[Federal Register Volume 75, Number 84 (Monday, May 3, 2010)]
[Rules and Regulations]
[Pages 23152-23167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10075]
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FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 985 and 989
FEDERAL HOUSING FINANCE AGENCY
12 CFR Parts 1273 and 1274
RIN 2590-AA30
Board of Directors of Federal Home Loan Bank System Office of
Finance
AGENCY: Federal Housing Finance Agency.
ACTION: Final Rule.
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SUMMARY: Governed by the Federal Housing Finance Agency's (FHFA)
regulations, the Federal Home Loan Bank System's (Bank System) Office
of Finance issues debt (``consolidated obligations'') as agent for the
Federal Home Loan Banks (Banks) on which the Banks are jointly and
severally liable and publishes combined financial reports on the Banks
so that members of the Bank System, investors in the consolidated
obligations, and other interested parties can assess the strength of
the Bank System that stands behind them. The Office of Finance (OF) is
governed by a board of directors, the composition and functions of
which are determined by FHFA's regulations. FHFA's experience with the
Bank System and with the OF's combined financial reports during the
recent period of market stress suggests that the OF and the Bank System
could benefit from a reconstituted board and strengthened audit
committee. This regulation is intended to achieve that end.
DATES: This rule is effective June 2, 2010.
FOR FURTHER INFORMATION CONTACT: Joseph A. McKenzie, 202-408-2845,
Division of Federal Home Loan Bank Regulation, Federal Housing Finance
Agency, 1625 Eye Street, NW., Washington, DC 20006; Neil Crowley,
Deputy General Counsel, 202-343-1316; or Thomas E. Joseph, Senior
Attorney-Advisor, 202-414-3095, Office of General Counsel, Federal
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington,
DC 20552. The telephone number for the Telecommunications Device for
the Deaf is 800-877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. Creation of the Federal Housing Finance Agency and Recent
Legislation
Effective July 30, 2008, the Housing and Economic Recovery Act of
2008 (HERA), Public Law 110-289, 122 Stat. 2654, transferred the
supervisory and oversight responsibilities of the Office of Federal
Housing Enterprise Oversight (OFHEO) over the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) (collectively, the Enterprises), the oversight
responsibilities of the Federal Housing Finance Board (FHFB or Finance
Board) over the Banks and the Office of Finance (OF) (which acts as the
Banks' fiscal agent), and certain functions of the Department of
Housing and Urban Development to FHFA, a new independent executive
branch agency. See id. at section 1101, 122 Stat. 2661-62. FHFA is
responsible for ensuring that the Enterprises and the Banks operate in
a safe and sound manner, including that they maintain adequate capital
and internal controls, that their activities foster liquid, efficient,
competitive, and resilient national housing finance markets, and that
they carry out their public policy missions through authorized
activities. See id. at section 1102, 122 Stat. 2663-64. The
Enterprises, the Banks, and the OF continue to operate under
regulations promulgated by OFHEO and the FHFB until FHFA issues its own
regulations. See id. at sections 1302, 1313, 122 Stat. 2795, 2798.
B. The Bank System Generally
The twelve Banks are instrumentalities of the United States
organized under the Federal Home Loan Bank Act (Bank Act).\1\ See 12
U.S.C. 1423, 1432(a). The Banks are cooperatives; only members of a
Bank may purchase the capital stock of a Bank, and only members or
certain eligible housing associates (such as state housing finance
agencies) may obtain access to secured loans, known as advances, or
other products provided by a Bank. See 12 U.S.C. 1426(a)(4), 1430(a),
1430b. Each Bank is managed by its own board of directors and serves
the public interest by enhancing the availability of residential
mortgage and community lending credit through its member institutions.
See 12 U.S.C. 1427. Any eligible institution (generally a federally
insured depository institution or state-regulated insurance company)
may become a member of a Bank if it satisfies certain criteria and
purchases a specified amount of the Bank's capital stock. See 12 U.S.C.
1424; 12 CFR part 1263.
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\1\ Each Bank is generally referred to by the name of the city
in which it is located. The twelve Banks are located in: Boston, New
York, Pittsburgh, Atlanta, Cincinnati, Indianapolis, Chicago, Des
Moines, Dallas, Topeka, San Francisco, and Seattle.
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As government-sponsored enterprises (GSEs), the Banks are granted
certain privileges under federal law. In light of those privileges and
their status as GSEs, the Banks typically can borrow funds at spreads
over the rates on U.S. Treasury securities of comparable maturity lower
than most other entities. The Banks pass along a portion of their GSE
funding advantage to their members--and ultimately to consumers--by
providing advances and other financial services at rates that would not
otherwise be available to their members. Consolidated obligations
(COs), consisting of bonds and discount notes, are the principal
funding source for the Banks. The OF issues all COs on behalf of the
twelve Banks. Although each Bank is primarily liable for the portion of
consolidated obligations corresponding to the proceeds received by that
Bank, each Bank is also jointly and severally liable with the other
eleven Banks for the payment of principal and interest on all COs. See
12 CFR 966.9.
C. The OF
The OF was one of a number of joint Bank offices established by
regulation by the former Federal Home Loan Bank Board (FHLBB), a
predecessor agency to
[[Page 23153]]
FHFA. See 65 FR 324, 326 (Jan. 4, 2000). The OF was originally formed
from two other joint Bank Offices, the Office of System Finance and the
Office of Fiscal Agent. Among other things, OF was assigned the duties
previously vested in the Fiscal Agent which included facilitating the
issuance of COs. Id.
In 1989, as part of the amendments made to the Bank Act by the
Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA),\2\ all joint offices of the Bank System other than the OF
were abolished. The FHLBB was also abolished and its regulatory
authority over the Bank System, including the OF, was transferred to
the Finance Board. The FHLBB's regulations were also transferred to the
Finance Board. Id. In 1992, the Finance Board reorganized the OF as
fiscal agent of the Finance Board for issuing COs under section 11(c)
of the Bank Act, and set forth other duties for OF.\3\ See 57 FR 11429
(Apr. 3, 1992) (adopting 12 CFR part 941). The regulation also
instituted a three-member board of directors for the oversight and
management of the OF, made up of two Bank presidents and a private
United States citizen with demonstrated expertise in financial markets.
Id.
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\2\ Public Law 101-73, 103 Stat. 183 (Aug. 9, 1989).
\3\ As it existed in 1992, section 11(c) of the Bank Act
provided the Finance Board authority to issue the debt on which the
Banks were jointly and severally liable. 12 U.S.C. 1431(c)(1992).
HERA recently amended this provision and removed authority from the
regulator to issue such debt on behalf of the Banks and provided the
OF as agent for the Banks with authority to issue the COs. See
section 1204(3)(B), Pub. L. 110-289, 122 Stat. 2786.
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In January 2000, the Finance Board proposed changes to its
regulations to alter how COs were issued under section 11 of the Bank
Act, reorganize the OF and its board of directors, and expand the
duties of the OF, including assigning the OF the duty to prepare the
Bank System combined annual and quarterly financial reports. See 65 FR
324. As proposed, the January 2000 regulation transferred authority for
issuance of the Bank COs from the Finance Board, which had been issuing
debt pursuant to then-existing authority under section 11(c) of the
Bank Act, to the Banks themselves pursuant to authority under section
11(a) of the Bank Act and subject to the requirement, among other
things, that all such debt issued by the Banks be the joint and several
obligations of all twelve Banks and be issued through the OF as their
agent. Id. Under the proposed regulation, the Finance Board retained
the option to issue COs itself under section 11(c) of the Bank Act at
any point in the future.
The Finance Board also believed that ``[a]s a natural and necessary
adjunct to the issuance of COs, the Banks also should be responsible
for the preparation of the disclosure documents that facilitate CO
issuance and for the periodic combined financial statements for the
Bank System.'' Id. at 325. The Finance Board therefore proposed that
the OF, as the only joint Bank System office and existing agent for CO
issuance, be assigned the duty of preparing the Bank System's combined
financial reports. Id. The Finance Board also proposed to codify
disclosure standards in the regulation, many of which had been set
forth in a Finance Board policy statement. Other duties related to debt
issuance and management were also proposed to be assigned to the OF.
In light of the expanded duties assigned to the OF as well as
amendments to the Bank Act that had recently been made by the Gramm-
Leach-Bliley Act (GLB Act) of 1999,\4\ the Finance Board also thought
it was appropriate to alter both the size and composition of the OF
board. Id. at 326. The Finance Board had two main goals in proposing
its changes. First, it wanted to build on the governance structure in
the Bank Act by which the Banks should be provided greater autonomy to
manage their affairs. Second, it wanted to assure each Bank had
representation on the OF board to help achieve operational goals and
wanted to assure that the OF board itself had directors with experience
and qualification to help the OF meet the evolving needs of the Bank
System.
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\4\ Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
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After consideration of the comments on the proposed regulation, the
Finance Board adopted many of the changes including those authorizing
the Banks to issue COs under section 11(a) of the Bank Act and
assigning to the OF the function of preparing the Bank System's
combined financial reports, along with additional duties. See 65 FR
36290 (June 7, 2000) (adopting among other parts 12 CFR parts 966 and
985). The Finance Board did not, however, adopt the proposed changes to
the OF board structure or composition. Instead, the new regulation
incorporated the prior three-person board structure. The Finance Board
also specified some additional duties for the OF board consistent with
the additional functions that had been assigned to the OF over the
years. Since the 2000 rulemaking, no significant changes to the
regulations governing the OF have been proposed.
D. Proposed Rule
On August 4, 2009, FHFA published a proposed rule for comment which
would have altered the structure, composition and duties of the OF
board of directors and its audit committee. See 74 FR 38564. As
proposed, the rule also would have transferred the current OF board
regulations, as well as regulations related to Banks' financial
statements, respectively from parts 985 and 989 of title 12 to parts
1273 and 1274 of Title 12.
The proposal would have expanded the OF board of directors to
between fifteen and seventeen members, consisting of the twelve Bank
presidents and from three to five Independent Directors (as defined
under the rule). The proposed rule also would have created an Audit
Committee for the OF board made up of the Independent Directors. The
Audit Committee would have been assigned the duty to oversee the audit
of the OF and the preparation of the Bank System's combined financial
report. To help ensure that information from the Banks could be
combined in a meaningful and accurate fashion in the combined financial
report, the proposed rule also would have empowered the OF Audit
Committee to require the Banks to establish common accounting policies
and procedures with regard to information submitted to the OF. As with
the current regulation, the proposed rule also set forth standards for
the combined financial reports. The proposed rule addressed the duties
of the OF board of directors generally, although it would have carried
over many of the provisions in the current regulations with regard to
the OF board's duties.
Under the proposed rule, FHFA would have selected the initial
Independent Directors for staggered terms of up to five years.\5\ Each
Bank was given the right to nominate one candidate for appointment.
Thereafter, Independent Directors would have been elected by the full
board of directors for five-year terms, subject to the right of FHFA to
review and object to a particular Independent Director's election,
reserving to FHFA the right to appoint Independent Directors if it
thought the OF board had not elected suitably qualified persons. Under
the proposed rule, FHFA also would have appointed the first chairman of
the reconstituted OF board from among the Independent Directors and a
vice chairman from among all directors.
[[Page 23154]]
Thereafter, the chairman would be elected by the full board of
directors from among the Independent Directors and the vice chairman
would be elected by the board from among all directors. The proposed
rule also set standards for a quorum for board meetings, established a
minimum number of board meetings per year, and addressed issues related
to board committees and other matters such as compensation and
indemnification of directors.
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\5\ Terms would have been staggered such that no more than one
Independent Director's seat would be scheduled to become vacant in
any year.
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The proposed rule also would have readopted current regulations
addressing the financial statements for the Banks, subject to technical
corrections made necessary by proposed changes in the composition and
duties of the OF Audit Committee. See 12 CFR part 989. The proposed
rule also would have made changes to part 989 to reflect the fact that
the Banks had registered equity securities with the Securities and
Exchange Commission subsequent to the adoption of these requirements.
The proposed rule originally had a comment period of 60 days, which
was set to close on October 5, 2009. This comment period was later
extended for an additional 30 days. See 74 FR 50926 (Oct. 2, 2009).
FHFA received 23 comment letters on the proposed rule. These comments
are discussed below.
E. Considerations of Differences Between the Banks and the Enterprises
Section 1201 of HERA (codified at 12 U.S.C. 4513(f)) requires the
Director, when promulgating regulations relating to the Banks, to
consider the following differences between the Banks and the
Enterprises: Cooperative ownership structure; Mission of providing
liquidity to members; Affordable housing and community development
mission; capital structure; and Joint and several liability. The
Director also may consider any other differences that are deemed
appropriate. In preparing this final regulation, FHFA considered the
differences between the Banks and the Enterprises as they relate to the
above factors, and determined that the rule is appropriate.
II. The Final Rule
A. Comments
FHFA received 23 comment letters on the proposed rule from the
Banks, the OF, trade associations, and individual representing members.
The OF along with eleven of the twelve Banks submitted a single joint
comment letter, while the remaining Bank submitted its own comment
letter. FHFA also received comments from six trade associations that
represent Bank System members, as well as fifteen letters from
individuals representing member institutions. Copies of the comments
are available at FHFA's Web site, http://www.fhfa.gov.
The comments generally supported the proposed expansion of the OF
board of directors to include all twelve Bank presidents and additional
independent directors. The comments were also generally supportive of
the proposal to establish for the OF an Audit Committee made up of
Independent Directors. The commenters opposed, however, some of the
specific powers and duties assigned to the Audit Committee under the
proposed rule, especially those provisions mandating the Audit
Committee to require the Banks to adopt common accounting policies. A
number of commenters felt that some of the duties and authority
assigned to the Audit Committee should be vested in the full OF Board
or were inconsistent with the role and authority of the individual
Banks' boards of directors and audit committees.
Commenters also felt that the duties that would be assigned to
either the OF board of directors or its Audit Committee should not be
described by reference to the part 917 rules. The commenters noted that
the part 917 rules addressed the duties and authority of the individual
Banks' board of directors and that the relationship of the OF to the
Banks was different from the relationship of a Bank to its members. A
number of commenters suggested that the duties of the OF board of
directors or Audit Committee be limited specifically to those
enumerated in the rule. Some commenters also believed that the proposed
rule gave FHFA too much authority to appoint Independent Directors and
to overrule decisions of the OF board of directors and urged FHFA to
change these provisions. Commenters also made specific suggestions of
wording changes in a number of proposed provisions of the rule that
they believed would clarify the meaning of the provision or otherwise
improve the rule.
B. Final Rule Provisions
FHFA has considered all the comments in developing the final rule.
It has accepted a number of the suggestions made by commenters and, as
discussed below, has made changes in the final rule as a result. FHFA
believes, however, that the basic approach of the proposed rule remains
correct, as do its underlying reasons for initially proposing the
changes. FHFA views the changes in this final rule as an important step
in assisting the Banks to coordinate among themselves the process of
providing the OF with information to prepare the Bank System's combined
financial reports and assisting the OF otherwise to obtain information
where the coordination process has not worked well. Most importantly,
FHFA continues to believe that high-quality combined financial reports
play an important role in the ability of the Banks to access financial
markets and issue debt and that they provide financial markets with
needed information about the Bank System. Therefore, much of the
proposed rule is carried over into the final regulation, albeit often
with some small changes in language to clarify the extent and scope of
the provision in question. Comments, and the changes that FHFA has made
to the rule, are discussed in more detail below in the section
describing each final rule provision.
Section 1273.1--Definitions
FHFA has adopted the definitions as proposed. FHFA did not receive
any comments that addressed the proposed definitions directly, although
one commenter suggested using a term other than ``Independent
Director'' since the term is used somewhat differently under the rule
than in the general corporate governance context. FHFA has considered
this comment, but is continuing to use the term Independent Director.
The qualifications for Independent Director are set forth in the rule.
The definition of this term makes clear that the term means a party
that meets such qualifications, and its use is not intended to imply
any other meaning. Thus, FHFA has not made the requested change.\6\
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\6\ Additional comments were received on the proposed
qualifications for an Independent Director. These comments are
discussed below in the section addressing Sec. 1273.7, which sets
out the qualifications for Independent Directors.
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Section 1273.2--Authority of the OF
FHFA has adopted this section as proposed. The provision, as
proposed, was similar to Sec. 985.2 which had previously set forth the
OF authority. The proposed provision reflected the fact that HERA
amended section 11 of the Bank Act so that the regulator was no longer
authorized to issue COs. See Public Law 110-289, Div. A, Title II,
section 1204(3) (amending 12 U.S.C. 1431(b) and (c)). Thus, Sec.
1273.2 as adopted, unlike former Sec. 985.2, does not provide that the
OF may act as agent for FHFA in the issuance of COs.
Section 1273.3--Functions of the OF
FHFA has made a number of clarifying changes in the final version
of Sec. 1273.3, which describes the general functions of the OF, in
response to
[[Page 23155]]
comments on the proposed rule. These changes do not alter the scope of
the proposed provision, but FHFA believes that the changes will make
its original intent more clear.
First, FHFA has altered Sec. 1273.3(a) to provide that, in the
offering, issuance and servicing of COs, the OF is acting as agent for
the Banks. As originally proposed, the provision merely stated that the
OF was agent. Some comments indicated that language in this provision
and in Sec. 1273.6 should make clear that the OF administers these
functions on behalf of the Banks but is not the issuer of debt and does
not enjoy independent authority to undertake these activities. FHFA
believes that the change in the final rule, along with the description
in Sec. 1273.2 that OF acts as agent for the Banks makes clear that
the OF is not acting independently of the Banks in these activities.
Moreover, the language in Sec. 1273.3(a) now closely follows the
language in section 11(b) and (c) of the Bank Act, as amended by HERA,
which states that ``the Office of Finance as agent for the Banks may
issue'' consolidated Bank debentures or bonds.\7\
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\7\ FHFA is adopting a similar change to wording in Sec.
1273.6(a) for the same reasons discussed here.
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Second, FHFA has changed Sec. 1273.3(b) to clarify that, in
preparing the combined financial reports, the OF shall apply consistent
accounting policies and procedures as provided under Sec. 1273.9(b).
Commenters urged that the reference to ``consistent accounting policies
and procedures'' should be removed from this section, and from Sec.
1273.6(b)(2), because the references were confusing and raised issues
as to whether the language created a ``consistency'' requirement beyond
or in addition to that set forth in Sec. 1273.9(b). FHFA believes that
the change in the language makes clear that language in this section is
referencing Sec. 1273.9(b) and is not creating a ``consistency''
requirement independent or separate from that under Sec. 1273.9(b).
The provision makes clear, however, that the OF has the duty to apply
policies adopted under Sec. 1273.9(b) in preparing the Bank System
combined financial reports.\8\
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\8\ FHFA is adopting a similar change to the language in Sec.
1273.6(b)(2) for the same reasons discussed here.
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Commenters also asked that Sec. 1273.3 be changed to specifically
limit the OF's functions to those listed in the section. FHFA sees no
need for this change. As now written, the provisions clearly delineate
the OF functions, and FHFA does not believe the rule as adopted is
vague or will be subject to expansive interpretation.
Section 1273.4--FHFA Oversight
As proposed, the provision would have carried over Finance Board
regulation Sec. 985.5 with minor technical changes. It also would have
added a new paragraph (c) that provided that FHFA would determine
whether a combined Bank System annual or quarterly financial report
complied with the standards of the part 1273 regulations, a provision
that in scope and content was basically the same as Finance Board rule
Sec. 985.6(b)(5). One commenter noted that the ramifications of this
proposed section were unclear and was not sure why the section was
included in the regulation. The commenter asked that the section be
removed or expanded to better explain its purpose.
FHFA disagrees that the provision is unclear. As proposed, the
provision described FHFA's general oversight authority with regard to
the OF, and provided more specific statements about FHFA's examination
of the OF and its oversight of the combined financial reports. FHFA
agrees that, because of revisions made by HERA the provision needs
revision from what was proposed. Prior to HERA, the Bank Act did not
clearly delineate the regulator's authority over the OF. HERA, however,
added provisions to the Bank Act and the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 \9\ which more clearly
define this authority. Paragraph (a) therefore has been changed to make
specific reference to FHFA regulatory authority over the OF under these
statutes.
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\9\ 12 U.S.C. 4501 et seq.
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Section 1273.5--Funding of the OF
As proposed, Sec. 1273.5 set forth the Banks' responsibility for
jointly funding the OF and the process for, and other requirements
related to, this funding. The rule, as proposed, carried over most of
the provisions that had been in Finance Board regulation Sec. 985.5.
FHFA proposed certain changes to the Finance Board requirements,
however. Most significantly, the proposed rule allowed that each Bank's
pro rata share of the OF's expenses could be calculated by any
reasonable formula set by the OF Board of Directors, subject to FHFA's
review and right to require the OF to make changes to that formula. By
contrast, under the Finance Board's regulation, the formula was
specified in the rule, although the OF board retained the right to
implement an alternative funding formula with the Finance Board's
approval.
FHFA received one comment that was generally supportive of the
approach in the proposed rule for establishing the method of
calculating each Bank's share of the OF's funding. Another commenter
believed, however, that FHFA did not need to reserve authority to
require the OF board of directors to change the formula. The commenter
stated that the rule required that any formula be reasonable and that
FHFA maintained its general oversight and enforcement authority to
enforce this requirement so that the agency could take action if the OF
board of directors did not adopt a reasonable approach to calculating
each Bank's share of the OF's expenses.
FHFA considered this comment asking for a change to the provision
but decided not to alter the proposed approach to establishing the
funding formula. FHFA believes the approach in Sec. 1273.5 will
provide greater flexibility than the approach in the Finance Board
regulation while maintaining regulatory oversight to make sure any
formula remains fair to all Banks and provides for adequate funding of
the OF. By removing from the rule a specific formula for calculating
each Bank's share of the OF expenses and the requirement that the OF
Board of Directors obtain pre-approval from FHFA for any change to such
formula, Sec. 1273.5 will allow the OF board of directors to take
action in response to changed conditions while allowing FHFA to
intervene quickly if needed. Thus, FHFA is adopting Sec. 1273.5 as
proposed.
Section 1273.6--Debt Management Duties of the OF
Proposed Sec. 1273.6 described the debt management duties of the
OF, and these duties substantively remained similar to those set forth
in Finance Board regulation Sec. 985.6. As indicated in the notice of
proposed rulemaking, however, FHFA proposed certain changes to the
standards governing the preparation of the combined financial report.
These proposed changes were needed, among other reasons, to conform the
duties in this section to new responsibilities proposed for the Audit
Committee with regard to ensuring consistency of information provided
by the Banks for use in the combined financial reports. See 74 FR at
38566, 38567. As already discussed, FHFA received comments on certain
aspects of proposed Sec. 1273.6 and has made clarifying changes to the
proposed language similar to changes made to proposed language in Sec.
1273.3. See notes 7 and 8, supra.
[[Page 23156]]
FHFA also received comments asking that it alter Sec. 1273.6(b)(4)
so that the deadline for publication of the combined financial report
be 21 days after the Banks' filing deadline with the SEC. The
commenters indicated that this would give the OF sufficient time to
complete the combined reports after each Bank finalized its reporting
to the SEC. After considering this request, FHFA is not altering the
deadline for publication of the quarterly and annual combined financial
reports. The Bank System is one of the largest non-governmental issuers
of debt in the world, with the level of outstanding COs approaching $1
trillion. The combined financial report is an important and convenient
source of information for investors and other parties interested in the
Bank System and Bank System debt. FHFA believes that timely publication
of the combined financial report is important to the Banks' continued
access to financial markets. Therefore, the combined reports are as
important, if not more so, than the individual Bank reports. FHFA,
therefore, expects that the OF and the Banks will take whatever steps
are necessary to file the combined financial reports on the schedule
set forth in SEC rules for the individual Banks. Further, given the
limited nature of the Banks' business lines--advances, and in some
cases acquired member assets--and the limited universe of their
investment activities, FHFA also thinks the deadlines set forth in the
rule are reasonable.
With regard to the requirements for delivering copies of the
combined reports to the Banks and Bank members also found in Sec.
1273.6(b)(4), FHFA confirms that OF may continue to rely on Finance
Board Regulatory Interpretation 2007-RI-01 (Jan. 19, 2007), which sets
forth terms and conditions for the electronic distribution of these
financial reports, to meet these requirements.
Other commenters suggested that FHFA modify Sec. 1273.6 to give
the OF Board of Directors authority to limit issuance of COs by any
Bank or Banks to enforce OF policies. While the OF board has delegated
to OF's management the authority to prohibit or redirect issuance of
COs because of market reasons, the OF does not currently enjoy the
power to prohibit the issuance of debt to enforce specific policies.
FHFA, therefore, has carefully considered making these changes but has
decided not to do so at this time because it does not believe such
changes are necessary to achieve the goals of this final rule. Under
rules adopted herein (and carried over from the Finance Board
regulations), the Banks are required to provide the OF with information
in form and timeframes set forth by the OF to facilitate the
preparation of the combined financial reports. See 12 CFR 1274.3 (as
adopted herein). Under the assessment formula approved by FHFA in
February 2009, a Bank that fails to meet a deadline for the submission
of information to OF can be subject to a special assessment. Thus, the
Banks could be subject to enforcement and other actions if they fail to
comply with OF policies with regard to submission of information.
Commenters also suggested that Sec. 1273.6 be modified to give the
OF authority to impose appropriate limits on any Bank's or the Bank
System's exposure to risk as necessary to facilitate the issuance of
COs. Assigning the OF risk management duties of the type suggested
would go beyond the current scope of the OF's duties, and FHFA does not
wish to take such a step at this time.
FHFA, however, intends to monitor how the OF board, and its Audit
Committee, implement the changes being adopted at this time, and may
consider proposing changes along the lines suggested in these comments
if it believes this type of authority needs to be granted to the OF
board to achieve the goals of this final rule.
Section 1273.7--Structure of the OF Board of Directors
Commenters generally supported the basic structure of having an OF
board of directors made up of the twelve Bank presidents and some
Independent Directors, but provided a number of comments about specific
aspects of this section. As discussed below, FHFA made a number of
changes to the provisions as a result of these comments and made some
other changes to clarify the meaning of some provisions in this
section.
In response to comments, FHFA clarified language in Sec.
1273.7(a)(1) to state that if a Bank presidency becomes vacant, the
person designated by the Bank's board of directors to fill temporarily
the duties of president shall serve on the OF board of directors until
the presidency is filled permanently. The language in the proposed rule
created some unintended ambiguity on this point, by stating that a
person appointed to temporarily fill the duties of president may serve
on the OF board of directors. The change will assure that a Bank has
representation on the board as soon as the Bank's board designates a
temporary or interim president.
Given that the proposed rule provided that from three to five
Independent Directors would serve on the OF board of directors,
commenters also requested that the final rule clarify how the final
number of Independent Directors should be determined within the
authorized range. They suggested that the OF board of directors be
given authority to make this determination. FHFA agrees that some
certainty on this point is needed, and has decided to change Sec.
1273.7(a)(2) to specify that five Independent Directors shall serve on
the OF board of directors. FHFA believes that five Independent
Directors will better help assure a diversity of perspective and
experience on the board and the Audit Committee and provide better
representation with regard to the public interest than would having as
few as three Independent Directors.
FHFA also received a number of comments concerning the
qualifications proposed in Sec. 1273.7(a)(2) for Independent
Directors. First, commenters felt that the criteria limiting an
Independent Director's financial interest in a Bank member or a
consolidated obligation dealer or seller group should be eliminated
because the requirement could prevent many qualified individuals
serving as Independent Directors, especially given the large number of
Bank members. Commenters also urged FHFA to adopt criteria closer to
those used by the New York Stock Exchange to determine independence of
board members, which would include a requirement that the board of
directors affirmatively determine that the Independent Director had no
material relationship with the Bank System. Commenters also indicated
that the rule should make clear that only current officers, directors,
or employees of a Bank or a Bank System member were prohibited from
serving as Independent Directors and that this prohibition did not
apply to former officers, directors, or employees.
FHFA has considered these comments and has modified the
qualifications for Independent Directors. Under the final rule, a
director, to be considered independent, must not have any material
relationship with a Bank or the OF (either directly or as the partner,
shareholder, or officer of an organization with a material
relationship) as determined under criteria set forth in a policy
adopted by the OF board of directors. This policy should address when a
financial interest in, or other relationship with, a Bank System member
would constitute a material relationship with a Bank or the OF. This
approach would give the board more flexibility to look at the nature of
an individual's financial interests in a member and determine whether
the
[[Page 23157]]
interest would constitute a material relationship with a particular
Bank that gives rise to a disqualifying conflict (or the appearance of
such a conflict). The policy should also consider and address issues
such as when a family member's professional or financial interest may
create a conflict that should disqualify an individual from serving as
an Independent Director, or whether other direct or indirect
relationships of an individual with the Bank System (which can include
business or advisory relationships) should disqualify such individual
from serving. FHFA expects that the OF board of directors will refer to
rules of the New York Stock Exchange and similar organizations in
developing the policy, but recognizes that the cooperative nature and
other unique aspects of the Bank System may not allow such criteria to
be adopted without appropriate modification.
The final rule also sets forth minimum criteria that the
``independence'' policy must meet. First, such policy must provide that
an Independent Director may not be an officer, director or employee of
any Bank, or member of a Bank. This requirement basically carries over
previously proposed criteria. After considering the comments, FHFA also
believes that recent employment or service as a director at a Bank or
Bank member may also create at least an appearance that a director is
not independent. Therefore, the OF board of directors' policy must
disqualify an individual who was an officer, director or employee of
any Bank, or member of a Bank at any time in the past three years from
serving as an Independent Director. The final rule also states that the
policy must provide that a current officer or employee of the OF, or a
person who was an officer or employee of the OF at any time during the
past three years, cannot serve as an Independent Director.
Second, the OF board policy must prohibit from serving as an
Independent Director, a person who is affiliated with any consolidated
obligations selling or dealer group under contract with the OF, or who
has a financial interest in such group that exceeds the lesser of
$250,000 or 0.01% of the group's market capitalization. This final
provision basically carries over the proposed financial interest limits
for consolidated obligation seller or dealer groups. The final rule
also adopts the proposed criteria as to when a financial interest in a
holding company of a consolidated obligations seller or dealer group
would disqualify a person from serving as an Independent Director. FHFA
has further altered the final rule so that a person who has combined
financial interests of more than $1,000,000 in more than one
consolidated obligation seller or dealer groups under contract with the
OF must also be disqualified by the OF board policy from serving as an
Independent Director. FHFA continues to believe that, given the OF role
in issuing COs, an Independent Director's possessing such a financial
interest in a consolidated obligation seller or dealer group or groups
would create a conflict, or an appearance of conflict, that would
prevent such a director from being considered independent, and is
therefore adopting this provision as part of the final rule.
As in the proposed rule, the final rule requires that Independent
Directors be United States citizens and, as a group, have substantial
experience in financial and accounting matters. With regard to this
latter requirement, some commenters asked that FHFA verify that the
reference to ``as a group'' meant that the requirement could be met
when considering the collective expertise of the Independent Directors
and did not have to be met by each Director. FHFA confirms that this
was its intent. Commenters also requested confirmation that the
experience can be derived from a variety of sources including past
experience as an attorney, government official, or business executive
that was involved in financial and accounting matters. Again, FHFA
confirms that this was its intent as long as such involvement qualified
as substantive experience and not merely tangential involvement in
these areas.
As proposed, Sec. 1273.7(b) of the final rule provides that
Independent Directors will serve for five-year terms which will be
staggered so that no more than one Independent Director seat is
scheduled for election in any one year. The final provision also
provides, as in the proposed rule, that when an Independent Director
seat becomes vacant prior to the end of a scheduled term, any
individual will be elected (or appointed by FHFA) only for the
remainder of the term associated with that seat. In response to
comments, FHFA has clarified in the final rule that where a director is
elected or appointed to fill an Independent Director seat that has
become vacant before the end of the term, the partial term does not
count for purposes of the prohibition on an Independent Director's
serving for more than two full terms.
The final rule also continues to provide for FHFA to appoint the
initial Independent Directors, the initial chairman of the
reconstituted board from among the Independent Directors, and the
initial vice chairman from among all directors, even though some
commenters urged that these positions initially be filled through
election by the board as a whole. FHFA believes that it has an
important role to play in the initial selection of the board members to
ensure that the overall goals of the rule are met, and thus has not
altered the proposal on this point.
To enable the current OF board of directors and the Banks to play
an important role in nominating candidates for initial selection,
however, FHFA has changed the process for nominating the initial slate
of Independent Directors. Under Sec. 1273.7(c)(2) of the final rule,
the current OF board of directors, in consultation with the Banks,
should nominate within 45 days of publication date of this final rule
in the Federal Register a slate of at least five candidates for the
Independent Directorships that FHFA can consider for appointment. This
slate of candidates can include the private citizen member of the
current OF board. This is a change from the proposed rule which
provided that each Bank individually nominate one person and which did
not give the current OF board a role in the nominating process. FHFA
believes that the change will allow the current OF board and the Banks
to propose a slate of candidates whose collective experience will be
more appropriate and better suited to the duties of the board than if
each Bank nominated a candidate individually. Overall, this should
improve the chances that FHFA will find suitable candidates among the
nominees. Under the final rule, FHFA will be able to appoint the
Independent Directors from among the candidates nominated by the OF
board, from among other persons identified by FHFA itself, or from some
combination of these two groups.
FHFA recognizes that at the time the current OF board will need to
nominate a slate of candidates for consideration by FHFA as Independent
Directors, the new board will not have had an opportunity to develop
and approve the policy identifying additional criteria for
``independence'' required by Sec. 1273.7(a)(2)(iii). Therefore, FHFA
expects that the current board in choosing its slate of nominees for
appointment as Independent Directors will assure that the candidates
meet at least the minimum criteria for independence set forth in the
final rule. In making its appointments, FHFA also will consider whether
any relationships that a candidate may have with a Bank or the Bank
System could, in its view, compromise the candidate's ability to act
independently and will make its decisions accordingly.
[[Page 23158]]
The final rule generally adopts the provisions dealing with
election of independent directors as proposed. In this respect, the
final rule requires the OF board to provide FHFA with relevant
biographic and background information about an elected Independent
Director at least 20 business days before that Director assumes any
duties. This requirement applies whether the person is newly elected or
is being re-elected; for directors that are re-elected, FHFA would
expect to receive relevant biographic and background information at
least 20 business days before the new term begins. The final rule also
retains FHFA's right to object to a particular Independent Director and
to appoint an Independent Director if FHFA believes in its judgment
that the OF board failed to elect a qualified person. Some commenters
objected to FHFA retaining the right of objection to, and appointment
of, Independent Directors, but FHFA believes that this right of review
is legitimate for the regulator and will help assure that the
requirements and goals of this rule are met. In response to comments,
the final rule does clarify, however, that FHFA will exercise its right
to object to a particular Director prior to the time that the
Independent Director is to assume his or her duties (or for a Director
that has been re-elected, prior to when the new term is to begin). The
rule also provides that in any notice of objection, FHFA will inform
the OF board if FHFA will appoint someone to fill the seat in question
or if the OF board should hold a new election to do so.
In response to comments, the final rule modifies the proposed
provisions subjecting the charters of any committees established by the
board to FHFA's review and approval, although the final rule continues
to provide that the by-laws of the board of directors and the charter
of the Audit Committee shall be subject to review and approval by FHFA.
The final rule also no longer specifically reserves to FHFA the right
to require the OF board of directors to withdraw or change the scope of
any delegation made by it. These changes, however, do not alter or
diminish FHFA's general oversight, examination, or enforcement
authority with regard to such actions by the OF board of directors.
With regard to these proposed provisions, some commenters felt that
it was inappropriate for FHFA to reserve to itself such direct
involvement in the internal affairs of the OF board and that the
provisions were contrary to the devolution of authority from the
regulator to the Banks that began with the passage of the Gramm-Leach-
Bliley Act of 1999. Commenters pointed out that this was especially
true because, even without these provisions, all aspects of the OF's
activities would remain subject to FHFA's general oversight and
examination authority. Similar comments were made with regard to the
proposed provision reserving to FHFA the right to require the OF board
to withdraw or change the scope of any delegation made by it.
FHFA believes that, in light of the changes to duties and
responsibilities of the board of directors and the Audit Committee made
by this regulation, FHFA has a legitimate need to review and approve
the by-laws of the board of directors and the charter of the Audit
Committee to assure that these documents are consistent with, and meet,
the goals and requirements of this rulemaking. FHFA also believes that
such review and approval is a proper exercise of its supervisory
authority. Thus, the final rule continues to provide that the by-laws
of the board of directors and the charter of the Audit Committee shall
be subject to review and approval by FHFA. FHFA believes that that
supervisory need is less prominent with respect to the charters of
other committees and delegations made by the board, and therefore has
deleted the requirement that those charters and delegations also be
subject to FHFA review and approval.
FHFA also adopted as final the proposed provision that provided
that the OF shall pay reasonable compensation and expenses to the
Independent Directors in accordance with the payment of compensation
and expenses to Bank directors. Commenters urged FHFA to change this
provision so that the OF board could compensate and pay expenses of
Independent Directors as would be reasonable under the circumstances
rather than limiting compensation and reimbursement by reference to
provision applicable to Bank directors. In fact, the rule provides that
OF director compensation must comply with the same standard as that of
Bank directors--a standard of reasonableness--and not that OF director
compensation be the same as that of Bank directors.
In response to urging by commenters, FHFA changed in the final rule
the provision dealing with indemnification so that the OF board can
choose the body of law that would govern corporate governance practice
and procedure, including indemnification, from among the law of the
jurisdiction in which the OF is located, Delaware Corporation law, or
the Revised Model Business Corporation Act. As commenters pointed out,
this approach would be similar to rules previously adopted by OFHEO
with regard to the Enterprises.\10\ The change will allow the OF board
to have more specific guidance as to what legal standards should apply
to their corporate governance and indemnification practices than did
the proposed provision, which was silent on this point. The final rule
requires the OF board to make this choice of law decision within 90
calendar days from the date of its initial organizational meeting
required under Sec. 1273.10. The final rule also makes clear that the
OF shall indemnify its directors, officers (including the Chief
Executive Officer), and employees under such terms and conditions as
are determined by the board, and that the board may maintain insurance
with respect to such persons.
---------------------------------------------------------------------------
\10\ See 12 CFR 1710.10.
---------------------------------------------------------------------------
Section 1273.8--General Duties of the OF Doard of Directors
Proposed Sec. 1273.8 sets out the general duties of the OF board
of directors. Most of the specific provisions in this section as
proposed were carried over from existing Finance Board regulation Sec.
985.8. Nevertheless, FHFA received a number of comments on this
section.
First, commenters urged FHFA not to describe the OF board's general
duties by reference to the regulations in 12 CFR part 917, as such
references could create confusion. Commenters noted that the part 917
regulations address the duty of a Bank's board of directors to a Bank's
members, and that the duties owed by the OF board of directors to the
Banks and the Bank System may differ fundamentally from those owed by a
Bank's board to its member institutions. FHFA agrees, and has changed
proposed Sec. 1273.8(a) accordingly. As adopted, Sec. 1273.8(a) now
provides that an OF director should carry out his or her duties in good
faith in a manner that the director believes to be in the best
interests of the OF and the Bank System, with such care, including a
duty of reasonable inquiry, as an ordinary prudent person in a like
position would use under similar circumstances. It also provides that
the OF directors should administer the affairs of the OF fairly and
impartially without discrimination in favor of or against any Bank. It
also requires directors to develop a familiarity with the basic
business, finance, and accounting practices of the Banks, to be able to
understand the Banks' combined financial statements, and to make
substantive inquiries of management and of the internal and external
auditors with regard to the combined financial statements and the
[[Page 23159]]
OF's individual financial statement. FHFA also removed other references
to the part 917 regulations where it felt the reference could be
confusing or inappropriate.
Commenters also suggested that FHFA alter the proposed quorum
requirements so that the requirement for a quorum could be set in the
OF by-laws rather than in the rule, or that the quorum be set at a
majority of sitting directors rather than ten directors as proposed.
FHFA has considered these comments but believes that the quorum
requirements should be set in the rule to assure that there is adequate
representation of all parties, including Independent Directors, at each
meeting. Thus, FHFA has adopted a final provision that states that a
quorum requires at least a majority of sitting directors, which must
include a majority of Independent Directors.\11\ The OF board may adopt
in its by-laws more stringent quorum requirements than those adopted in
the rule.
---------------------------------------------------------------------------
\11\ Thus, if all board seats were filled, a quorum would
require the presence of at least nine board members, of whom at
least three would have to be Independent Directors.
---------------------------------------------------------------------------
Commenters argued that the requirement for at least six in-person
board meetings per year should be dropped, and that the number of
required meetings should instead be established in the by-laws. FHFA
believes that, given the duties assigned to the OF board, a requirement
of six in-person board meetings is reasonable and necessary to assure
that those duties are carried out. Thus, it has not changed this
requirement.
FHFA also received comments asking that the proposal be changed to
allow the OF board, rather than FHFA, to assign additional duties to
the Chief Executive Officer of the OF. Proposed Sec. 1273.8(d)(4),
however, already clearly provided that the OF board (and not FHFA)
select, employ, determine the compensation for, and assign the duties
and functions of the Chief Executive Officer, subject to certain
minimum responsibilities.\12\ Thus, no change was made in the final
rule in response to this comment.
---------------------------------------------------------------------------
\12\ By contrast, the proposed rule also provided that the OF
board of directors should assume such additional duties as might be
assigned to it by FHFA. This provision was proposed and adopted as
Sec. 1273.8(d)(6).
---------------------------------------------------------------------------
Section 1273.9--Audit Committee
Proposed Sec. 1273.9 set out the duties and function of the OF
Audit Committee. Under the proposed rule, the Audit Committee would
assume the OF board's previous responsibility for overseeing the OF's
preparation of the combined financial reports, and duties related to
overseeing the audit of these reports and of the OF itself. As part of
these responsibilities, the proposed rule would have required the Audit
Committee to ensure that the Banks adopt consistent accounting policies
and procedures so that the combined financial reports continue to be
accurate and meaningful. Where the Banks were unable to agree to such
policies, the proposed rule would have authorized the Audit Committee,
in consultation with FHFA, to prescribe them.
A large number of the comments made on the proposed rule addressed
Sec. 1273.9. In particular, commenters addressed the proposed
provisions assigning to the Audit Committee the duty and authority to
require the Banks to adopt consistent accounting policies and
procedures so that information submitted by them may be combined to
create accurate and meaningful combined financial reports. In general,
commenters felt these provisions were inappropriate in that the power
to adopt accounting policies and procedures should be vested in the
board of directors or audit committees of the individual Banks. They
also felt that the rule failed to recognize the role of the individual
Banks in establishing their own accounting policies, and felt that
consistency can only be achieved through cooperation, not by mandate of
the OF's Audit Committee.
Alternatively, commenters suggested that the Audit Committee's role
be that of making recommendations to the full OF board of directors.
One commenter suggested that the Audit Committee be required only to
assure that Banks' accounting policies and procedures be only
``sufficiently'' consistent to assure that information can be combined
in an accurate and meaningful way. Some commenters also questioned
whether the regulator-imposed limitation under the rule on a Bank's
right to make accounting policy choices otherwise acceptable under
generally accepted accounting principles (GAAP) would itself be a
violation of GAAP. Other commenters urged that the proposed rule be
refined to reflect the appropriate discretion that is accorded to the
Banks as independent entities to apply GAAP.
Commenters also questioned the use of the phrase ``accurate and
meaningful'' stating that it had no well-understood meaning in law.
Commenters said the proposed provision also appeared to impose on the
OF Audit Committee the duty to ensure accuracy of the underlying
financial information submitted by the Banks, a task that they did not
believe could be accomplished by the Audit Committee. They urged that
the rule be recast to make clear that the OF Audit Committee was only
responsible for the acts related to the combining of information and
not for the accuracy of the information reported by the Banks.
FHFA has carefully considered these comments. It continues to
believe that the OF Audit Committee, made up of the Independent
Directors, remains the appropriate body for overseeing the preparation
of the combined financial reports, and it must have all appropriate
authority needed to be successful in this task. As Independent
Directors, members of the Audit Committee will have a lesser incentive
and less of a vested interest than any Bank president to represent the
view of any particular Bank or Banks, and will be in the best position
to ensure that, given the information presented by the Banks, the
combined financial reports presents an accurate and meaningful picture
of the Bank System's financial condition. FHFA agrees that as an
initial matter, it is the duty of the Banks themselves to coordinate
accounting policies and procedures to assure that information is
presented in a uniform manner so that it can be combined in an accurate
and meaningful fashion. FHFA also recognizes, however, that the Banks
have not always been able to agree on such presentation and that it is
appropriate to give the Audit Committee authority, in consultation with
FHFA, to require consistent accounting policies and procedures where
needed so that it can carry out its duties with regard to the
preparation of the combined financial reports. FHFA does not believe
that it is inconsistent with GAAP for the Audit Committee to require
particular accounting principles to be used in submitting information
for the combined reports from among the range of principles that may be
available under GAAP; nor does FHFA believe that this is inconsistent
with the independent identities and reporting responsibilities of the
twelve Banks, given that they retain their authority to issue their own
separate financial statements, which are not required to be consistent
across all twelve Banks, in their SEC filings.
FHFA also believes that its overall approach is consistent with its
authority to supervise the safety and soundness of the Bank System. The
goal of the rule is to improve the disclosure now provided by the
combined financial reports. Combined financial reports are necessary
and useful to the market because a Bank does not issue debt in its own
name but as a Bank System. Thus, the need for the rule is driven by the
unique funding mechanism of the
[[Page 23160]]
Bank System, including the joint and several nature of Bank COs.
Given the comments just discussed, FHFA also realizes that the
wording of the proposed provisions may not have fully reflected its
intent and thus has made some changes to the language of the final
rule. First, it has changed the language in Sec. 1273.9(b)(1) to state
that the Audit Committee will be responsible for ``overseeing the audit
function of the OF and the preparation and the accurate and meaningful
combination of the information submitted by the Banks in the Bank
System's combined financial reports.'' FHFA believes that this wording
more accurately reflects the Audit Committee's oversight of the
preparation of the combined financial reports especially, with regard
to the basis and approach to combining information received from the
Banks, but that the OF Audit Committee is not responsible for
overseeing the reliability and integrity of the accounting policies and
financial reporting and disclosure policies of the individual Banks, or
the accuracy of the information that they submit. FHFA has also adopted
new language in Sec. 1273.9(b)(2) which now states that the ``Audit
Committee shall ensure that the Banks adopt consistent accounting
policies and procedures to the extent necessary for information
submitted by the Banks to the OF to be combined to create accurate and
meaningful combined financial reports.'' This change makes it clear
that the Audit Committee's authority to require consistent accounting
policies and procedures is not meant to be unlimited in nature, but to
assure it can fulfill its duties with regard to the combined financial
reports.
While FHFA has made some changes, it has kept the phrase ``accurate
and meaningful'' even though some commenters felt it lacked precision
and had no clear meaning under law. FHFA believes the words themselves
have a well understood plain meaning and can be applied accordingly. In
using the term ``accurate'', FHFA contemplates that the combination of
the several Banks' financial statements and quantitative disclosures is
correctly presented, that the overall presentation complies with GAAP,
relevant interpretative materials put forth by accounting and audit
standard setters, and with this and other applicable regulations and
guidance issued by FHFA. In using the term ``meaningful'', FHFA
contemplates that the combined statements will present, in an
understandable and transparent manner, robust disclosures and
discussion that will enhance the readers' understanding of the Banks'
combined financial conditions, changes in this financial condition, and
the combined results of their operations.
FHFA also notes that under this rule both as proposed and adopted,
the Audit Committee is responsible for selecting the external auditor
for the combined financial statements. Historically, the Banks have
selected a common auditor for the individual Bank and combined
financial statements audits. Engaging a common external auditor may
promote more consistent accounting practices, would avoid subjecting
the Banks and the OF to inter-firm disagreements on accounting matters,
and has been found by the Banks to be more cost-effective than using
multiple auditors. FHFA recognizes that as a practical matter the
auditor for the combined financial reports is likely to be the same
firm that audits the individual Banks.
Based on comments, the final rule does not define the Audit
Committee duties in Sec. 1273.9(c) by reference to Sec. 917.7 of this
title, which addresses the duties of a Bank's audit committee. FHFA
agrees that this reference is confusing given the differences between
the Banks and the OF. Instead, FHFA added descriptions of relevant
duties that should be carried out by the Audit Committee in the final
rule as paragraphs (c)(7) through (c)(15) of Sec. 1273.9. This list of
duties is based on those in Sec. 917.7, although they have been
modified to reflect differences between the Banks and the OF. The
duties assigned to the Audit Committee under these provisions include
overseeing the preparation and audit of the OF's own financial
statements and the OF's internal controls. The Audit Committee is also
responsible for providing an independent direct channel of
communication between the OF board of directors and OF's internal and
external auditors. The Audit Committee also must periodically report
findings to the full board and must keep written minutes of its
meetings. The final rule also requires that the Audit Committee adopt
and the full board approve, a written charter that specifies the scope
of the Audit Committee's powers and responsibilities, consistent with
the duties and authority set forth in Sec. 1273.9. The Audit Committee
and the board also must review and assess the adequacy of the charter
on an annual basis, and where appropriate make changes, and re-adopt
and re-approve the charter not less often than every three years. The
final rule makes clear that the charter of the Audit Committee is
subject to review and approval by FHFA.
Some commenters also requested that FHFA recast the duties of the
Audit Committee based on language contained in the Securities Exchange
Act of 1934 (1934 Act).\13\ Along these lines commenters also asked
that the rule should make clear that the Audit Committee is part of the
board of directors as a whole and is not acting separate or apart from
the board's general oversight responsibility for the OF. FHFA has not
made specific changes in response to these comments. FHFA believes that
Sec. 1273.9 as adopted is consistent with the audit committee
provisions of the 1934 Act, although FHFA notes that, because the OF is
not a reporting company or a company at all, those provisions do not
apply to it.
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\13\ Section 10A(m)(2) of the 1934 Act states in relevant part
that:
The audit committee * * *, in its capacity as a committee of
the board of directors, shall be directly responsible for the
appointment, compensation and oversight of the work of any
registered public accounting firm employed * * * (including
resolution of disagreements between management and the auditor
regarding financial reporting) for purposes of preparing or issuing
an audit report or related work, and each registered public
accounting firm shall report directly to the audit committee.
15 U.S.C. 78j-1(m).
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FHFA also received comments that the OF board of directors should
be able to establish an Audit Committee made up of less than all of the
Independent Directors. Commenters felt this would allow the board to
find Independent Directors whose skills may not fit with those required
for the Audit Committee but could provide important insights on other
areas of interest. As already noted, FHFA believes that having five
Independent Directors sit on the Audit Committee will better assure a
diversity of perspective and experience than would a smaller number,
and will thereby help the Committee better carry out its duties under
this rule. FHFA also believes that the skill sets required of the
Independent Directors under the rule are not narrowly tailored and that
the board will be able to find Independent Directors with a wide range
of knowledge and experience that will prove valuable to the board in
carrying out its duties. FHFA therefore is not adopting this
suggestion.
Section 1273.9(a) of the final rule also now clarifies that the
Audit Committee shall elect its chairperson from among its members. The
provision makes clear that nothing prevents the Audit Committee from
choosing the OF Chairperson also to serve as chair of the Audit
Committee if the Committee so decides. This is not a requirement,
however, and any Independent Director
[[Page 23161]]
may be elected chair of the Audit Committee.
Section 1273.10--Transition
Commenters suggested that the final rule should require that an
organizational meeting of the new OF board of directors be held within
a set time of the effective date of the rule and that the new OF board
of directors be deemed to be reconstituted as of that date. FHFA agrees
that it is important to set out in the rule more specific details of
how the transition should occur between the current OF board of
directors and the new board of directors required under this part 1273.
As such, FHFA is adopting, as part of the final rule, Sec. 1273.10,
which lays out a transition provision.
Under this section, the new OF board of directors will be required
to hold an organizational meeting within 45 calendar days of the date
that FHFA first appoints an Independent Director under Sec. 1273.7(c).
The board shall be deemed to be reconstituted as of the date of the
organizational meeting. The rule provides that the person appointed
chairman of the new board shall have authority to set the date of the
organizational meeting. The transition provision also makes clear that
until the date of the organizational meeting, the current OF board of
directors and its audit committee shall continue to have power and
authority to act in these capacities.
The transition provision also provides that the audit committee as
in existence immediately prior to the effective date of the rule may
continue to have responsibility and oversight authority with regard to
the preparation and publication of any combined financial report that
covers a reporting period that ends prior to July 1, 2010. This
provision will avoid requiring the members of the reconstituted Audit
Committee to review and approve any combined financial statements for a
period during which the new Committee was not in existence. The rule,
however, would allow the new board of directors to determine that the
new Audit Committee of Independent Directors may take over the
responsibility for a combined financial report that covers a period
prior to July 1, 2010. This provision is meant to provide flexibility
in when responsibility for the combined financial reports is handed
over, given that it is difficult to predict the exact date of the
organizational meeting and therefore hard to predict how much time a
new Audit Committee would have before it had to take its first actions
with respect to a combined financial report. Thus, if the board
believes the Independent Directors have sufficient time to familiarize
themselves with relevant issues prior to the completion of the
preparation and publication of a combined financial report, it can
allow the new Audit Committee to take over this duty with respect to a
report that covers a period prior to the third quarter of 2010.
Appendix A to Part 1273 and Part 1274
FHFA did not receive any specific comments on the proposed Appendix
A to Part 1273 or to the proposed Part 1274 rules. FHFA is adopting
these provisions substantively as proposed. FHFA notes that as adopted,
Appendix A to Part 1273 would require biographical information about
the Bank presidents to appear only once in the combined financial
report and not twice, even though the Bank presidents also serve as OF
board members. The combined report should make clear that the Bank
presidents serve as OF board members and provide an appropriate cross
reference to where the biographical information appears.
III. Paperwork Reduction Act
The final rule does not contain any collections of information
pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.). Therefore, FHFA has not submitted any information to the Office
of Management and Budget for review.
IV. Regulatory Flexibility Act
The final rule applies only to the Banks and the OF (which is a
joint office of the Banks), which do not come within the meaning of
small entities as defined in the Regulatory Flexibility Act (RFA). See
5 U.S.C. 601(6). Therefore, in accordance with section 605(b) of the
RFA, 5 U.S.C. 605(b), FHFA certifies that this final rule will not have
significant economic impact on a substantial number of small entities.
List of Subjects
12 CFR Part 985
Federal home loan bank, Securities.
12 CFR Part 989
Accounting, Federal home loan banks, Financial disclosure.
12 CFR Part 1273
Federal home loan banks, Securities.
12 CFR Part 1274
Accounting, Federal home loan banks, Financial disclosure.
0
Accordingly, for reasons stated in the preamble, under the authority of
12 U.S.C. 4526(a), FHFA amends chapters IX and XII of title 12 of the
Code of Federal Regulations as follows:
CHAPTER IX--FEDERAL HOUSING FINANCE BOARD
Subchapter K--Office of Finance
PART 985--[REMOVED]
0
1. Remove 12 CFR part 985.
PART 989--[REMOVED]
0
2. Remove 12 CFR part 989.
CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY
Subchapter D--Federal Home Loan Banks
0
3. Add part 1273 to subchapter D to read as follows:
PART 1273--OFFICE OF FINANCE
Sec.
1273.1 Definitions.
1273.2 Authority of the OF.
1273.3 Functions of the OF.
1273.4 FHFA oversight.
1273.5 Funding of the OF.
1273.6 Debt management duties of the OF.
1273.7 Structure of the OF board of directors.
1273.8 General duties of the OF board of directors.
1273.9 Audit Committee.
1273.10 Transition.
Appendix A to Part 1273--Exceptions to the General Disclosure
Standards
Authority: 12 U.S.C. 1431, 1440, 4511(b), 4513, 4514(a),
4526(a).
Sec. 1273.1 Definitions.
For purposes of this part:
Audit Committee means the OF Independent Directors acting as the
committee established in accordance with Sec. 1273.9 of this part.
Bank written in title case, means a Federal Home Loan Bank
established under section 12 of the Bank Act (12 U.S.C. 1432).
Bank Act means the Federal Home Loan Bank Act, as amended (12
U.S.C. 1421 through 1449).
Bank System means the Federal Home Loan Bank System, consisting of
the twelve Banks and the Office of Finance.
Chair means the chairperson of the board of directors of the Office
of Finance.
Chief Executive Officer or CEO means the chief executive officer of
the Office of Finance.
Consolidated obligations means any bond, debenture or note on which
the Banks are jointly and severally liable and which was issued under
section 11 of the Bank Act (12 U.S.C. 1431) and any implementing
regulations, whether or not such instrument was originally issued
jointly by the Banks or by the Federal Housing Finance Board on behalf
of the Banks.
[[Page 23162]]
FHFA means the Federal Housing Finance Agency.
Financing Corporation or FICO means the Financing Corporation
established and supervised by FHFA under section 21 of the Bank Act (12
U.S.C. 1441).
Generally accepted accounting principles or GAAP means accounting
principles generally accepted in the United States.
Independent Director means a member of the OF board of directors
who meets the qualifications set forth in Sec. 1273.7(a)(2) of this
part.
NRSRO means a credit rating organization registered as a Nationally
Recognized Statistical Rating Organization with the Securities and
Exchange Commission.
Office of Finance or OF means the Office of Finance, a joint office
of the Banks established under this part 1273 and referenced in the
Bank Act and the Safety and Soundness Act.
Resolution Funding Corporation or REFCORP means the Resolution
Funding Corporation established by section 21B of the Bank Act (12
U.S.C. 1441b).
Safety and Soundness Act means the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.), as
amended.
Sec. 1273.2 Authority of the OF.
(a) General. The OF shall enjoy such incidental powers under
section 12(a) of the Bank Act (12 U.S.C. 1432(a)), as are necessary,
convenient and proper to accomplish the efficient execution of its
duties and functions pursuant to this part, including the authority to
contract with a Bank or Banks for the use of Bank facilities or
personnel in order to perform its functions or duties.
(b) Agent. The OF, in the performance of its duties, shall have the
power to act on behalf of the Banks in issuing consolidated obligations
and in paying principal and interest due on the consolidated
obligations, or other obligations of the Banks.
(c) Assessments. The OF shall have authority to assess the Banks
for the funding of its operations in accordance with Sec. 1273.5 of
this part.
Sec. 1273.3 Functions of the OF.
(a) Joint debt issuance. Subject to parts 965 and 966 of this
title, and this part, the OF, as agent for the Banks, shall offer,
issue, and service (including making timely payments on principal and
interest due) consolidated obligations.
(b) Preparation of combined financial reports. The OF shall prepare
and issue the combined annual and quarterly financial reports for the
Bank System in accordance with the requirements of Sec. 1273.6(b) and
Appendix A of this part, using consistent accounting policies and
procedures as provided in Sec. 1273.9(b) of this part.
(c) Fiscal agent. The OF shall function as the fiscal agent of the
Banks.
(d) Financing Corporation and Resolution Funding Corporation. The
OF shall perform such duties and responsibilities for FICO as may be
required under part 995 of this title, or for REFCORP as may be
required under part 996 of this title or authorized by FHFA pursuant to
section 21B(c)(6)(B) of the Bank Act (12 U.S.C. 1441b(c)(6)(B)).
Sec. 1273.4 FHFA oversight.
(a) Oversight and enforcement actions. FHFA shall have such
oversight authority over the OF, the OF board of directors, the
officers, employees, agents, attorneys, accountants, or other OF staff
as set forth in the Bank Act, the Safety and Soundness Act, and FHFA
regulations issued thereunder.
(b) Examinations. Pursuant to section 20 of the Bank Act (12 U.S.C.
1440), FHFA shall examine the OF, all funds and accounts that may be
established pursuant to this part 1273, and the operations and
activities of the OF, as provided for in the Bank Act, the Safety and
Soundness Act, or any regulations promulgated pursuant thereto.
(c) Combined financial reports. FHFA shall determine whether a
combined Bank System annual or quarterly financial report complies with
the standards of this part.
Sec. 1273.5 Funding of the OF.
(a) Generally. The Banks are responsible for jointly funding all
the expenses of the OF, including the costs of indemnifying the members
of the OF board of directors, the Chief Executive Officer, and other
officers and employees of the OF, as provided for in this part.
(b) Funding policies.--(1) At the direction of and pursuant to
policies and procedures adopted by the OF board of directors, the Banks
shall periodically reimburse the OF in order to maintain sufficient
operating funds under the budget approved by the OF board of directors.
The OF operating funds shall be:
(i) Available for expenses of the OF and the OF board of directors,
according to their approved budgets; and
(ii) Subject to withdrawal by check, wire transfer or draft signed
by the Chief Executive Officer or other persons designated by the OF
board of directors.
(2) Each Bank's respective pro rata share of the reimbursement
described in paragraph (b)(1) of this section shall be based on a
reasonable formula approved by the OF board of directors. Such formula
shall be subject to the review of FHFA, and the OF board of directors
shall make any changes to the formula as may be ordered by FHFA from
time to time.
(c) Alternative funding method. With the prior approval of FHFA,
the OF board of directors may, by contract with a Bank or Banks, choose
to be reimbursed through a fee structure, in lieu of or in addition to
assessment, for services provided to the Bank or Banks.
(d) Prompt reimbursement. Each Bank from time to time shall
promptly forward funds to the OF in an amount representing its share of
the reimbursement described in paragraph (b) of this section when
directed to do so by the Chief Executive Officer pursuant to the
procedures of the OF board of directors.
(e) Indemnification expenses. All expenses incident to
indemnification of the members of the OF board of directors, the Chief
Executive Officer, and other officers and employees of the OF shall be
treated as an expense of the OF to be reimbursed by the Banks under the
provisions of this part.
(f) Operating funds segregated. Any funds received by the OF from
the Banks pursuant to this section for OF operating expenses promptly
shall be deposited into one or more accounts and shall not be
commingled with any proceeds from the sale of consolidated obligations
in any manner.
Sec. 1273.6 Debt management duties of the OF.
(a) Issuing and servicing of consolidated obligations. The OF, as
agent for the Banks, shall issue and service (including making timely
payments on principal and interest due, subject to Sec. Sec. 966.8 and
966.9 of this title) consolidated obligations pursuant to and in
accordance with the policies and procedures established by the OF board
of directors under this part.
(b) Combined financial reports requirements. The OF, under the
oversight of the Audit Committee, shall prepare and distribute the
combined annual and quarterly financial reports for the Bank System in
accordance with the following requirements:
(1) The scope, form, and content of the disclosure generally shall
be consistent with the requirements of the Securities and Exchange
Commission Regulations S-K and S-X (17 CFR parts 229 and 210).
(2) Information about each Bank shall be presented as a segment of
the Bank System as if generally accepted
[[Page 23163]]
accounting principles regarding business segment disclosure applied to
the combined annual and quarterly financial reports of the Bank System,
and shall be presented using consistent accounting policies and
procedures as provided in Sec. 1273.9(b) of this part.
(3) The standards set forth in paragraphs (b)(1) and (b)(2) of this
section are subject to the exceptions set forth in Appendix A to this
part.
(4) The combined Bank System annual financial reports shall be
filed with FHFA and distributed to each Bank and Bank member within 90
days after the end of the fiscal year. The combined Bank System
quarterly financial reports shall be filed with FHFA and distributed to
each Bank and Bank member within 45 days after the end of the of the
first three fiscal quarters of each year.
(5) The Audit Committee shall ensure that the combined Bank System
annual or quarterly financial reports comply with the standards of this
part.
(6) The OF and the OF board of directors, including the Audit
Committee, shall comply promptly with any directive of FHFA regarding
the preparation, filing, amendment, or distribution of the combined
Bank System annual or quarterly financial reports.
(7) Nothing in this section shall create or be deemed to create any
rights in any third party.
(c) Capital markets data. The OF shall provide capital markets
information concerning debt to the Banks.
(d) NRSROs. The OF shall manage the relationships with NRSROs in
connection with their rating of consolidated obligations.
(e) Research. The OF shall conduct research reasonably related to
the issuance or servicing of consolidated obligations.
(f) Monitor Banks' credit exposure. The OF shall timely monitor,
and compile relevant data on, each Bank's and the Bank System's
unsecured credit exposure to individual counterparties.
Sec. 1273.7 Structure of the OF board of directors.
(a) Membership. The OF board of directors shall consist of
seventeen part-time members as follows:
(1) The twelve Bank presidents, ex officio, provided that if the
presidency of any Bank becomes vacant, the person designated by the
Bank's board of directors to temporarily fulfill the duties of
president of that Bank shall serve on the OF board of directors until
the presidency is filled permanently; and
(2) Five Independent Directors who--
(i) Each shall be a citizen of the United States;
(ii) As a group, shall have substantial experience in financial and
accounting matters; and
(iii) Shall not have any material relationship with a Bank, or the
OF (directly or as a partner, shareholder or officer of an
organization), as determined under criteria set forth in a policy
adopted by the OF board of directors. At a minimum, such policy shall
provide that an Independent Director may not:
(A) Be an officer, director, or employee of any Bank or member of a
Bank, or have been an officer director or employee of a Bank or member
of a Bank during the previous three years;
(B) Be an officer or employee of the OF, or have been an officer or
employee of the OF during the previous three years; or
(C) Be affiliated with any consolidated obligations selling or
dealer group under contract with OF, or hold shares or any other
financial interest in any entity that is part of a consolidated
obligations seller or dealer group in an amount greater than the lesser
of $250,000 or 0.01% of the market capitalization of the seller or
dealer group; or in an amount that exceeds $1,000,000 for all entities
that are part of any consolidated obligations seller dealer group,
combined. For purposes of this paragraph (a)(2)(iii)(C), a holding
company of an entity that is part of a consolidated obligations seller
or dealer group shall be deemed to be part of the consolidated
obligations selling or dealer group if the assets of the holding
company's subsidiaries that are part of a consolidated obligation
seller or dealer group constitute 35% or more of the consolidated
assets of the holding company.
(b) Terms.--(1) Except as provided in paragraphs (b)(2) and (c)(1)
of this section, each Independent Director shall serve for five-year
terms (which shall be staggered so that no more than one Independent
Director seat would be scheduled to become vacant in any one year), and
shall be subject to removal or suspension in accordance with Sec.
1273.4(a) of this part. An Independent Director may not serve more than
two full, consecutive terms, provided that any partial term served by
an Independent Director pursuant to paragraph (b)(2) of this section,
or time served by a private citizen member of the OF Board pursuant to
an appointment made prior to the effective date of this part, shall not
count as a term for purposes of this restriction.
(2) The OF board of directors shall fill any vacancy among the
Independent Directors occurring prior to the scheduled end of a term by
majority vote, subject to FHFA's review of, and non-objection to, the
new Independent Director. The OF board of directors shall provide FHFA
with the same biographic and background information about the new
Independent Director required under paragraph (d) of this section, and
FHFA shall have the same rights of non-objection to the Independent
Director (and to appoint a different Independent Director) as set forth
in paragraph (d) of this section. A person shall be elected (or
otherwise appointed by FHFA) under this paragraph to serve only for the
remainder of the term associated with the vacant directorship.
(c) Initial selection of Independent Directors.--(1) As soon as
practicable after the effective date of this regulation, FHFA shall
fill the initial Independent Director positions by appointment. The
Independent Directors shall be appointed for such periods of time, not
to exceed five years, to assure the terms are staggered in accordance
with paragraph (b)(1) of this section.
(2) The two Bank presidents and the private citizen member who
constituted the OF board of directors immediately prior to the
effective date of this rule shall, in consultation with the Banks,
agree on a slate of at least five persons and nominate such persons for
consideration for appointment as Independent Directors by FHFA under
this paragraph (c). The nominations shall be submitted to FHFA on or
before June 17, 2010. FHFA may appoint persons nominated under this
paragraph or other persons identified by it and meeting the
requirements of paragraph (a)(2) of this section, or some combination.
(d) Election of Independent Directors after the initial terms. Once
the terms of the Independent Directors initially appointed by FHFA
expire or the positions otherwise become vacant, the Independent
Directors subsequently shall be elected by majority vote of the OF
board of directors, subject to FHFA's review of, and non-objection to,
each Independent Director. The OF board of directors shall provide FHFA
with relevant biographic and background information, including
information demonstrating that the new Independent Director meets the
requirements of paragraph (a)(2) of this section, at least 20 business
days before the person assumes any duties as a member of the OF board
of directors. If the OF board of directors, in FHFA's judgment, fails
to elect a suitably qualified person, FHFA may appoint some other
person who meets the requirements of paragraph (a)(2) of this section.
FHFA will provide notice of its objection to a particular Independent
[[Page 23164]]
Director prior to the date that such Director is to assume duties as a
member of the OF board of directors. Such notice shall indicate
whether, given FHFA's objection, FHFA intends to fill the seat through
appointment or a new election should be held by the OF board of
directors.
(e) Initial Selection of Chair and Vice-Chair. The first Chair and
Vice-Chair of the OF board of directors after the effective date of
this regulation shall be appointed by FHFA. The Chair shall be selected
from among the Independent Directors appointed under paragraph (c)(1)
of this section. The Vice-Chair shall be selected from among all OF
board directors.
(f) Subsequent Election of Chair and Vice-Chair. After the terms of
the persons selected under paragraph (e) of this section expire or the
positions otherwise become vacant:
(1) Subsequent Chairs shall be elected by majority vote of the OF
board of directors from among the Independent Directors then serving on
the OF board of directors; and
(2) Subsequent Vice-Chairs shall be elected by majority vote of the
OF board of directors from among all directors.
(3) The OF board of directors shall promptly inform FHFA of the
election of a Chair or Vice-Chair. If FHFA objects to any Chair or
Vice-Chair elected by the OF board of directors, FHFA shall provide
written notice of its objection within 20 business days of the date
that FHFA first receives the notice of the election of the Chair and or
Vice-Chair, and the OF board of directors must then promptly elect a
new Chair or Vice-Chair, as appropriate.
(g) By-laws and Committees.--(1) The OF board of directors shall
adopt by-laws governing the manner in which the board conducts its
affairs, which shall be consistent with the requirements of this part
and other applicable laws and regulations as administered by FHFA. The
by-laws of the board of directors shall be subject to review and
approval by FHFA.
(2) In addition to the Audit Committee required under Sec. 1273.9
of this part, the OF board of directors may establish other committees,
including an Executive Committee. The duties and powers of such
committee, including any powers delegated by the OF board of directors,
shall be specified in the by-laws of the board of directors or the
charter of the committee.
(h) Compensation.--(1) The Bank presidents shall not receive any
additional compensation or reimbursement as a result of their service
as a director of the OF board.
(2) The OF shall pay reasonable compensation and expenses to the
Independent Directors in accordance with the requirements for payment
of compensation and expenses to Bank directors as set forth in part
1261 of this title.
(i) Corporate Governance and Indemnification.--(1) General. The
corporate governance practices and procedures of the OF, and practices
and procedures related to indemnification (including advancement of
expenses) shall comply with applicable Federal law rules and
regulations.
(2) Election and designation of body of law. To the extent not
inconsistent with paragraph (i)(1) of this section, the OF shall elect
to follow the corporate governance and indemnification practices and
procedures set forth in one of the following: (i) The law of the
jurisdiction in which the principal office of the OF is located, as
amended; (ii) the Delaware General Corporation Law (Del. Code Ann.
Title 8, as amended); or (iii) the Revised Model Business Corporation
Act, as amended. The OF board of directors, as constituted under this
part, shall designate in its by-laws the body of law elected pursuant
to this paragraph (i)(2) within 90 calendar days from the date that it
holds the organizational meeting required under Sec. 1273.10(a) of
this part.
(3) Indemnification. Subject to paragraphs (i)(1) and (i)(2) of
this section, to the extent applicable, the OF shall indemnify (and
advance the expenses of) its directors, officers and employees under
such terms and conditions as are determined by the OF board of
directors. The OF shall be authorized to maintain insurance for its
directors, the CEO, and any other officer or employee of the OF.
Nothing in this paragraph shall affect any rights to indemnification
(including the advancement of expenses) that a director, the CEO, or
any other officer or employee of the OF had with respect to any
actions, omissions, transactions, or facts occurring prior to the
effective date of this paragraph (i).
(j) Delegation. In addition to any delegation to a committee
allowed under paragraph (g) of this section, the OF board of directors
may delegate any of its authority or duties to any employee of the OF
in order to enable OF to carry out its functions.
(k) Outside staff and consultants. In carrying out its duties and
responsibilities, the OF board of directors, or any committee thereof,
shall have authority to retain staff and outside counsel, independent
accountants, or other outside consultants at the expense of the OF.
Sec. 1273.8 General duties of the OF board of directors.
(a) General. Each director shall have the duty to:
(1) Carry out his or her duties as director in good faith, in a
manner such director believes to be in the best interests of the OF and
the Bank System, and with such care, including reasonable inquiry, as
an ordinarily prudent person in a like position would use under similar
circumstances;
(2) Administer the affairs of the OF fairly and impartially and
without discrimination in favor of or against any Bank;
(3) At the time of appointment or election, or within a reasonable
time thereafter, have a working familiarity with basic finance and
accounting practices, including the ability to read and understand the
Banks' combined balance sheets and income statements and the relevant
financial statements of the OF and to ask substantive questions of
management and the internal and external auditors with regard to both
the combined financial statements of the Bank System and the operations
and financial statements of the OF, as appropriate; and
(4) Direct the operations of the OF in conformity with the
requirements set forth in the Bank Act, Safety and Soundness Act, and
this chapter.
(b) Meetings and quorum. The OF board of directors shall conduct
its business by majority vote of its members at meetings convened in
accordance with its by-laws, and shall hold no fewer than six in-person
meetings annually. Due notice shall be given to FHFA by the Chair prior
to each meeting. A quorum, for purposes of meetings of the OF board of
directors, shall require a majority of sitting board members, which
must include a majority of sitting Independent Directors.
(c) Duties regarding COs. The OF board of directors shall oversee
the establishment of policies regarding COs that shall:
(1) Govern the frequency and timing of issuance, issue size,
minimum denomination, CO concessions, underwriter qualifications,
currency of issuance, interest-rate change or conversion features, call
features, principal indexing features, selection and retention of
outside counsel, selection of clearing organizations, and the selection
and compensation of underwriters for consolidated obligations, which
shall be in accordance with the requirements and limitations set forth
in paragraph (c)(4) of this section;
[[Page 23165]]
(2) Prohibit the issuance of COs intended to be privately placed
with or sold without the participation of an underwriter to retail
investors, or issued with a concession structure designed to facilitate
the placement of the COs in retail accounts, unless the OF has given
notice to the board of directors of each Bank describing a policy
permitting such issuances, soliciting comments from each Bank's board
of directors, and considering the comments received before adopting a
policy permitting such issuance activities;
(3) Require all broker-dealers or underwriters under contract to
the OF to have and maintain adequate suitability sales practices and
policies, which shall be acceptable to, and subject to review by, the
OF;
(4) Require that COs shall be issued efficiently and at the lowest
all-in funding costs over time, consistent with--
(i) Prudent risk-management practices, prudential debt parameters,
short and long-term market conditions, and the Banks' role as GSEs;
(ii) Maintaining reliable access to the short-term and long-term
capital markets; and
(iii) Positioning the issuance of debt to take advantage of current
and future capital market opportunities.
(d) Other duties. The OF board of directors shall:
(1) Set policies for management and operation of the OF;
(2) Approve a strategic business plan for the OF in accordance with
the provisions of Sec. 917.5 of this title, as appropriate;
(3) Review, adopt and monitor annual operating and capital budgets
of the OF in accordance with the provisions of Sec. 917.8 of this
title, as appropriate;
(4) Select, employ, determine the compensation for, and assign the
duties and functions of a Chief Executive Officer of the OF who shall--
(i) Be head of the OF and direct the implementation of the OF board
of directors' policies;
(ii) Serve as a member of the Directorate of the FICO, pursuant to
section 21(b)(1)(A) of the Bank Act (12 U.S.C. 1441(b)(1)(A)); and
(iii) Serve as a member of the Directorate of the REFCORP, pursuant
to section 21B(c)(1)(A) of the Bank Act (12 U.S.C. 1441b(c)(1)(A)).
(5) Review and approve all contracts of the OF, except for
contracts for which exclusive authority is provided to the Audit
Committee by paragraphs (b)(5) and (b)(6) of Sec. 1273.9; and
(6) Assume any other responsibilities that may from time to time be
assigned to it by FHFA.
(e) No rights created. Nothing in this part shall create or be
deemed to create any rights in any third party.
Sec. 1273.9 Audit Committee.
(a) Composition. The Independent Directors shall serve as the Audit
Committee. The Audit Committee shall elect its chairperson from among
its members. The Chairperson of the OF may also serve as chairperson of
the Audit Committee, if the Audit Committee members so decide.
(b) Responsibilities.--(1) The Audit Committee shall be responsible
for overseeing the audit function of the OF and the preparation and the
accurate and meaningful combination of information submitted by the
Banks in the Bank System's combined financial reports.
(2) For purposes of the combined financial reports, the Audit
Committee shall ensure that the Banks adopt consistent accounting
policies and procedures to the extent necessary for information
submitted by the Banks to the OF to be combined to create accurate and
meaningful combined financial reports.
(3) The Audit Committee, in consultation with FHFA, may establish
common accounting policies and procedures for the information submitted
by the Banks to the OF for the combined financial reports where the
Committee determines such information provided by the several Banks is
inconsistent and that consistent policies and procedures regarding that
information are necessary to create accurate and meaningful combined
financial reports.
(4) To the extent possible the Audit Committee shall operate
consistent with the requirements pertaining to audit committee reports
set forth in Item 407(d)(3) of Regulation S-K promulgated by the
Securities and Exchange Commission.
(5) The Audit Committee shall oversee internal audit activities,
including the selection, evaluation, compensation and, where
appropriate, replacement of the internal auditor. The internal auditor
shall report directly to the Audit Committee and administratively to
executive management.
(6) The Audit Committee shall have the exclusive authority to
employ and contract for the services of an independent, external
auditor for the Banks' annual and quarterly combined financial
statements and of an independent, external auditor for OF.
(7) The Audit Committee shall direct senior management to maintain
the reliability and integrity of the accounting policies and financial
reporting of the OF.
(8) The Audit Committee shall review the basis for the OF's
financial statements and the external auditor's opinion rendered with
respect to such financial statements.
(9) The Audit Committee shall ensure that senior management has
established and is maintaining an adequate internal control system
within the OF by:
(i) Reviewing the OF's internal control system and the resolution
of identified material weaknesses and reportable conditions in the
internal control system, including the prevention or detection of
management override or compromise of the internal control system; and
(ii) Reviewing the programs and policies of the OF designed to
ensure compliance with applicable laws, regulations, and policies and
monitoring the results of these compliance efforts.
(10) The Audit Committee shall review the policies and procedures
established by senior management to assess and monitor implementation
of the OF strategic business plan and the operating goals and
objectives contained therein.
(11) The Audit Committee shall provide an independent, direct
channel of communication between the OF's board of directors and the
internal and external auditors.
(12) The Audit Committee shall conduct or authorize investigations
into any matters within the Audit Committee's scope of
responsibilities.
(13) The Audit Committee shall report periodically its findings to
the OF's board of directors.
(14) The Audit Committee shall prepare written minutes of each
Audit Committee meeting.
(c) Charter.--(1) The Audit Committee shall adopt, and the OF board
of directors shall approve, a formal written charter, consistent with
the duties and authority set forth in this section, that specifies the
scope of the Audit Committee's powers and responsibilities. The Audit
Committee and the OF board of directors shall:
(i) Review, and assess the adequacy of and, where appropriate,
amend the Audit Committee charter on an annual basis; and
(ii) Re-adopt and re-approve, respectively, the Audit Committee
charter not less often than every three years.
(2) The charter of the Audit Committee shall be subject to review
and approval by FHFA.
(d) No delegation. The Audit Committee may not delegate the
responsibilities assigned to it under this
[[Page 23166]]
section to any person, or to any other committee or sub-committee of
the OF board of directors.
Sec. 1273.10 Transition.
(a) Within 45 calendar days of the date on which FHFA first
appoints an Independent Director pursuant to Sec. 1273.7(c) of this
part, the OF board of directors as structured under this part shall
hold an organizational meeting. At the time of such meeting, the OF
board of directors and its Audit Committee shall be deemed to be
reconstituted in accordance with this part, and, except as set forth in
paragraph (c) of this section, shall thereafter operate in accordance
with this part. The date of this organizational meeting shall be set by
the Independent Director that has been appointed as Chairman of the OF
board of directors by FHFA pursuant to Sec. 1273.7(e) of this part.
(b) Until the date of the organizational meeting required by
paragraph (a) of this section, the board of directors of OF, and audit
committee thereof, as in existence immediately prior to the effective
date of this rule, shall continue to have power and authority to act as
the OF board of directors or audit committee thereof, as applicable.
Further, the board members who served as Chair and Vice-Chair of the OF
board immediately prior to the effective date of this rule shall
continue also to serve in these capacities until the date of the
organizational meeting required under paragraph (a).
(c) Further, the audit committee as in existence immediately prior
to the effective date of this rule shall continue to have
responsibility and oversight authority with regard to the preparation
and publication of the combined financial report for any reporting
period that ends prior to July 1, 2010, unless the board of directors
established under this part determines that the Audit Committee as
established under this part should be given such responsibility.
Appendix A to Part 1273--Exceptions to the General Disclosure Standards
A. Related-party transactions. Item 404 of Regulation S-K, 17
CFR 229.404, requires the disclosure of certain relationships and
related party transactions. In light of the cooperative nature of
the Bank System, related-party transactions are to be expected, and
a disclosure of all related-party transactions that meet the
threshold would not be meaningful. Instead, the combined annual
report will disclose the percent of advances to members an officer
of which serves as a Bank director, and list the top ten holders of
advances in the Bank System and the top five holders of advances by
Bank, with a further disclosure indicating which of these members
had an officer that served as a Bank director. The combined
financial report will also disclose the top ten holders of advances
in the Bank System by holding company, where the advances of all
affiliates within a holding company are aggregated.
B. Biographical information. The biographical information
required by Items 401 and 405 of Regulation S-K, 17 CFR 229.401 and
405, will be provided only for members of the OF board of directors,
including the Bank presidents, the Chair and Vice-Chair of the board
of directors of each Bank, and the Chief Executive Officer of OF.
C. Compensation. The information on compensation required by
Item 402 of Regulation S-K, 17 CFR 229.402, will be provided only
for Bank presidents and the CEO of the OF. Since stock in each Bank
trades at par, the OF will not include the performance graph
specified in Item 402(1) of Regulation S-K, 17 CFR 229.402(1).
D. Submission of matters to a vote of stockholders. No
information will be presented on matters submitted to shareholders
for a vote, as otherwise required by Item 4 of the SEC's form 10-K,
17 CFR 249.310. The only item shareholders vote upon is the annual
election of directors.
E. Exhibits. The exhibits required by Item 601 of Regulation S-
K, 17 CFR 229.601, are not applicable and will not be provided.
F. Per share information. The statement of financial information
required by Items 301 and 302 of Rule S-K, 17 CFR 229.301 and 302,
is inapplicable because the shares of the Banks are subscription
capital that trades at par, and the shares expand or contract with
changes in member assets or advance levels.
G. Beneficial ownership. Item 403 of Rule S-K, 17 CFR 229.403,
requires the disclosure of security ownership of certain beneficial
owners and management. The combined financial report will provide a
listing of the ten largest holders of capital stock in the Bank
System and a listing of the five largest holders of capital stock by
Bank. This listing will also indicate which members had an officer
that served as a director of a Bank. The combined financial report
will also disclose the top ten holders of Bank stock in the Bank
System by holding company, where the Bank stock of all affiliates
within a holding company is aggregated.
0
4. Add part 1274 to subchapter D to read as follows:
PART 1274--FINANCIAL STATEMENTS OF THE BANKS
Sec.
1274.1 Definitions.
1274.2 Audit requirements.
1274.3 Requirements to provide financial and other information to
FHFA and the OF.
Authority: 12 U.S.C. 1426, 1431, 4511(b), 4513, 4526(a).
Sec. 1274.1 Definitions.
For purposes of this part:
Audit means an examination of the financial statements by an
independent accountant in accordance with generally accepted auditing
standards for the purpose of expressing an opinion thereon.
Audit report means a document in which an independent accountant
indicates the scope the audit made and sets forth an opinion regarding
the financial statement taken as a whole, or an assertion to the effect
that an overall opinion cannot be expressed. When an overall opinion
cannot be expressed, the reasons therefor shall be stated.
Bank written in title case, means a Federal Home Loan Bank
established under section 12 of the Bank Act (12 U.S.C. 1432).
Bank System means the Federal Home Loan Bank System, consisting of
the twelve Banks and the Office of Finance.
FHFA means the Federal Housing Finance Agency.
Financing Corporation or FICO means the Financing Corporation
established and supervised by FHFA under section 21 of the Bank Act (12
U.S.C. 1441).
Office of Finance or OF has the same meaning as set forth in Sec.
1273.1 of this chapter.
Sec. 1274.2 Audit requirements.
(a) Each Bank, the OF, and the FICO shall obtain annually an
independent external audit of and an audit report on its individual
financial statement.
(b) The OF audit committee shall obtain an audit and an audit
report on the combined annual financial statements for the Bank System.
(c) All audits must be conducted in accordance with generally
accepted auditing standards and in accordance with the most current
government auditing standards issued by the Office of the Comptroller
General of the United States.
(d) An independent, external auditor must meet at least twice each
year with the audit committee of each Bank, the audit committee of OF,
and the FICO Directorate.
(e) FHFA examiners shall have unrestricted access to all auditors'
work papers and to the auditors to address substantive accounting
issues that may arise during the course of any audit.
Sec. 1274.3 Requirements to provide financial and other information
to FHFA and the OF.
In order to facilitate the preparation by the OF of combined Bank
System annual and quarterly reports, each Bank shall provide to the OF
in such form and within such timeframes as FHFA or the OF shall
specify, all financial and other information and assistance that the OF
shall request for that purpose. Nothing in this section shall
contravene or be deemed to circumscribe in any manner the authority of
FHFA to obtain any information from any Bank related
[[Page 23167]]
to the preparation or review of any financial report.
Dated: April 26, 2010.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2010-10075 Filed 4-30-10; 8:45 am]
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