[Federal Register Volume 61, Number 78 (Monday, April 22, 1996)]
[Proposed Rules]
[Pages 17603-17606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9775]



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FEDERAL HOUSING FINANCE BOARD

12 CFR Part 932

[No. 96-27]


Federal Home Loan Bank Directors' Compensation and Expenses

AGENCY: Federal Housing Finance Board.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Housing Finance Board (Finance Board) is proposing 
to repeal its Directors' Fees and Allowances Policy (Policy) and amend 
its regulation on the compensation of Federal Home Loan Bank (Bank) 
directors to provide greater flexibility to the Banks in compensating 
their directors and to set forth a clear standard of reasonableness for 
such compensation under the Federal Home Loan Bank Act (Bank Act). The 
current Finance Board regulation on the compensation of Bank directors 
subjects the payment of fees and expenses to limits set by the Finance 
Board. Those limits and other criteria are contained in the Policy, 
which essentially imposes a uniform directors' compensation structure 
on all Banks. The proposed rule would replace the current regulatory/
policy scheme with an amended regulation permitting each Bank, within 
certain general guidelines, to devise its own compensation structure 
for Bank directors, and allowing each Bank to pay its directors for 
such expenses as are payable by the Bank to its senior officers.
    The Finance Board is also proposing a rule requiring that meetings 
of a Bank's board of directors be held within the United States. This 
will codify an important provision of the Finance Board's Policy, which 
would be rescinded simultaneously with the adoption of a final rule on 
Bank directors' compensation and expenses.

DATES: Comments must be received on or before June 21, 1996.

ADDRESSES: Comments may be mailed to: Executive Secretariat, Federal 
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006. 
Comments will be available for public inspection at this address.

FOR FURTHER INFORMATION CONTACT: Patricia L. Sweeney, Program Analyst, 
District Banks Secretariat, (202) 408-2872; or Eric M. Raudenbush, 
Attorney-Advisor, Office of General Counsel, (202) 408-2932; Federal 
Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

    Subsection 7(i) of the Bank Act permits each Bank, with the 
approval of the Finance Board, to pay its directors reasonable 
compensation and necessary expenses for the time required of them in 
the performance of their Bank-related duties, in accordance with 
resolutions adopted by such directors. 12 U.S.C. 1427(i) (1994). A 
general provision on Bank directors' compensation, which appears at 
section 932.27 of the Finance Board's regulations, provides merely that 
directors' fees shall be established by each Bank within limits set by 
the Finance Board. See 12 CFR 932.27 (1995).
    The Finance Board has exercised its statutory responsibility to 
approve Bank director compensation and expenses largely through its 
Directors' Fees and Allowances Policy, adopted by resolution of its 
Board of Directors on February 23, 1993. See Finance Board Resolution 
No. 93-12 (Feb. 23, 1993). The existing policy establishes a maximum 
fee of $1,200 per day payable to the Chair of a Bank's board of 
directors when presiding over meetings of the board or its executive 
committee, and a maximum fee of $650 per day payable to all other 
directors for attendance at board, committee, or other meetings for 
which a fee is authorized. Under the Policy, daily meeting fees are the 
only authorized source of compensation for Bank directors; the Policy 
does not provide for payment of either a retainer, or non-cash benefits 
to directors. The Policy also sets forth generally the categories of 
expenses that are payable to Bank directors and identifies several 
specific expense items the payment of which is either authorized or 
prohibited.
    The Banks first became subject to a formal policy on directors fees 
and expenses in 1974, when the former Federal Home Loan Bank Board 
(FHLBB) (the Finance Board's predecessor agency) adopted a policy that 
revised, clarified and incorporated the various resolutions, minute 
entries and interpretations on director compensation and expenses that 
had been issued by the FHLBB since its creation in 1932. The FHLBB 
policy was amended several times, lastly in 1986, when the current dual 
$1200/$650 per day meeting fee caps were incorporated. When the Finance 
Board succeeded the FHLBB as regulator of the Bank system in 1989, the 
FHLBB's policy on Bank directors' fees and expenses remained in effect, 
as provided by the Financial Institutions Reform, Recovery and 
Enforcement Act's (FIRREA) provision on the continuation of orders, 
resolutions, determinations and regulations of the FHLBB. See Public 
Law 101-73, section 401(h), 103 Stat. 183 (1989) (codified at 12 U.S.C. 
1437 note). The Policy is essentially identical to the FHLBB's 1986 
policy.
    The Bank Act currently vests in the Finance Board the 
responsibility to supervise the Bank System, to regulate it for 
financial safety and soundness, and to pass upon most matters of 
corporate governance of the Banks. A series of studies and reports 
mandated by the Housing and Community Development Act of 1992, Public 
Law 102-550, section 1393, 106 Stat. 3672 (1992), including a report 
prepared by the Finance Board in April 1993, concluded that the Finance 
Board's authority over Bank corporate governance is in conflict with 
the agency's primary role as Bank System regulator. Since the 
completion of these studies, the Finance Board has been working closely 
with the Banks to implement regulatory and policy changes designed to 
devolve to the Banks the authority to set policy on matters of 
corporate governance, to the extent permissible under the Bank Act. In 
conjunction with these efforts, two separate task forces composed of 
senior officials of the Banks have recommended that the Finance Board 
rescind the Policy and establish broad

[[Page 17604]]

guidelines within which the Banks' boards of directors can set the 
structure and limits for the compensation of their directors.
    As part of its policy to devolve matters of corporate governance to 
the Banks, the Finance Board is now proposing to rescind both its 
current regulation on Bank directors' compensation and the Policy 
adopted thereunder and to replace both with a comprehensive regulation 
on Compensation and Expenses of Bank Directors. This proposed 
regulation, though more detailed than the existing regulation, will 
allow the Banks greater freedom to develop and implement their own 
directors' compensation plans than is possible under the current 
regulatory/policy scheme, while establishing clear and enforceable 
regulatory limitations.

II. Analysis of the Proposed Rule

    The proposed rule provides for the addition of a new Sec. 932.26 to 
the Finance Board's regulations and for the revision of Sec. 932.27 
thereof to contain entirely new text. Proposed Sec. 932.26 codifies 
existing Finance Board policies requiring that most meetings of a 
Bank's boards of directors and its committees be held within the 
district served by that Bank and prohibiting Banks from holding any 
such meetings outside the borders of the United States. This provision 
is taken from the Finance Board's existing Policy and the codification 
of these requirements as a regulation is intended merely to preserve 
these important requirements when the Policy is rescinded.
    The proposed rule also would replace Sec. 932.27 of the Finance 
Board's regulations, entitled ``Compensation,'' with a new regulation 
entitled ``Compensation and Expenses of Bank Directors.'' As a whole, 
proposed Sec. 932.27 is intended to limit the total dollar pool 
available to each Bank to compensate its directors to an appropriate 
level, while providing the Banks with maximum flexibility to devise 
their own directors' compensation schemes within the dollar limit. The 
proposed regulation is not designed to answer specific compensation 
issues; rather, it is intended to empower each Bank to exercise its 
reasonable discretion to decide how to compensate its directors, and 
thereby to allow many practices that are not authorized under the 
Policy, including, without limitation: the payment of retainer fees, 
the provision of non-cash benefits and the payment of meeting fees for 
participation in telephonic meetings.
    Paragraph (a) of the proposed regulation defines two terms--
''compensation'' and ``average compensation per director.''
    Paragraph (b) of the proposed regulation is the operative provision 
with respect to the compensation of directors. It requires each Bank to 
adopt annually, by resolution of its board of directors, a written 
policy to provide for the payment of ``reasonable compensation'' to its 
directors for their work on Bank-related matters during the following 
calendar year. In conjunction with the definition of ``compensation'' 
contained in paragraph (a), paragraph (b) is intended to permit the 
Banks to remunerate their directors in a wide variety of fashions, 
including through the use of daily meeting fees, retainer fees, cash or 
non-cash fringe benefits, deferred payments, or combinations thereof.
    Under proposed paragraph (b), the text of each Bank's policy must 
detail the types of Bank-related meetings or other activities in which 
its directors are required or expected to participate and for which 
they may be compensated. In addition, the policy must explain fully the 
methodology for determining the amounts and the circumstances under 
which its directors may be paid, including, if applicable: setting 
forth rates of compensation for participation in Bank-related 
activities; setting forth any retainer fees payable to directors and 
the circumstances under which they may be paid; explaining the 
rationale behind any graduated meeting or retainer fee scales; and 
detailing any non-cash fringe benefits to be provided to directors, 
including the approximate cash value thereof. By requiring a detailed 
written policy on director compensation, paragraph (b) is intended, in 
part, to facilitate review of the Banks' director compensation 
practices during the Finance Board's annual regulatory examination 
process. The Finance Board specifically requests comment on whether to 
include as part of the regulation a requirement that the Banks' 
policies on director compensation be made available to the public 
through either the Finance Board or the Banks individually and, if so, 
whether the policies should be disseminated as a matter of course, or 
merely made available upon request.
    Paragraph (c) of the proposed regulation sets forth the substantive 
limits on Bank directors' compensation that must be reflected in each 
Bank's policy on director compensation. The requirements of this 
subsection are designed to operate in tandem and are intended to 
require each Bank to develop a compensation plan that, using a 
reasonable pool of money, provides incentive for active director 
participation in Bank-related affairs and rewards those directors who 
assume greater responsibilities.
    The introductory text to paragraph (c)(1) provides for a $28,000 
cap on each Bank's annual ``average compensation per director'' (ACPD), 
which is defined in paragraph (a) as the total amount the Bank pays in 
compensation to all directors, divided by the total number of directors 
designated by the Federal Housing Finance Board to serve on the Bank's 
board for that year. By capping the ACPD, the proposed regulation 
effectively would limit the total pool of money available to each Bank 
to compensate its directors (to $28,000 times the total number of 
directors), but, because each Bank has a different number of directors, 
this has been expressed in terms of ``compensation per director'' 
instead of as a lump sum. Because the regulation caps only the average 
amount paid to a Bank's directors, it would not prohibit a Bank from 
paying one or more directors more than $28,000, as long as the average 
compensation of all the Bank's directors does not exceed that amount.
    In reaching the $28,000 figure, the board of directors of the 
Finance Board has considered a number of factors, including: Bank 
directors' earnings under the Policy; compensation of directors at 
other Government Sponsored Enterprises (GSEs), including an analysis of 
similarities and differences between the Banks and other GSEs that 
might require different compensation levels; and the compensation of 
board directors of Bank system member financial institutions. After 
reviewing these factors, and considering the agency's statutory 
responsibility to ``approve'' Bank directors' compensation, see 12 
U.S.C. 1427(i), the Bank Act's requirement that such compensation be 
``reasonable,'' see id., and the preference for providing a clear 
regulatory standard, the board of directors of the Finance Board 
concluded that an ACPD cap of $28,000 would be sufficient to allow the 
Banks to attract high quality individuals to serve on their boards of 
directors, yet is moderate enough, considering market rates, the Banks' 
GSE status and the general duties of Bank directors, to qualify as 
``reasonable compensation'' under the Bank Act.
    As provided in paragraph (c)(2), the cap on ACPD will increase 
automatically, beginning in 1997, to reflect the previous year's change 
in the Consumer Price Index (CPI). Although paragraph (c)(2) requires 
the Finance Board to communicate to the Banks each year's new ACPD cap 
figure, the annual change in the regulatory ACPD

[[Page 17605]]

cap is not contingent upon such communication. It is understood that 
the precise change in CPI will not be available until after the 
beginning of the year to which it is to apply. However, the agency 
views this provision as a mechanism for allowing the ACPD cap to keep 
pace with the level of inflation over a number of years and does not 
anticipate the need for Banks to make minute adjustments to their 
compensation policies on an annual basis, although the proposed 
regulation would not prohibit such adjustments.
    Paragraph (c)(1)(i) requires that, keeping within stated cap on 
ACPD, each Bank's policy on director compensation should be designed 
such that, at year end, the total compensation paid to each director 
reflects both the amount of time that the director has spent on Bank-
related business and the level of responsibility the director has 
assumed with respect to his or her role on the Bank's board of 
directors.
    Specifically, the requirement that a directors' annual compensation 
must reflect the amount of time spent on official Bank business is 
intended to ensure that Bank directors are being paid for meetings they 
actually attend and duties they actually perform for each Bank. For 
example, a Bank's policy should ensure that, at year end, a director 
who has attended every scheduled Bank-related meeting receives more in 
compensation (all other factors being equal) than a director who has 
missed more than a negligible amount of meetings. Although there are 
many permissible ways for a Bank to implement this requirement, the one 
method would be to incorporate into its policy a schedule of meeting 
fees, the payment of which would be contingent upon directors' 
attendance at appropriate Bank functions. While the proposed regulation 
would not prohibit a Bank from paying a portion of its directors' 
compensation in the form of a retainer fee, paragraph (c)(1)(i) 
effectively would prohibit a Bank from paying its directors entirely 
through retainer fees, unless their payment somehow was made contingent 
on the fulfillment of Bank-related duties.
    Paragraph (c)(1)(i) also requires that each director's total annual 
compensation reflect the level of responsibility assumed by that 
director. This requirement is aimed primarily at ensuring that 
directors are rewarded appropriately for serving as committee Chair, or 
for assuming other positions of responsibility. The provision leaves to 
the discretion of the Bank the identification of the particular formal 
or informal duties that warrant additional compensation. While the 
provision also leaves to the discretion of the Bank the method of 
incorporating such incentives into its director compensation policy, 
the one method of doing so would be to provide for graduated scales of 
meeting or retainer fees under which those assuming more responsibility 
in general, or with respect to a particular meeting or function, 
receive a higher sum than those who do not.
    Paragraph (c)(1)(ii) requires each Bank to pay its Chair: (1) more 
than any other director and (2) at least 125 percent of the Bank's 
ACPD. Any plan under which a Bank's board Chair would not receive 
significant additional compensation for assuming such duties would not 
provide ``reasonable compensation,'' as required by subsection 7(i) of 
the Bank Act. 12 U.S.C. 1427(i). Accordingly, although paragraph 
(c)(1)(i) requires generally that a Bank stratify its compensation 
based on the level of responsibility assumed by each director, the 
Finance Board has determined that a requirement dealing specifically 
with Bank Chairs is appropriate to ensure that statutory requirements 
are being fulfilled. To avoid ambiguity in determining compliance with 
the provision and to ensure that Bank Chairs are provided more than a 
negligible premium for their additional service, the proposed rule 
includes the specific ``125 percent'' minimum figure, arrived at after 
reviewing the compensation practices of other GSEs and financial 
institutions.
    The Finance Board specifically requests comment on whether to 
include as part of the regulation a provision under which a portion of 
each Bank's directors' annual compensation would be contingent upon 
that Bank's achievement of performance-related goals such as meeting 
particular earnings targets, achieving a satisfactory regulatory 
examination, or fulfilling the Bank's housing finance mission, and, if 
so, whether these incentive goals should be set forth in the 
regulation, or left to the discretion of the Banks.
    Finally, paragraph (d) of the proposed regulation allows each Bank 
to pay its directors such Bank-related travel, subsistence and other 
related expenses as are payable to senior officers of the Bank under 
the Bank's travel policy, except for gift or entertainment expenses. 
This provision ties payment of directors' expenses to existing Bank 
policies which are subject to regulatory examination and which may be 
amended at the discretion of the Bank.

III. Regulatory Flexibility Act

    The proposed rule applies only to the Banks, which do not come 
within the meaning of ``small entities,'' as defined in the Regulatory 
Flexibility Act. See 5 U.S.C. 601(6). Therefore, in accordance with 5 
U.S.C. 605(b), the Finance Board hereby certifies that this proposed 
rule, if promulgated as a final rule, will not have a significant 
economic impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 932

    Conflict of interests, Federal home loan banks, Reporting and 
recordkeeping requirements.

    Accordingly, part 932, chapter IX, title 12, Code of Federal 
Regulations, is hereby amended as follows:

PART 932--ORGANIZATION OF THE BANKS

    1. The authority citation for part 932 continues to read as 
follows:

    Authority: 12 U.S.C. 1442a, 1422b, 1426, 1427, 1464; 18 U.S.C. 
207; 42 U.S.C. 8101 et seq.

    2. Section 932.26 is added to read as follows:


Sec. 932.26  Site of board of directors and committee meetings.

     Meetings of a Bank's board of directors and committees thereof 
usually should be held within the district served by the Bank. No 
meetings of a Bank's board of directors and committees thereof may be 
held in any location that is not within the United States, including 
its possessions and territories.
    3. Section 932.27 is revised to read as follows:


Sec. 932.27  Compensation and expenses of Bank directors.

     (a) Definitions. As used in this section:
     (1) Compensation means any payment of money or provision of any 
other thing of value (or the accrual of a right to receive money or a 
thing of value in a subsequent year) in consideration of a director's 
performance of official duties for the Bank, including, without 
limitation, retainer fees, daily meeting fees and fringe benefits.
     (2) Average compensation per director means the sum of the total 
annual compensation paid to all directors serving on a Bank's board of 
directors, divided by the total number of directors designated by the 
Federal Housing Finance Board to serve on the Bank's board for that 
year.
     (b) Annual compensation. Each Bank's board of directors shall 
adopt annually by resolution a written policy to provide for the 
payment to Bank directors of reasonable compensation for the 
performance of their duties as

[[Page 17606]]

members of the Bank's board for the following calendar year, subject to 
the requirements set forth in paragraph (c) of this section. At a 
minimum, such policy shall address the activities or functions for 
which attendance is necessary and appropriate and may be compensated, 
and shall explain and justify the methodology for determining the 
amount of compensation to be paid to directors.
     (c) Policy requirements. Each Bank's policy on director 
compensation shall conform to the following requirements:
    (1) The Average Compensation Per Director for each Bank shall not 
exceed $28,000 for the year 1996. Within this limit:
    (i) The total annual compensation for each director shall reflect 
both the amount of time spent on official Bank business and the level 
of responsibility assumed by that director; and
    (ii) The total annual compensation for the chair of each Bank's 
board of directors shall not be equaled or exceeded by the total annual 
compensation of any other director and shall not be less than 125 
percent of the Average Compensation Per Director for that Bank.
    (2) For 1997 and subsequent years, the limit on Average 
Compensation Per Director set forth in paragraph (c)(1) of this section 
shall be adjusted annually to reflect the preceding year's change in 
the Consumer Price Index (CPI) for all urban consumers, as published by 
the Bureau of Labor Statistics. Each year, as soon as practicable after 
the publication of the previous year's CPI, the Board shall publish 
notice, by Federal Register, distribution of a memorandum, or 
otherwise, of the CPI-adjusted limit on Average Compensation Per 
Director.
    (d) Expenses. Each Bank may pay its directors for such necessary 
and reasonable travel, subsistence and other related expenses incurred 
in connection with the performance of their official duties as are 
payable to senior officers of the Bank under the Bank's travel policy, 
except that directors may not be paid for gift or entertainment 
expenses.

    By the Board of Directors of the Federal Housing Finance Board.

    Dated: April 10, 1996.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-9775 Filed 4-19-96; 8:45 am]
BILLING CODE 6725-01-U