[Federal Register Volume 79, Number 18 (Tuesday, January 28, 2014)]
[Rules and Regulations]
[Pages 4394-4401]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01364]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1231

RIN 2590-AA08


Golden Parachute Payments

AGENCY: Federal Housing Finance Agency.

ACTION: Final rule.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing a final 
regulation amending the Golden Parachute Payments regulation that was 
published in the Federal Register on January 29, 2009. This final rule 
amendment (final rule) addresses prohibited and permissible golden 
parachute payments to entity-affiliated parties in connection with the 
Federal National Mortgage Association, the Federal Home Loan Mortgage 
Corporation, and the Federal Home Loan Banks (regulated entities) as 
well as the Office of Finance. Additionally, this final rule responds 
to public comments received by FHFA on the golden parachute payment 
provisions.

DATES: Effective Date: February 27, 2014.

FOR FURTHER INFORMATION CONTACT: Alfred M. Pollard, General Counsel, 
(202) 649-3050, Alfred.Pollard@fhfa.gov, or Lindsay Simmons, Assistant 
General Counsel, (202) 649-3066, Lindsay.Simmons@fhfa.gov (not toll-
free numbers). The telephone number for the

[[Page 4395]]

Telecommunications Device for the Hearing Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

A. General Background

    Section 1114 of the Housing and Economic Recovery Act of 2008 
(HERA) amended section 1318(e) of the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) 
(12 U.S.C. 4518(e)) to provide explicit authorities to FHFA in 
addressing golden parachute payments and indemnification payments.\1\
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    \1\ FHFA published an interim final regulation on Golden 
Parachute and Indemnification Payments in the Federal Register on 
September 16, 2008 (73 FR 53356). Subsequently, it published 
corrections rescinding that portion of the regulation that addressed 
indemnification payments on September 19, 2008 (73 FR 54309) and on 
September 23, 2008 (73 FR 54673). On November 14, 2008 (73 FR 
67424), FHFA published in the Federal Register a proposed amendment 
to the interim final regulation that addressed indemnification 
payments. The public notice and comment period closed on December 
29, 2008. On January 29, 2009 (74 FR 5101), FHFA published the final 
regulation on Golden Parachute Payments (the 2009 final rule). On 
June 29, 2009 (74 FR 30975), FHFA published a proposed amendment to 
the 2009 final rule that addressed prohibited and permissible golden 
parachute payments in further detail (Proposal). The Proposal noted 
that comments received in response to the November 14, 2008, 
publication on indemnification payments would be considered along 
with comments received in response to the Proposal. On May 14, 2013, 
FHFA re-issued the Proposal (78 FR 28452) (Re-proposal) and 
addressed only golden parachute payments, stating in the 
Supplementary Information that comments received on indemnification 
payments would be addressed in a final rule on Golden Parachute and 
Indemnification Payments. This final rule amends only the golden 
parachute payment provisions. A final rule on indemnification 
payment provisions remains under review.
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B. Background on Golden Parachute Payments

    In the SUPPLEMENTARY INFORMATION to the final regulation on Golden 
Parachute Payments published on January 29, 2009 (the 2009 final rule), 
FHFA stated that in response to comments it would consider subsequent 
rulemaking to align provisions of the Golden Parachute Payments 
regulation with standards set forth in the Federal Deposit Insurance 
Corporation (FDIC) regulation on golden parachute payments (FDIC rule). 
To this end, FHFA issued a proposed rule on June 29, 2009 (Proposal) to 
amend the 2009 final regulation and solicit comments. The Proposal 
included provisions that were substantially similar to those of the 
FDIC rule.
    FHFA issued the Re-proposal on May 14, 2013, in order to narrow its 
approach to grandfathering, address comments regarding retirement 
plans, clarify its intent through both the SUPPLEMENTARY INFORMATION 
and regulatory text, and provide additional opportunity for the public 
to comment on any provision of the rule. The comment period for the Re-
proposal closed on July 15, 2013. This final rule responds to comments 
and implements the Re-proposal, amending the 2009 final rule to align 
more closely with the FDIC rule.
    FHFA recently adopted a rule setting forth definitions of terms 
commonly used in its regulations, and has removed a duplicative 
definition in this final rule.\2\
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    \2\ The definition of ``Safety and Soundness Act'' was removed. 
See 12 CFR 1201.1.
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II. Comments on the Proposed Amendment

    FHFA received comments on the golden parachute provisions of the 
Re-proposal from the 12 Federal Home Loan Banks (Banks), the Office of 
Finance (OF), and the public during the comment period for the Re-
proposal, which closed on July 15, 2013. Comments received in response 
to the Re-proposal addressed grandfathering of plans, the double 
approval process, the golden parachute payment definition's exception 
for severance plans, mitigating factors in the FHFA Director's review, 
and requests for clarification, among other topics.
    In response to the comments, FHFA notes generally that this final 
rule implements amendments to the 2009 final rule which were proposed 
in response to prior requests from nine of the Federal Home Loan Banks 
and Fannie Mae to follow the FDIC rule's precedent. The nine Federal 
Home Loan Banks requested that FHFA consider changes to conform FHFA's 
regulation of golden parachute payments to that of the FDIC rule, as 
the legislative provisions on which they are based are similar to those 
of HERA and represent industry practice. Fannie Mae also commented that 
the FDIC rule implements legislation similar to HERA, so conformance 
with regulations would foster uniformity in regulation, public 
perception of fairness, and competition on a level regulatory playing 
field for executive talent. Fannie Mae stated that such conformance 
would reduce administrative burden because of existing guidance and 
precedent. Much of the substance of this final rule, and the comments 
relating to it, originate from FHFA's response to those requests to 
more closely align its golden parachute regulation with the FDIC rule.

A. Summary of Final Rule's Application

    To provide further clarity, FHFA is addressing in this 
Supplementary Information the intended meaning of the regulation text. 
Specifically, the regulated entities and OF may find the below format 
useful when determining whether approval of the Director is required to 
enter into an agreement to make a golden parachute payment, or make a 
payment under such an agreement. Below is a summary of when approval of 
the Director is required.
    A regulated entity or OF need not obtain approval of the Director 
to enter into a termination agreement with, or to pay under such 
agreement, an entity-affiliated party under the following 
circumstances:
     A regulated entity or OF is not subject to any of the 
triggering events listed in paragraph 1(ii) of the definition of 
``golden parachute payment'' (``triggering events'');
     A regulated entity or OF is no longer subject to a 
triggering event (e.g., it has emerged from a troubled condition); or
     An entity-affiliated party begins to receive payments 
under an agreement prior to the occurrence of a triggering event that 
continue after the triggering event, if the entity-affiliated party's 
employment was not terminated in contemplation of the triggering event.
    A regulated entity or OF, when subject to a triggering event, must 
obtain the approval of the Director if it:
     Enters into an agreement with an entity-affiliated party 
providing a golden parachute payment;
     Amends an employment contract containing golden parachute 
provisions with an entity-affiliated party;
     Renews an employment agreement (including automatic 
renewal) with an entity-affiliated party that contains severance 
provisions;
     Makes a payment related to a change in control (not 
resulting from conservatorship or receivership); or
     Otherwise makes a payment to an entity-affiliated party 
under a golden parachute agreement.

B. Grandfathering

    In the Re-proposal, FHFA stated its intention to grandfather a 
subset of the golden parachute agreements that may currently be in 
place. Specifically, FHFA grandfathered all retirement plans and 
deferred compensation plans in place as of the Re-proposal's 
publication on May 14, 2013. FHFA clarified at that time that it would 
not grandfather severance plans, change-in-control agreements, and 
arrangements to make ad hoc payments, as had originally been 
contemplated in the Supplementary Information to the Proposal.

[[Page 4396]]

    The Banks commented that FHFA did not provide a reason for reducing 
the scope of the grandfathering, and requested that all plans that 
could result in a golden parachute payment (including severance, change 
in control, and ad hoc payments) be grandfathered as of the Re-
proposal, not just retirement and deferred compensation plans.
    FHFA has considered the Banks' comments, but is not changing its 
approach to grandfathering. FHFA returns to the language of the 
authorizing statute, the Safety and Soundness Act as amended by HERA, 
which gives FHFA the authority to prohibit or limit any golden 
parachute payment and has no provision for grandfathering. FHFA has 
determined that it is appropriate to grandfather certain plans that it 
has reviewed, after concluding that they do not pose a risk of the kind 
of corporate waste and abuse that the statute was intended to prevent. 
These are the retirement and deferred compensation plans. FHFA has 
considered the remaining types of golden parachute agreements--
severance agreements, change in control agreements, and arrangements to 
make ad hoc payments--and is unable to make the same determination with 
respect to them or to satisfy itself that it is aware of all of them. 
Therefore, those agreements must remain subject to review by FHFA in 
order for FHFA to carry out its authority under HERA.
    For further clarification, FHFA confirms that it has grandfathered 
all retirement plans and deferred compensation plans in place as of the 
date of the Re-proposal, with other plans subject to review by FHFA, as 
appropriate. The grandfathered plans include defined-contribution, 
defined-benefit, and deferred compensation plans in place as of the 
publication of the Re-proposal on May 14, 2013, without regard to 
whether they meet the requirements to be treated as a bona fide 
deferred compensation plan or arrangement under Sec.  1231.1.
    With respect to severance plans, FHFA will allow the entities three 
months from the effective date of the final rule within which they may 
submit for FHFA review and approval existing severance plans that were 
adopted, or modified to increase the amount or scope of severance 
benefits, at a time when the entity was subject to a triggering event 
specified in paragraph (1)(ii) of the definition of the term ``golden 
parachute payment'' but which otherwise fall under the severance 
exception from the definition of ``golden parachute payment.'' Pursuant 
to paragraph (2)(v)(A) of the ``golden parachute payment'' definition, 
such plans may qualify for the exception only if they receive approval 
from FHFA.
    Below is a summary of how the definition of ``golden parachute 
payment'' applies to different plans:
    Qualified pension or retirement plans and benefit plans are 
excepted from the requirements of the regulation and, therefore, any 
changes to them do not require FHFA approval.
    Nonqualified retirement plans (either defined-contribution or 
defined-benefit plans or deferred compensation plans) established for 
the benefit of executives whose participation in a regulated entity's 
qualified plans is curtailed by the Internal Revenue Service limits are 
``bona fide deferred compensation plans'' if they meet the requirements 
of that definition. Such nonqualified plans meeting those requirements 
are therefore excepted from the definition of ``golden parachute 
payment.''
    All retirement plans established for the benefit of executives in 
place as of the Re-proposal's publication date of May 14, 2013, are 
grandfathered. From that date forward, any retirement plans that are 
not qualified, and that are not bona fide deferred compensation plans, 
and payouts on such plans, will qualify as golden parachute payments 
and will require FHFA review and approval, if the regulated entity is 
subject to a triggering event.
    Severance plans are excepted if they meet the various terms of the 
regulation (such as those that authorize payment of not more than 12 
months of compensation, as discussed further below). As stated above, 
FHFA will allow the entities three months from the effective date of 
the final rule within which they may submit for FHFA review and 
approval existing severance plans that were adopted, or modified to 
increase the amount or scope of severance benefits, at a time when the 
entity was subject to a triggering event specified in paragraph (1)(ii) 
of the definition of the term ``golden parachute payment'' but which 
otherwise fall under the severance exception from the definition of 
``golden parachute payment.'' Pursuant to paragraph (2)(v)(A) of the 
``golden parachute payment'' definition, such plans may qualify for the 
exception only if they receive approval from FHFA.
    Severance plans outside of the exception to the term ``golden 
parachute payment'' (such as severance plans that fail to satisfy the 
definition of ``nondiscriminatory'') are subject to FHFA review and 
approval if the entity is subject to a triggering event.
    Change-of-control agreements and ad hoc payments are not 
grandfathered or excepted and, therefore, require FHFA review and 
approval if the regulated entity is subject to a triggering event.

C. Double Approval

    The Banks expressed concerns with the ``double approval'' process 
for golden parachute payments. According to the final rule, in any 
circumstance in which an agreement that provides for a golden parachute 
payment has been approved by the Director, an additional approval by 
the Director is required in order to make such a payment under the 
agreement if the entity is subject to a triggering event. This 
requirement appeared in the Proposal and in the Re-proposal, follows 
the structure in the statute implemented by this regulation (the Safety 
and Soundness Act as amended by HERA), and mirrors the practice of the 
FDIC for institutions subject to its golden parachute payments 
regulation.
    The Banks state that the double approval process may create an 
adverse impact on a Bank's ability to attract and retain qualified 
executives if an executive's right to payment in the event of a future 
separation from employment is subject to the approval of the Director. 
The Banks expressed concern particularly in the case of change-in-
control payments and when hiring new employees if an entity is 
currently subject to, or seeking to avoid, a triggering event.
    The double approval process is supported by the following 
considerations: First, an agreement containing provisions that the 
regulator considers unreasonable for an entity subject to a triggering 
event should be disapproved without waiting for payments to be made 
under it, so that the regulated entity can develop an alternative 
acceptable arrangement and so that executives will not be relying on an 
agreement under which they will not, in the event, be able to receive 
payments. Further, subsequent to the approval of a golden parachute 
agreement, the regulated entity or OF may deteriorate further, and a 
golden parachute payment may negatively affect its safety and 
soundness, or the executive may be found to have contributed to the 
deterioration. To address that concern, FHFA believes that a review of 
both the golden parachute agreement, and the circumstances of the 
regulated entity or OF during the period in which the payment is 
actually being made, is necessary.
    For these reasons, FHFA has declined to remove the double approval 
process, in order to uphold its responsibility to ensure the safety and 
soundness of the regulated entities. FHFA recognizes the

[[Page 4397]]

challenges that may be raised by its authority to withhold golden 
parachute payments under certain circumstances, but believes that 
Congress clearly intended for golden parachute payments, in addition to 
agreements, to be subject to review when a regulated entity or OF is 
insolvent, in conservatorship or receivership, or otherwise in troubled 
condition, and that this is the prudentially sound result. This is the 
same regime that the FDIC administers under its statute and regulation.

D. Director's Review and Mitigating Factors

    FHFA emphasizes that a regulated entity or OF always may apply for 
approval from the Director if a golden parachute payment is not 
otherwise permissible. The Director's review will take into account 
factors set forth in Sec.  1231.6, including the cost of the payment 
and the effect that the payment will have on the capital and earnings 
of the regulated entity. The Director may consider the degree to which 
the proposed payment represents a reasonable payment for services 
rendered over the period of employment, and other case-specific facts 
and circumstances surrounding the golden parachute payment as set forth 
in Sec.  1231.3(b)(2)(i) through (iii). For example, the Director may 
consider mitigating factors such as the individual's history of 
beneficial contribution to the regulated entity, and cooperation with 
FHFA's relevant remediation efforts. The presence of any of the 
negative factors enumerated in proposed Sec.  1231.3(b)(2) is not an 
absolute bar to the approval of a golden parachute payment. Absent 
mitigating factors, there would be a presumption, if any of those 
factors were present, that the golden parachute application should be 
denied. That presumption can be overcome, however, and the Director has 
discretion to approve payment in such circumstances.

E. Definition of Compensation

    The Banks requested that FHFA provide an express definition of 
``compensation'' in the final rule. The definition of ``golden 
parachute payment'' in Sec.  12131.2 is ``[a]ny payment (or any 
agreement to make any payment) in the nature of compensation by any 
regulated entity or the Office of Finance for the benefit of any 
current or former entity-affiliated party pursuant to an obligation of 
such regulated entity or the Office of Finance. . . .'' [Emphasis 
added.]
    The Safety and Soundness Act provision on golden parachute 
payments, the Federal Deposit Insurance Act provision on which it is 
based, and the FDIC rule on which this regulation is based all define a 
golden parachute payment as being ``in the nature of compensation,'' 
but none defines the term ``compensation.'' The FDIC included the 
qualifying phrase ``in the nature of compensation'' in its final 
regulation to make clear that the FDIC did not intend to restrict 
institutions, even those that are troubled, from paying terminating 
employees accrued but unused benefits, such as vacation. The FDIC also 
noted that the qualifying phrase is used to show that a certain payment 
should be treated as a golden parachute payment because the regulators 
have historically treated it as compensation, e.g., payments under 
``split dollar'' insurance agreements.
    Against the statutory background, and the treatment of the concept 
by the FDIC in its regulation, FHFA understands ``compensation'' to be 
payment for employment or services rendered by individuals. So 
understood, the concept does not include the various types of payments 
that commenters previously expressed concern about: payments of advance 
proceeds, dividends, deposit account withdrawals, and AHP funds; nor 
does it include debt service payments from Banks to OF, or payout of 
accrued but unused benefits, such as vacation.

F. Inclusion of Directors

    For purposes of clarity, FHFA reiterates that members of the 
regulated entities' boards of directors fall within the definition of 
``entity-affiliated party'' as stated in the statute and the rule, 
though directors may not have an employee relationship to the regulated 
entity. Directors are responsible for the governance and oversight of 
management of the regulated entity, and FHFA believes there is no 
reason to exclude them from the rule.

G. GAAP

    The Banks submitted a comment on the definition of ``bona fide 
deferred compensation plan or arrangement,'' regarding GAAP accounting 
treatment. FHFA notes that the reference to GAAP is identical to that 
of the FDIC rule, and is intended to require that compensation expense 
is recognized and a liability accrued on a reasonable schedule and in 
all other ways in accordance with GAAP. No further clarification is 
needed to specify the timing of GAAP treatment.

H. Exception for Severance

    The definition of ``golden parachute payment'' includes an 
exception for payments pursuant to a nondiscriminatory severance pay 
plan or arrangement. The Banks requested that FHFA alter the definition 
of ``nondiscriminatory,'' and also remove the $300,000 salary cap, 
which was a new addition in the Re-proposal.
    The Banks requested that FHFA expressly clarify that the objective 
criteria that may be used in a nondiscriminatory severance pay plan can 
include service at other Banks. The definition of ``nondiscriminatory'' 
is modeled on the FDIC rule's definition, and both require that under a 
nondiscriminatory plan, provision of different benefits can be based 
only on objective criteria. FHFA included the following examples of 
objective criteria: salary, total compensation, length of service, and 
job grade or classification. Other objective criteria may be used. It 
is not necessary for FHFA to list additional objective criteria that 
may be included, particularly a criterion that is specific to only some 
of the regulated entities.
    Regarding the $300,000 salary cap, while the Banks objected to the 
use of any salary cap, FHFA continues to believe that payment of a full 
year's severance may be inappropriate to certain top executives with 
high salaries, when their institution is in a troubled condition. 
However, FHFA has modified the salary cap so that it applies only to 
employees who are both a) executive officers, as that term is defined 
in FHFA's rule on executive compensation, and b) have base salaries 
exceeding $300,000. This modification more narrowly tailors the 
regulation to allow an exception for severance, limiting its 
availability to certain executives for whom it may not be appropriate. 
As always, the Director continues to have discretion under Sec.  
1231.3(b)(1)(i) to approve golden parachute payments that are not 
otherwise permissible.
    This $300,000 salary cap for executive officers is now effective in 
this final rule. FHFA has determined that additional notice and comment 
is not required for this modification because its effect is to reduce 
the number of individuals to whom the salary cap applies to a subset of 
those to whom it applied under the Re-proposal. The public, the 
regulated entities, and OF have had an opportunity to provide comment 
regarding the salary cap when it applied to a larger group that 
included all of those to whom it currently applies.\3\
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    \3\ This is the only significant change that FHFA made from the 
rule as proposed.
    FHFA also transferred the regulation's reference to regulated 
entities with low examination ratings from the list of triggering 
events in the definition of ``golden parachute payment'' to the 
definition of ``troubled condition.'' Since a troubled condition is 
itself a triggering event to coverage under the rule, this transfer 
makes no difference to whether an institution is subject to the 
restrictions of the rule, and it is more intuitive to consider the 
low examination rating as part of the definition of ``troubled 
condition'' than outside of it. The resulting structure is 
consistent with that of the FDIC's rule, which includes a low 
examination rating in its definition of ``troubled condition.'' 12 
CFR 303.101(c). The transfer also makes explicit that a regulated 
entity must take the low examination rating into account under Sec.  
1231.3(b)(1)(iv)(B) when making its request for permission to make a 
golden parachute payment. The involvement of an entity-affiliated 
party in a regulated entity's poor condition, including as reflected 
in its examination rating, is a factor that the Director may in any 
event consider when deciding on such a request under Sec.  
1231.3(b)(2) as proposed and now final.

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Regulatory Impacts

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 regulation that has a significant economic impact on a substantial 
number of small entities, small businesses, or small organizations must 
include an initial regulatory flexibility analysis describing the 
regulation's impact on small entities. Such an analysis need not be 
undertaken if the agency has certified that the regulation will not 
have a significant economic impact on a substantial number of small 
entities. 5 U.S.C. 605(b). FHFA has considered the impact of the Final 
Rule under the Regulatory Flexibility Act. FHFA certifies that the 
Final Rule is not likely to have a significant economic impact on a 
substantial number of small business entities because the regulation is 
applicable only to the regulated entities which are not small entities 
for the purposes of the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 1231

    Golden parachutes, Government-sponsored enterprises, 
Indemnification.

Authority and Issuance

    Accordingly, for reasons stated in the Supplementary Information, 
under the authority of 12 U.S.C. 4518(e) and 4526, FHFA amends part 
1231 of subchapter B of title 12 CFR Chapter XII as follows:

SUBCHAPTER B--ENTITY REGULATIONS

PART 1231--GOLDEN PARACHUTE AND INDEMNIFICATION PAYMENTS

0
1. The authority citation for part 1231 is revised to read as follows:

    Authority: 12 U.S.C. 4518(e), 4518a, 4526.


0
2. The heading of part 1231 is revised to read as set forth above.


0
3. Section 1231.1 is revised to read as follows:


Sec.  1231.1  Purpose.

    The purpose of this part is to implement section 1318(e) of the 
Safety and Soundness Act (12 U.S.C. 4518(e)) by setting forth the 
standards that the Director will take into consideration in determining 
whether to limit or prohibit golden parachute payments and by setting 
forth prohibited and permissible indemnification payments that 
regulated entities and the Office of Finance may make to entity-
affiliated parties.


0
4. Section 1231.2 is revised to read as follows:


Sec.  1231.2  Definitions.

    The following definitions apply to the terms used in this part:
    Benefit plan means any plan, contract, agreement, or other 
arrangement which is an ``employee welfare benefit plan'' as that term 
is defined in section 3(1) of the Employee Retirement Income Security 
Act of 1974, as amended (29 U.S.C. 1002(1)), or other usual and 
customary plans such as dependent care, tuition reimbursement, group 
legal services, or cafeteria plans; provided however, that such term 
shall not include any plan intended to be subject to paragraphs 
(2)(iii) and (v) of the term golden parachute payment as defined in 
this section.
    Bona fide deferred compensation plan or arrangement means any plan, 
contract, agreement, or other arrangement whereby:
    (1) An entity-affiliated party voluntarily elects to defer all or a 
portion of the reasonable compensation, wages, or fees paid for 
services rendered which otherwise would have been paid to such party at 
the time the services were rendered (including a plan that provides for 
the crediting of a reasonable investment return on such elective 
deferrals) and the regulated entity or the Office of Finance either:
    (i) Recognizes compensation expense and accrues a liability for the 
benefit payments according to generally accepted accounting principles 
(GAAP); or
    (ii) Segregates or otherwise sets aside assets in a trust which may 
only be used to pay plan and other benefits and related expenses, 
except that the assets of such trust may be available to satisfy claims 
of creditors of the regulated entities or the Office of Finance in the 
case of insolvency; or
    (2) A regulated entity or the Office of Finance establishes a 
nonqualified deferred compensation or supplemental retirement plan, 
other than an elective deferral plan described in paragraph (1) of this 
definition:
    (i) Primarily for the purpose of providing benefits for certain 
entity-affiliated parties in excess of the limitations on contributions 
and benefits imposed by sections 401(a)(17), 402(g), 415, or any other 
applicable provision of the Internal Revenue Code of 1986 (26 U.S.C. 
401(a)(17), 402(g), 415); or
    (ii) Primarily for the purpose of providing supplemental retirement 
benefits or other deferred compensation for a select group of 
directors, management, or highly compensated employees (excluding 
severance payments described in paragraph (2)(v) of the term golden 
parachute payment as defined in this section and permissible golden 
parachute payments described in Sec.  1231.3(b)); and
    (3) In the case of any nonqualified deferred compensation or 
supplemental retirement plans as described in paragraphs (1) and (2) of 
this definition, the following requirements shall apply:
    (i) The plan was in effect at least one year prior to any of the 
events described in paragraph (1)(ii) of the term golden parachute 
payment as defined in this section;
    (ii) Any payment made pursuant to such plan is made in accordance 
with the terms of the plan as in effect no later than one year prior to 
any of the events described in paragraph (1)(ii) of the term golden 
parachute payment as defined in this section and in accordance with any 
amendments to such plan during such one-year period that do not 
increase the benefits payable thereunder, provided that changes 
required by law should be disregarded in determining whether a plan 
provision has been in effect for one year;
    (iii) The entity-affiliated party has a vested right, as defined 
under the applicable plan document, at the time of termination of 
employment to payments under such plan;
    (iv) Benefits under such plan are accrued each period only for 
current or prior service rendered to the employer (except that an 
allowance may be made for service with a predecessor employer);

[[Page 4399]]

    (v) Any payment made pursuant to such plan is not based on any 
discretionary acceleration of vesting or accrual of benefits which 
occurs at any time later than one year prior to any of the events 
described in paragraph (1)(ii) of the term golden parachute payment as 
defined in this section;
    (vi) The regulated entity or the Office of Finance has previously 
recognized compensation expense and accrued a liability for the benefit 
payments according to GAAP, or segregated or otherwise set aside assets 
in a trust which may only be used to pay plan benefits and related 
expenses, except that the assets of such trust may be available to 
satisfy claims of the regulated entity's creditors or the Office of 
Finance's creditors in the case of insolvency; and
    (vii) Payments pursuant to such plans shall not be in excess of the 
accrued liability computed in accordance with GAAP.
    Entity-affiliated party means:
    (1) With respect to the Office of Finance, any director, officer, 
or manager of the Office of Finance; and
    (2) With respect to a regulated entity:
    (i) Any director, officer, employee, or controlling stockholder of, 
or agent for, a regulated entity;
    (ii) Any shareholder, affiliate, consultant, or joint venture 
partner of a regulated entity, and any other person as determined by 
the Director (by regulation or on a case-by-case basis) that 
participates in the conduct of the affairs of a regulated entity, 
provided that a member of a Federal Home Loan Bank shall not be deemed 
to have participated in the affairs of that Federal Home Loan Bank 
solely by virtue of being a shareholder of, and obtaining advances 
from, that Federal Home Loan Bank;
    (iii) Any independent contractor for a regulated entity (including 
any attorney, appraiser, or accountant) if:
    (A) The independent contractor knowingly or recklessly participates 
in any violation of any law or regulation, any breach of fiduciary 
duty, or any unsafe or unsound practice; and
    (B) Such violation, breach, or practice caused, or is likely to 
cause, more than a minimal financial loss to, or a significant adverse 
effect on, the regulated entity;
    (iv) Any not-for-profit corporation that receives its principal 
funding, on an ongoing basis, from any regulated entity.
    Golden parachute payment means:
    (1) Any payment (or any agreement to make any payment) in the 
nature of compensation by any regulated entity or the Office of Finance 
for the benefit of any current or former entity-affiliated party 
pursuant to an obligation of such regulated entity or the Office of 
Finance that:
    (i) Is contingent on, or by its terms is payable on or after, the 
termination of such party's primary employment or affiliation with the 
regulated entity or the Office of Finance; and
    (ii) Is received on or after, or is made in contemplation of, any 
of the following events:
    (A) The insolvency (or similar event) of the regulated entity which 
is making the payment;
    (B) The appointment of any conservator or receiver for such 
regulated entity; or
    (C) The regulated entity is in a troubled condition.
    (2) Exceptions. The term golden parachute payment shall not 
include:
    (i) Any payment made pursuant to a pension or retirement plan that 
is qualified (or is intended within a reasonable period of time to be 
qualified) under section 401 of the Internal Revenue Code of 1986 (26 
U.S.C. 401) or pursuant to a pension or other retirement plan that is 
governed by the laws of any foreign country;
    (ii) Any payment made pursuant to a ``benefit plan'' as that term 
is defined in this section;
    (iii) Any payment made pursuant to a ``bona fide deferred 
compensation plan or arrangement'' as that term is defined in this 
section;
    (iv) Any payment made by reason of death or by reason of 
termination caused by the disability of an entity-affiliated party; or
    (v) Any payment made pursuant to a nondiscriminatory severance pay 
plan or arrangement that provides for payment of severance benefits to 
all eligible employees upon involuntary termination other than for 
cause, voluntary resignation, or early retirement; provided that:
    (A) No employee shall receive any such payment that exceeds the 
base compensation paid to such employee during the 12 months (or such 
longer period or greater benefit as the Director shall consent to) 
immediately preceding termination of employment, resignation, or early 
retirement, and such severance pay plan or arrangement shall not have 
been adopted, or modified to increase the amount or scope of severance 
benefits, at a time when the regulated entity or the Office of Finance 
is in a condition specified in paragraph (1)(ii) of the term golden 
parachute payment as defined in this section, or in contemplation of 
such a condition, without the prior written consent of the Director; 
and
    (B) If an employee is an executive officer, as ``executive 
officer'' is defined under 12 CFR 1230.2, and such employee's base 
salary exceeds $300,000, then the exception provided under this 
paragraph (2)(v) shall not apply to that employee; or
    (vi) Any severance or similar payment that is required to be made 
pursuant to a state statute or foreign law that is applicable to all 
employers within the appropriate jurisdiction (with the exception of 
employers that may be exempt due to their small number of employees or 
other similar criteria).
    Nondiscriminatory means that the plan, contract, or arrangement in 
question applies to all employees of a regulated entity or the Office 
of Finance who meet reasonable and customary eligibility requirements 
applicable to all employees, such as minimum length of service 
requirements. A nondiscriminatory plan, contract, or arrangement may 
provide different benefits based only on objective criteria such as 
salary, total compensation, length of service, job grade, or 
classification, which are applied on a proportionate basis (with a 
variance in severance benefits relating to any criterion of plus or 
minus ten percent) to groups of employees consisting of not less than 
the lesser of 33 percent of employees or 1,000 employees.
    Payment means:
    (1) Any direct or indirect transfer of any funds or any asset;
    (2) Any forgiveness of any debt or other obligation;
    (3) The conferring of any benefit, including but not limited to 
stock options and stock appreciation rights; and
    (4) Any segregation of any funds or assets, the establishment or 
funding of any trust or the purchase of or arrangement for any letter 
of credit or other instrument, for the purpose of making, or pursuant 
to any agreement to make, any payment on or after the date on which 
such funds or assets are segregated, or at the time of or after such 
trust is established or letter of credit or other instrument is made 
available, without regard to whether the obligation to make such 
payment is contingent on:
    (i) The determination, after such date, of the liability for the 
payment of such amount; or
    (ii) The liquidation, after such date, of the amount of such 
payment.
    Troubled condition means a regulated entity that:
    (1) Is subject to a cease-and-desist order or written agreement 
issued by FHFA that requires action to improve the financial condition 
of the regulated entity or is subject to a proceeding

[[Page 4400]]

initiated by the Director, which contemplates the issuance of an order 
that requires action to improve the financial condition of the 
regulated entity, unless otherwise informed in writing by FHFA;
    (2) Is assigned a composite rating of 4 or 5 by FHFA under its 
CAMELSO examination rating system as it may be revised from time to 
time; or
    (3) Is informed in writing by the Director that it is in a troubled 
condition for purposes of the requirements of this part on the basis of 
the most recent report of examination or other information available to 
FHFA, on account of its financial condition, risk profile, or 
management deficiencies.


0
5. Section 1231.3 is added to read as follows:


Sec.  1231.3  Golden parachute payments.

    (a) Prohibited golden parachute payments. No regulated entity or 
the Office of Finance shall make or agree to make any golden parachute 
payment, except as provided in this part.
    (b) Permissible golden parachute payments. (1) A regulated entity 
or the Office of Finance may agree to make or may make a golden 
parachute payment if and to the extent that:
    (i) The Director determines that such a payment or agreement is 
permissible; or
    (ii) Such an agreement is made in order to hire a person to become 
an entity-affiliated party either at a time when the regulated entity 
or the Office of Finance satisfies, or in an effort to prevent it from 
imminently satisfying, any of the criteria set forth in paragraph 
(1)(ii) of the term golden parachute payment as defined in Sec.  
1231.2, and the Director consents in writing to the amount and terms of 
the golden parachute payment. Such consent by the Director shall not 
improve the entity-affiliated party's position in the event of the 
insolvency of the regulated entity or the Office of Finance since such 
consent can neither bind a receiver nor affect the provability of 
receivership claims; or
    (iii) Such a payment is made pursuant to an agreement which 
provides for a reasonable severance payment, not to exceed 12 months 
salary, to an entity-affiliated party in the event of a change in 
control of the regulated entity or the Office of Finance; provided, 
however, that a regulated entity or the Office of Finance shall obtain 
the consent of the Director prior to making such a payment, and this 
paragraph (b)(1)(iii) shall not apply to any change in control of a 
regulated entity that results from the regulated entity being placed 
into conservatorship or receivership; and
    (iv) A regulated entity or the Office of Finance making a request 
pursuant to paragraphs (b)(1)(i) through (iii) of this section shall 
demonstrate that it does not possess and is not aware of any 
information, evidence, documents, or other materials that would 
indicate that there is a reasonable basis to believe, at the time such 
payment is proposed to be made, that:
    (A) The entity-affiliated party has committed any fraudulent act or 
omission, breach of trust or fiduciary duty, or insider abuse with 
regard to the regulated entity or the Office of Finance that is likely 
to have a material adverse effect on the regulated entity or the Office 
of Finance;
    (B) The entity-affiliated party is substantially responsible for 
the insolvency of, the appointment of a conservator or receiver for, or 
the troubled condition of the regulated entity or the Office of 
Finance;
    (C) The entity-affiliated party has materially violated any 
applicable Federal or State law or regulation that has had or is likely 
to have a material effect on the regulated entity or the Office of 
Finance; and
    (D) The entity-affiliated party has violated or conspired to 
violate sections 215, 657, 1006, 1014, or 1344 of title 18 of the 
United States Code, or section 1341 or 1343 of such title affecting a 
``financial institution'' as the term is defined in title 18 of the 
United States Code (18 U.S.C. 20).
    (2) In making a determination under paragraphs (b)(1)(i) through 
(iii) of this section, the Director may consider:
    (i) Whether, and to what degree, the entity-affiliated party was in 
a position of managerial or fiduciary responsibility;
    (ii) The length of time the entity-affiliated party was affiliated 
with the regulated entity or the Office of Finance, and the degree to 
which the proposed payment represents a reasonable payment for services 
rendered over the period of employment; and
    (iii) Any other factor the Director determines relevant to the 
facts and circumstances surrounding the golden parachute payment, 
including any fraudulent act or omission, breach of fiduciary duty, 
violation of law, rule, regulation, order, or written agreement, and 
the level of willful misconduct, breach of fiduciary duty, and 
malfeasance on the part of the entity-affiliated party.


0
6. Section 1231.5 is revised to read as follows:


Sec.  1231.5  Applicability in the event of receivership.

    The provisions of this part, or any consent or approval granted 
under the provisions of this part by FHFA, shall not in any way bind 
any receiver of a regulated entity in receivership. Any consent or 
approval granted under the provisions of this part by FHFA shall not in 
any way obligate FHFA or receiver to pay any claim or obligation 
pursuant to any golden parachute, severance, indemnification, or other 
agreement. Nothing in this part may be construed to permit the payment 
of salary or any liability or legal expense of an entity-affiliated 
party contrary to section 1318(e)(3) of the Safety and Soundness Act 
(12 U.S.C. 4518(e)(3)).


0
7. Section 1231.6 is added to read as follows:


Sec.  1231.6  Filing instructions.

    (a) Scope. This section contains the procedures to apply for the 
consent of the Director to make golden parachute payments under Sec.  
1231.3(b) (including entering into agreements to make such payments) or 
to make excess nondiscriminatory severance plan payments under 
paragraph (2)(v) of the term golden parachute payment as defined in 
Sec.  1231.2.
    (b) Where to file. A regulated entity or the Office of Finance must 
submit a letter application to the Manager, Executive Compensation, 
Division of Supervision Policy and Support, or to such other person as 
FHFA may direct.
    (c) Content of filing. The letter application must contain the 
following:
    (1) The reasons why the regulated entity or the Office of Finance 
seeks to make the payment;
    (2) An identification of the entity-affiliated party who will 
receive the payment;
    (3) A copy of any contract or agreement regarding the subject 
matter of the filing;
    (4) The cost of the proposed payment and its impact on the capital 
and earnings of the regulated entity;
    (5) The reasons why the consent to the payment should be granted; 
and
    (6) Certification and documentation as to each of the factors 
listed in Sec.  1231.3(b)(1)(iv).
    (d) Additional information. FHFA may request additional information 
at any time during the processing of the letter application.
    (e) Written notice. FHFA shall provide the applicant with written 
notice of the decision as soon as it is rendered.


[[Page 4401]]


    Dated: January 15, 2014.
Melvin L. Watt,
Director, Federal Housing Finance Agency.
[FR Doc. 2014-01364 Filed 1-27-14; 8:45 am]
BILLING CODE 8070-01-P