Daily Rules, Proposed Rules, and Notices of the Federal Government
The FHFA invites comments on all aspects of the proposed regulation, and will adopt a final regulation with appropriate changes after taking all comments into consideration. Copies of all comments will be posted on the Internet Web site at
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 a new independent executive branch agency, the FHFA.
The twelve Banks are instrumentalities of the United States organized under the Federal Home Loan Bank Act (Bank Act).
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.
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 the FHFA.
In 1989, as part of the amendments made to the Bank Act by the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA),
In January 2000, the Finance Board proposed changes to its regulations to alter how COs were issued under section 11of the Bank Act, reorganize the OF and its board of directors, and expand the duties of the OF, including assigning OF the duty to prepare the Bank System combined annual and quarterly financial reports.
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.”
In light of the expanded duties assigned to OF as well as amendments to the Bank Act that had recently been made by the Gramm-Leach-Bliley Act (GLB Act),
Under the 2000 proposal, the OF board of directors would have been expanded to 24 members, 12 of whom would have been appointed by the Banks, 6 of whom would have been elected by Bank members and 6 of whom would have been appointed by the Finance Board. The Finance Board also proposed that the chair and vice chair of the board be appointed by the Finance Board. The proposal would have required the OF board of directors
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 OF the function of preparing the Bank System's combined financial reports, along with additional duties.
Section 1201 of HERA 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.
As discussed in detail below, the FHFA is proposing a number of changes to the size and structure of the OF board of directors and how the OF board exercises oversight over the process for preparing the Bank System's combined financial reports. The FHFA believes that these changes will assist the Banks in coordinating among themselves the process of providing OF the necessary information to prepare the System combined financial reports, and that these changes will facilitate accurate and meaningful disclosure in the combined reports and, thereby, garner market confidence.
Because the Bank System's main source of funding is COs on which the Banks are jointly and severely liable, the combined financial reports prepared by OF remain an important source of information about the financial state of the Bank System as a whole and are an important tool in marketing System debt and in assuring the Banks' access to domestic and international financial markets. For these purposes, the combined financial reports provide a single source of information about the Bank System. Assuring that this information is consistent and can readily be compared across all Banks is important to market acceptance of Bank debt and hence to the continued financial health of the Banks.
The proposed regulation would achieve these purposes with two principal elements: first, by expanding the OF's board to include all of the Federal Home Loan Bank presidents plus an audit committee comprising three to five independent directors; and second; by empowering the audit committee to ensure that the combined financial reports are compiled using common accounting policies and procedures across the twelve Banks. The FHFA's authority to adopt this regulation is grounded in its general supervisory authority over the OF and the Banks, 12 U.S.C. 1311(b)(2), 1313(a)(1), 1319G, 1431.
The proposed regulation would re-adopt many of the provisions in current 12 CFR part 985, which established the OF and governs the duties and function of OF and its board of directors, and in 12 CFR part 989, which address audit requirements and financial statements for the Banks. It would, however, make a number of amendments to the current regulations, most significantly with regard to the structure and duties of both the OF board of directors and its audit committee. The proposed regulation also would make some changes with regard to the standards governing the Bank System's combined financial reports and would amend some of the current part 985 provisions to conform the regulatory language to statutory changes made by HERA. Under the proposed regulation, the regulations that had been set forth in the parts 985 and 989 of the former Finance Board regulations, would be removed and adopted by the FHFA, respectively, as 12 CFR parts 1273 and 1274.
Proposed part 1273 would provide regulations which re-establish the OF and set forth its duties, and functions. Under part 1273 as proposed, the specification of the OF's authority and functions would remain substantially unchanged, although the language in the regulations would be altered to reflect the fact that the FHFA is no longer authorized to issue debt on behalf of the Banks and the OF would thus be acting only as a agent for the Banks with respect to its debt issuance duties.
The debt management functions and duties assigned to OF also would also remain much the same under the proposed regulation as currently, although, as discussed more fully below, the FHFA is proposing some changes to the standards governing the preparation of the combined financial reports. Under the proposed regulation, the OF would also still be required to monitor the unsecured credit exposure of the Banks and would be required to compile relevant data on such exposures.
As proposed, the specific requirements now set forth in 12 CFR part 989 would be readopted in part 12 CFR part 1274 almost in their entirety. The proposed regulation would make some conforming changes in § 1274.2 to reflect the fact that the FHFA is proposing an audit committee to be established for OF which would have a composition that is different from that of the OF board of directors as a whole. In addition, current section 989.4 of this title, which relates to voluntary Bank disclosure of financials, would not be re-adopted as part of the proposed part 1274 regulations. This particular provision pre-dated the Banks' registration of their stock with the Securities and Exchange Commission (SEC). Given that an individual Bank's disclosure of financial information is now subject to the SEC's regulations and oversight, the FHFA does not see a need to maintain this provision going forward.
The new structure being proposed for the OF board of directors is set forth in proposed § 1273.7. Under this provision, the OF board of directors would be composed of 15 to17 part-time members—the twelve Bank presidents and three to five independent directors. The independent directors would be required to be citizens of the United States and none could be an officer, employee, or director of any Bank or Bank System member, nor could the independent director have any substantial financial interest in a Bank System member. Persons affiliated with or having substantial financial interests in any CO seller or dealer group member under contract with OF would not qualify to be an independent director. The proposed regulation would also require the independent directors, as a group, to have substantial experience in financial and accounting matters.
Under the proposed regulation, the FHFA would appoint the first independent directors that serve on the board after the effective date of the regulation from candidates nominated by the Banks. Thereafter, the independent directors would be elected by majority vote of the OF board of directors. If the FHFA objected to the election of any individual independent director, the FHFA would retain the ability to appoint a more qualified director. As a practical matter, the FHFA would expect the OF board of directors to provide the names of, and background information on, nominees for board positions in sufficient time for the FHFA to raise any concerns prior to the actual election.
Terms for independent directors would be set at five years, although the proposal would require staggering of the seats to assure that no more than one seat would be scheduled to become vacant in any one year, so the initial terms could range from one to five years. If an independent director's seat became vacant for any reason before the end of a scheduled term, the proposed regulation would allow that seat to be filled by majority vote of the OF board, but only for the remainder of the original term.
The proposed regulation would also allow the FHFA to appoint the initial chair and vice chair of the OF board. The chair would be one of the independent directors while the vice chair could be appointed from among any of the directors. After the term of the initial chair or vice chair expired or became vacant for any other reason, the proposal would allow subsequent chairs and vice chairs to be elected by majority vote of the OF board. The chair would be elected from among the independent directors while the vice chair could be elected from among any of the directors. Under the proposal, the FHFA would retain the authority to object to the election of any chair or vice chair by providing the OF board of directors written notice within 20 calendar-days, upon FHFA receipt of notification of the election, and the board of OF would then be required to promptly elect a new chair or vice chair as appropriate.
The OF board of directors would be authorized to create committees, such as an executive committee, and to delegate authority to such committees, although the regulation would specifically require that an audit committee be established and would specify the duties of that committee. The functions and duties of any committee (including the scope of any delegation) would be specified in the board's bylaws or in specific committee charters. The bylaws and charters would be subject to review and approval by the FHFA. The OF board, or any committee thereof including the audit committee, would be authorized to hire outside counsel, independent accountants, or other outside experts at the expense of the OF to help it carry out its duties.
As under the current regulations, the proposed regulation would specify that Bank presidents would serve without additional compensation. The compensation for the independent directors would be set in accordance with 12 CFR part 918, which currently governs compensation for directors and chairs of the Banks' boards of directors. The current indemnification provision would also be carried over to the new regulation as now proposed.
The proposed duties of the OF board of directors are set forth in proposed § 1273.8. These duties closely correspond to those in the current regulations. Duties and functions related to the preparation of the combined financial reports and oversight of the internal and external audit function for OF and the combined reports, which are currently among the duties of the OF board of directors, would be specifically transferred to the audit committee, as is discussed in the next section.
Under the proposed regulation, the audit committee, constituted as described above, would assume the board's responsibilities for overseeing the audit function of the OF and the OF's preparation of accurate combined financial reports, including selection and appointment of the OF's internal and external auditors. As part of its responsibilities, the audit committee would be specifically authorized to ensure that the Banks adopt consistent accounting policies and procedures so that the combined financial reports will continue to be accurate and meaningful. If the Banks are not able to agree on such consistent accounting policies and procedures, the audit committee, in consultation with the FHFA, may prescribe them.
Consistent with the responsibility of the audit committee to ensure consistency of accounting policies and procedures across the Bank System, the regulations governing the content of the combined financial reports would be amended to include a requirement that information about the Banks be presented using consistent accounting policies and procedures (proposed § 1273.6(b)(2)). In addition, in acknowledgement of the increasingly national business models of major holding companies who can access multiple Banks through subsidiaries in different Bank districts, the regulations would be amended to include requirements that the combined financial reports include lists of the top ten holders of advances and of stock in the Bank System by holding company (proposed Part 1273 Appendix A, paragraphs A and G).
The proposed regulation does not contain any collections of information pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501
The proposed regulation applies only to the Banks, which do not come within the meaning of small entities as defined in the Regulatory Flexibility Act (RFA).
Federal home loan bank, Securities.
Accounting, Federal home loan banks, financial disclosure.
Federal home loan banks, securities.
Accounting, Federal home loan banks, financial disclosure.
Accordingly, for reasons stated in the the preamble, under the authority of 12 U.S.C. 1311(b)(2), 1313(a)(1), 1319G and 1431, the FHFA proposes to amend chapters IX and XII of title 12 of the Code of Federal Regulations as follows:
1. Remove 12 CFR part 985.
2. Remove 12 CFR part 989.
3. Add part 1273 to subchapter D to read as follows:
12 U.S.C. 1431(a) and (c), 1440, 4511(b), 4513, 4514(a), 4526(a).
For purposes of this part:
(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
(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 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.
(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 the 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 the 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 the 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.
(1) The twelve Bank presidents,
(2)(i) Three to five Independent Directors who each shall be a citizen of the United States and who, as a group, shall have substantial experience in financial and accounting matters. Such Independent Directors may not be officers, directors, or employees of any Bank or Bank System member, be affiliated with any consolidated-obligations selling or dealer group member under contract with OF, or hold shares or any other financial interest in any member of a Bank or in any such dealer group member in an amount greater than the lesser of—
(A) $250,000 or
(B) 0.01% of the market capitalization of the member or dealer.
(ii) For purposes of this paragraph (a)(2), a holding company of a member of a Bank or a dealer group member shall be deemed to be a member if the assets of the holding company's member subsidiaries constitute 35% or more of the consolidated assets of the holding company.
(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 the FHFA's review of, and non-objection to, the new Independent Director. The OF board of directors shall provide the FHFA with relevant biographic and background information, including information demonstrating that the new Independent Director meets the requirements of paragraph (a)(2) of this
(2) Each Bank shall have the right to nominate one person for consideration for appointment as an Independent Director by the FHFA under this paragraph (c). The nominations will be made according to any procedures established by the FHFA. The FHFA may appoint persons nominated by the Banks, or other persons meeting the requirements of paragraph (a)(2) of this section, or some combination.
(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 the FHFA of the election of a Chair or Vice Chair. If the FHFA objects to any Chair or Vice Chair elected by the OF board of directors, the FHFA shall provide written notice of its objection within 20 business days of the date that the 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.
(2) The OF shall pay compensation and expenses to the Independent Directors in accordance with the requirements for payment of compensation and expenses to Bank chairs and directors as set forth in part 918 of this title.
(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;
(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.
(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 § 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 § 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; and
(6) Assume any other responsibilities that may from time to time be assigned to it by the FHFA.
(2) For purposes of the combined financial reports, the Audit Committee shall ensure that the Banks adopt consistent accounting policies and procedures such that the information submitted by the Banks to OF may be combined to create accurate and meaningful combined financial reports.
(3) The Audit Committee, in consultation with the 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—
(i) The requirements of § 917.7 of this title; and
(ii) The requirements pertaining to audit committee reports set forth in Item 306 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.
4. Add part 1274 to subchapter D to read as follows:
12 U.S.C. 1426, 1431, 4511(b), 4513, 4526(a).
For purposes of this part:
(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.
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 the 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 the FHFA to obtain any information from any Bank related to the preparation or review of any financial report.