analysis describing the
rule's impact on small entities. Such an analysis need not be
undertaken if
[[Page 4393]]
the agency has certified that the rule will not have a significant
economic impact on a substantial number of small entities. 5 U.S.C.
605(b). FHFA has considered the impact of the interim final rule under
the Regulatory Flexibility Act. FHFA certifies that the interim final
rule is not likely to have a significant economic impact on a
substantial number of small business entities because the rule is
applicable only to the regulated entities, which are not small entities
for purposes of the Regulatory Flexibility Act.
List of Subjects
12 CFR Part 1230
Administrative practice and procedure, Compensation, Confidential
business information, Government-sponsored enterprises, Reporting and
recordkeeping requirements.
12 CFR Part 1770
Administrative practice and procedure, Confidential business
information, Reporting and recordkeeping requirements.
Authority and Issuance
Accordingly, for the reasons stated in the Supplementary
Information, the Interim Final Rule published at 78 FR 28442 (May 14,
2013) is adopted as a final rule with the following changes:
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
SUBCHAPTER B--ENTITY REGULATIONS
0
1. Revise part 1230 to read as follows:
PART 1230--EXECUTIVE COMPENSATION
Sec.
1230.1 Purpose.
1230.2 Definitions.
1230.3 Prohibition and withholding of executive compensation.
1230.4 Prior approval of termination agreements of Enterprises.
1230.5 Submission of supporting information.
Authority: 12 U.S.C. 1427, 1431(l)(5), 1452(h), 4502(6),
4502(12), 4513, 4514, 4517, 4518, 4518a, 4526, 4631, 4632, 4636, and
1723a(d).
Sec. 1230.1 Purpose.
The purpose of this part is to implement requirements relating to
the supervisory authority of FHFA under the Safety and Soundness Act
with respect to compensation provided by the regulated entities and the
Office of Finance to their executive officers. This part also
establishes a structured process for submission of relevant information
by the regulated entities and the Office of Finance, in order to
facilitate and enhance the efficiency of FHFA's oversight of executive
compensation.
Sec. 1230.2 Definitions.
The following definitions apply to the terms used in this part:
Charter acts mean the Federal National Mortgage Association Charter
Act and the Federal Home Loan Mortgage Corporation Act, which are
codified at 12 U.S.C. 1716 through 1723i and 12 U.S.C. 1451 through
1459, respectively.
Compensation means any payment of money or the provision of any
other thing of current or potential value in connection with
employment. Compensation includes all direct and indirect payments of
benefits, both cash and non-cash, granted to or for the benefit of any
executive officer, including, but not limited to, payments and benefits
derived from an employment contract, compensation or benefit agreement,
fee arrangement, perquisite, stock option plan, post-employment
benefit, or other compensatory arrangement.
Enterprise means the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation (collectively, Enterprises) and,
except as provided by the Director, any affiliate thereof.
Executive officer means:
(1) With respect to an Enterprise:
(i) The chairman of the board of directors, chief executive
officer, chief financial officer, chief operating officer, president,
vice chairman, any executive vice president, any senior vice president,
any individual in charge of a principal business unit, division, or
function, and any individual who performs functions similar to such
positions whether or not the individual has an official title; and
(ii) Any other officer as identified by the Director;
(2) With respect to a Bank:
(i) The president, the chief financial officer, and the three other
most highly compensated officers; and
(ii) Any other officer as identified by the Director.
(3) With respect to the Office of Finance:
(i) The chief executive officer, chief financial officer, and chief
operating officer; and
(ii) Any other officer identified by the Director.
Reasonable and comparable means compensation that is:
(1) Reasonable--compensation, taken in whole or in part, that would
be appropriate for the position and based on a review of relevant
factors including, but not limited to:
(i) The duties and responsibilities of the position;
(ii) Compensation factors that indicate added or diminished risks,
constraints, or aids in carrying out the responsibilities of the
position; and
(iii) Performance of the regulated entity, the specific employee,
or one of the entity's significant components with respect to
achievement of goals, consistency with supervisory guidance and
internal rules of the entity, and compliance with applicable law and
regulation.
(2) Comparable--compensation that, taken in whole or in part, does
not materially exceed compensation paid at institutions of similar size
and function for similar duties and responsibilities.
Regulated entity means any Enterprise and any Federal Home Loan
Bank.
Sec. 1230.3 Prohibition and withholding of executive compensation.
(a) In general. The Director may review the compensation
arrangements for any executive officer of a regulated entity or the
Office of Finance at any time, and shall prohibit the regulated entity
or the Office of Finance from providing compensation to any such
executive officer that the Director determines is not reasonable and
comparable with compensation for employment in other similar businesses
involving similar duties and responsibilities. No regulated entity or
the Office of Finance shall pay compensation to an executive officer
that is not reasonable and comparable with compensation paid by such
similar businesses involving similar duties and responsibilities. No
Enterprise in conservatorship shall pay a bonus to any senior executive
during the period of that conservatorship.
(b) Factors to be taken into account. In determining whether
compensation provided by a regulated entity or the Office of Finance to
an executive officer is not reasonable and comparable, the Director may
take into consideration any factors the Director considers relevant,
including any wrongdoing on the part of the executive officer, such as
any fraudulent act or omission, breach of trust or fiduciary duty,
violation of law, rule, regulation, order, or written agreement, and
insider abuse with respect to the regulated entity or the Office of
Finance.
(c) Prohibition on setting compensation by Director. In carrying
out paragraph (a) of this section, the Director may not prescribe or
set a specific level or range of compensation.
(d) Advance notice to Director of certain compensation actions. (1)
A regulated entity or the Office of Finance
[[Page 4394]]
shall not, without providing the Director at least 60 days' advance
written notice, enter into any written arrangement that provides
incentive awards to any executive officer or officers.
(2) A regulated entity or the Office of Finance shall not, without
providing the Director at least 30 days' advance written notice, enter
into any written arrangement that:
(i) Provides an executive officer a term of employment for a term
of six months or more; or
(ii) In the case of a Bank or the Office of Finance, provides
compensation to any executive officer in connection with the
termination of employment, or establishes a policy of compensation in
connection with the termination of employment.
(3) A regulated entity or the Office of Finance shall not, without
providing the Director at least 30 days' advance written notice, pay,
disburse, or transfer to any executive officer, annual compensation
(where the annual amount has changed); pay for performance or other
incentive pay; any amounts under a severance plan, change-in-control
agreement, or other separation agreement; any compensation that would
qualify as direct compensation for purposes of securities filings; or
any other element of compensation identified by the Director prior to
the notice period.
(4) Notwithstanding the foregoing review periods, a regulated
entity or the Office of Finance shall provide five business days'
advance written notice to the Director before committing to pay
compensation of any amount or type to an executive officer who is being
newly hired.
(5) The Director reserves the right to extend any of the foregoing
review periods, and may do so in the Director's discretion, upon notice
to the regulated entity or the Office of Finance. Any such notice shall
set forth the number of business or calendar days by which the review
period is being extended.
(e) Withholding, escrow, prohibition. During the review period
required by paragraph (d) of this section, or any extension thereof, a
regulated entity or the Office of Finance shall not execute the
compensation action that is under review unless the Director provides
written notice of approval or non-objection. During a review under
paragraph (a) or (d) of this section, or at any time before an
executive compensation action has been taken, the Director may, by
written notice, require a regulated entity or the Office of Finance to
withhold any payment, transfer, or disbursement of compensation to an
executive officer, or to place such compensation in an escrow account,
or may prohibit the action.
Sec. 1230.4 Prior approval of termination agreements of Enterprises.
(a) In general. An Enterprise may not enter into any agreement or
contract to provide any payment of money or other thing of current or
potential value in connection with the termination of employment of an
executive officer unless the agreement or contract is approved in
advance by the Director.
(b) Covered agreements or contracts. An agreement or contract that
provides for termination payments to an executive officer of an
Enterprise that was entered into before October 28, 1992,\1\ is not
retroactively subject to approval or disapproval by the Director.
However, any renegotiation, amendment, or change to such an agreement
or contract shall be considered as entering into an agreement or
contract that is subject to approval by the Director.
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\1\ This date refers to the date of enactment of the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992.
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(c) Factors to be taken into account. In making the determination
whether to approve or disapprove termination benefits, the Director may
consider:
(1) Whether the benefits provided under the agreement or contract
are comparable to benefits provided under such agreements or contracts
for officers of other public or private entities involved in financial
services and housing interests who have comparable duties and
responsibilities;
(2) The factors set forth in Sec. 1230.3(b); and
(3) Such other information as deemed appropriate by the Director.
(d) Exception to prior approval. An employment agreement or
contract subject to prior approval of the Director under this section
may be entered into prior to that approval, provided that such
agreement or contract specifically provides notice that termination
benefits under the agreement or contract shall not be effective and no
payments shall be made under such agreement or contract unless and
until approved by the Director. Such notice should make clear that
alteration of benefit plans subsequent to FHFA approval under this
section, which affect final termination benefits of an executive
officer, requires review at the time of the individual's termination
from the Enterprise and prior to the payment of any benefits.
(e) Effect of prior approval of an agreement or contract. The
Director's approval of an executive officer's termination of employment
benefits shall not preclude the Director from making any subsequent
determination under this section to prohibit and withhold executive
compensation.
(f) Form of approval. The Director's approval pursuant to this
section may occur in such form and manner as the Director shall provide
through written notice to the regulated entities or the Office of
Finance.
Sec. 1230.5 Submission of supporting information.
In support of the reviews and decisions provided for in this part,
the Director may issue guidance, orders, or notices on the subject of
information submissions by the regulated entities and the Office of
Finance.
Dated: January 15, 2014.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2014-01362 Filed 1-27-14; 8:45 am]
BILLING CODE 8070-01-P