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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1261

RIN 2590-AA03

Federal Home Loan Bank Boards of Directors: Eligibility and Elections

AGENCY: Federal Housing Finance Board; Federal Housing Finance Agency.
ACTION: Interim final rule with request for comments.
SUMMARY: The Federal Housing Finance Agency (FHFA) is issuing and seeking comment on an interim final regulation to implement section 1202 of the Housing and Economic Recovery Act of 2008, which revises section 7 of the Federal Home Loan Bank Act (Bank Act). Section 7 governs the eligibility and election of individuals to serve on the boards of directors of the 12 Federal Home Loan Banks (Banks).
DATES: This interim final rule is effective on September 26, 2008. The FHFA will accept written comments on the interim final rule on or before November 25, 2008.
ADDRESSES: E-mail:comments@fhfb.gov.Please include RIN 2590-AA03 in the subject line of the message.

Fax:202-408-2580.

Mail/Hand Delivery:Federal Housing Finance Board, 1625 Eye Street, NW., Washington DC 20006, Attention: Public Comments/RIN 2590-AA03.

Federal eRulemaking Portal: http://www.regulations.gov.Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by e-mail to the FHFA atcomments@fhfb.govto ensure timely receipt by the FHFA. Include the following information in the subject line of your submission: Federal Housing Finance Agency. Interim Final Rule: Federal Home Loan Bank Boards of Directors: Eligibility and Elections. RIN Number 2590-AA03.

We will post all public comments we receive without change, including any personal information you provide, such as your name and address, on the FHFA Web site athttp://www.fhfb.gov/Default.aspx?Page=93&Top=93.

FOR FURTHER INFORMATION CONTACT: Thomas P. Jennings, Senior Attorney Advisor (FHFB),jenningst@fhfb.gov,(202) 408-2553; or Patricia L. Sweeney, Management Analyst (FHFB),sweeneyp@fhfb.govor (202) 408-2872. You can send regular mail to the Federal Housing Finance Board, 1625 Eye Street, NW., Washington DC 20006.
SUPPLEMENTARY INFORMATION: I. Statutory and Regulatory Background

Effective July 30, 2008, the Federal Housing Finance Regulatory Reform Act of 2008 (Act), Division A of the Housing and Economic Recovery Act of 2008, Public Law No. 110-289, 122 Stat. 2654 (2008), transferred the supervisory and oversight responsibilities of the Office of Federal Housing Enterprise Oversight and the Federal Housing Finance Board over the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), and the Banks to a new independent executive branch agency known as the Federal Housing Finance Agency (FHFA). The FHFA is responsible for ensuring that the Enterprises and the Banks operate in a safe and sound manner, including being capitalized adequately, and carry out their public policy missions, including fostering liquid, efficient, competitive, and resilient national housing finance markets. The Enterprises and the Banks continue to operate under regulations promulgated by OFHEO and the FHFB until the FHFA issues its own regulations.

Section 1101 of the Act revised section 7 of the Bank Act. 12 U.S.C. 1427. The FHFB regulation implementing section 7 is codified at 12 CFR part 915. Part 915 governed the nomination and election only of those directors who are chosen from among the officers and directors of members of the Banks, which this interim final rule refers to as member directors. The Act amended section 7(b) of the Bank Act, 12 U.S.C. 1427(b), to give the members the right to also elect all of the other directors on the boards of directors of the Banks, which other directors are referred to in this interim final rule as independent directors. The FHFA has kept the basic process of elections that exists in part 915 as it applies to member directorships, making changes as necessary to comply with the amendments to section 7 of the Bank Act. The FHFA has added provisions to govern the process for nominating individuals for independent directorships and for conducting the election of independent directors in conjunction with the election of member directors. The organizational structure of part 915 also has been revised.

Section 1201 of the Act (codified at12 U.S.C. 4513(f)) requires the Director of the FHFA to consider the differences between the Banks and the Enterprises in rulemakings that affect the Banks with respect to the Banks' cooperative ownership structure, mission of providing liquidity to members, affordable housing and community development mission, capital structure, and joint and several liability. In preparing the interim final rule, the Director considered these factors and determined that the rule is appropriate, particularly because this interim final rule implements a statutory provision of the Bank Act that applies only to the Banks.See12 U.S.C. 1427.

II. Description of the Interim Final Rule

The interim final regulation removes part 915 of the FHFB regulations and establishes part 1261 of the FHFA regulations, which will contain the rules governing the eligibility and election of Bank directors. The name of new part 1261 will read “Federal Home Loan Bank Director Eligibility and Elections.”

A. Definitions: Section 1261.1

The FHFA has made technical changes to the definitions of “bona fide resident,” “guaranteed directorship,” “stock directorship,” and “voting state,” but their meanings remain the same as they were in part 915. The meaning of “record date” has not changed. The identification number for the Banks is the same, except that it is now the number assigned by the FHFA.

The Act's amendments to section 7 of the Bank Act, 12 U.S.C. 1427, divide the directorships of the Banks into two categories—member directorships and independent directorships. Both types of directorships are filled by a vote of the members; however, elections for member directors are held on a state-by-state basis, whereas independent directors are elected at large by all the members of a Bank without regard to whether the members located in a particular voting state may be voting on member directors in any particular year. The definitions of “independent directorship” and “member directorship” reflect that difference.

The definitions of “guaranteed directorship” and “stock directorship”reflect that there are two categories of member directorships, because section 7(c) of the Bank Act, 12 U.S.C. 1417(c), guarantees that directorships from members located in some states will be no fewer than the number that existed on December 31, 1960, regardless of the amount of voting stock located in those states. The definition of “public interest directorship” reflects the statutory criteria that an independent director must have in order to receive this designation.

Section 7(c) of the Bank Act, 12 U.S.C. 1427(c), requires the Director of the FHFA to determine the number of member directorships based on the approximate ratio of required stock held by members located in particular states in a Bank's geographic region. The method the FHFA uses is defined in this section as the “method of equal proportions.”

B. General Provisions: Section 1261.2

Section 7(a) of the Bank Act, 12 U.S.C. 1427(a), sets the size of a Bank's board of directors at 13, or such other number as the Director may determine, provided the member directorships always maintain a majority and the independent directorships comprise at least 40 percent of the entire board. Section 1261.2(a) provides that the FHFA Director annually will set the number of directorships for each Bank, and will designate the directorships as either member directorships or independent directorships. The rule does not provide that the Director will designate the independent directorships as either public interest directorships or other independent directorships. If the Director does not further designate the independent directorships, the board of directors of a Bank will have the power, through the nomination process, to nominate any number of the independent directorships as public interest directorships, provided it so designates at least two of the independent directorships. The FHFA requests comments on whether the boards of the Banks or the FHFA Director should establish the number of public interest directorships.

Section 7(c) of the Bank Act, 12 U.S.C. 1427(c), continues to require that states be grandfathered with the number of directorships representing members in the states on December 31, 1960, notwithstanding any other provision in section 7. Thus, in applying the grandfather provision to the Banks based on their current districts, notwithstanding the Act's apparent default board size of 13, every Bank must have a minimum of 14 directorships, 8 of which must be member directorships. The Act amends section 7(d) of the Bank Act, 12 U.S.C. 1427(d), to require that the term of office of directors elected after July 30, 2008 be four years, except that the FHFA has to adjust terms to achieve an approximately equal staggering of the years for the election of the members of the board of directors of a Bank. Section 1261.2(b) addresses this requirement. The Act also amends the Bank Act to require that existing directorships that do not expire on December 31, 2008 continue their existing terms, so the FHFA has to adjust the terms of new directorships beginning January 1, 2009 in order to achieve staggering.

Section 1261.2(c) carries forward the requirement in section 915.3(a) that the Banks are responsible for conducting annual elections. Section 1261.2(d) and (e) are based on the sections 915.3(d) and 915.2, respectively, of the FHFB rule.

C. Designation of Member Directorships: Section 1261.3

Section 1261.3(a) continues the requirement in section 915.4 of the FHFB rule that each Bank must submit a capital report. The FHFA will rely on this information to designate stock directorships among the voting states in a Bank's district. Each Bank also must notify each of its members of its minimum required stock holdings. Section 1261.3(a)(2) applies only to the Chicago Bank, whose capital plan is not yet in effect.

Section 1261.3(b) and (c) of the interim final rule carry forward the requirements of section 915.3(b) of the FHFB regulations. Section 1261.3(b) specifies the methodology by which the FHFA will make the allocation of member directorships, and section 1261.3(c) provides that the FHFA will follow the requirements in sections 7(b) and (c) of the Bank Act in designating member directorships to the states. Annually, the FHFA will use the method of equal proportions to determine how member directorships should be divided among the states in a Bank's district, based on the stock holdings of the members located in each state in the Bank's district. The FHFA's annual allocation to each state will be sufficient to meet the requirement in section 7(c) of the Bank Act that the number of member directorships in each state be equal to the number of elective directorships that it had on December 31, 1960 (the guaranteed directorships).

The effect of the so-called “grandfather” provision is that, based on the present geographic districts of the Banks, each Bank will have a minimum of eight member directorships. Section 1261.3(c) recognizes that some existing directorships at a Bank may cease to exist if, resulting from the Director's annual designation, the number of directors is set at a number below the size of the existing board, the number of member directorships increases and the number of independent directorships decreases, or vice versa, or the application of the method of equal proportions causes any state to lose a directorship to another state. If a state loses a directorship through any of these events, section 1261.3(c) provides that the director sitting in that directorship shall be ineligible to serve after December 31 of that year.

Section 1261.3(d) continues the notification provision in section 915.3(e) of the FHFB rule.

D. Director Eligibility: Section 1261.4

Section 1261.4(a) carries forward section 915.7(b) of the FHFB rule regarding the eligibility requirements of member directors. Section 1261.4(b) sets forth the eligibility requirements of independent directors in section 7(a) of the Bank Act.

Section 1261.4(c) describes situations in which otherwise eligible individuals would not be eligible to serve. The term limit provisions of section 7(d) of the Bank Act limit service of individuals who have served all or part of three consecutive full terms. Such individuals are ineligible for the two years following such service. For terms beginning after the effective date of the Act, section 1261.4(c) deems only four year terms to be full terms. The existing directorships that do not end on December 31, 2008, have three year terms, and those directorships' terms are full terms. If the FHFA creates shorter than four year terms for directorships that begin on or after January 1, 2009, to effectively stagger the directorships, those shorter terms will not be deemed to be full terms. Nonetheless, such shorter terms will not be effective for purposes of creating a break in service or avoiding the three consecutive term count. In other words, serving in three consecutive three year elective directorships ending December 31, 2008 will render an individual ineligible to serve a shortened term beginning January 1, 2009, and serving in one or two three year elective directorships ending December 31, 2008, a shortened term beginning January 1, 2009, and one or two four year terms immediately thereafter, for a total of three full terms, will render an individual ineligible to again serve for two more years.

The FHFA seeks comment on its application of the consecutive full-termlimitation in section 7(d) of the Bank Act. If a director serves in a term which met the Bank Act's requirement of a full term at the time the director assumed that directorship, no matter how long the term is, should that term be considered a full term? Should the current terms and any prior terms consecutive thereto of directors elected prior to July 30, 2008, be deemed to be full terms for purposes of the three consecutive term rule in section 7(d) of the Bank Act? Should the full terms of the directors appointed by the Finance Board be treated any differently from how the terms of elective directors are treated? Should the shorter term that the FHFA creates for purposes of staggering be considered a break between terms before and after other terms of service, for purposes of treating the other terms as consecutive full terms?

Section 1261.4(d) deems a sitting director to be ineligible on December 31 of the year in which that person's directorship is eliminated or redesignated to another state through the annual allocation under the method of equal proportions. The FHFA is required to do an annual allocation, and changes in member stock ownership on a state-by-state basis may cause a state to lose one or more directorships. Although an individual may have to give up a directorship due to reallocation or elimination, if the individual does not complete a full term due to such action, that term will not count as a full term for purposes of eligibility.

E. Determination of Member Votes: Section 1261.5

Section 1261.5 carries forward section 915.5 of the FHFB rule, which sets forth how the Banks must determine the number of votes of each member. For those Banks that have more than one class of stock, the Banks are required to calculate the average number of shares separately for each class and allow each member to vote its combined average number of shares. The average for each class is calculated based on the total number of members in each state, even if a member holds no shares in a class of stock. The number of votes allocated to a member is the number of votes that the member may vote for any directorship, whether it is a member directorship, independent public interest directorship, or other independent directorship.

F. Nominations for Member and Independent Directorships: Section 1261.6

Section 915.6 of the FHFB regulation set forth the requirements for member directorship nominations. Section 1261.6 carries forth these requirements with some modifications and sets forth how the Banks will nominate independent directorship candidates. Banks are not required to do so in any particular mode of communication, so long as they can demonstrate to the FHFA their compliance with the regulations.

As required by section 1261.6(a) of the interim final rule, the Banks must provide to each member a notice of the commencement of the election process in a reasonable time in advance of the elections. As to member directorships, the notice and nomination procedures do not differ significantly from the procedures set forth in the FHFB regulation.

As to independent directorships, section 7 of the Bank Act requires each Bank to nominate candidates, and the election from among the candidates is the right of the members of each Bank. Under section 1261.6(d) of the interim final rule, a Bank must consider anyone who applies using an application form prescribed by the FHFA and indicates on the form that s/he meets the eligibility requirements set forth in section 1261.4(b), provided the application form is delivered to the Bank by a deadline set by the Bank and the application form contains any of the qualifications for independent directors set forth in that section. Independent directors may meet either the requirements of public interest directors or the requirements set forth in section 1261.6(e).

Section 1261.6(d) also requires that a Bank's board of directors consult with the Bank's Advisory Council before nominating independent directors. The FHFA requests comment on whether it should require the Advisory Council to play any specific role in the consultation process and whether the FHFA should prescribe procedures on how the consultation should take place.

Section 7(a) of the Bank Act and section 1261.6(d) of the interim final rule require that public interest directors have more than four years experience in representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections. Prior to the Act's amendments to section 7(a), a public interest director had to be from an organization that had a history of more than two years representing consumer or community interests, but the individual did not necessarily have to have personal experience doing so. Although the FHFA will impose the Act's requirements on newly chosen independent directors, the FHFA will deem existing public interest directors who qualified and were designated as public interest directors under the Bank Act before it was amended to be public interest directors for the remainder of their existing terms.

The FHFA requests comments on whether it should apply the revised experience requirements to existing public interest directors and, if so, whether it should require any Bank that does not have two public interest directors who meet the revised requirements to nominate candidates who do meet those requirements.

Section 1261.6(d)(3) requires the Banks to establish the number of public interest directorships from among the number of independent directorships established by the FHFA Director pursuant to section 1261.3(c). It requires the Banks to have at least two public interest directors, as required by section 7(a) of the Bank Act. The boards of directors of the Banks must nominate at least as many individuals for public interest directorships as there are positions available. Any board may nominate more individuals for public interest directorship positions than there are positions to be filled; however, the Bank may fill only those vacant positions that the board has designated as public interest directorships with public interest director nominees.

The rule permits a board of directors to have only enough nominees to fill the vacant positions, because the board of directors of a Bank might determine that the most highly qualified candidates may not apply unless they are assured of a seat after having been nominated. The FHFA requests comment on whether the board of directors of a Bank should be required to nominate more candidates for independent directorships than there are positions to be filled, if the board has determined that there are sufficient applicants who are both eligible and qualified.

Section 7(a) of the Bank Act sets forth specific qualifications that independent directors, other than public interest directors, must have, and it authorizes the FHFA Director to establish other knowledge or experience that an independent director may have in lieu of the types of knowledge or experience specified in section 7(a). Section 1261.6(e) provides that independent directors may be qualified if they have knowledge or experience in the law, in addition to the statutorily prescribed subjects of auditing or accounting, derivatives, financial management, organizational management, project development or risk management practices. In each case, a candidate's knowledge or experience must becommensurate with the knowledge or experience needed to oversee a business of the size and complexity of the Bank. The FHFA solicits comment on whether additional areas of expertise should be added to the list.

Pursuant to section 1261.6(f) of the interim final rule, Banks must verify the eligibility of nominees for directorships before placing their names on the ballots. The FHFA will prescribe eligibility certification forms for member directors, and the Banks must use information on those forms to verify eligibility of nominees for member directorships. The FHFA will prescribe application forms and eligibility certification forms for independent directors. For new nominees for independent directorships, the Banks may use information on the application forms. For incumbent nominees for independent directorships, the Banks may use information on eligibility certification forms or on application forms. As to independent directorship nominees, both incumbent and new nominees, the Banks must deliver the names and contemporaneously executed director application forms of the nominees to the FHFA for its review and comment before the names of any such nominees can be placed on ballots. The FHFA intends to review the information submitted and, whenever it has comments that might aid a Bank, make comments to the Bank's board of directors about how any nominee's qualifications might serve the needs of the Bank.

G. Election Process: Section 1261.7 1. Ballots

Similar to the current election process conducted by the Banks, the interim final rule requires each Bank to prepare a ballot for each voting state. A Bank may not deliver ballots until after the FHFA has commented on the independent director nominees. Independent director nominees are elected on a district-wide basis, so all states in the district will be voting states in each annual election. The FHFA contemplates that ballots will differ from state to state, because a Bank likely will not include on the ballots in one state the member director nominees for the other states in its district. The ballots must include a closing date for voting, which may not be sooner than 30 days after the ballots are delivered.

The ballots must contain the type of minimum information on member directorship nominees required in section 915.8 of the FHFB rule. As to independent directorship nominees, the ballots must include information about their qualifications for the type of directorship for which they are nominated. All nominees must be listed alphabetically and separately for each type of directorship for which the election is being held. A Bank may include additional information it deems appropriate, including a description of the skills and experience of the member director nominees. If, pursuant to section 1261.9, a Bank has conducted an assessment of the skills and experience it needs on its board of directors and included that information in its notice required in section 1261.6, or subsequently has revised that assessment, the Bank may include a statement of the most recent version of its assessment with the ballots. The interim final rule also requires the Banks to include on the ballots a statement that write-in candidates are not permitted and a statement that the Bank will not disclose how any member votes its ballot.

2. Lack of Member Directorship Nominees

In those instances where the number of member nominees is not greater than the number of member directorships to be filled, section 1261.7(c) of the interim final rule requires a Bank to declare the seats filled by the eligible nominees, first filling any guaranteed directorships and then any remaining stock directorships. If any member directorship is not filled, or if the failure to fill any directorship would cause the number of member directors to be fewer than a majority of the directors, then such directorship will become vacant on January 1 of the following year, and the Bank's board of directors at that time may elect an individual to fill the vacancy.

3. Voting

The interim final rule provides that a member's vote for a nominee is deemed a vote in the amount of all the stock that the member is required to hold as of the record date. A member may not vote more than the amount of its required stock for any one nominee, no matter how many directorships are being filled by the election. A member may vote for as many nominees as there are directorships being filled by the election, but a member may vote only one time for any one nominee. A member may vote at any time up until the closing date, by which time it must have delivered its ballot to the Bank.

4. Declaring Results

Section 1261.7(f) of the interim final rule provides that the individual receiving the highest number of votes is declared the winner of a member directorship. If other member directorships are being filled, the individual receiving the next highest number of votes also will be declared a winner, and so on down the line. The same rule applies to each type of independent directorship, except that a nominee who receives fewer than 20 percent of the number of votes eligible to be cast may not be declared a winner. If, for the last available directorship of any type, there is a tie vote, and for an independent directorship the tie vote is at least 20 percent of the eligible votes, then the disinterested members of the Bank's board of directors by majority vote will determine the winner. At the time of declaring winners and at the time any director is seated, a Bank may not have any reason to know that such director is ineligible to serve.

The FHFA requests comment on whether the rule should continue to require that independent directors must receive at least a minimum percentage of votes cast in order to be elected and, if so, what that minimum should be. The FHFA believes that receiving at least a minimum percentage of votes affirms that the candidate is the choice of the members, even when the number of candidates does not exceed the number of directorships to be filled. If there is a minimum percentage, should it be based on the number of shares actually voting or on the number of shares eligible to vote?

5. Report of Election

Section 1261.7(g) of the interim final rule requires each Bank to promptly report to its members, each nominee, and the FHFA on the results of an election. The report must contain the number of voting members, the number of votes cast, and the number of votes received by each nominee. As to each member director-elect, the Bank must provide the same information required in section 915.8(e) or the FHFB rule. As to each public interest director, the Bank must provide the consumer or community interest represented and the expiration date of the term of office. For each other independent director-elect, the Bank must provide the individual's qualifications under section 1261.6(e) and the expiration date of the term of office.

6. Failing To Fill All Independent Directorships

If any independent directorship is not filled for failure to receive 20 percent of the eligible votes, section 1261.7(h) of the interim final rule requires a Bank to conduct another election for such directorship, following the sameprocedures required for the initial election. The Bank must continue repeated election procedures until the directorship is filled by a vote of 20 percent of the votes eligible to be voted. The eligible votes remain the same for each such repeat election.

H. Section 1261.8 Is Reserved for Future Use I. Action Affecting Director Elections: Section 1261.9

Section 1261.9(a) of the interim final rule continues the authorization to a Bank's board of directors to conduct an annual assessment of the skills and experience needed on a Bank's board of directors, as provided in section 915.9(a) of the FHFB rule. If such an assessment identifies particular skills or experience needed on the board, a Bank may inform its members of those needs in its notice of elections.

Section 1261.9(b) of the interim final rule authorizes a Bank and any of its directors, officers, attorneys, employees, and agents, including the Bank's board of directors and Advisory Council, to support any individual for nomination and election to an independent directorship. Such individuals, if acting in their personal capacity, are not prohibited from supporting the nomination or election of any individual for a member directorship. The distinction between member directorships and independent directorships is that the Bank's board of directors nominates individuals for independent directorships, and support of the Bank's nominees could benefit the Bank without discriminating against any member.

Except as allowed under section 1261.9(a) and (b), no director, officer, employee, attorney, or agent of a Bank may support or oppose the nomination or election of any individual for any directorship of the Bank, or take any other action to influence the voting for or against any such individual.

The FHFA seeks comment on whether it is appropriate to distinguish between member and independent directors when establishing prohibitions on actions that might influence others with respect to any director. Comment also is sought on whether there are other issues that the FHFA should address in this section.

J. Independent Director Conflict of Interests: Section 1261.10

Section 7(a) of the Bank Act prohibits an independent director from serving as an officer of any Bank and from serving as a director, officer, or employee of any member of the Bank on whose board the director sits, or of any recipient of any advances from that Bank. Section 1261.10 of the interim final rule sets forth this prohibition and requires any nominee for, and incumbent holding, an independent directorship to disclose such interests. Positions held in a holding company that controls any member or any recipient of advances, are attributed to any member or recipient of advances if the assets of all members or recipients of advances under the control of the holding company equal at least 35 percent of the assets of the holding company. Positions in any other subsidiary or affiliate of the holding company are not attributed to the member or recipient of advances. Positions held by an individual's spouse are attributed to the individual.

The FHA seeks comment on whether the holding company attribution rule should be set at a number other than 35 percent.

K. Conflict of Interests Policy for Bank Directors: Section 1261.11

Section 1261.11(a) of the interim final rule revises and restates the requirement in section 915.11 of the FHFB rule that Banks adopt a conflicts of interest policy to apply to the members of their boards of directors. The rule sets forth the minimum contents of such a policy. One requirement is that the policy must require the board of directors to administer the affairs of the Bank fairly and impartially, without discriminating in favor of or against any member. The rule does not address nonmember borrowers specifically, but the absence of any reference to nonmember borrowers does not prohibit a Bank from addressing conflicts of interests with respect to nonmember borrowers.

Section 1261.11(b) of the interim final rule requires any director of a Bank to disclose fully to the board of directors of the Bank any financial interest that the director or any immediate family member or business associate has in any business matter or proposed business matter involving the Bank and to refrain from any action in connection with the matter. Section 1261.11(c) requires directors to maintain the confidentiality of confidential information obtained by serving as a director and to refrain from using that information for personal benefit.

Section 1261.11(d) of the interim final rule prohibits the acceptance of gifts to influence the director's actions as a member of the board of directors of a Bank. A director may not accept a gift, no matter the value, if the director believes, or would have reason to believe, that the gift is given with the intent to influence the director's actions. A director may not accept a gift, no matter the value, if acceptance would have the appearance of the donor's intent to influence the director's actions. Although the prohibition does not prohibit other gifts, the absence of a specific prohibition does not prohibit a Bank from addressing other situations in its conflict of interest policy.

Section 1261.11(e) of the interim final rule prohibits a director from accepting compensation for service on the board of a Bank from any source other than the Bank. This prohibition does not prohibit any director who is a salaried employee from continuing to receive a salary even when the time that the director devotes to the Bank would otherwise be time devoted to the employer.

L. Reporting Requirements for Bank Directors: Section 1261.12

Pursuant to section 1261.12(a) of the interim final rule, each sitting director is required to execute an annual eligibility certification form applicable to the directorship held by the director. The form, prescribed by the FHFA for the purpose of identifying any changes since a prior eligibility review, must be executed and delivered to the Bank, and the Bank must deliver a copy to the FHFA.

Section 1261.12(b) of the interim final rule requires any sitting director of a Bank who believes or has reason to believe that s/he no longer meets the statutory or regulatory eligibility requirements to notify promptly both the Bank and the FHFA. Likewise, any Bank that believes or has reason to believe that any of its directors no longer meets the eligibility requirements must notify the FHFA promptly.

M. Ineligible Bank Directors: Section 1261.13

Section 7(f) of the Bank Act, prior to the amendments made by the Act, provided that an appointive directorship would become vacant whenever the director holding that directorship failed to meet the eligibility requirements set forth in the Bank Act, but the director could continue to serve until replaced. The amendments to section 7(f) now require that all directors who fail to meet their statutory eligibility requirements immediately must vacate their offices. Section 1261.13 of the interim final rule applies these results whenever the FHFA or a director's Bank makes a determination that the director has failed to meet any eligibility requirement set forth in the Bank Act or in part 1261 or has failed to comply with the reporting requirements in section 1261.12 of the interim final rule. Section 1261.13 alsorequires a Bank to notify the FHFA promptly after it has made such a determination.

N. Vacant Bank Directorships: Section 1261.14

Section 1261.14(a) of the interim final rule implements the requirements in section 7(f) of the Bank Act that any individual who fills a vacancy on the board of a Bank be elected by a majority vote of the remaining directors.

Section 1261.14(b) of the interim final rule requires the board of directors of a Bank to fill any vacancy with an individual who meets the eligibility and qualification requirements applicable to any individual who was the predecessor in that position; however, if a Bank continues to have at least two public interest directors, the board of directors of the Bank may fill the vacant directorship with an individual who meets the eligibility and qualification requirements for any independent directorship. The eligibility requirements for both member and independent directors are set forth in section 1261.4 of the interim final rule. The eligibility requirements for independent public interest directors and for other independent directors are the same. The qualification requirements for independent public interest directors and for other independent directors are set forth in section 1261.6 of the interim final rule. The Bank must verify eligibility before allowing any director elected by the board to assume office, and the Bank must deliver the individual's application form to the FHFA for review and comment before the individual is allowed to assume office.

Section 1261.14(c) of the interim final rule requires a Bank to provide a notice to the FHFA and to each member of the Bank that includes specified information about any individual who has been elected by the directors of the Bank.

O. Minimum Number of Member Directorships: Section 1261.15

Section 1261.15 designates the grandfathered directorships that apply at the present time to the 12 Banks. The section also provides that the grandfathering of directorships for any two or more Banks that merge does not apply to those Banks that are a part of the merger, as required by an amendment to section 7(c) of the Bank Act.

P. 2008 Temporary Schedule for Election of Directors: Section 1261.16

Section 1261.16 of the interim final rule requires each Bank to set a reasonable schedule for the nomination and election of directors in 2008 only.

This temporary director election schedule will cease to be effective after December 31, 2008.

III. Notice and Public Participation

The notice and comment procedure required by the Administrative Procedure Act is inapplicable to this interim final rule because it is in the public interest to implement the requirements of the Act as soon as it is practicable to do so: The Banks need to conduct elections and install directors in compliance with the new law by January 1, 2009, when a number of terms of existing directors expire.See5 U.S.C. 553(b)(3)(B). However, because the FHFA believes that public comments are valuable, it encourages comments on this interim final rule, and will consider all comments received on or before November 25, 2008 in promulgating a final rule.

IV. Effective Date

For the reasons stated in part III above, the FHFA for good cause finds that the interim final rule should become effective on September 26, 2008.See5 U.S.C. 553(d)(3).

V. Paperwork Reduction Act

The interim final rule will have no substantive effect on any collection of information covered by the Paperwork Reduction Act of 1995 (PRA).See44 U.S.C. 3501et seq.Therefore, the FHFA has not submitted this interim final rule to the Office of Management and Budget (OMB) for review. The Finance Board used application forms to collect information on prospective appointive directors, and those forms had been assigned control number 3069-0002 by the OMB. The FHFA will direct the Banks to use those forms, which will be amended as appropriate but the changes to the forms will not materially modify the approved information collection. Consequently, the FHFA has not submitted any information to OMB for review under the PRA.

VI. Regulatory Flexibility Act

The FHFA is adopting this regulation in the form of an interim final rule and not as a proposed rule. Therefore, the provisions of the Regulatory Flexibility Act do not apply.See5 U.S.C. 601(2) and 603(a).

List of Subjects in 12 CFR Parts 915 and 1261

Banks, Banking, Conflicts of interest, Elections, Ethical conduct, Federal home loan banks, Financial disclosure, Reporting and recordkeeping requirements.

For the reasons stated in the preamble, under the authority of 12 U.S.C. 1319(G) and 12 U.S.C. 1426, 1427 and 1432, the FHFA proposes to amend chapters IX and XII of title 12 of the Code of Federal Regulations as follows: CHAPTER IX—FEDERAL HOUSING FINANCE BOARD PART 915—BANK DIRECTOR ELIGIBILITY AND ELECTIONS 1. Remove 12 CFR part 915. CHAPTER XII—FEDERAL HOUSING FINANCE AGENCY 2. Add and reserve subchapters A and C to 12 CFR Chapter XII. 3. Add subchapter B to 12 CFR chapter XII, and transfer part 1231 to subchapter B. 4. Amend title 12 CFR chapter XII by establishing subchapter D to read as follows: Subchapter D—Federal Home Loan Banks 5. Add part 1261 to subchapter D to read as follows: PART 1261—FEDERAL HOME LOAN BANK DIRECTOR ELIGIBILITY AND ELECTIONS Sec. 1261.1 Definitions. 1261.2 General provisions. 1261.3 Designation of member directorships. 1261.4 Director eligibility. 1261.5 Determination of member votes. 1261.6 Nominations for member and independent directorships. 1261.7 Election process. 1261.8 [Reserved]. 1261.9 Actions affecting director elections. 1261.10 Independent director conflict of interests. 1261.11 Conflict of interests policy for Bank directors. 1261.12 Reporting requirements for Bank directors. 1261.13 Ineligible Bank directors. 1261.14 Vacant Bank directorships 1261.15 Minimum number of member directorships. 1261.16 Temporary rule for 2008 election of directors. Authority:

12 U.S.C. 1426, 1427, and 1432.

§ 1261.1 Definitions.

For purposes of this part:

Actmeans the Federal Home Loan Bank Act, as amended (12 U.S.C. 1421 through 1449).

Bank,written in title case, means a Federal Home Loan Bank established under section 12 of the Act (12 U.S.C. 1432).

Bona fide residentof a Bank district means an individual who:

(1) Maintains a principal residence in the Bank district; or

(2) If serving as an independent director, owns or leases in his or her own name a residence in the Bank district and is employed in a voting state in the Bank district.

Directormeans the Director of the Federal Housing Finance Agency.

FHFAmeans the Federal Housing Finance Agency.

FHFA ID numbermeans the number assigned to a member by the FHFA and used by the FHFA and the Banks to identify a particular member.

Guaranteed directorshipmeans a member directorship that is required by section 7(c) of the Act (12 U.S.C 1427(c)) to be designated as representing Bank members that are located in a particular state, other than a stock directorship.

Independent directorshipmeans a directorship, as defined by section 7(a)(4)(A) of the Act, 12 U.S.C. 1427(a)(4)(A), that is filled by a plurality vote of the members at large by a person having the qualifications specified by section 7(a)(3)(B)(i) or (ii), 12 U.S.C. 1427(a)(3)(B)(i) or (ii).

Member directorshipmeans a directorship, as defined by section 7(a)(4)(A) of the Act, 12 U.S.C. 1427(a)(4)(A), that is filled by a plurality vote of the members located in a particular state by a person who is an officer or director of a member located in that state, and includes guaranteed directorships and stock directorships.

Method of equal proportionsmeans the mathematical formula used by the FHFA to allocate member directorships among the states in a Bank's district based on the relative amounts of Bank stock required to be held as of the record date by members located in each state.

Public interest directormeans a person serving in a public interest directorship.

Public interest directorshipmeans an independent directorship filled by an individual with more than four years experience representing consumer or community interests in banking services, credit needs, housing or consumer financial protections.

Record datemeans December 31 of the calendar year immediately preceding the election year.

Stock directorshipmeans a member directorship that is designated by the FHFA as representing the members located in a particular voting state based on the amount of Bank stock held required to be held by the members in that state as of the record date, other than a guaranteed directorship.

Voting statemeans the District of Columbia, Puerto Rico, or the state of the United States in which a member's principal place of business, as determined in accordance with 12 CFR part 925, is located as of the record date. The voting state of a member with a principal place of business located in the U.S. Virgin Islands as of the record date is Puerto Rico, and the voting state of a member with a principal place of business located in American Samoa, Guam, or the Commonwealth of the Northern Mariana Islands as of the record date is Hawaii.

§ 1261.2 General provisions.

(a)Board size and composition.Annually, the FHFA Director will determine the size of the board of directors for each Bank and will designate at least a majority, but no more than 60 percent, of the directorships as member directorships and the remainder as independent directorships.

(b)Term of directorships.The term of office of each directorship commencing on or after January 1, 2009 shall be four years, except as adjusted pursuant to section 7(d) of the Act (12 U.S.C 1427(d)) to achieve a staggered board, and shall commence on January 1 of the calendar year so designated by the FHFA.

(c)Annual elections.Each Bank annually shall conduct an election the purpose of which is to fill all directorships designated by the FHFA as commencing on January 1 of the calendar year immediately following such election. Subject to the provisions of the Act and in accordance with the requirements of this part, the disinterested members of the board of directors of each Bank, or a committee of disinterested directors, shall administer and conduct the annual election of directors. In so doing, the disinterested directors may use Bank staff or independent contractors to perform ministerial and administrative functions concerning the elections process.

(d)Location of members.In accordance with section 7(c) of the Act (12 U.S.C 1427(c)), for purposes of the election of member directors, a member is deemed to be located in its voting state, unless otherwise designated by the Director.

(e)Dates.If any date specified in this part for action by a Bank, or specified by a Bank pursuant to this part, falls on a Saturday, Sunday, or Federal holiday, the relevant time period is deemed to be extended to the next calendar day that is not a Saturday, Sunday, or Federal holiday.

§ 1261.3 Designation of member directorships.

(a)Determination of voting stock.(1) On or before April 10 of each year, each Bank shall deliver to the FHFA a capital stock report that indicates, as of the record date, the number of members located in each voting state in the Bank's district, the number of shares of Bank stock that each member (identified by its FHFA ID number) was required to hold, and the number of shares of Bank stock that all members located in each voting state were required to hold. If a Bank has issued more than one class of stock, it shall report the total shares of stock of all classes required to be held by the members. The Bank shall certify to the FHFA that, to the best of its knowledge, the information provided in the capital stock report is accurate and complete, and that it has notified each member of its minimum capital stock holdings.

(2) If a Bank's capital plan was not in effect as of the record date, the number of shares of Bank stock that any member is required to hold as of the record date shall be determined in accordance with 12 CFR 925.20 and 925.22. If a Bank's capital plan was in effect as of the record date, the number of shares of Bank stock that any member was required to hold as of that date shall be determined in accordance with the minimum investment established by the capital plan for that Bank; however, for any member whose Bank stock is less than the minimum investment during a transition period, the amount of Bank stock to be reported shall be the number of shares of Bank stock actually owned by the member as of the record date.

(b)Designation of member directorships as stock directorships.The Director annually will conduct a designation of member directorships for each Bank based on the number of shares of Bank stock required to be held by the members in each state as of December 31 of the preceding calendar year, using the method of equal proportions. If a Bank has issued more than one class of stock, the Director will designate the directorships for each state in that Bank district based on the combined number of shares required to be held by the members in that state. For purposes of conducting the designation, if a Bank's capital plan was not in effect on the immediately preceding December 31, the number of shares of Bank stock required to be held by members as of that date shall be determined in accordance with 12 CFR 925.20 and 925.22. If a Bank's capital plan was in effect on the immediately preceding December 31, the number of shares of Bank stock required to be heldby members as of that date shall be determined in accordance with the minimum investment established by such capital plan; however, for any members whose Bank stock is less than the minimum investment during a transition period, the amount of stock to be used in the designation of directorships shall be the number of shares of Bank stock actually owned by those members as of that December 31. In all cases, the Director will designate the directorships by using the information provided by each Bank in its capital stock report required by paragraph (a)(1) of this section.

(c)Allocation of directorships.(1) The member directorships designated by the Director will be allocated among the states by the Director in accordance with sections 7(b) and (c) of the Act.

(2) If the designation of directorships conducted by the Director under paragraph (c)(1) of this section eliminates any existing directorship, or if the allocation of directorships under this paragraph (c) designates any existing stock directorship to another state, the director elected or appointed to that existing directorship shall not be eligible to serve after the close of business on the immediately following December 31.

(d)Notification.On or before June 1 of each year, the FHFA will notify each Bank in writing of the total number of directorships established for the Bank and the number of member directorships designated as representing the members in each voting state in the Bank district. If the annual designation of member directorships results in an existing directorship being redesignated as representing members in a different state, the directorship shall be deemed to become vacant as of December 31 of that year, and thereafter shall filled by the board of directors of the Bank with an eligible person who is an officer or director of a member located in the newly designated state, regardless of whether the term for the incumbent director would have expired by that date.

§ 1261.4 Director eligibility.

(a)Eligibility requirements for member directors.Each member director, and each nominee to a member directorship, shall be:

(1) A citizen of the United States; and

(2) An officer or director of a member that is located in the voting state to be represented by the member directorship, that was a member of the Bank as of the record date, and that meets all minimum capital requirements established by its appropriate Federal banking agency or appropriate state regulator.

(b)Eligibility requirements for independent directors.Each independent director, and each nominee to an independent directorship, shall be:

(1) A citizen of the United States; and

(2) A bona fide resident of the district in which the Bank is located.

(c)Restrictions.(1) A nominee is not eligible if he or she:

(i) Is an incumbent director, unless:

(A) The incumbent director's term of office would expire before the new term of office would begin; and

(B) The new term of office would not be barred by the term limit provision of section 7(d) of the Act (12 U.S.C. 1427(d)); or

(ii) Is a former director whose service would be barred by the term limit provision of section 7(d) of the Act.

(2) For purposes of applying the term limit provision of section 7(d) of the Act (12 U.S.C. 1427(d)):

(i) A term of office that is adjusted after July 30, 2008 to a period of fewer than four years shall not be deemed to be a full term;

(ii) Any three year term of office ending immediately before a term of office that is adjusted after July 30, 2008 to a period of fewer than four years and any term of office commencing immediately following such adjusted term of office shall constitute consecutive full terms of office; and

(iii) Any member director's service through election to any directorship with a three year term of office existing on or before July 30, 2008 shall be deemed to be service in a full term directorship to which the director has been elected.

(d)Loss of eligibility.(1) A director shall become ineligible to remain in office if, during his or her term of office, the directorship to which he or she has been elected is eliminated or, with respect to a member directorship, is redesignated by the FHFA as representing members located in another state, in accordance with § 1261.3(c)(2). The incumbent director shall become ineligible after the close of business on December 31 of the year in which the directorship is redesignated or eliminated. Any directorship ceasing through elimination or redesignation shall not be deemed to be a full-term directorship for purposes of the section.

(2) In the case of a redesignation to another state, the redesignated directorship shall be filled by a majority vote of the remaining Bank directors, sitting as a board, regardless of whether the remaining directors constitute a quorum of the board.

§ 1261.5 Determination of member votes.

(a)In general.Each Bank shall determine, in accordance with this section, the number of votes that each member of the Bank may cast for each directorship that is to be filled by the vote of the members.

(b)Number of votes.For each member directorship and each independent directorship that is to be filled in an election, each member shall be entitled to cast one vote for each share of Bank stock that the member was required to hold as of the record date. Notwithstanding the preceding sentence, the number of votes that any member may cast for any one directorship shall not exceed the average number of shares of Bank stock required to be held as of the record date by all members located in the same state as of the record date. If a Bank has issued more than one class of stock, it shall calculate the average number of shares separately for each class of stock, using the total number of members in a state as the denominator, and shall apply those limits separately in determining the maximum number of votes that any member owning that class of stock may cast in the election. If a Bank's capital plan was not in effect as of the record date, the number of shares of Bank stock that a member was required to hold as of the record date shall be determined in accordance with 12 CFR 925.20 and 925.22. If a Bank's capital plan was in effect as of the record date, the number of shares of Bank stock that a member was required to hold as of the record date shall be determined in accordance with the minimum investment requirement established by the Bank's capital plan; however, for any member whose Bank stock is less than the minimum investment during a transition period, the amount of Bank stock to be used shall be the number of shares of Bank stock actually owned by the member as of the record date.

(c)Voting preferences.If the board of directors of a Bank includes any voting preferences as part of its approved capital plan, those preferences shall supersede the provisions of paragraph (b) of this section that otherwise would allow a member to cast one vote for each share of Bank stock it was required to hold as of the record date. If a Bank establishes a voting preference for a class of stock, the members with voting rights shall remain subject to the provisions of section 7(b) of the Act (12 U.S.C. 1427(b)) that prohibit any member from casting any vote in excess of the average number of shares of stockrequired to be held by all members in its state.

§ 1261.6 Nominations for member and independent directorships.

(a)Election announcement.Within a reasonable time in advance of an election, a Bank shall notify each member in its district of the commencement of the election process. Such notice shall include:

(1) The number of member directorships designated for each voting state in the Bank district and the number of independent directorships for the Bank;

(2) The name of each incumbent Bank director, the name and location of the member at which each member director serves, and the name and location of the organization with which each independent director is affiliated, if any, and the expiration date of each Bank director's term of office;

(3) A brief statement describing the skills and experience the Bank believes are most likely to add strength to the board of directors, provided that the Bank previously has conducted the annual assessment permitted by § 1261.9 and the Bank has elected to provide the results of the assessment to the members;

(4) An attachment indicating the name, location, and FHFA ID number of every member in the member's voting state, and the number of votes each such member may cast for each directorship to be filled by such members, as determined in accordance with § 1261.5; and

(5) A nominating certificate.

(b)Member directorship nominations.(1) Any member that is entitled to vote in the election may nominate an eligible individual to fill each available member directorship for its voting state by delivering to its Bank, prior to a deadline to be established by the Bank and set forth in the notice required in paragraph (a) of this section, a nominating certificate duly adopted by the member's governing body or by an individual authorized by the member's governing body to act on its behalf.

(2) The nominating certificate shall include the name of the nominee and the name, location, and FHFA ID number of the member the nominee serves as an officer or director.

(3) The Bank shall establish a deadline for delivery of nominating certificates, which shall be no earlier than 30 calendar days after the date on which the Bank delivers the notice required by paragraph (a) of this section, and the Bank shall not accept certificates received after that deadline. The Bank shall retain all accepted nominating certificates for at least two years after the date of the election.

(c)Accepting member directorship nominations.A Bank shall notify in writing any person nominated for a member directorship promptly upon receipt of the nominating certificate. A person may accept the nomination only by delivering to the Bank, prior to a deadline established by the Bank and set forth in its notice, an executed director eligibility certification form prescribed by the FHFA. A Bank shall allow each nominee at least 30 calendar days after the date the Bank delivered the notice of nomination within which to deliver the executed form. A nominee may decline the nomination by so advising the Bank in writing, or by failing to deliver a properly executed director eligibility certification form prior to the deadline. Each Bank shall retain all information received under this paragraph for at least two years after the date of the election.

(d)Independent directorship nominations.(1) Any individual who seeks to be an independent director of the board of directors of a Bank may deliver to the Bank, on or before the deadline set by the Bank for delivery of nominating certificates, an executed independent director application form prescribed by the FHFA that demonstrates that the individual both is eligible and has either of the following qualifications:

(i) More than four years experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections; or

(ii) Knowledge of or experience in one or more of the areas set forth in paragraph